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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended June 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 001-13958
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No[ ]
As of July 31, 2003, there were outstanding 282,409,553 shares of Common Stock,
$0.01 par value per share, of the registrant.
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INDEX
PAGE
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Independent Accountants' Review Report 3
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS 4
Condensed Consolidated Statements of Operations - Second Quarter
and Six Months Ended June 30, 2003 and 2002 4
Condensed Consolidated Balance Sheets - June 30, 2003 and December 31, 2002 5
Condensed Consolidated Statements of Changes in Stockholders' Equity -
Six Months Ended June 30, 2003 and 2002 6
Condensed Consolidated Statements of Comprehensive Income (Loss) - Second
Quarter and Six Months Ended June 30, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 24
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 54
ITEM 4. CONTROLS AND PROCEDURES 54
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 54
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 55
Signature 56
Exhibits Index 57
- 2 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of The
Hartford Financial Services Group, Inc. and subsidiaries (the "Company") as of
June 30, 2003, and the related condensed consolidated statements of operations
and comprehensive income (loss) for the second quarters and six months ended
June 30, 2003 and 2002, and changes in stockholders' equity and cash flows for
the six months ended June 30, 2003 and 2002. These interim financial statements
are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2002, and the related consolidated statements of
income, changes in stockholders' equity, comprehensive income and cash flows for
the year then ended (not presented herein); and in our report dated February 19,
2003, which includes an explanatory paragraph relating to the Company's change
in its method of accounting for goodwill and indefinite-lived intangible assets
in 2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2002 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
August 1, 2003
- 3 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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(IN MILLIONS, EXCEPT FOR PER SHARE DATA) 2003 2002 2003 2002
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(Unaudited) (Unaudited)
REVENUES
Earned premiums $ 2,812 $ 2,640 $ 5,661 $ 5,226
Fee income 656 672 1,273 1,334
Net investment income 810 726 1,606 1,432
Other revenues 147 120 269 233
Net realized capital gains (losses) 257 (166) 204 (173)
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TOTAL REVENUES 4,682 3,992 9,013 8,052
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BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,629 2,482 7,874 4,898
Amortization of deferred policy acquisition costs and present value
of future profits 557 573 1,121 1,128
Insurance operating costs and expenses 625 560 1,192 1,094
Other expenses 242 177 422 364
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TOTAL BENEFITS, CLAIMS AND EXPENSES 4,053 3,792 10,609 7,484
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INCOME (LOSS) BEFORE INCOME TAXES 629 200 (1,596) 568
Income tax expense (benefit) 122 15 (708) 91
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NET INCOME (LOSS) $ 507 $ 185 $ (888) $ 477
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BASIC EARNINGS (LOSS) PER SHARE $ 1.89 $ 0.75 $ (3.39) $ 1.93
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DILUTED EARNINGS (LOSS) PER SHARE [1] $ 1.88 $ 0.74 $ (3.39) $ 1.91
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Weighted average common shares outstanding 268.8 247.4 262.1 246.7
Weighted average common shares outstanding and dilutive potential
common shares [1] 270.2 250.7 262.1 250.2
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Cash dividends declared per share $ 0.27 $ 0.26 $ 0.54 $ 0.52
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[1] As a result of the net loss for the six months ended June 30, 2003,
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings
Per Share", requires the Company to use basic weighted average common
shares outstanding in the calculation of the six months ended June 30,
2003 diluted earnings per share, since the inclusion of options of 1.0
would have been antidilutive to the earnings per share calculation. In the
absence of the net loss, weighted average common shares outstanding and
dilutive potential common shares would have totaled 263.1.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(IN MILLIONS, EXCEPT FOR SHARE DATA) 2003 2002
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(Unaudited)
ASSETS
Investments
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Fixed maturities, available for sale, at fair value (amortized cost of $53,185 and $46,241) $ 57,137 $ 48,889
Equity securities, available for sale, at fair value (cost of $614 and $937) 671 917
Policy loans, at outstanding balance 2,889 2,934
Other investments 1,493 1,790
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Total investments 62,190 54,530
Cash 429 377
Premiums receivable and agents' balances 2,822 2,611
Reinsurance recoverables 6,193 5,027
Deferred policy acquisition costs and present value of future profits 6,915 6,689
Deferred income taxes 765 545
Goodwill 1,721 1,721
Other assets 4,210 3,397
Separate account assets 122,556 107,078
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TOTAL ASSETS $ 207,801 $ 181,975
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LIABILITIES
Reserve for future policy benefits and unpaid claims and claim adjustment expenses
Property and casualty $ 21,068 $ 17,091
Life 8,915 8,567
Other policyholder funds and benefits payable 26,254 23,956
Unearned premiums 4,454 3,989
Short-term debt 514 315
Long-term debt 3,337 2,596
Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding
solely junior subordinated debentures ("trust preferred securities") 1,296 1,468
Other liabilities 7,908 6,181
Separate account liabilities 122,556 107,078
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TOTAL LIABILITIES 196,302 171,241
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COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY
Common stock - 750,000,000 shares authorized, 285,144,711 and 258,184,483 shares issued,
$0.01 par value 3 3
Additional paid-in capital 3,869 2,784
Retained earnings 5,857 6,890
Treasury stock, at cost - 2,945,592 and 2,943,565 shares (37) (37)
Accumulated other comprehensive income 1,807 1,094
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TOTAL STOCKHOLDERS' EQUITY 11,499 10,734
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 207,801 $ 181,975
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED
JUNE 30,
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(IN MILLIONS, EXCEPT FOR SHARE DATA) 2003 2002
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COMMON STOCK/ADDITIONAL PAID-IN CAPITAL (Unaudited)
Balance at beginning of period $ 2,787 $ 2,364
Issuance of common stock in underwritten offering 1,161 --
Issuance of equity units (112) --
Issuance of shares and compensation expense associated with incentive and stock
compensation plans 32 83
Tax benefit on employee stock options and awards 4 17
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Balance at end of period 3,872 2,464
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RETAINED EARNINGS
Balance at beginning of period 6,890 6,152
Net income (loss) (888) 477
Dividends declared on common stock (145) (128)
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Balance at end of period 5,857 6,501
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TREASURY STOCK, AT COST
Balance at beginning of period (37) (37)
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Balance at end of period (37) (37)
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period 1,094 534
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Change in net unrealized gain/loss on securities, net of tax 732 183
Change in net gain/loss on cash-flow hedging instruments, net of tax (38) 14
Foreign currency translation adjustments 19 (3)
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Total other comprehensive income 713 194
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Balance at end of period 1,807 728
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TOTAL STOCKHOLDERS' EQUITY $ 11,499 $ 9,656
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OUTSTANDING SHARES (IN THOUSANDS)
Balance at beginning of period 255,241 245,536
Issuance of common stock in underwritten offering 26,377 --
Issuance of shares under incentive and stock compensation plans 581 2,040
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Balance at end of period 282,199 247,576
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
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(IN MILLIONS) 2003 2002 2003 2002
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COMPREHENSIVE INCOME (LOSS) (Unaudited) (Unaudited)
Net income (loss) $ 507 $ 185 $ (888) $ 477
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OTHER COMPREHENSIVE INCOME (LOSS)
Change in net unrealized gain/loss on securities, net of tax 555 418 732 183
Change in net gain/loss on cash-flow hedging instruments, net of tax (15) 31 (38) 14
Foreign currency translation adjustments 10 1 19 (3)
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Total other comprehensive income 550 450 713 194
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TOTAL COMPREHENSIVE INCOME (LOSS) $ 1,057 $ 635 $ (175) $ 671
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 6 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
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(IN MILLIONS) 2003 2002
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(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ (888) $ 477
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Amortization of deferred policy acquisition costs and present value of future profits 1,121 1,128
Additions to deferred policy acquisition costs and present value of future profits (1,568) (1,430)
Change in:
Reserve for future policy benefits and unpaid claims and claim adjustment expenses and
unearned premiums 4,791 795
Reinsurance recoverables (1,184) 24
Receivables (169) (214)
Payables and accruals (217) (121)
Accrued and deferred income taxes (739) 285
Net realized capital (gains) losses (204) 173
Depreciation and amortization 11 35
Other, net 382 (63)
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NET CASH PROVIDED BY OPERATING ACTIVITIES 1,336 1,089
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INVESTING ACTIVITIES
Purchase of investments (16,196) (8,368)
Sale of investments 8,960 4,967
Maturity of investments 1,928 1,254
Sale of affiliates -- 3
Additions to property, plant and equipment (72) (90)
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NET CASH USED FOR INVESTING ACTIVITIES (5,380) (2,234)
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FINANCING ACTIVITIES
Issuance of short-term debt, net -- 16
Issuance of long-term debt 918 --
Repayment of trust preferred securities (180) --
Issuance of common stock in underwritten offering 1,162 --
Net proceeds from investment and universal life-type contracts charged against
policyholder accounts 2,313 1,136
Dividends paid (138) (128)
Proceeds from issuance of shares under incentive and stock purchase plans 17 79
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NET CASH PROVIDED BY FINANCING ACTIVITIES 4,092 1,103
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Foreign exchange rate effect on cash 4 8
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Net increase (decrease) in cash 52 (34)
Cash - beginning of period 377 353
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CASH - END OF PERIOD $ 429 $ 319
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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NET CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Income taxes $ 45 $ (185)
Interest $ 133 $ 119
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 7 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions except per share data unless otherwise stated)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The Hartford Financial Services Group, Inc. and its consolidated subsidiaries
("The Hartford" or the "Company") provide investment products and life and
property and casualty insurance to both individual and business customers in the
United States and internationally.
