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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the Quarterly Period Ended September 30, 2003
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 001-13958
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Exchange Act).
Yes [X] No[ ]
As of October 31, 2003, there were outstanding 282,903,893 shares of Common
Stock, $0.01 par value per share, of the registrant.
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- 1 -
INDEX
PAGE
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Independent Accountants' Review Report 3
PART I. FINANCIAL INFORMATION
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ITEM 1. FINANCIAL STATEMENTS 4
Condensed Consolidated Statements of Operations - Third Quarter
and Nine Months Ended September 30, 2003 and 2002 4
Condensed Consolidated Balance Sheets - September 30, 2003 and
December 31, 2002 5
Condensed Consolidated Statements of Changes in Stockholders'
Equity - Nine Months Ended September 30, 2003 and 2002 6
Condensed Consolidated Statements of Comprehensive Income (Loss)
- - Third Quarter and Nine Months Ended September 30, 2003 and 2002 6
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 30, 2003 and 2002 7
Notes to Condensed Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 25
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK 59
ITEM 4. CONTROLS AND PROCEDURES 59
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 60
ITEM 5. OTHER INFORMATION 61
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 61
Signature 62
Exhibits Index 63
- 2 -
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of The
Hartford Financial Services Group, Inc. and subsidiaries (the "Company") as of
September 30, 2003 and the related condensed consolidated statements of
operations and comprehensive income (loss) for the third quarter and nine months
ended September 30, 2003 and 2002, and changes in stockholders' equity and cash
flows for the nine months ended September 30, 2003 and 2002. These interim
financial statements are the responsibility of the Company's management.
We conducted our reviews in accordance with standards established by the
American Institute of Certified Public Accountants. A review of interim
financial information consists principally of applying analytical procedures and
making inquiries of persons responsible for financial and accounting matters. It
is substantially less in scope than an audit conducted in accordance with
auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should
be made to such condensed consolidated interim financial statements for them to
be in conformity with accounting principles generally accepted in the United
States of America.
We have previously audited, in accordance with auditing standards generally
accepted in the United States of America, the consolidated balance sheet of the
Company as of December 31, 2002, and the related consolidated statements of
income, changes in stockholders' equity, comprehensive income and cash flows for
the year then ended (not presented herein); and in our report dated February 19,
2003, which includes an explanatory paragraph relating to the Company's change
in its method of accounting for goodwill and indefinite-lived intangible assets
in 2002, we expressed an unqualified opinion on those consolidated financial
statements. In our opinion, the information set forth in the accompanying
condensed consolidated balance sheet as of December 31, 2002 is fairly stated,
in all material respects, in relation to the consolidated balance sheet from
which it has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
November 3, 2003
- 3 -
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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(IN MILLIONS, EXCEPT FOR PER SHARE DATA) 2003 2002 2003 2002
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(Unaudited) (Unaudited)
REVENUES
Earned premiums $ 3,249 $ 2,774 $ 8,910 $ 8,000
Fee income 716 627 1,989 1,961
Net investment income 825 729 2,431 2,161
Other revenues 145 115 414 348
Net realized capital gains (losses) 12 (160) 216 (333)
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TOTAL REVENUES 4,947 4,085 13,960 12,137
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BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,998 2,557 10,872 7,455
Amortization of deferred policy acquisition costs and present value
of future profits 633 568 1,754 1,696
Insurance operating costs and expenses 609 567 1,801 1,661
Other expenses 271 199 693 563
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TOTAL BENEFITS, CLAIMS AND EXPENSES 4,511 3,891 15,120 11,375
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INCOME (LOSS) BEFORE INCOME TAXES 436 194 (1,160) 762
Income tax expense (benefit) 93 (71) (615) 20
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NET INCOME (LOSS) $ 343 $ 265 $ (545) $ 742
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BASIC EARNINGS (LOSS) PER SHARE $ 1.21 $ 1.06 $ (2.03) $ 3.00
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DILUTED EARNINGS (LOSS) PER SHARE [1] $ 1.20 $ 1.06 $ (2.03) $ 2.96
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Weighted average common shares outstanding 282.5 248.9 268.9 247.4
Weighted average common shares outstanding and dilutive potential
common shares [1] 284.8 250.5 268.9 250.3
