NOTICE
This document is a copy of the Annual Report filed by The Hartford Financial
Services Group, Inc. with the Securities and Exchange Commission. It has not
been approved or disapproved by the Commission nor has the Commission passed
upon its accuracy or adequacy.
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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
--------------
(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, 2002
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or Other Jurisdiction of (I.R.S. Employer
Incorporation Or Organization) Identification No.)
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
7.75% Notes due June 15, 2005
4.7% Notes due September 1, 2007
6.375% Notes due November 1, 2008
4.1% Equity Unit Notes due November 16, 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. [X]
As of February 27, 2003, there were outstanding 255,399,358 shares of Common
Stock, $0.01 par value per share, of the registrant. Indicate by check mark
whether the registrant is an accelerated filer (as defined in Exchange Act Rule
12b-2) Yes [X] No [ ].
The aggregate market value of the shares of Common Stock held by non-affiliates
of the registrant as of June 28, 2002, was $14,673,000,000 based on the closing
price of $59.47 per share of the Common Stock on the New York Stock Exchange on
June 28, 2002.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 2003 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of The Hartford 2
2 Properties 13
3 Legal Proceedings 13
4 Submission of Matters to a Vote of Security Holders 15
PART II 5 Market for The Hartford's Common Stock and Related
Stockholder Matters 15
6 Selected Financial Data 16
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 17
7A Quantitative and Qualitative Disclosures About Market Risk 72
8 Financial Statements and Supplementary Data 72
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 72
PART III 10 Directors and Executive Officers of The Hartford 72
11 Executive Compensation 73
12 Security Ownership of Certain Beneficial Owners and
Management and Related Stockholder Matters 73
13 Certain Relationships and Related Transactions 74
14 Controls and Procedures 74
PART IV 15 Exhibits, Financial Statements Schedules, and
Reports on Form 8-K 74
Signatures II-1
Certifications II-2
Exhibits Index II-4
PART I
ITEM 1. BUSINESS OF THE HARTFORD
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT FOR PER 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, 2002,
total assets and total stockholders' equity of The Hartford were $182.0 billion
and $10.7 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 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 and
other subsidiaries 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 33
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"), Hartford Life, Inc. ("HLI"), the holding company parent of The
Hartford's significant life insurance subsidiaries, 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 18(a) 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 by
means of a number of dispositions. 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
nine operating segments. Additionally, the capital raising and purchase
accounting adjustment activities related to The HLI Repurchase, capital raised
in 2002 that was not contributed to the Company's insurance subsidiaries, 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 Japan and Latin
America; realized capital gains and losses; as well as corporate items not
directly allocated to any of its reportable operating segments, principally
interest expense; and intersegment eliminations.
In January 2002, Property & Casualty integrated its Affinity Personal Lines and
Personal Insurance segments, now reported as Personal Lines. As a result,
Property & Casualty is now organized into five reportable operating segments:
the North American underwriting segments of the Business Insurance, Personal
Lines, Specialty Commercial and Reinsurance; and the Other Operations segment,
which includes substantially all of the Company's asbestos and environmental
exposures. "North American" includes the combined underwriting results of
Business Insurance, Personal Lines, Specialty Commercial and Reinsurance
underwriting segments along with income and expense items not directly allocated
to these segments, such as
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net investment income, net realized capital gains and losses, other expenses
including interest, and income taxes.
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.
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 wealth protection,
accumulation and transfer needs for approximately 740,000 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. As of December 31, 2002, retail mutual fund
assets were $14.2 billion. 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.) In
addition, The Hartford's Japanese operation achieved $1.4 billion in variable
annuity sales for the year ended December 31, 2002, bringing account values
related to Japan to more than $1.7 billion as of December 31, 2002.
HLI is among the largest consolidated life insurance groups in the United States
based on statutory assets as of December 31, 2001. In the past year, Life's
total assets under management, which include $15.3 billion of third-party assets
invested in the Company's mutual funds and 529 College Savings Plans, decreased
2% to $165.1 billion at December 31, 2002 from $168.4 billion at December 31,
2001. Life generated revenues of $6.4 billion, $6.5 billion and $6.0 billion in
2002, 2001 and 2000, respectively. Additionally, Life generated net income of
$557, $685 and $575 in 2002, 2001 and 2000, respectively.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
Life maintains advantageous economies of scale and operating efficiencies due to
its 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 have
been reduced since 1992, declining from 43 basis points to 25 basis points in
2002. 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 2002 Annuity Service Award by DALBAR Inc., a recognized
independent financial services research organization, for the seventh
consecutive year. The Hartford is the only company to receive this prestigious
award in every year of the award's existence. Also, in both 2002 and 2001, 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 its second consecutive DALBAR award for service of life insurance customers
and its first DALBAR Intermediary Service Award in 2002.
RISK MANAGEMENT
Life's product designs, prudent underwriting standards and risk management
techniques are structured to protect it against disintermediation risk and
greater than expected mortality and morbidity experience. As of December 31,
2002, the Company had limited exposure to disintermediation risk on
approximately 96% 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, 1997 to December 31, 2002, this segment's assets under management
grew to $110.2 billion from $71.3 billion, a five year compounded annual growth
rate of 9.4%. Investment Products generated revenues of $2.6 billion, $2.5
billion and $2.4 billion in 2002, 2001 and 2000, respectively, of which
individual annuities accounted for $1.5 billion in 2002, 2001 and 2000. Net
income in the Investment Products segment was $432, $463 and $424 in 2002, 2001
and 2000, 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 $11.6 billion,
$10.0 billion and $10.7 billion in 2002, 2001 and 2000, respectively. The
Hartford was the largest seller of individual
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retail variable annuities in the United States with sales of $10.3 billion in
2002 and $9.0 billion in 2001 and 2000. In addition, the Company continues to be
the largest seller of individual retail variable annuities through banks in the
United States.
The Company's total account value related to individual annuity products was
$74.9 billion as of December 31, 2002. Of this total account value, $64.3
billion, or 86%, related to individual variable annuity products and $10.6
billion, or 14%, related primarily to fixed MVA annuity products. In 2001, the
Company's total account value related to individual annuity products was $84.2
billion. 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 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 small and medium size 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 and
403(b) of the Internal Revenue Code of 1986, as amended (referred to as "Section
457" and "403(b)", respectively). The Company also provides structured
settlement contracts, terminal funding products and other investment products
such as guaranteed investment contracts ("GICs"). In 2002, The Hartford began
selling a 529 college savings product.