The condensed consolidated financial statements have been prepared on the basis
of accounting principles generally accepted in the United States of America,
which differ materially from the accounting practices prescribed by various
insurance regulatory authorities. Subsidiaries in which The Hartford has at
least a 20% interest, but less than a majority ownership interest, are reported
on the equity basis. All material intercompany transactions and balances between
The Hartford, its subsidiaries and affiliates have been eliminated.
The accompanying condensed consolidated financial statements and the condensed
notes as of June 30, 2003, and for the second quarter and six months ended June
30, 2003 and 2002 are unaudited. These financial statements reflect all
adjustments (consisting only of normal accruals) which are, in the opinion of
management, necessary for the fair presentation of the financial position,
results of operations, and cash flows for the interim periods. These condensed
consolidated financial statements and condensed notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in The Hartford's 2002 Form 10-K Annual Report. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
(B) RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial information
to conform to the current period classifications.
(C) USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The most significant estimates include those used in determining reserves for
future policy benefits and unpaid claim and claim adjustment expenses; deferred
policy acquisition costs; valuation of investments and derivative instruments;
pension and other postretirement benefits; and contingencies.
(D) SIGNIFICANT ACCOUNTING POLICIES
For a description of accounting policies, see Note 1 of Notes to Consolidated
Financial Statements included in The Hartford's 2002 Form 10-K Annual Report.
(E) ADOPTION OF NEW ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board ("FASB") issued SFAS No.
150, "Accounting for Certain Financial Instruments with Characteristics of Both
Liabilities and Equity". SFAS No. 150 establishes standards for classifying and
measuring as liabilities certain financial instruments that embody obligations
of the issuer and have characteristics of both liabilities and equity.
Generally, SFAS No. 150 requires liability classification for two broad classes
of financial instruments: (a) instruments that represent, or are indexed to, an
obligation to buy back the issuer's shares regardless of whether the instrument
is settled on a net-cash or gross physical basis and (b) obligations that (i)
can be settled in shares but derive their value predominately from another
underlying instrument or index (e.g. security prices, interest rates, and
currency rates), (ii) have a fixed value, or (iii) have a value inversely
related to the issuer's shares. Mandatorily redeemable equity and written
options requiring the issuer to buyback shares are examples of financial
instruments that should be reported as liabilities under this new guidance.
SFAS No. 150 specifies accounting only for certain freestanding financial
instruments and does not affect whether an embedded derivative must be
bifurcated and accounted for in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
SFAS No. 150 is effective for instruments entered into or modified after May 31,
2003 and for all other instruments beginning with the first interim reporting
period beginning after June 15, 2003. Adoption of this statement did not have a
material impact on the Company's consolidated financial condition or results of
operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities" ("FIN 46"), which requires an enterprise to assess
whether consolidation of an entity is appropriate based upon its interests in a
variable interest entity ("VIE"). A VIE is an entity in which the equity
investors do not have the characteristics of a controlling financial interest or
do not have sufficient equity at risk for the entity to finance its activities
without additional subordinated financial support from other parties. The
initial determination of whether an entity is a VIE shall be made on the date at
which an enterprise becomes involved with the entity. An enterprise shall
consolidate a VIE if it has a variable interest that will absorb a majority of
the VIE's expected losses if they occur, receive a majority of the entity's
expected residual returns if they occur or both. FIN 46 is effective immediately
for new VIEs established or purchased subsequent to January 31, 2003. For VIEs
entered into prior to February 1, 2003, FIN 46 is effective for interim periods
beginning after June 15, 2003. The adoption of FIN 46 did not have a material
impact on the Company's financial condition or results of operations as there
were no material VIEs identified which required consolidation. FIN 46 further
requires the disclosure of certain information related to VIEs in which the
Company holds a significant variable interest. As of June 30, 2003, the Company
did not own any such interests that required disclosure.
- 8 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
(E) ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45" or "the Interpretation"). FIN 45 requires
certain guarantees to be recorded at fair value and also requires a guarantor to
make new disclosures, even when the likelihood of making payments under the
guarantee is remote. In general, the Interpretation applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying instrument or
indices (e.g., security prices, interest rates, or currency rates) that are
related to an asset, liability or an equity security of the guaranteed party.
The recognition provisions of FIN 45 are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 15, 2002. For further discussion, see Note 5(c),
"Lease Commitments", of Notes to Condensed Consolidated Financial Statements and
Note 1(h), "Other Investment and Risk Management Activities-Specific
Strategies", of Notes to Consolidated Financial Statements included in The
Hartford's 2002 Form 10-K Annual Report. Adoption of this statement did not have
a material impact on the Company's consolidated financial condition or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The
principal difference between SFAS No. 146 and Issue 94-3 is that SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. Adoption of SFAS No. 146
resulted in a change in the timing of when a liability is recognized for certain
restructuring activities after December 31, 2002. Adoption of this statement did
not have a material impact on the Company's consolidated financial condition or
results of operations.
(F) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In July 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a final Statement of Position
03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP").
The SOP addresses a wide variety of topics, some of which may have a significant
impact on the Company. The major provisions of the SOP require:
o Recognizing expenses for a variety of contracts and contract features,
including guaranteed minimum death benefits ("GMDB") and annuitization
options, on an accrual basis versus the previous method of recognition upon
payment;
o Reporting and measuring assets and liabilities of certain separate account
products as general account assets and liabilities when specified criteria
are not met;
o Reporting and measuring seed money in separate accounts as general account
assets based on the insurer's proportionate beneficial interest in the
separate account's underlying assets; and
o Capitalizing sales inducements that meet specified criteria and amortizing
such amounts over the life of the contracts using the same methodology as
used for amortizing deferred policy acquisition costs ("DAC").