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Cash dividends declared per share $ 0.27 $ 0.26 $ 0.81 $ 0.78
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[1] As a result of the net loss for the nine months ended September 30, 2003,
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings Per
Share", requires the Company to use basic weighted average common shares
outstanding in the calculation of the nine months ended September 30, 2003
diluted earnings (loss) per share, since the inclusion of options of 1.5
would have been antidilutive to the earnings per share calculation. In the
absence of the net loss, weighted average common shares outstanding and
dilutive potential common shares would have totaled 270.4.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 4 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
SEPTEMBER 30, DECEMBER 31,
(IN MILLIONS, EXCEPT FOR SHARE DATA) 2003 2002
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(Unaudited)
ASSETS
Investments
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Fixed maturities, available-for-sale, at fair value (amortized cost of $55,649 and $46,241) $ 58,909 $ 48,889
Equity securities, available-for-sale, at fair value (cost of $584 and $937) 639 917
Policy loans, at outstanding balance 2,533 2,934
Other investments 1,539 1,790
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Total investments 63,620 54,530
Cash 496 377
Premiums receivable and agents' balances 2,831 2,611
Reinsurance recoverables 6,215 5,027
Deferred policy acquisition costs and present value of future profits 7,247 6,689
Deferred income taxes 888 545
Goodwill 1,720 1,721
Other assets 3,238 3,397
Separate account assets 125,110 107,078
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TOTAL ASSETS $ 211,365 $ 181,975
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LIABILITIES
Reserve for future policy benefits and unpaid claims and claim adjustment expenses
Property and casualty $ 21,444 $ 17,091
Life 9,351 8,567
Other policyholder funds and benefits payable 26,240 23,956
Unearned premiums 4,560 3,989
Short-term debt 515 315
Long-term debt 3,660 2,596
Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding
solely junior subordinated debentures ("trust preferred securities") 962 1,468
Other liabilities 8,179 6,181
Separate account liabilities 125,110 107,078
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TOTAL LIABILITIES 200,021 171,241
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COMMITMENTS AND CONTINGENCIES (NOTE 5)
STOCKHOLDERS' EQUITY
Common stock - 750,000,000 shares authorized, 285,666,976 and 258,184,483 shares issued,
$0.01 par value 3 3
Additional paid-in capital 3,897 2,784
Retained earnings 6,124 6,890
Treasury stock, at cost - 2,948,161 and 2,943,565 shares (37) (37)
Accumulated other comprehensive income 1,357 1,094
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TOTAL STOCKHOLDERS' EQUITY 11,344 10,734
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 211,365 $ 181,975
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 5 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED
SEPTEMBER 30,
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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 1,161 330
Issuance of equity units (112) (33)
Issuance of shares and compensation expense associated with incentive and stock
compensation plans 56 89
Tax benefit on employee stock options and awards 8 19
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Balance at end of period 3,900 2,769
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RETAINED EARNINGS
Balance at beginning of period 6,890 6,152
Net income (loss) (545) 742
Dividends declared on common stock (221) (193)
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Balance at end of period 6,124 6,701
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TREASURY STOCK, AT COST
Balance at beginning of period (37) (37)
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Balance at end of period (37) (37)
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ACCUMULATED OTHER COMPREHENSIVE INCOME (LOSS)
Balance at beginning of period 1,094 534
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Change in net unrealized gain/loss on securities, net of tax 349 899
Change in net gain/loss on cash-flow hedging instruments, net of tax (81) 81
Foreign currency translation adjustments (5) (4)
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Total other comprehensive income 263 976
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Balance at end of period 1,357 1,510
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TOTAL STOCKHOLDERS' EQUITY $ 11,344 $ 10,943
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OUTSTANDING SHARES (IN THOUSANDS)
Balance at beginning of period 255,241 245,536
Issuance of common stock in underwritten offering 26,377 7,303
Issuance of shares under incentive and stock compensation plans 1,101 2,170
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Balance at end of period 282,719 255,009
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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
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(IN MILLIONS) 2003 2002 2003 2002
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COMPREHENSIVE INCOME (LOSS) (Unaudited) (Unaudited)
Net income (loss) $ 343 $ 265 $ (545) $ 742