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%, helped
solidify the Company's strong position in variable annuities and strengthened
the Company's 401(k) sales.
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. Additionally,
the Investment Products segment sells variable annuity contracts that offer
various guaranteed death benefits. For certain guaranteed death benefits, The
Hartford pays the greater of (1) the account value at death; (2) the sum of all
premium payments less prior withdrawals; or (3) the maximum anniversary value of
the contract, plus any premium payments since the contract anniversary, minus
any withdrawals following the contract anniversary.
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 up 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 $64.3 billion as of December 31, 2002, 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 88% and 94% of the individual variable
annuity account values were held in non-guaranteed separate accounts as of
December 31, 2002 and 2001, 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"); Hartford Investment
Management Company ("HIMCO"), a wholly-owned subsidiary of The Hartford; Putnam
Financial Services, Inc. ("Putnam"); American Funds; MFS Investment Management
("MFS"); Franklin Templeton Group; and AIM Investments ("AIM"). 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 the industry leader in terms of retail 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 and ranks in the top 5 in the industry.
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 $10.6
billion and $9.6 billion as of December 31, 2002 and 2001, respectively.
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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 33 funds, including the addition of five
new fixed income funds introduced in 2002. The Company's funds are managed by
Wellington and HIMCO. The Company has entered into agreements with over 960
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 assets under management were $14.2 billion and $15.9 billion as of
December 31, 2002 and 2001, respectively.
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 variable annuities and a fixed bucket, 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, 2002, the Company administered over 3,000 plans
under Sections 457 and 403(b). Total governmental assets under management were
$7.9 billion and $8.6 billion as of December 31, 2002 and 2001, respectively.
Corporate -- The Company sells retirement plan products and services to
corporations under Section 401 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, 2002, the Company administered over
4,100 Section 401(k) plans. Total corporate assets under management were $3.4
billion and $2.6 billion as of December 31, 2002 and 2001, respectively.
Institutional Investment Products -- 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. Total institutional investment products assets
under management were $9.7 billion and $9.1 billion as of December 31, 2002 and
2001, respectively.
Section 529 Plans - The Hartford introduced a tax advantaged college savings
product ("529 plan") in March 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 residents of West Virginia and
out-of-state participants to plan for a college education. In 1996, Congress
created a tax-advantaged college savings program as part of Section 529 of the
Internal Revenue Code (the "Code"). The 529 Plan is an investment plan operated
by a state and 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. Total 529 Plan assets under management were $87 as
of December 31, 2002.
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 retail investment products to
customers is consummated).
The Hartford maintains a distribution network of approximately 1,500
broker-dealers and approximately 500 banks. As of September 30, 2002, the
Company was selling products through 24 of the 25 largest retail banks in the
United States, including proprietary relationships with 12 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 529
Plans 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 and institutional markets.
- 5 -
Competition
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The Investment Products segment competes with numerous other insurance companies
as well as certain banks, securities brokerage firms, independent financial
advisors and other financial intermediaries marketing annuities, mutual funds
and other retirement-oriented products. 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
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The Individual Life segment provides life insurance solutions to a wide array of
partners to solve the wealth protection, accumulation and transfer needs of
their affluent, emerging affluent and business insurance clients. The individual
life business acquired from Fortis in 2001 added significant scale to the
Company's Individual Life segment, contributing to the significant increase in
life insurance in-force. As of December 31, 2002, life insurance in-force
increased 5% to $126.7 billion, from $120.3 billion as of December 31, 2001.
Account values decreased 4% to $7.6 billion as of December 31, 2002 from $7.9
billion as of December 31, 2001. Revenues were $958, $890 and $640 in 2002, 2001
and 2000, respectively. Net income in the Individual Life segment was $133, $121
and $79 in 2002, 2001 and 2000, respectively.
Principal Products
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The Hartford holds a significant market share in the variable life product
market. In 2002, the Company's new sales of individual life insurance were 82%
variable life, 13% universal life and other, and 5% 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, the surrender
value of the variable life policy will increase or decrease, and, under certain
policyholder options or market conditions, the death benefit may also 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 for a married couple. Variable life account values were $3.6 billion
and $4.0 billion as of December 31, 2002 and 2001, 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 as of December 31, 2002 and 2001.
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; financial planners; certified public
accountants 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. These individuals are generally employees
of The Hartford who are managed through a regional sales office system.
Competition
- -----------
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, effectiveness of wholesaling
support, pricing and availability of reinsurance, 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, 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,
policies are sold with one, two or three year rate guarantees depending on the
product. This allows the Company to adjust the rates or terms of its policies in
order to minimize the adverse effect of various market trends, including
declining interest rates and other factors. In the disability market, the
Company focuses on strong underwriting and claims management to derive a
competitive advantage. The Group Benefits segment generated revenues of $2.6
billion, $2.5 billion and $2.2 billion in 2002, 2001 and 2000, respectively, of
which group disability insurance accounted for $1.2 billion, $1.1 billion and
$964 and group life insurance accounted for $1.0 billion, $902 and $810,
respectively. The Company held group disability reserves of $2.5 billion and
$2.4 billion and group life reserves of $765 and $706, as of December 31, 2002
and 2001, respectively. The Company's net income in the Group Benefits segment
was $128, $106 and $90 in 2002, 2001 and 2000, 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 growing "small case"
- 6 -
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 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 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 waiver 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
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
had been the members of the Retired Officers Association, an organization
consisting of retired military officers. Congress 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 reduced the Company's premium revenue by
$131 in 2002, compared to 2001.
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, including brokers,
consultants, third-party administrators and trade associations. The Company
intends to continue to expand the system over the coming years in areas that
offer the highest growth potential.
Competition
- -----------
The Group Benefits business remains highly competitive. Competitive factors
primarily affecting Group Benefits are the variety and quality of products and
services 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.
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 passage of the Health Insurance Portability and Accountability Act of 1996
("HIPAA"), 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. HIPAA 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 $19.7 billion and $18.0 billion as of December
31, 2002 and 2001, respectively. Leveraged COLI account values decreased to $3.3
billion as of December 31, 2002 from $4.3 billion as of December 31, 2001,
primarily due to the continuing effects of HIPAA. COLI generated revenues of
$592, $719 and $767 in 2002, 2001 and 2000, respectively, and net income of $32,
$37 and $34 in 2002, 2001 and 2000, respectively.