The SOP is effective for financial statements for fiscal years beginning after
December 15, 2003. At the date of initial application of the SOP, the Company
will have to make various determinations, such as qualification for separate
account treatment, classification of securities in separate account arrangements
not meeting the criteria of the SOP, significance of mortality and morbidity
risk, adjustments to contract holder liabilities, and adjustments to estimated
gross profits, all of which may have a significant effect on the Company's
consolidated financial condition and results of operations.
Based on management's preliminary review of the SOP and market conditions as of
June 30, 2003, it appears that a significant impact to the Company is the
requirement for recording a liability for variable annuity products with a
guaranteed minimum death benefit feature. The determination of this liability is
based on models that involve numerous estimates and subjective judgments,
including those regarding expected market rates of return and volatility,
contract surrender rates and mortality experience. Based on management's
preliminary review of the SOP, the unrecorded GMDB liabilities, net of
anticipated reinsurance recoverables of approximately $300, are estimated to be
between $75 and $85 at June 30, 2003. Net of estimated DAC and income tax
effects, the cumulative effect of establishing the required GMDB reserves as of
June 30, 2003 would result in an estimated reduction of net income of between
$35 and $45. The ultimate actual impact on the Company's financial statements
may differ from management's current estimates.
Since the SOP is not yet effective, the Company has not recorded any liabilities
for the risks associated with GMDB offered on the Company's variable annuity
business, but has consistently recorded the related expenses in the period the
benefits are paid to contractholders. Net of reinsurance, the Company paid $14
and $31 for the second quarter and six months ended June 30, 2003, respectively,
and $9 and $16 for the second quarter and six months ended June 30, 2002,
respectively, in GMDB benefits to contractholders. Further downturns in the
equity markets could increase these payments. At June 30, 2003, the Company held
$64.8 billion of variable annuities in its separate accounts. The Company
estimates its net amount at risk relating to these variable annuities (the
amount by which current account values of its variable annuity contracts are not
sufficient to meet its GMDB commitments) at $17.4 billion. However, at June 30,
2003, approximately 78% of the Company's net amount at risk was covered by
reinsurance, resulting in a retained net amount at risk of $3.8 billion.
- 9 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
(F) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
In addition to the foregoing impact of the SOP, certain of the Company's fixed
annuity products which are currently recorded as separate account assets and
liabilities are expected to be revalued upon reclassification to the general
account. The Company is currently assessing this requirement and all the other
impacts of the SOP, and has not yet determined the total impact on the Company's
consolidated financial condition or results of operations.
In May 2003, the EITF reached a consensus in EITF Issue No. 03-4, "Determining
the Classification and Benefit Attribution Method for a Cash Balance Pension
Plan", that cash balance plans should be considered defined benefit plans for
purposes of applying SFAS No. 87, "Employers' Accounting for Pension Plans". The
EITF also concluded that the attribution method used to determine the benefit
for the entire plan for certain cash balance plans should be the traditional
unit credit method. The consensus is effective as of the next measurement date
of the plan, which is December 31, 2003, for the Company's cash balance plan.
Any difference between the valuation under the previous attribution method and
the new attribution method should be recognized as an actuarial gain or loss.
Adoption of this issue is not expected to have a material impact on the
Company's consolidated financial condition or results of operations.
In April 2003, the FASB issued guidance in Statement 133 Implementation Issue
No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only
Partially Related to the Creditworthiness of the Obligor of Those Instruments",
("DIG B36") that addresses the instances in which bifurcation of an instrument
into a debt host contract and an embedded credit derivative is required. DIG B36
indicates that bifurcation is necessary in a modified coinsurance arrangement
when the yield on the receivable and payable is based on a specified proportion
of the ceding company's return on either its general account assets or a
specified block of those assets, rather than the overall creditworthiness of the
ceding company. The Company believes that the majority of its modified
coinsurance and funds withheld agreements are not impacted by DIG B36. While the
Company believes there will be no material effect on its consolidated results of
operations or financial condition due to the implementation of this guidance, it
is currently evaluating those potential impacts. The guidance is effective for
quarterly periods beginning after September 15, 2003.
DIG B36 is also applicable to corporate issued debt securities that incorporate
credit risk exposures that are unrelated or only partially related to the
creditworthiness of the obligor. The Company is currently evaluating the impact
of DIG B36 on such corporate issued debt securities. The Company does not
believe the adoption of DIG B36 will have a material effect on the Company's
consolidated financial condition or results of operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of SFAS No. 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133.
SFAS No. 149 amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group ("DIG") process that effectively required amendments to
SFAS No. 133, in connection with other FASB projects dealing with financial
instruments. SFAS No. 149 also clarifies under what circumstances a contract
with an initial net investment and purchases and sales of when-issued securities
that do not yet exist meet the characteristics of a derivative as discussed in
SFAS No. 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003. The provisions of this statement should be applied prospectively,
except as stated below.
The provisions of this statement that relate to SFAS No. 133 DIG issues that
have been effective for fiscal quarters that began prior to June 15, 2003,
should continue to be applied in accordance with their respective effective
dates. In addition, the guidance in SFAS No. 149 related to forward purchases or
sales of when-issued securities or other securities that do not yet exist,
should be applied to both existing contracts and new contracts entered into
after June 30, 2003. The Company has determined that the adoption of SFAS No.
149 will not have a material impact on the Company's consolidated financial
condition or results of operations.
(G) STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment to FASB No. 123", which
provides three optional transition methods for entities that decide to
voluntarily adopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock Issued to Employees", and modifies the disclosure
requirements of SFAS No. 123. In January 2003, the Company adopted the fair
value recognition provisions of accounting for employee stock compensation and
used the prospective transition method. Under the prospective method,
stock-based compensation expense is recognized for awards granted or modified
after the beginning of the fiscal year in which the change is made. The fair
value of stock-based awards granted during the six months ended June 30, 2003
was $32, after-tax. The fair value of these awards will be recognized as expense
over the awards' vesting periods, generally three years.
All stock-based awards granted or modified prior to January 1, 2003 will
continue to be valued using the intrinsic value-based provisions set forth in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock-Issued
to Employees".
- 10 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
(G) STOCK-BASED COMPENSATION (CONTINUED)
Under the intrinsic value method, compensation expense is determined on the
measurement date, which is the first date on which both the number of shares the
employee is entitled to receive and the exercise price are known. Compensation
expense, if any, is measured based on the award's intrinsic value, which is the
excess of the market price of the stock over the exercise price on the
measurement date. The expense, including non-option plans, related to
stock-based employee compensation included in the determination of net income
for the second quarter and six months ended June 30, 2003 is less than that
which would have been recognized if the fair value method had been applied to
all awards granted since the effective date of SFAS No. 123. (For further
discussion of the Company's stock-based compensation plans, see Note 11 of Notes
to Consolidated Financial Statements included in The Hartford's 2002 Form 10-K
Annual Report.)