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OTHER COMPREHENSIVE INCOME (LOSS)
Change in net unrealized gain/loss on securities, net of tax (383) 716 349 899
Change in net gain/loss on cash-flow hedging instruments, net of tax (43) 67 (81) 81
Foreign currency translation adjustments (24) (1) (5) (4)
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Total other comprehensive income (450) 782 263 976
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TOTAL COMPREHENSIVE INCOME (LOSS) $ (107) $ 1,047 $ (282) $ 1,718
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SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER, 30,
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(IN MILLIONS) 2003 2002
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(Unaudited)
OPERATING ACTIVITIES
Net income (loss) $ (545) $ 742
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Amortization of deferred policy acquisition costs and present value of future profits 1,754 1,696
Additions to deferred policy acquisition costs and present value of future profits (2,434) (2,129)
Change in:
Reserve for future policy benefits and unpaid claims and claim adjustment expenses and
unearned premiums 5,601 1,055
Reinsurance recoverables (1,246) 208
Receivables (215) (282)
Payables and accruals (151) 114
Accrued and deferred income taxes (520) 229
Net realized capital (gains) losses (216) 333
Depreciation and amortization 199 61
Other, net 651 34
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NET CASH PROVIDED BY OPERATING ACTIVITIES 2,878 2,061
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INVESTING ACTIVITIES
Purchase of investments (24,559) (15,992)
Sale of investments 14,909 8,304
Maturity of investments 2,818 2,033
Sale of affiliates 33 3
Additions to property, plant and equipment (74) (128)
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NET CASH USED FOR INVESTING ACTIVITIES (6,873) (5,780)
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FINANCING ACTIVITIES
Issuance of short-term debt, net -- 16
Issuance of long-term debt 1,235 617
Repayment of trust preferred securities (500) --
Issuance of common stock in underwritten offering 1,162 330
Net proceeds from investment and universal life-type contracts charged against
policyholder accounts 2,399 2,916
Dividends paid (215) (192)
Proceeds from issuance of shares under incentive and stock purchase plans 34 84
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NET CASH PROVIDED BY FINANCING ACTIVITIES 4,115 3,771
================================================================================================================================
Foreign exchange rate effect on cash (1) 8
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Net increase in cash 119 60
Cash - beginning of period 377 353
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CASH - END OF PERIOD $ 496 $ 413
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
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NET CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Income taxes $ (121) $ (162)
Interest $ 178 $ 167
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
- 7 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions except per share data unless otherwise stated)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The Hartford Financial Services Group, Inc. and its consolidated subsidiaries
("The Hartford" or the "Company") provide investment products and life and
property and casualty insurance to both individual and business customers in the
United States and internationally.
The condensed consolidated financial statements have been prepared on the basis
of accounting principles generally accepted in the United States of America,
which differ materially from the accounting practices prescribed by various
insurance regulatory authorities. Subsidiaries in which The Hartford has at
least a 20% interest, but less than a majority ownership interest, are reported
on the equity basis. All material intercompany transactions and balances between
The Hartford, its subsidiaries and affiliates have been eliminated.
The accompanying condensed consolidated financial statements and the condensed
notes as of September 30, 2003, and for the third quarter and nine months ended
September 30, 2003 and 2002 are unaudited. These financial statements reflect
all adjustments (consisting only of normal accruals) which are, in the opinion
of management, necessary for the fair presentation of the financial position,
results of operations, and cash flows for the interim periods. These condensed
consolidated financial statements and condensed notes should be read in
conjunction with the consolidated financial statements and notes thereto
included in The Hartford's 2002 Form 10-K Annual Report. The results of
operations for the interim periods should not be considered indicative of
results to be expected for the full year.
(B) RECLASSIFICATIONS
Certain reclassifications have been made to prior period financial information
to conform to the current period classifications.
(C) USE OF ESTIMATES
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, requires
management to make estimates and assumptions that affect the reported amounts of
assets and liabilities and disclosure of contingent assets and liabilities at
the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those
estimates.