PROPERTY & CASUALTY
Property & Casualty provides (1) workers' compensation, property, automobile,
liability, umbrella, specialty casualty, marine, agricultural and bond coverages
to commercial accounts primarily 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 commercial
lines insurers; (3) automobile, homeowners and home-based business coverage to
individuals throughout the United States; (4) assumed reinsurance, primarily
through professional reinsurance brokers covering various property, casualty,
catastrophe, alternative risk transfer and marine classes of business; and (5)
insurance related services.
The Hartford is the fourteenth largest property and casualty insurance operation
in the United States based on written premiums for the year ended December 31,
2001 according to A.M. Best Company, Inc. ("A.M. Best"). Property & Casualty
generated revenues of $9.5 billion, $8.6 billion and $8.7 billion, in 2002, 2001
and 2000, respectively. Written premiums for 2002, 2001 and 2000 were $8.6
billion, $7.6 billion and $7.3 billion, respectively. Additionally, net income
(loss) was $469, $(115) and $494 for 2002, 2001 and 2000, respectively. Total
- 7 -
assets for Property & Casualty were $31.2 billion and $29.2 billion as of
December 31, 2002 and 2001, respectively.
BUSINESS INSURANCE
Business Insurance provides standard commercial insurance coverage to small and
middle market commercial businesses primarily throughout the United States. This
segment also provides commercial risk management products and services as well
as marine coverage. The segment had written premiums of $3.4 billion, $2.9
billion and $2.4 billion in 2002, 2001 and 2000, respectively, and underwriting
income (loss) of $44, $(242) (includes $245 of underwriting loss related to
September 11) and $(50) in 2002, 2001 and 2000, 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.
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 independent agents and involving trade associations and employee
groups. Independent agents, who often represent other companies as well, are
compensated on a commission basis and are not employees of The Hartford.
Competition
- -----------
The commercial insurance industry is a highly competitive environment regarding
product, price, service and technology. The Hartford competes with other stock
companies, mutual companies, alternative risk sharing groups and other
underwriting organizations. These companies sell through various distribution
channels and business models, across a broad array of product lines, and with a
high level of variation regarding geographic, marketing and customer
segmentation. The Hartford is the fourteenth largest commercial lines' insurer
in the United States based on 2001 written premiums according to A.M. Best. The
relatively large size and underwriting capacity of The Hartford provide
opportunities not available to smaller companies. In addition, the marketplace
is affected by available capacity of the insurance industry as measured by
policyholders' surplus. Surplus expands and contracts primarily in conjunction
with profit levels generated by the industry. The low interest rate environment
is impacting returns and making underwriting decisions even more critical.
Overall, in 2002, market conditions in the commercial industry have continued to
improve as a result of increased underwriting discipline and a firmer pricing
environment, but are still under stress from years of soft market conditions.
PERSONAL LINES
Personal Lines provides automobile, homeowners' and home-based business
coverages to the members of AARP through a direct marketing operation; to
individuals who prefer local agent involvement through a network of independent
agents in the standard personal lines market; and in the non-standard automobile
market through the Company's Omni Insurance Group, Inc. ("Omni") subsidiary.
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 Personal Lines with an important competitive advantage.
Personal Lines had written premiums of $3.1 billion, $2.9 billion and $2.6
billion in 2002, 2001 and 2000, respectively. Underwriting income (loss) for
2002, 2001 and 2000 was $(46), $(87) (includes $9 of underwriting loss related
to September 11) and $2, respectively.
Principal Products
- ------------------
Personal Lines provides standard and non-standard 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
- --------------------------
Personal Lines reaches diverse markets through multiple distribution channels
including independent agents, direct mail, the Internet and advertising in
publications. This segment 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. Personal Lines has an
important relationship with AARP and markets directly to its over 35 million
members.
Competition
- -----------
The personal lines automobile and homeowners businesses continue to remain
highly competitive. Personal lines insurance is written by insurance companies
of varying sizes that sell products through various distribution channels,
including independent agents, captive agents and directly to the consumer. The
personal lines market competes on the basis of price; product; service,
including claims handling; stability of the insurer and name recognition. For
2001, the industry net written premiums were $163 billion. The Hartford's share
of this market was approximately 2% and ranked twelfth in size. The personal
lines marketplace reported a combined ratio of 104.9 for the first nine months
of 2002. Industry data and The Hartford's market share and ranking in the
industry were derived directly from data reported by 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. This arrangement was renewed during the
fourth quarter of 2001 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.
- 8 -
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 $1.4 billion, $989 (includes $7 of reinsurance cessions related to
September 11) and $1.1 billion in 2002, 2001 and 2000, respectively, and
underwriting losses of $23, $262 (includes $167 of underwriting loss related to
September 11) and $103 in 2002, 2001 and 2000, respectively.
Principal Products
- ------------------
Specialty Commercial offers a variety of customized insurance products and risk
management services. Specialty Commercial provides standard commercial insurance
products including workers' compensation, automobile and liability coverages to
large-sized companies. Specialty Commercial also provides bond, professional
liability, specialty casualty and agricultural coverages, as well as core
property and excess and surplus lines coverages not normally written by standard
lines insurers. Alternative markets, within Specialty Commercial, provides
insurance products and services primarily to captive insurance companies, pools
and self-insurance groups. In addition, Specialty Commercial provides
third-party administrator services for claims administration, integrated
benefits, loss control and performance measurement through Specialty Risk
Services.
Marketing and Distribution
- --------------------------
Specialty Commercial provides insurance products and services through its home
office located in Hartford, Connecticut and multiple domestic 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.
Competition
- -----------
The commercial insurance industry is a highly competitive environment regarding
product, price, service and technology. Specialty Commercial is comprised of a
diverse group of businesses that are unique to commercial lines. Each line of
business operates independently with its own set of business objectives, and
focuses on the operational dynamics of their specific industry. These
businesses, while somewhat interrelated, each have a unique business model and
operating cycle. Specialty Commercial is considered a transactional business
and, therefore, competes with other companies for business primarily on an
account by account basis due to the complex nature of each transaction.