The following table illustrates the effect on net income (loss) and earnings
(loss) per share as if the fair value method had been applied to all outstanding
and unvested awards in each period.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------- -----------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 507 $ 185 $ (888) $ 477
Add: Stock-based employee compensation expense included in reported net
income (loss), net of related tax effects [1] 9 1 11 2
Deduct: Total stock-based employee compensation expense determined under
the fair value method for all awards, net of related tax effects (17) (15) (26) (25)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) [2] $ 499 $ 171 $ (903) $ 454
- ------------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) per share:
Basic - as reported $ 1.89 $ 0.75 $ (3.39) $ 1.93
Basic - pro forma [2] $ 1.86 $ 0.69 $ (3.45) $ 1.84
Diluted - as reported [3] $ 1.88 $ 0.74 $ (3.39) $ 1.91
Diluted - pro forma [2] [3] $ 1.85 $ 0.68 $ (3.45) $ 1.81
====================================================================================================================================
[1] Includes the impact of non-option plans of $1 and $1, respectively, for the
second quarter, and $2 and $2, respectively, for the six months ended June
30, 2003 and 2002.
[2] The pro forma disclosures are not representative of the effects on net
income (loss) and earnings (loss) per share in future periods.
[3] As a result of the net loss in the six months ended June 30, 2003, SFAS No.
128 requires the Company to use basic weighted average common shares
outstanding in the calculation of the six months ended June 30, 2003
diluted earnings (loss) per share, since the inclusion of options of 1.0
would have been antidilutive to the earnings per share calculation. In the
absence of the net loss, weighted average common shares outstanding and
dilutive potential common shares would have totaled 263.1.
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", and accordingly ceased all amortization of goodwill.
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
JUNE 30, 2003 DECEMBER 31, 2002
------------------------------------------- ---------------------------------------
GROSS CARRYING ACCUMULATED NET GROSS CARRYING ACCUMULATED NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ------------------------------------------------------------------------------------------------------------------------------------
Present value of future profits $ 1,406 $ 323 $ 1,406 $ 274
Renewal rights 46 30 42 27
Other 9 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,461 $ 353 $ 1,448 $ 301
====================================================================================================================================
- 11 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED)
Net amortization expense for the second quarter and six months ended June 30,
2003 was $27 and $52, respectively. Net amortization expense for the second
quarter and six months ended June 30, 2002 was $26 and $52, respectively.
Estimated future net amortization expense for the succeeding five years is as
follows:
FOR THE YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------
2003 $ 123
2004 $ 117
2005 $ 106
2006 $ 95
2007 $ 80
=================================================================
The carrying amounts of goodwill as of June 30, 2003 and December 31, 2002, are
shown below.
JUNE 30, DECEMBER 31,
2003 2002
- ------------------------------------------------------------------
Life $ 796 $ 796
Property & Casualty 153 153
Corporate 772 772
- ------------------------------------------------------------------
Total $ 1,721 $ 1,721
==================================================================
NOTE 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS
(A) SECURITIES LENDING
The Company has engaged in a securities lending program to generate additional
income, whereby certain domestic fixed income securities are loaned for a short
period of time from the Company's portfolio to qualifying third parties, via a
lending agent. Borrowers of these securities provide collateral of 102% of the
market value of the loaned securities. Acceptable collateral may be in the form
of cash or U.S. Government securities. The market value of the loaned securities
is monitored and additional collateral is obtained if the market value of the
collateral falls below 100% of the market value of the loaned securities. Under
the terms of the securities lending program, the lending agent indemnifies the
Company against borrower defaults. As of June 30, 2003, the fair value of the
loaned securities was approximately $1.0 billion and was included in fixed
maturities. The cash collateral received as of June 30, 2003 of approximately
$1.0 billion was invested in short-term securities and was also included in
fixed maturities, with a corresponding liability recognized for the obligation
to return the collateral recorded in other liabilities. The Company retains a
portion of the income earned from the cash collateral or receives a fee from the
borrower. The Company recorded income from securities lending transactions, net
of lending fees, that was immaterial for the second quarter and six months ended
June 30, 2003, which was included in net investment income.
(B) DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, for one of four
Company-approved objectives: to hedge risk arising from interest rate, price or
currency exchange rate volatility; to manage liquidity; to control transaction
costs; or to enter into income enhancement and replication transactions.
All of the Company's derivative transactions are permitted uses of derivatives
under the derivatives use plan filed with and/or approved by, as applicable, by
the State of Connecticut and State of New York insurance departments. The
Company does not make a market or trade in these instruments for the express
purpose of earning short-term trading profits.
For a detailed discussion of the Company's use of derivative instruments, see
Note 1(h) of Notes to Consolidated Financial Statements included in The
Hartford's 2002 Form 10-K Annual Report.
As of June 30, 2003 and December 31, 2002, the Company carried $318 and $299,
respectively, of derivative assets in other investments and $226 and $208,
respectively, of derivative liabilities in other liabilities. In addition, the
Company recognized embedded derivative liabilities related to guaranteed minimum
withdrawal benefits ("GMWB") on certain of its variable annuity contracts of $32
and $48 at June 30, 2003 and December 31, 2002, respectively, in other
policyholder funds. Offsetting reinsurance arrangements recognized as derivative
assets at June 30, 2003 and December 31, 2002 were $32 and $48, respectively,
and were included in reinsurance recoverables.
Cash-Flow Hedges
For the second quarter and six months ended June 30, 2003 and 2002, the
Company's gross gains and losses representing the total ineffectiveness of all
cash-flow hedges were immaterial, with the net impact reported as net realized
capital gains and losses.
Gains and losses on derivative contracts that are reclassified from accumulated
other comprehensive income ("AOCI") to current period earnings are included in
the line item in the statement of income in which the hedged item is recorded.
As of June 30, 2003 and 2002, the after-tax deferred net gains on derivative
instruments accumulated in AOCI that are expected to be reclassified to earnings
during the next twelve months were $11 and $3, respectively. This expectation is
based on the anticipated interest payments on hedged investments in fixed
maturity securities that will occur over the next twelve months, at which time
the Company will recognize the deferred net gains and losses as an adjustment to
interest income over the term of the investment cash flows. The maximum term
over which the Company is hedging its exposure to the variability of future cash
flows (for all forecasted transactions, excluding interest payments on
variable-rate debt) is twelve months. As of June 30, 2003 and December 31, 2002,
the Company held derivative notional value related to strategies categorized as
cash-flow hedges of $2.9 billion and $3.2 billion, respectively. For the second
quarter and six months ended June 30, 2003 and 2002, the net reclassifications
from AOCI to earnings resulting from the discontinuance of cash-flow hedges were
immaterial.
- 12 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(B) DERIVATIVE INSTRUMENTS (CONTINUED)
Fair-Value Hedges
For the second quarter and six months ended June 30, 2003 and 2002, the
Company's gross gains and losses representing the total ineffectiveness of all
fair-value hedges were immaterial, with the net impact reported as net realized
capital gains and losses. All components of each derivative's gain or loss are
included in the assessment of hedge effectiveness. As of June 30, 2003 and
December 31, 2002, the Company held $728 and $800, respectively, in derivative
notional value related to strategies categorized as fair-value hedges.