The most significant estimates include those used in determining reserves for
future policy benefits and unpaid claim and claim adjustment expenses; deferred
policy acquisition costs; valuation of investments and derivative instruments;
pension and other postretirement benefits; and contingencies.
(D) SIGNIFICANT ACCOUNTING POLICIES
For a description of accounting policies, see Note 1 of Notes to Consolidated
Financial Statements included in The Hartford's 2002 Form 10-K Annual Report.
(E) ADOPTION OF NEW ACCOUNTING STANDARDS
In May 2003, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 150, "Accounting for Certain
Financial Instruments with Characteristics of both Liabilities and Equity". SFAS
No. 150 establishes standards for classifying and measuring as liabilities
certain financial instruments that embody obligations of the issuer and have
characteristics of both liabilities and equity. Generally, SFAS No. 150 requires
liability classification for two broad classes of financial instruments: (a)
instruments that represent, or are indexed to, an obligation to buy back the
issuer's shares regardless of whether the instrument is settled on a net-cash or
gross physical basis and (b) obligations that (i) can be settled in shares but
derive their value predominately from another underlying instrument or index
(e.g. security prices, interest rates, and currency rates), (ii) have a fixed
value, or (iii) have a value inversely related to the issuer's shares.
Mandatorily redeemable equity and written options requiring the issuer to
buyback shares are examples of financial instruments that should be reported as
liabilities under this new guidance.
SFAS No. 150 specifies accounting only for certain freestanding financial
instruments and does not affect whether an embedded derivative must be
bifurcated and accounted for in accordance with SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities".
SFAS No. 150 is effective for instruments entered into or modified after May 31,
2003 and for all other instruments beginning with the first interim reporting
period beginning after June 15, 2003. Adoption of this statement did not have a
material impact on the Company's consolidated financial condition or results of
operations.
In April 2003, the FASB issued SFAS No. 149, "Amendment of Statement 133 on
Derivative Instruments and Hedging Activities". The Statement amends and
clarifies accounting for derivative instruments, including certain derivative
instruments embedded in other contracts, and for hedging activities under SFAS
No. 133.
SFAS No. 149 amends SFAS No. 133 for decisions made as part of the Derivatives
Implementation Group ("DIG") process that effectively required amendments to
SFAS No. 133, in connection with other FASB projects dealing with financial
instruments. SFAS No. 149 also clarifies under what circumstances a contract
with an initial net investment and purchases and sales of when-issued securities
that do not yet exist meet the characteristics of a derivative as discussed in
SFAS No. 133. In addition, it clarifies when a derivative contains a financing
component that warrants special reporting in the statement of cash flows.
SFAS No. 149 is effective for contracts entered into or modified after June 30,
2003, except as stated below and for hedging relationships designated after June
30, 2003. The provisions of this statement should be applied prospectively,
except as stated below.
- 8 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
(E) ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
The provisions of SFAS No. 149 that relate to SFAS No. 133 DIG issues that have
been effective for fiscal quarters that began prior to June 15, 2003, should
continue to be applied in accordance with their respective effective dates. In
addition, the guidance in SFAS No. 149 related to forward purchases or sales of
when-issued securities or other securities that do not yet exist, should be
applied to both existing contracts and new contracts entered into after June 30,
2003. The adoption of SFAS No. 149 did not have a material impact on the
Company's consolidated financial condition or results of operations.
In January 2003, the FASB issued Interpretation No. 46, "Consolidation of
Variable Interest Entities, an interpretation of ARB No. 51" ("FIN 46"), which
requires an enterprise to assess whether consolidation of an entity is
appropriate based upon its interests in a variable interest entity ("VIE"). A
VIE is an entity in which the equity investors do not have the characteristics
of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial
support from other parties. The initial determination of whether an entity is a
VIE shall be made on the date at which an enterprise becomes involved with the
entity. An enterprise shall consolidate a VIE if it has a variable interest that
will absorb a majority of the VIE's expected losses if they occur, receive a
majority of the entity's expected residual returns if they occur or both. FIN 46
was effective immediately for new VIEs established or purchased subsequent to
January 31, 2003. For VIEs established or purchased subsequent to January 31,
2003, the adoption of FIN 46 did not have a material impact on the Company's
consolidated financial condition or results of operations as there were no
material VIEs identified which required consolidation.