Specialty Commercial competes with other stock companies, mutual companies,
alternative risk sharing groups and other underwriting organizations. The
relatively large size and underwriting capacity of The Hartford provide
opportunities not available to smaller companies. September 11 has significantly
affected the Specialty Commercial business by demonstrating the importance of
risk aggregation, by driving property pricing increases and by influencing
capital decisions. Overall, in 2002, market conditions in the commercial
industry have continued to improve as a result of increased underwriting
discipline and a firmer pricing environment, but are still under stress from
years of soft market conditions.
REINSURANCE
The Reinsurance segment assumes reinsurance in North America and primarily
writes treaty reinsurance through professional reinsurance brokers covering
various property, casualty and specialty classes of business. The Reinsurance
segment also writes catastrophe, marine and alternative risk transfer business
outside of North America. The Reinsurance segment had written premiums of $703,
$849 (includes $69 of reinsurance cessions related to September 11) and $826 in
2002, 2001 and 2000, respectively, and underwriting losses of $59, $375
(includes $226 of underwriting loss related to September 11) and $73 in 2002,
2001 and 2000, respectively.
Principal Products
- ------------------
The Reinsurance segment offers a full range of treaty and facultative
reinsurance products including property, casualty, catastrophe, marine and
alternative risk transfer which includes non-traditional reinsurance products
such as multi-year property catastrophe treaties, aggregate of excess of loss
agreements and quota share treaties with event or aggregate loss ratio caps.
Marketing and Distribution
- --------------------------
The Reinsurance segment assumes insurance from other insurers, primarily through
reinsurance brokers, but also through direct channels and pools in the worldwide
reinsurance market.
Competition
- -----------
The property and casualty worldwide reinsurance market remains extremely
competitive, although the pricing environment continued to improve in 2002.
There are domestic and foreign reinsurers, which compete in this market, with
varying levels of financial resources and scope. Reinsurers compete on the basis
of financial strength and stability, price, service, capacity and terms and
conditions. The Hartford was the eleventh largest reinsurer in the United States
based on 2001 net written premiums, according to data published by Reinsurance
Associate of America. In the aftermath of the terrorist attack on September 11,
the reinsurance landscape has become very dynamic. Several new reinsurers were
formed in Bermuda, and existing reinsurers raised additional capital, while
several others have either exited the market, announced plans to do so, or are
considering other strategic options. In addition, poor underwriting results over
the past few years and the decline in equity markets have put pressure on
capital.
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, and for
- 9 -
2002, the activity in the exited international lines of HartRe following its
restructuring in the fourth quarter of 2001.
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. The Hartford
Insurance Company (Singapore), Ltd. (formerly People's Insurance Company, Ltd.
("Singapore Insurance")), located in Singapore, was sold in January 2002.
The Hartford was a global reinsurer through its Hartford Reinsurance Company
("HartRe") operations in the United Kingdom, France, Italy, Germany, Spain, Hong
Kong and Taiwan, writing treaty and facultative assumed reinsurance including
property, casualty, fidelity, and specialty coverages. In October 2001, HartRe
announced that it was exiting most international lines and in January 2002 these
lines were moved to Other Operations.
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 $189, $168 and $602 in 2002,
2001 and 2000, respectively. Net income (loss) for 2002, 2001 and 2000 was
$(13), $10 and $28, respectively.
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 disability or 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 Critical Accounting
Estimates section of the MD&A under "Reserves".)
PROPERTY & CASUALTY RESERVES
The Hartford establishes property and casualty reserves to provide for the
estimated costs of paying claims under insurance policies written by The
Hartford. These reserves include estimates for both claims that have been
reported and those that have been incurred but not reported to The Hartford and
include estimates of all expenses associated with processing and settling these
claims. This estimation process is primarily based on historical experience and
involves a variety of actuarial techniques which analyze trends and other
relevant factors.
As a result of September 11, the Company established estimated gross and net
reserves of $1.1 billion and $556, respectively, 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
incurred but not reported policyholder losses and costs incurred in settling
claims. The Company continues to carry the original incurred amount related to
September 11, less any paid losses. Reported losses to date have fallen within
the original reserved amounts. However, there is significant uncertainty around
September 11, particularly with regard to inhalation claims, stress claims and
other bodily injury, as well as the three year statute of limitations in New
York State. Included in net reserves was an estimate of amounts recoverable
under the Company's ceded reinsurance programs. Although management anticipates
certain claims for recovery to be challenged, the impact of these challenges is
not expected to be material. Risk of non-collection due to the financial
condition of The Hartford's reinsurers has been mitigated as a result of the
Company's process of selecting its reinsurers. The Hartford's property and
casualty reinsurance is placed with reinsurers that meet strict financial
criteria established by the Company's credit committee. As a result of the
uncertainties involved in the estimation process, final claim settlements may
vary from present estimates.
The Hartford continues to receive claims that assert damages from asbestos- and
environmental-related exposures. Asbestos claims relate primarily to bodily
injuries asserted by those who came in contact with asbestos or products
containing asbestos. Environmental claims relate primarily to pollution related
clean-up costs. Due to deviations from past experience and a variety of social,
economic and legal issues, the Company's ability to estimate the unpaid claims
and claim adjustment expenses is significantly impacted. Further discussion may
be found in the Critical Accounting Estimates and Other Operations sections of
the MD&A.
Most of the Company's reserves do not include discounts. However, certain
liabilities for unpaid claims where the amount and timing of payments are fixed
and reliably determinable, principally for permanently disabled claimants, and
certain structured settlement contracts that fund loss run-offs for unrelated
parties, have been discounted to present value. The amount of the discount was
approximately $424 and $429 as of December 31, 2002 and 2001, respectively, and
amortization of
- 10 -
the discount had no material effect on net income during 2002, 2001 and 2000.
As of December 31, 2002, property and casualty reserves for claims and claim
adjustment expenses reported on a statutory basis exceeded those reported under
Generally Accepted Accounting Principles ("GAAP") by $27. The primary difference
resulted from the discounting of GAAP-basis workers' compensation reserves at
risk free interest rates, which exceeded the statutory discount rates set by
regulators, partially offset by the required exclusion from statutory reserves
of assumed retoactive reinsurance.
There were no significant changes in the mix of the Company's business that have
impacted property and casualty claims and claim adjustment expense reserves; nor
has the Company completed any significant loss portfolio transfers, structured
settlements or other transactions which would change claim payment patterns.