Other Investment and Risk Management Activities
The Company's other investment and risk management activities primarily relate
to strategies used to reduce economic risk or enhance income, and do not receive
hedge accounting treatment. Swap agreements, interest rate cap and floor
agreements and option contracts are used to reduce economic risk. Income
enhancement and replication transactions include the use of written covered call
options, which offset embedded equity call options, total return swaps and
synthetic replication of cash market instruments. The change in the value of all
derivatives held for other investment and risk management purposes is reported
in current period earnings as net realized capital gains and losses. As of June
30, 2003 and December 31, 2002, the Company held $7.1 billion and $6.8 billion,
respectively, in derivative notional value related to strategies categorized as
Other Investment and Risk Management Activities. In addition, the Company issues
certain variable annuity products that contain a GMWB. The GMWB gives the
policyholder the right to make periodic surrenders that total an amount equal to
the policyholders' premium payments. This guarantee will remain in effect if
periodic surrenders each contract year do not exceed an amount equal to 7% of
total premium payments. If the policyholder chooses to surrender an amount equal
to more than 7% in a contract year, then the guarantee may be reduced to an
amount less than premium payments. In addition, the policyholder has the option,
after a specified time period, to reset the guarantee value to the then-current
account value, if greater. The GMWB represents an embedded derivative liability
in the variable annuity contract. It is carried at fair value and reported in
other policyholder funds. The fair value of the GMWB obligations are calculated
based on actuarial assumptions related to the projected benefits and related
contract charges over the lives of the contracts. Because of the dynamic and
complex nature of these cash flows, stochastic techniques under a variety of
market return scenarios and other best estimate assumptions are used. This model
involves numerous estimates and subjective judgments including those regarding
expected market rates of return and volatility and policyholder behavior.
For all contracts in effect as of June 30, 2003, the Company has entered into a
reinsurance arrangement to offset its exposure to the GMWB for the lives of
those contracts. This arrangement is recognized as a derivative asset and
carried at fair value in reinsurance recoverables. Changes in the fair value of
both the derivative assets and liabilities related to the GMWB are recorded in
net realized capital gains and losses. Beginning in July 2003, the Company has
utilized substantially all of its existing reinsurance under the current
arrangement and will be ceding only a very small number of new contracts.
Substantially all new contracts with the GMWB will not be covered by
reinsurance. These unreinsured contracts are expected to generate some
volatility in net income as the underlying embedded derivative liabilities are
marked to fair value each reporting period, resulting in the recognition of net
realized capital gains or losses in response to changes in certain critical
factors including capital market conditions and policyholder behavior.
For further discussion of the Company's other investment and risk management
activities, see "Other Investments and Risk Management Activities" in Note 1(h)
to Notes of Consolidated Financial Statements included in The Hartford's 2002
Form 10-K Annual Report.
NOTE 4. EARNINGS (LOSS) PER SHARE
The following tables present a reconciliation of net income (loss) and shares
used in calculating basic earnings (loss) per share to those used in calculating
diluted earnings (loss) per share.
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------------------------- -------------------------------------
NET PER SHARE NET INCOME PER SHARE
JUNE 30, 2003 INCOME SHARES AMOUNT (LOSS) SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) available to common shareholders $ 507 268.8 $ 1.89 $ (888) 262.1 $ (3.39)
------------- -----------
DILUTED EARNINGS (LOSS) PER SHARE [1]
Options -- 1.4 -- --
------------------------- --------------------------
Income (loss) available to common shareholders plus
assumed conversions $ 507 270.2 $ 1.88 $ (888) 262.1 $ (3.39)
====================================================================================================================================
[1] As a result of the net loss in the six months ended June 30, 2003, SFAS No.
128 requires the Company to use basic weighted average common shares
outstanding in the calculation of the six months ended June 30, 2003
diluted earnings (loss) per share, since the inclusion of options of 1.0
would have been antidilutive to the earnings per share calculation. In the
absence of the net loss, weighted average common shares outstanding and
dilutive potential common shares would have totaled 263.1.
- 13 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 4. EARNINGS (LOSS) PER SHARE (CONTINUED)
SECOND QUARTER ENDED SIX MONTHS ENDED
-------------------------------------- -------------------------------------
NET PER SHARE NET PER SHARE
JUNE 30, 2002 INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 185 247.4 $ 0.75 $ 477 246.7 $ 1.93
------------- -----------
DILUTED EARNINGS PER SHARE
Options -- 3.3 -- 3.5
------------------------- --------------------------
Income available to common shareholders plus
assumed conversions $ 185 250.7 $ 0.74 $ 477 250.2 $ 1.91
====================================================================================================================================
Basic earnings (loss) per share reflects the actual weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per share
includes the dilutive effect of outstanding options, using the treasury stock
method. Under the treasury stock method exercise of options is assumed, with the
proceeds used to repurchase common stock at the average market price for the
period.
NOTE 5. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
The Hartford is involved in claims litigation arising in the ordinary course of
business, both as a liability insurer defending third-party claims brought
against insureds and as an insurer defending coverage claims brought against it.
The Hartford accounts for such activity through the establishment of unpaid
claim and claim adjustment expense reserves. Subject to the discussion of the
litigation below involving Mac Arthur Company and its subsidiary, Western
MacArthur Company, both former regional distributors of asbestos products
(collectively or individually, "MacArthur"), and the uncertainties discussed in
(b) below under the caption "Asbestos and Environmental Claims," management
expects that the ultimate liability, if any, with respect to such
ordinary-course claims litigation, after consideration of provisions made for
potential losses and costs of defense, will not be material to the consolidated
financial condition, results of operations or cash flows of The Hartford.
The Hartford also is involved in other kinds of legal actions, some of which
assert claims for substantial amounts. These actions include, among others,
putative state and federal class actions seeking certification of a state or
national class. Such putative class actions have alleged, for example,
underpayment of claims or improper underwriting practices in connection with
various kinds of insurance policies, such as personal and commercial automobile,
premises liability and inland marine. The Hartford also is involved in
individual actions in which punitive damages are sought, such as claims alleging
bad faith in the handling of insurance claims. Management expects that the
ultimate liability, if any, with respect to such lawsuits, after consideration
of provisions made for potential losses and costs of defense, will not be
material to the consolidated financial condition of The Hartford. Nonetheless,
given the large or indeterminate amounts sought in certain of these actions, and
the inherent unpredictability of litigation, it is possible that an adverse
outcome in certain matters could, from time to time, have a material adverse
effect on the Company's consolidated results of operations or cash flows in
particular quarterly or annual periods.
The MacArthur Litigation - Hartford Accident and Indemnity Company ("Hartford
A&I"), a subsidiary of the Company, issued primary general liability policies to
MacArthur during the period 1967 to 1976. MacArthur sought coverage for
asbestos-related claims from Hartford A&I under these policies beginning in
1978. During the period between 1978 and 1987, Hartford A&I paid its full
aggregate limits under these policies plus defense costs. In 1987, Hartford A&I
notified MacArthur that its available limits under these policies had been
exhausted, and MacArthur ceased submitting claims to Hartford A&I under these
policies.
On October 3, 2000, thirteen years after it had accepted Hartford A&I's notice
of exhaustion, MacArthur filed an action against Hartford A&I and another
insurer in the U.S. District Court for the Eastern District of New York,
seeking, for the first time, additional coverage for asbestos bodily injury
claims under the Hartford A&I primary policies on the theory that Hartford A&I
had exhausted only its products aggregate limit of liability, not separate
limits MacArthur alleges to be available for non-products liability. The
complaint sought a declaration of coverage and unquantified damages. On March
28, 2003, the District Court dismissed this action without prejudice on
MacArthur's motion.
On June 3, 2002, The St. Paul Companies, Inc. ("St. Paul") announced a
settlement of a coverage action brought by MacArthur against United States
Fidelity and Guaranty Company ("USF&G"), a subsidiary of St. Paul. Under the
settlement, St. Paul agreed to pay a total of $975 to resolve its asbestos
liability to MacArthur in conjunction with a proposed bankruptcy petition and
pre-packaged plan of reorganization to be filed by MacArthur. USF&G provided at
least twelve years of primary general liability coverage to MacArthur, but,
unlike Hartford A&I, had denied coverage and had refused to pay for defense or
indemnity.
On October 7, 2002, MacArthur filed an action in the Superior Court in Alameda
County, California, against Hartford A&I and two other insurers. As in the
now-dismissed New York action, MacArthur seeks a declaration of coverage and
damages for asbestos bodily injury claims. Four asbestos claimants who allegedly
have obtained default judgments against MacArthur also are joined as plaintiffs;
they seek to recover the amount of their default judgments and additional
damages directly from the defendant insurers and assert a right to an
accelerated trial.
- 14 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(A) LITIGATION (CONTINUED)
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 in conjunction with plan
confirmation it will seek to have the full amount of its current and future
asbestos liability estimated in an amount substantially more than the alleged
liquidated but unpaid claims. 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. A confirmation trial currently is scheduled to begin November 10,
2003.
In a second amended complaint filed on July 21, 2003 in the Alameda County
action, following Hartford A&I's successful demurrer to the first two
complaints, MacArthur alleges that its liability for liquidated but unpaid
asbestos bodily injury claims is $2.5 billion, of which more than $1.8 billion
consists of unpaid judgments. The ultimate amount of MacArthur's alleged
non-products asbestos liability, including any unresolved present claims and
future demands, is currently unknown.
Hartford A&I intends to defend the MacArthur action vigorously. In the opinion
of management, the ultimate outcome is highly uncertain for many reasons. It is
not yet known, for example, whether Hartford A&I's defenses based on MacArthur's
long delay in asserting claims for further coverage will be successful; how
other significant coverage defenses will be decided; or the extent to which the
claims and default judgments against MacArthur involve injury outside of the
products and completed operations hazard definitions of the policies. In the
opinion of management, an adverse outcome could have a material adverse effect
on the Company's results of operations, financial condition and liquidity.
Bancorp Services, LLC - On March 15, 2002, a jury in the U.S. District Court for
the Eastern District of Missouri issued a verdict in Bancorp Services, LLC
("Bancorp") v. Hartford Life Insurance Company ("HLIC"), et al., in favor of
Bancorp in the amount of $118. The case involved claims of patent infringement,
misappropriation of trade secrets, and breach of contract against HLIC and its
affiliate International Corporate Marketing Group, Inc. ("ICMG"). The judge
dismissed the patent infringement claim on summary judgment. The jury's award
was based on the last two claims. 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 appeal is fully briefed but has not been argued. 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 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.
(B) ASBESTOS AND ENVIRONMENTAL CLAIMS
The Hartford continues to receive claims that assert damages from asbestos- and
environmental-related exposures. Asbestos claims relate primarily to bodily
injuries asserted by those who came in contact with asbestos or products
containing asbestos. Environmental claims relate primarily to pollution and the
related costs.
The Hartford wrote several different categories of insurance coverage to which
asbestos and environmental claims may apply. First, The Hartford wrote direct
policies as a primary liability insurance carrier. Second, The Hartford wrote
direct excess insurance policies providing additional coverage for insureds that
exhausted their underlying liability insurance coverage. Third, The Hartford
acted as a reinsurer assuming a portion of risks previously assumed by other
insurers writing primary, excess and reinsurance coverages. Fourth, The Hartford
participated as a London Market company that wrote both direct insurance and
assumed reinsurance business.
With regard to both environmental and particularly asbestos claims, significant
uncertainty limits the ability of insurers and reinsurers to estimate the
ultimate reserves necessary for unpaid losses and related expenses. Traditional
reserving techniques cannot reasonably estimate the ultimate cost of these
claims, particularly during periods where theories of law are in flux. As a
result of the factors discussed in the following paragraphs, the degree of
variability of reserve estimates for these exposures is significantly greater
than for other, more traditional exposures. In particular, The Hartford believes
there is a high degree of uncertainty inherent in the estimation of asbestos
loss reserves.
In the case of the reserves for asbestos exposures, factors contributing to the
high degree of uncertainty include inadequate development patterns, plaintiffs'
expanding theories of liability, the risks inherent in major litigation, and
inconsistent emerging legal doctrines. Courts have reached inconsistent
conclusions as to when losses are deemed to have occurred and which policies
provide coverage; what types of losses are covered; whether there is an insurer
obligation to defend; how policy limits are applied; whether particular injuries
are subject to the product/completed
- 15 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(B) ASBESTOS AND ENVIRONMENTAL CLAIMS (CONTINUED)
operation claims aggregate limit; and how policy exclusions and conditions are
applied and interpreted. Furthermore, insurers in general, including The
Hartford, recently have experienced an increase in the number of
asbestos-related claims due to, among other things, more intensive advertising
by lawyers seeking asbestos claimants, plaintiffs' increased focus on new and
previously peripheral defendants, and an increase in the number of insureds
seeking bankruptcy protection as a result of asbestos-related liabilities.
Plaintiffs and insureds have sought to use bankruptcy proceedings, including
"pre-packaged" bankruptcies, to accelerate and increase loss payments by
insurers. In addition, some policyholders have begun to assert new classes of
claims for so-called "non-product" coverages to which an aggregate limit of
liability may not apply. Recently, many insurers, including The Hartford, also
have been sued directly by asbestos claimants asserting that insurers had a duty
to protect the public from the dangers of asbestos. Management believes these
issues are not likely to be resolved in the near future.
In the case of the reserves for environmental exposures, factors contributing to
the high degree of uncertainty include court decisions that have interpreted the
insurance coverage to be broader than originally intended; inconsistent
decisions, especially across jurisdictions; and uncertainty as to the monetary
amount being sought by the claimant from the insured.
Further uncertainties include the effect of the recent acceleration in the rate
of bankruptcy filings by asbestos defendants on the rate and amount of The
Hartford's asbestos claims payments; a further increase or decrease in asbestos
and environmental claims that cannot now be anticipated; whether some
policyholders' liabilities will reach the umbrella or excess layer of their
coverage; the resolution or adjudication of some disputes pertaining to the
amount of available coverage for asbestos claims in a manner inconsistent with
The Hartford's previous assessment of these claims; the number and outcome of
direct actions against The Hartford; and unanticipated developments pertaining
to The Hartford's ability to recover reinsurance for asbestos and environmental
claims. It is also not possible to predict changes in the legal and legislative
environment and their impact on the future development of asbestos and
environmental claims. In particular, it is unknown whether a potential federal
bill concerning asbestos litigation approved by the Senate Judiciary Committee,
or some other potential federal asbestos-related legislation, will be enacted
and, if so, what its effect will be on The Hartford's aggregate asbestos
liabilities. Additionally, the reporting pattern for excess insurance and
reinsurance claims is much longer than direct claims. In many instances, it
takes months or years to determine that the policyholder's own obligations have
been met and how the reinsurance in question may apply to such claims. The delay
in reporting excess and reinsurance claims and exposures adds to the uncertainty
of estimating the related reserves.
Given the factors and emerging trends described above, The Hartford believes the
actuarial tools and other techniques it employs to estimate the ultimate cost of
claims for more traditional kinds of insurance exposure are less precise in
estimating reserves for its asbestos and environmental exposures. The Hartford
regularly evaluates new information in assessing its potential asbestos
exposures.
In the first quarter of 2003, The Hartford conducted a detailed study of its
asbestos exposures. Based on the results of the study, the Company strengthened
its gross and net asbestos reserves by $3.9 billion and $2.6 billion,
respectively. The Company believes that its current asbestos reserves are
reasonable and appropriate. However, analyses of future developments could cause
The Hartford to change its estimates of its asbestos and environmental reserves,
and the effect of these changes could be material to the Company's consolidated
operating results, financial condition and liquidity.