Further discussion on The Hartford's property and casualty reserves, including
asbestos and environmental claims reserves, may be found in the Reserves section
of the MD&A- Critical Accounting Estimates.
A reconciliation of liabilities for unpaid claims and claim adjustment expenses
is herein referenced from Note 7 of Notes to Consolidated Financial Statements.
A table depicting the historical development of the liabilities for unpaid
claims and claim adjustment expenses, net of reinsurance, follows.
LOSS DEVELOPMENT TABLE
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - NET OF REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, [1]
1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities for unpaid claims and
claim adjustment expenses, net of
reinsurance $10,498 $10,717 $10,776 $11,024 $12,202 $12,265 $12,401 $12,020 $11,857 $12,437 $12,688
CUMULATIVE PAID CLAIMS AND CLAIM EXPENSES
One year later 2,596 2,578 2,654 2,434 2,551 2,447 2,903 2,929 3,183 3,008
Two years later 4,282 4,207 4,179 4,004 4,078 4,223 4,626 4,873 4,851 --
Three years later 5,433 5,268 5,286 5,056 5,390 5,363 5,972 5,944 -- --
Four years later 6,229 6,112 6,040 6,077 6,211 6,303 6,617 -- -- --
Five years later 6,895 6,682 6,877 6,717 6,922 6,702 -- -- -- --
Six years later 7,354 7,391 7,406 7,303 7,178 -- -- -- -- --
Seven years later 7,987 7,861 7,924 7,478 -- -- -- -- -- --
Eight years later 8,411 8,332 8,052 -- -- -- -- -- -- --
Nine years later 8,851 8,426 -- -- -- -- -- -- -- --
Ten years later 8,917 -- -- -- -- -- -- -- -- --
LIABILITIES REESTIMATED
One year later 10,757 10,811 11,019 11,988 12,183 12,090 12,176 11,980 11,973 12,668
Two years later 10,970 11,009 12,142 11,992 12,065 11,808 12,048 11,975 12,218 --
Three years later 11,182 12,094 12,127 11,919 11,887 11,638 11,992 12,083 -- --
Four years later 12,304 12,157 12,113 11,789 11,772 11,511 12,008 -- -- --
Five years later 12,406 12,184 12,082 11,769 11,615 11,488 -- -- -- --
Six years later 12,462 12,165 12,088 11,640 11,556 -- -- -- -- --
Seven years later 12,414 12,218 11,981 11,568 -- -- -- -- -- --
Eight years later 12,500 12,154 11,902 -- -- -- -- -- -- --
Nine years later 12,472 12,076 -- -- -- -- -- -- -- --
Ten years later 12,414 -- -- -- -- -- -- -- -- --
DEFICIENCY (REDUNDANCY), NET OF
REINSURANCE $1,916 $1,359 $1,126 $544 $(646) $(777) $(393) $63 $361 $231
- ------------------------------------------------------------------------------------------------------------------------------------
The table above shows the cumulative deficiency (redundancy) of the Company's
reserves, net of reinsurance, as now estimated with the benefit of additional
information. Those amounts are comprised of changes in estimates of gross losses
and changes in estimates of related reinsurance recoveries. The table below, for
the periods presented, reconciles the net reserves to the gross reserves, as
initially estimated and recorded, and as currently estimated and recorded, and
computes the cumulative deficiency (redundancy) of the Company's reserves before
reinsurance.
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 2002
- ------------------------------------------------------------------------------------------------------------------------------------
NET RESERVE, AS INITIALLY ESTIMATED $10,776 $11,024 $12,202 $12,265 $12,401 $12,020 $11,857 $12,437 $12,688
Reinsurance and other recoverables, as initially
estimated 5,156 4,829 4,357 3,996 3,275 3,706 3,871 4,176 4,018
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS RESERVE, AS INITIALLY ESTIMATED $15,932 $15,853 $16,559 $16,261 $15,676 $15,726 $15,728 $16,613 $16,706
- ------------------------------------------------------------------------------------------------------------------------------------
NET REESTIMATED RESERVE $11,902 $11,568 $11,556 $11,488 $12,008 $12,083 $12,218 $12,668
Reestimated and other reinsurance recoverables 5,337 4,572 3,896 3,606 3,080 3,858 3,866 4,049
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS REESTIMATED RESERVE $17,239 $16,140 $15,452 $15,094 $15,088 $15,941 $16,084 $16,717
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS DEFICIENCY (REDUNDANCY) $1,307 $287 $(1,107)$(1,167) $(588) $(215) $356 $104
- ------------------------------------------------------------------------------------------------------------------------------------
[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.
- 11 -
The above tables exclude the liabilities and claim developments for certain
reinsurance coverages written for affiliated parties detailed in the table
below.
1994 1995 1996 1997 1998 1999 2000 2001 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, net and gross of reinsurance for unpaid
claims and claim adjustment expenses excluded $495 $550 $500 $505 $501 $456 $459 $423 $453
====================================================================================================================================
The following table reconciles the Loss Development Table to the Consolidated
Financial Statements:
2002 2001 2000
- ------------------------------------------------------------------
Loss Development Table:
Gross reserves $ 16,706 $ 16,613 $ 15,728
Exclusion of international
subsidiaries -- -- 106
Reinsurance - affiliated parties 453 423 459
==================================================================
Gross reserves per
Consolidated Financial
Statements (see Note 7) $ 17,159 $ 17,036 $ 16,293
==================================================================
The following table is derived from the Loss Reserve Development table and
summarizes the effect of reserve re-estimates, net of reinsurance, on calendar
year operations for the ten-year period ended December 31, 2002. The total of
each column details the amount of reserve re-estimates made in the indicated
calendar year and shows the accident years to which the re-estimates are
applicable. The amounts in the total accident year column on the far right
represent the cumulative reserve re-estimates during the ten year period ended
December 31, 2002 for the indicated accident year(s).
EFFECT OF NET RESERVE RE-ESTIMATES ON CALENDAR YEAR OPERATIONS
CALENDAR YEAR
---------------------------------------------------------------------------------------------------------
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
By Accident year
1992 & Prior $259 $213 $212 $1,122 $102 $56 $(48) $86 $(28) $(58) $1,916
1993 (119) (14) (37) (39) (29) 29 (33) (36) (20) (298)
1994 45 38 (78) (41) (12) (47) (43) (1) (139)
1995 (159) 19 (59) (99) (26) (22) 7 (339)
1996 (23) (45) (48) (95) (28) 13 (226)
1997 (57) (104) (55) 30 36 (150)
1998 57 42 71 39 209
1999 88 51 92 231
2000 121 137 258
2001 (14) (14)
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Total $259 $94 $243 $964 $(19) $(175) $(225) $(40) $116 $231 $1,448
====================================================================================================================================
CEDED REINSURANCE
Consistent with industry practice, The Hartford cedes insurance risk to
reinsurance companies. For Property & Casualty operations, these reinsurance
arrangements are intended to 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.
Reinsurance does not relieve The Hartford of its primary liability and, as such,
failure of reinsurers to honor their obligations could result in losses to The
Hartford. The Hartford evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk. The Company's monitoring procedures
include careful initial selection of its reinsurers, structuring agreements to
provide collateral funds where possible, and regularly monitoring the financial
condition and ratings of its reinsurers.
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, 2002, the largest amount of life insurance
retained on any one life by any one of the life operations was approximately
$2.5. In addition, the Company reinsures the majority of the minimum death
benefit guarantee and the guaranteed withdrawal benefits offered in connection
with its variable annuity contracts.
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 and 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
- 12 -
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.
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.
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.
EMPLOYEES
The Hartford had approximately 29,000 employees as of December 31, 2002.
AVAILABLE INFORMATION
The Hartford files annual, quarterly and current reports, proxy statements and
other documents with the Securities and Exchange Commission (the "SEC") under
the Securities Exchange Act of 1934 (the "Exchange Act"). The public may read
and copy any materials that The Hartford files with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including The Hartford, that file electronically with the SEC. The
public can obtain any documents that The Hartford files with the SEC at
http://www.sec.gov.
The Hartford also makes available free of charge on or through its Internet
website (http://thehartford.com) The Hartford's Annual Report on Form 10-K,
Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13(a) or 15(d) of the
Exchange Act as soon as reasonably practicable after The Hartford electronically
files such material with, or furnishes it to, the SEC.
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 1.8 million square feet. In addition, The Hartford leases
approximately 6.5 million square feet throughout the United States and 37
thousand square feet in other countries. All of the properties owned or leased
are used by one or more of all nine 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 involved in claims litigation arising in the ordinary course of
business, both as a liability insurer defending third-party claims brought
against insureds and as an insurer defending coverage claims brought against it.
The Hartford accounts for such activity through the establishment of unpaid
claim and claim adjustment expense reserves. Subject to the discussion of the
litigation involving Mac Arthur Company and its subsidiary, Western MacArthur
Company, both former regional distributors of asbestos products (collectively or
individually, "MacArthur"), below and the uncertainties discussed in Note 16(b)
of Notes to Consolidated Financial Statements under the caption "Asbestos and
Environmental Claims," management expects that the ultimate liability, if any,
with respect to such ordinary-course claims litigation, after consideration of
provisions made for potential losses and costs of defense, will not be material
to the consolidated financial condition, results of operations or cash flows of
The Hartford.
- 13 -
The Hartford is also involved in other kinds of legal actions, some of which
assert claims for substantial amounts. These actions include, among others,
putative state and federal class actions seeking certification of a state or
national class. Such putative class actions have alleged, for example,
underpayment of claims or improper underwriting practices in connection with
various kinds of insurance policies, such as personal and commercial automobile,
premises liability, and inland marine. The Hartford also is involved in
individual actions in which punitive damages are sought, such as claims alleging
bad faith in the handling of insurance claims. Management expects that the
ultimate liability, if any, with respect to such lawsuits, after consideration
of provisions made for potential losses and costs of defense, will not be
material to the consolidated financial condition of The Hartford. Nonetheless,
given the large or indeterminate amounts sought in certain of these actions, and
the inherent unpredictability of litigation, it is possible that an adverse
outcome in certain matters could, from time to time, have a material adverse
effect on the Company's consolidated results of operations or cash flows in
particular quarterly or annual periods.
As further discussed in the MD&A under the caption "Other Operations," The
Hartford continues to receive environmental and asbestos claims that involve
significant uncertainty regarding policy coverage issues. Regarding these
claims, The Hartford continually reviews its overall reserve levels,
methodologies and reinsurance coverages.
Hartford Accident and Indemnity Company ("Hartford A&I"), a subsidiary of the
Company, issued primary general liability policies to MacArthur during the
period 1967 to 1976. MacArthur sought coverage for asbestos-related claims from
Hartford A&I under these policies beginning in 1978. During the period between
1978 and 1987, Hartford A&I paid its full aggregate limits under these policies
plus defense costs. In 1987, Hartford A&I notified MacArthur that its available
limits under these policies had been exhausted, and MacArthur ceased submitting
claims to Hartford A&I under these policies.
On October 3, 2000, thirteen years after it had accepted Hartford A&I's notice
of exhaustion, MacArthur filed an action against Hartford A&I and another
insurer in the U.S. District Court for the Eastern District of New York, seeking
for the first time additional coverage for asbestos bodily injury claims under
The Hartford A&I primary policies. MacArthur seeks additional coverage on the
theory that Hartford A&I has exhausted only its products aggregate limit of
liability, not separate limits MacArthur alleges to be available for
non-products liability. The complaint seeks a declaration of coverage and
unquantified damages. Hartford A&I has moved for summary judgment dismissing
MacArthur's claims with prejudice. MacArthur has moved to dismiss the action
without prejudice. Both motions are pending.
On June 3, 2002, The St. Paul Companies, Inc. ("St. Paul") announced a
settlement of a coverage action brought by MacArthur against United States
Fidelity and Guaranty Company ("USF&G"), a subsidiary of St. Paul. Under the
settlement, St. Paul agreed to pay a total of $975 to resolve its asbestos
liability to MacArthur in conjunction with a proposed bankruptcy petition and
pre-packaged plan of reorganization to be filed by MacArthur. USF&G provided at
least 12 years of primary general liability coverage to MacArthur, but, unlike
Hartford A&I, had denied coverage and had refused to pay for defense or
indemnity.
On October 7, 2002, MacArthur filed an action in the Superior Court in Alameda
County, California, against Hartford A&I and two other insurers. As in the New
York action, MacArthur seeks a declaration of coverage and damages for asbestos
bodily injury claims. Five asbestos claimants who allegedly have obtained
default judgments against MacArthur also are joined as plaintiffs; they seek to
recover the amount of their default judgments and additional damages directly
from the defendant insurers and assert a right to an accelerated trial.