As of June 30, 2003 and December 31, 2002, the Company reported $3.6 billion and
$1.1 billion of net asbestos and $536 and $591 of net environmental reserves,
respectively. Because of the significant uncertainties previously described,
principally those related to asbestos, the ultimate liabilities may exceed the
currently recorded reserves. Any such additional liability (or any range of
additional amounts) cannot be reasonably estimated now but could be material to
The Hartford's future consolidated operating results, financial condition and
liquidity. Consistent with the Company's longstanding reserving practices, The
Hartford will continue to regularly review and monitor these reserves and, where
future circumstances indicate, make appropriate adjustments to the reserves.
(C) LEASE COMMITMENTS
On June 30, 2003, the Company entered into a sale-leaseback of certain furniture
and fixtures with a net book value of $40. The sale-leaseback resulted in a gain
of $15, which was deferred and will be amortized into earnings over the initial
lease term of three years. The lease qualifies as an operating lease for
accounting purposes. At the end of the initial lease term, the Company has the
option to purchase the leased assets, renew the lease for two one-year periods
or return the leased assets to the lessor. If the Company elects to return the
assets to the lessor at the end of the initial lease term, the assets will be
sold, and the Company has guaranteed a residual value on the furniture and
fixtures of $20.
At June 30, 2003, no liability was recorded for this guarantee, as the expected
fair value of the furniture and fixtures at the end of the initial lease term
was greater than the residual value guarantee.
(D) TAX MATTERS
The Hartford's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). The Company is currently under audit for the 1998-2001
tax years. No material issues have been raised to date by the IRS. Management
believes that adequate provision has been made in the financial statements for
any potential assessments that may result from tax examinations and other
tax-related matters.
The tax provision recorded during the second quarter of 2003, reflects a benefit
of $30, consisting primarily of a change in
- 16 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(D) TAX MATTERS (CONTINUED)
estimate of the dividends-received deduction ("DRD") tax benefit reported during
2002. The change in estimate was the result of 2002 actual investment
performance on the related separate accounts being unexpectedly out of pattern
with past performance which had been the basis for the estimate. In addition to
the foregoing change in estimate, based on the financial information received by
the Company in preparing its 2002 Federal income tax returns, as well as its
current best judgment, the Company has revised its estimate of the 2003 fiscal
year DRD benefit to $85, from its prior estimate of $63. As a result of this
revised estimate, in the second quarter the Company revised its first quarter
DRD benefit upwards by $5, bringing the total DRD benefit related to the 2003
tax year for the six months ended June 30, 2003 to $43.
NOTE 6. SEGMENT INFORMATION
The Hartford is organized into two major operations: Life and Property &
Casualty. Within these operations, The Hartford conducts business principally in
nine operating segments. Additionally, the capital raising and purchase
accounting adjustment activities related to the June 27, 2000 acquisition of all
of the outstanding shares of Hartford Life, Inc. ("HLI") that the Company did
not already own, as well as capital that has not been allocated to the Company's
insurance subsidiaries are included in Corporate.
Life is organized into four reportable operating segments: Investment Products,
Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI").
Investment Products offers individual variable and fixed annuities, mutual
funds, retirement plan services and other investment products. Individual Life
sells a variety of life insurance products, including variable life, universal
life, interest sensitive whole life and term life insurance. Group Benefits
sells group insurance products, including group life and group disability
insurance as well as other products, including stop loss and supplementary
medical coverage to employers and employer sponsored plans, accidental death and
dismemberment, travel accident and other special risk coverages to employers and
associations. COLI primarily offers variable products used by employers to fund
non-qualified benefits or other postemployment benefit obligations as well as
leveraged COLI. Life also includes in an Other category, its international
operations, which are primarily located in Japan and Brazil; realized capital
gains and losses; as well as corporate items not directly allocated to any of
its reportable operating segments, principally interest expense; and
intersegment eliminations.
Property & Casualty is organized into five reportable operating segments: the
North American underwriting segments of Business Insurance, Personal Lines,
Specialty Commercial and Reinsurance; and the Other Operations segment, which
includes substantially all of the Company's asbestos and environmental
exposures. "North American" includes the combined underwriting results of the
Business Insurance, Personal Lines, Specialty Commercial and Reinsurance
underwriting segments along with income and expense items not directly allocated
to these segments, such as net investment income, net realized capital gains and
losses, and other expenses including interest, severance and income taxes.
Included in net income for North American in the second quarter ended June 30,
2003 is an expense of $27, after-tax, related to severance costs associated with
several expense reduction initiatives announced in May 2003.
Business Insurance provides standard commercial insurance coverage to small
commercial and middle market commercial business primarily throughout the United
States. This segment offers workers' compensation, property, automobile,
liability, umbrella and marine coverages. Commercial risk management products
and services also are provided.
Personal Lines provides automobile, homeowners' and home-based business
coverages to the members of AARP through a direct marketing operation; to
individuals who prefer local agent involvement through a network of independent
agents in the standard personal lines market; and through the Omni Insurance
Group in the non-standard automobile market. Personal Lines also operates a
member contact center for health insurance products offered through AARP's
Health Care Options.
The Specialty Commercial segment offers a variety of customized insurance
products and risk management services. Specialty Commercial provides standard
commercial insurance products including workers' compensation, automobile and
liability coverages to large-sized companies. Specialty Commercial also provides
bond, professional liability, specialty casualty and agricultural coverages, as
well as core property and excess and surplus lines coverages not normally
written by standard lines insurers. Alternative markets, within Specialty
Commercial, provides insurance products and services primarily to captive
insurance companies, pools and self-insurance groups. In addition, Specialty
Commercial provides third party administrator services for claims
administration, integrated benefits, loss control and performance measurement
through Specialty Risk Services, a subsidiary of the Company.
The Reinsurance segment assumes reinsurance in North America and primarily
writes treaty reinsurance through professional reinsurance brokers covering
various property, casualty, property catastrophe, marine and alternative risk
transfer ("ART") products. ART includes non-traditional reinsurance products
such as multi-year property catastrophe treaties, aggregate of excess of loss
agreements and quota share treaties with single event caps. International
property catastrophe, marine and ART are also written outside of North America
through a London contact office. On May 16, 2003, as part of the Company's
decision to withdraw from the assumed reinsurance business, the Company entered
into a quota share and purchase agreement with Endurance Reinsurance Corporation
of America ("Endurance") whereby the Reinsurance segment retroceded the majority
of its inforce book of business as of April 1, 2003 and sold renewal rights to
Endurance. Under the quota share agreement, Endurance will reinsure most of the
segment's assumed reinsurance contracts that were written on or after January 1,
2002 and that had unearned premium as of April 1, 2003.
- 17 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
The Other Operations segment consists of certain property and casualty insurance
operations of The Hartford which have discontinued writing new business and
includes substantially all of the Company's asbestos and environmental
exposures.
The measure of profit or loss used by The Hartford's management in evaluating
the performance of its Life segments is net income. North American underwriting
segments are evaluated by The Hartford's management primarily based upon
underwriting results. Underwriting results represent earned premiums less
incurred claims, claim adjustment expenses and underwriting expenses.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided, security transfers and capital contributions. In addition, certain
reinsurance stop loss agreements exist between the segments which specify that
one segment will reimburse another for losses incurred in excess of a
predetermined limit. Also, one segment may purchase group annuity contracts from
another to fund pension costs and annuities to settle casualty claims. In
addition, certain intersegment transactions occur in Life. These transactions
include interest income on allocated surplus and the allocation of certain net
realized capital gains and losses through net investment income utilizing the
duration of the segment's investment portfolios. During the six months ended
June 30, 2003, $1.8 billion of securities were sold by the Property & Casualty
operation to the Life operation. For segment reporting, the net gain on this
sale was deferred by the Property & Casualty operation and will be reported as
realized when the underlying securities are sold by the Life operation. On
December 1, 2002, the Company entered into a contract with a subsidiary, whereby
reinsurance will be provided to the Property & Casualty operation. The financial
results of this reinsurance program, net of retrocessions to unrelated
reinsurers, are included in the Specialty Commercial segment.