In its October 7, 2002 complaint, MacArthur alleges that it has approximately
$1.8 billion of unpaid asbestos liability judgments against it to date. The
ultimate amount of MacArthur's alleged non-products asbestos liability,
including any unresolved current claims and future demands, is currently
unknown. On Hartford A&I's motion, the court stayed the action until March 3,
2003, to allow the New York federal court time to rule first on the motions
pending there.
On November 22, 2002, MacArthur filed a bankruptcy petition and proposed plan of
reorganization, which seeks to implement the terms of its settlement with St.
Paul. MacArthur's bankruptcy filings indicate that it will seek to have the full
amount of its current and future asbestos liability estimated in conjunction
with plan confirmation. If such an estimation is made, MacArthur intends to ask
the Alameda County court to enter judgment against the insurers for the amount
of its total estimated liability, including unliquidated claims and future
demands, less the amount ultimately paid by St. Paul. Hartford A&I has filed an
adversary complaint in the MacArthur bankruptcy seeking a declaratory judgment
that any estimation made in the bankruptcy proceedings is not an adjudication of
MacArthur's asbestos liability for purposes of insurance coverage.
Hartford A&I intends to defend the MacArthur actions vigorously. Based on the
information currently available, management believes that Hartford A&I's
liability, if any, to MacArthur will not be finally resolved for at least a year
and most probably not for several years. In the opinion of management, the
ultimate outcome is highly uncertain for many reasons. It is not yet known, for
example, in which venue Hartford A&I's liability, if any, will be determined;
whether Hartford A&I's defenses based on MacArthur's long delay in asserting
claims for further coverage will be successful; how other significant coverage
defenses will be decided; or the extent to which the claims and default
judgments against MacArthur involve injury outside of the products and completed
operations hazard definitions of the policies. In the opinion of management, an
adverse outcome could have a material adverse effect on the Company's results of
operations, financial condition and liquidity.
In addition, on May 14, 2002, The Hartford announced its participation, along
with several dozen other insurance carriers, in a settlement in principle with
its insured, PPG Industries ("PPG"), of litigation arising from asbestos
exposures involving Pittsburgh Corning Corporation, which is 50% owned by PPG.
(For further discussion, see Note 16(b) of Notes to Consolidated Financial
Statements.)
- 14 -
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company ("HLIC"), et al., in favor of Bancorp in the amount of $118.
The case involved claims of patent infringement, misappropriation of trade
secrets, and breach of contract against HLIC and its affiliate International
Corporate Marketing Group, LLC ("ICMG"). The judge dismissed the patent
infringement claim on summary judgment. The jury's award was based on the last
two claims. On August 28, 2002, the Court entered an order awarding Bancorp
prejudgment interest on the breach of contract claim in the amount of $16.
HLIC and ICMG have appealed the judgment on the trade secret and breach of
contract claims. Bancorp has cross-appealed the pretrial dismissal of its patent
infringement claim. The Company's management, based on the advice of its legal
counsel, believes that there is a substantial likelihood that the judgment will
not survive at its current amount. Based on the advice of legal counsel
regarding the potential outcomes of this litigation, the Company recorded an $11
after-tax charge for this matter in the first quarter of 2002 to increase
litigation reserves. Should HLIC and ICMG not succeed in eliminating or reducing
the judgment, a significant additional expense would be recorded in the future
related to this matter.
The Company is involved in arbitration with one of its primary reinsurers
relating to policies with death benefit guarantees written from 1994 to 1999.
The arbitration involves alleged breaches under the reinsurance treaties.
Although the Company believes that its position in this pending arbitration is
strong, an adverse outcome could result in a decrease to the Company's statutory
surplus and capital and potentially increase the death benefit costs incurred by
the Company in the future. The arbitration hearing was held during the fourth
quarter of 2002, but no decision has been rendered.
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 2002.
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.
- -----------------------------------------------------------------
2002
Common Stock Price
High $68.56 $69.97 $58.63 $50.10
Low 59.93 58.04 41.00 37.38
Dividends Declared 0.26 0.26 0.26 0.27
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
=================================================================
As of February 19, 2003, the Company had approximately 115,000 shareholders. The
closing price of The Hartford's common stock on the NYSE on February 19, 2003
was $37.11.
On October 24, 2002, The Hartford's Board of Directors declared a quarterly
dividend of $0.27 per share payable on January 2, 2003 to shareholders of record
as of December 2, 2002. 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".
- 15 -
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS)
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Total revenues [1] $ 15,907 $ 15,147 $ 14,703 $ 13,528 $ 15,022
Income before cumulative effect of accounting
changes [2] 1,000 541 974 862 1,015
Net income [2] [3] 1,000 507 974 862 1,015
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 182,043 $ 181,593 $ 171,951 $ 167,486 $ 150,632
Long-term debt 2,596 1,965 1,862 1,548 1,548
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 1,468 1,412 1,243 1,250 1,250
Total stockholders' equity 10,734 9,013 7,464 5,466 6,423
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DATA
BASIC EARNINGS PER SHARE [2]
Income before cumulative effect of accounting changes
[2] $ 4.01 $ 2.27 $ 4.42 $ 3.83 $ 4.36
Net income [2] [3] 4.01 2.13 4.42 3.83 4.36
DILUTED EARNINGS PER SHARE [2]
Income before cumulative effect of accounting changes
[2] 3.97 2.24 4.34 3.79 4.30
Net income [2] [3] 3.97 2.10 4.34 3.79 4.30
Dividends declared per common share 1.05 1.01 0.97 0.92 0.85
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Mutual fund assets [4] $ 15,321 $ 16,809 $ 11,432 $ 6,374 $ 2,506
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [5] 99.2 112.4 102.4 103.3 102.9
====================================================================================================================================
[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 COLI business from MBL Life Assurance Co. of New Jersey.
Also, 1998 includes revenues from London & Edinburgh, which was sold in
November 1998, of $1,117.
[2] 2002 includes $76 tax benefit in Life, $11 after-tax expense in Life
related to Bancorp and an $8 after-tax benefit in Life's September 11
exposure. 2001 includes $440 of losses related to September 11 and a $130
tax benefit at Life.
[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 No. 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in
Securitized Financial Assets".
[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] Represents statutory ratio. 2001 includes the impact of September 11.