The following tables present revenues and net income (loss). Underwriting
results are presented for the Business Insurance, Personal Lines, Specialty
Commercial and Reinsurance segments, while net income is presented for all other
segments, along with Life and Property & Casualty, including North American.
REVENUES
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 877 $ 766 $ 1,650 $ 1,576
Individual Life 240 249 484 481
Group Benefits 638 654 1,305 1,298
COLI 126 146 253 306
Other [1] 81 (117) 56 (127)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 1,962 1,698 3,748 3,534
- ------------------------------------------------------------------------------------------------------------------------------------
Property & Casualty
North American
Earned premiums and other revenues
Business Insurance 897 766 1,777 1,498
Personal Lines 817 772 1,617 1,519
Specialty Commercial 436 333 858 623
Reinsurance 63 172 214 343
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American earned premiums and other revenues 2,213 2,043 4,466 3,983
Net investment income 257 234 500 451
Net realized capital gains (losses) 155 (28) 140 (21)
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American 2,625 2,249 5,106 4,413
Other Operations 92 40 152 96
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 2,717 2,289 5,258 4,509
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate 3 5 7 9
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 4,682 $ 3,992 $ 9,013 $ 8,052
====================================================================================================================================
[1] Amounts include net realized capital gains (losses), before-tax, of $50 and
$(120) for the second quarter ended June 30, 2003 and 2002, respectively,
and $2 and $(135) for the six months ended June 30, 2003, and 2002,
respectively.
- 18 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
NET INCOME (LOSS) SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------- -----------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 141 $ 118 $ 239 $ 235
Individual Life 36 35 68 66
Group Benefits 35 30 69 58
COLI 9 10 19 10
Other [1] 22 (92) (26) (98)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 243 101 369 271
- ------------------------------------------------------------------------------------------------------------------------------------
Property & Casualty
North American underwriting results
Business Insurance 42 (8) 30 (4)
Personal Lines 3 (24) 55 (35)
Specialty Commercial (4) 8 (4) (2)
Reinsurance (76) (9) (95) (13)
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American underwriting results (35) (33) (14) (54)
Net servicing and other income 3 1 6 3
Net investment income 257 234 500 451
Other expenses [2] (78) (58) (123) (109)
Net realized capital gains (losses) 155 (28) 140 (21)
Income tax expense (73) (15) (112) (42)
- ------------------------------------------------------------------------------------------------------------------------------------
Total North American 229 101 397 228
Other Operations 48 (11) (1,633) (10)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 277 90 (1,236) 218
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate (13) (6) (21) (12)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 507 $ 185 $ (888) $ 477
====================================================================================================================================
[1] Amounts include net realized capital gains (losses), after-tax, of $32 and
$(76) for the second quarter ended June 30, 2003 and 2002, respectively,
and $1 and $(83) for the six months ended June 30, 2003, and 2002,
respectively.
[2] Amounts include before-tax severance charges of $41 for the second quarter
and six months ended June 30, 2003.
NOTE 7. DEBT JUNE 30, DECEMBER, 31,
2003 2002
- --------------------------------------------------------------------
SHORT-TERM DEBT
Commercial paper $ 315 $ 315
Current maturities of long-term debt 199 --
- --------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $ 514 $ 315
====================================================================
LONG-TERM DEBT [1]
6.9% Notes, due 2004 $ -- $ 199
7.75% Notes, due 2005 247 247
2.375% Notes, due 2006 250 --
7.1% Notes, due 2007 198 198
4.7% Notes, due 2007 300 300
6.375% Notes, due 2008 200 200
4.1% Equity Units Notes, due 2008 330 330
2.56% Equity Units Notes, due 2008 690 --
7.9% Notes, due 2010 274 274
7.3% Notes, due 2015 200 200
7.65% Notes, due 2027 248 248
7.375% Notes, due 2031 400 400
- --------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 3,337 $ 2,596
====================================================================
[1] The Hartford's long-term debt securities are issued by either The Hartford
Financial Services Group, Inc. ("HFSG") or HLI and are unsecured
obligations of HFSG or HLI and rank on a parity with all other unsecured
and unsubordinated indebtedness of HFSG or HLI.
(A) LONG-TERM DEBT
Equity Units Offering
On May 23, 2003, The Hartford issued 12.0 million 7% equity units at a price of
fifty dollars per unit and received net proceeds of $582. Subsequently, on May
30, 2003, The Hartford issued an additional 1.8 million 7% equity units at a
price of fifty dollars per unit and received net proceeds of $87.
Each equity unit offered initially consists of a corporate unit with a stated
amount of fifty dollars per unit. Each corporate unit consists of one purchase
contract for the sale of a certain number of shares of the Company's stock and a
5% ownership interest in one thousand dollars principal amount of senior notes
due August 16, 2008.
The corporate unit may be converted by the holder into a treasury unit
consisting of the purchase contract and a 5% undivided beneficial interest in a
zero-coupon U.S. Treasury security with a principal amount of one thousand
dollars that matures on August 15, 2006. The holder of an equity unit owns the
underlying senior notes or treasury securities but has pledged the senior notes
or treasury securities to the Company to secure the holder's obligations under
the purchase contract.
- 19 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 7. DEBT (CONTINUED)
(A) LONG-TERM DEBT (CONTINUED)
Equity Units Offering (continued)
- ---------------------------------
The purchase contract obligates the holder to purchase, and obligates The
Hartford to sell, on August 16, 2006, for fifty dollars, a variable number of
newly issued common shares of The Hartford. The number of The Hartford's shares
to be issued will be determined at the time the purchase contracts are settled
based upon the then current applicable market value of The Hartford's common
stock. If the applicable market value of The Hartford's common stock is equal to
or less than $45.50, then the Company will deliver 1.0989 shares to the holder
of the equity unit, or an aggregate of 15.2 million shares. If the applicable
market value of The Hartford's common stock is greater than $45.50 but less than
$56.875, then the Company will deliver the number of shares equal to fifty
dollars divided by the then current applicable market value of The Hartford's
common stock to the holder. Finally, if the applicable market value of The
Hartford's common stock is equal to or greater than $56.875, then the Company
will deliver 0.8791 shares to the holder, or an aggregate of 12.1 million
shares. Accordingly, upon settlement of the purchase contracts on August 16,
2006, The Hartford will receive proceeds of approximately $690 and will deliver
between 12.1 million and 15.2 million common shares in the aggregate. The
proceeds will be credited to stockholders' equity and allocated between the
common stock and additional paid-in-capital accounts. The Hartford will make
quarterly contract adjustment payments to the equity unit holders at a rate of
4.44% of the stated amount per year until the purchase contract is settled.
Each corporate unit also includes a 5% ownership interest in one thousand
dollars principal amount of senior notes that will mature on August 16, 2008.
The aggregate maturity value of the senior notes is $690. The notes are pledged
by the holders to secure their obligations under the purchase contracts. The
Hartford will make quarterly interest payments to the holders of the notes
initially at an annual rate of 2.56%. On May 11, 2006, the notes will be