Excluding the impact of September 11, the 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:
2002 2001 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------------
United States Industry Combined Ratios [1] 105.7 116.0 110.1 107.8 105.6
- ------------------------------------------------------------------------------------------------------------------------------------
[1] Represents statutory ratio. U.S. Industry Combined Ratio information
obtained from A.M. Best. Combined ratio for 2002 is an A.M. Best estimate
prepared as of January 2003.
- 16 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT FOR 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, 2002, compared with December 31, 2001, and its
results of operations for each of the three years in the period ended December
31, 2002. 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 (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 difficulty in
predicting the Company's potential exposure for asbestos and environmental
claims and related litigation, in particular, significant uncertainty with
regard to the outcome of the Company's current dispute with Mac Arthur Company
and its subsidiary, Western MacArthur Company (collectively or individually,
"MacArthur"); the uncertain nature of damage theories and loss amounts and the
development of additional facts related to the September 11 terrorist attack
("September 11"); the uncertain impact on the Company of the Bush
Administration's budget proposals relating to the distribution of nontaxable
dividends to shareholders and the creation of new tax-favored individual savings
accounts; the response of reinsurance companies under reinsurance contracts, the
impact of increasing reinsurance rates, and the availability and adequacy of
reinsurance to protect the Company against losses; the possibility of more
unfavorable loss experience than anticipated; the possibility of general
economic and business conditions that are less favorable than anticipated; the
incidence and severity of catastrophes, both natural and man-made; the effect of
changes in interest rates, the stock markets or other financial markets;
stronger than anticipated competitive activity; unfavorable legislative,
regulatory or judicial developments; the Company's ability to distribute its
products through distribution channels, both current and future; the uncertain
effects of emerging claim and coverage issues; the effect of assessments and
other surcharges for guaranty funds and second-injury funds and other mandatory
pooling arrangements; a downgrade in the Company's claims-paying, financial
strength or credit ratings; the ability of the Company's subsidiaries to pay
dividends to the Company; and other factors described in such forward-looking
statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
- --------------------------------------------------------------------------------
INDEX
- --------------------------------------------------------------------------------
Critical Accounting Estimates 17
Consolidated Results of Operations: Operating Summary 23
Life 27
Investment Products 29
Individual Life 30
Group Benefits 31
Corporate Owned Life Insurance (COLI) 32
Property & Casualty 33
Business Insurance 36
Personal Lines 37
Specialty Commercial 38
Reinsurance 40
Other Operations (Including Asbestos and
Environmental Claims) 41
Investments 46
Capital Markets Risk Management 50
Capital Resources and Liquidity 64
Effect of Inflation 71
- --------------------------------------------------------------------------------
CRITICAL ACCOUNTING ESTIMATES
- --------------------------------------------------------------------------------
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The Company has identified the following estimates as critical in that they
involve a higher degree of judgment and are subject to a significant degree of
variability: reserves; valuation of investments and derivative instruments;
deferred policy acquisition costs; pension and other postretirement benefits;
and contingencies. In developing these estimates management makes subjective and
complex judgments that are inherently uncertain and subject to material change
as facts and circumstances develop. Although variability is inherent in these
estimates, management believes the amounts provided are appropriate based upon
the facts available upon compilation of the financial statements.
- 17 -
RESERVES
LIFE
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. Changes in or deviations from
the assumptions used for mortality, morbidity, expected future premiums and
interest can significantly affect the Life reserve levels and related future
operations. Reserves also include unearned premiums, premium deposits, claims
incurred but not reported ("IBNR") and claims reported but not yet paid.
Reserves for assumed reinsurance are computed in a manner that is comparable to
direct insurance reserves.
The liability for policy benefits for universal life-type contracts and
interest-sensitive whole life policies is equal to the balance that accrues to
the benefit of policyholders, including credited interest, amounts that have
been assessed to compensate the Company for services to be performed over future
periods and any amounts previously assessed against policyholders that are
refundable on termination of the contract.
For investment contracts, policyholder liabilities are equal to the accumulated
policy account values, which consist of an accumulation of deposit payments plus
credited interest, less withdrawals and amounts assessed through the end of the
period. Certain investment contracts include provisions whereby a guaranteed
minimum death benefit is provided in the event that the contractholder's account
value at death is below the guaranteed value. Although the Company reinsures the
majority of the death benefit guarantees associated with its in-force block of
business, declines in the equity market may increase the Company's net exposure
to death benefits under these contracts. In addition, these contracts contain
various provisions for determining the amount of the death benefit guaranteed
following the withdrawal of a portion of the account value by the policyholder.
Partial withdrawals under certain of these contracts may not result in a
reduction in the guaranteed minimum death benefit in proportion to the portion
surrendered. The Company records the death benefit costs, net of reinsurance,
when deaths occur.
For the Company's group disability policies, the level of reserves is based on a
variety of factors including particular diagnoses, termination rates and benefit
levels.
PROPERTY & CASUALTY
The Hartford establishes property and casualty reserves to provide for the
estimated costs of paying claims made under policies written by the Company.
These reserves include estimates for both claims that have been reported and
those that have been incurred but not reported, and include estimates of all
expenses associated with processing and settling these claims. Estimating the
ultimate cost of future claims and claim adjustment expenses is an uncertain and
complex process. This estimation process is based largely on the assumption that
past developments are an appropriate predictor of future events and involves a
variety of actuarial techniques that analyze experience, trends and other
relevant factors. Reserve estimates can change over time because of unexpected
changes in the external environment. Potential external factors include (1)
changes in the inflation rate for goods and services related to covered damages
such as medical care, hospital care, auto parts, wages and home repair, (2)
changes in the general economic environment that could cause unanticipated
changes in the claim frequency per unit insured, (3) changes in the litigious
environment as evidenced by changes in claimant attorney representation in the
claims negotiation and settlement process, (4) changes in the judicial
environment regarding the interpretation of policy provisions relating to the
determination of coverage and/or the amount of damages awarded for certain types
of damages, (5) changes in the social environment regarding the general attitude
of juries in the determination of liability and damages, (6) changes in the
regulatory environment regarding rates, rating plans and policy forms, (7)
changes in the legislative environment regarding the definition of damages and
(8) new types of injuries caused by new types of exposure to injury: past
examples include breast implants, tobacco products, lead paint, construction
defect and blood product contam