For VIEs entered into prior to February 1, 2003, FIN 46 was originally effective
for interim periods beginning after June 15, 2003. In October 2003, the FASB
deferred this effective date until interim or annual periods ending after
December 15, 2003. Early adoption is permitted. The Company has elected to defer
the adoption of FIN 46 for VIEs created before February 1, 2003 until the fourth
quarter of 2003. The adoption of FIN 46 for these VIEs is not expected to have a
material impact on the Company's consolidated financial condition or results of
operations. FIN 46 further requires the disclosure of certain information
related to VIEs in which the Company holds a significant variable interest. As
of September 30, 2003, the Company did not own any such interests that required
disclosure.
In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting
and Disclosure Requirements for Guarantees, Including Indirect Guarantees of
Indebtedness of Others" ("FIN 45" or "the Interpretation"). FIN 45 requires
certain guarantees to be recorded at fair value and also requires a guarantor to
make new disclosures, even when the likelihood of making payments under the
guarantee is remote. In general, the Interpretation applies to contracts or
indemnification agreements that contingently require the guarantor to make
payments to the guaranteed party based on changes in an underlying instrument or
indices (e.g., security prices, interest rates, or currency rates) that are
related to an asset, liability or an equity security of the guaranteed party.
The recognition provisions of FIN 45 are effective on a prospective basis for
guarantees issued or modified after December 31, 2002. The disclosure
requirements are effective for financial statements of interim and annual
periods ending after December 15, 2002. For further discussion, see Note 5(c),
"Lease Commitments", of Notes to Condensed Consolidated Financial Statements and
Note 1(h), "Other Investment and Risk Management Activities-Specific
Strategies", of Notes to Consolidated Financial Statements included in The
Hartford's 2002 Form 10-K Annual Report. Adoption of this statement did not have
a material impact on the Company's consolidated financial condition or results
of operations.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated
with Exit or Disposal Activities", which addresses financial accounting and
reporting for costs associated with exit or disposal activities and supercedes
Emerging Issues Task Force ("EITF") Issue No. 94-3, "Liability Recognition for
Certain Employee Termination Benefits and Other Costs to Exit an Activity
(including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The
principal difference between SFAS No. 146 and Issue 94-3 is that SFAS No. 146
requires that a liability for a cost associated with an exit or disposal
activity be recognized when the liability is incurred, rather than at the date
of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or
disposal activities initiated after December 31, 2002. Adoption of SFAS No. 146
resulted in a change in the timing of when a liability is recognized for certain
restructuring activities after December 31, 2002. Adoption of this statement did
not have a material impact on the Company's consolidated financial condition or
results of operations.
(F) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In July 2003, the Accounting Standards Executive Committee of the American
Institute of Certified Public Accountants issued a final Statement of Position
03-1, "Accounting and Reporting by Insurance Enterprises for Certain
Nontraditional Long-Duration Contracts and for Separate Accounts" (the "SOP").
The SOP addresses a wide variety of topics, some of which may have a significant
impact on the Company. The major provisions of the SOP require:
o Recognizing expenses for a variety of contracts and contract features,
including guaranteed minimum death benefits ("GMDB") and annuitization
options, on an accrual basis versus the previous method of recognition
upon payment;
o Reporting and measuring assets and liabilities of certain separate
account products as general account assets and liabilities when
specified criteria are not met;
o Reporting and measuring seed money in separate accounts as general
account assets based on the insurer's proportionate beneficial interest
in the separate account's underlying assets; and
o Capitalizing sales inducements that meet specified criteria and
amortizing such amounts over the life of the contracts using the same
methodology as used for amortizing deferred acquisition costs ("DAC").
- 9 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
(F) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
The SOP is effective for financial statements for fiscal years beginning after
December 15, 2003. At the date of initial application of this SOP, the Company
will have to make various determinations, such as qualification for separate
account treatment, classification of securities in separate account arrangements
not meeting the criteria of the SOP, significance of mortality and morbidity
risk, adjustments to contract holder liabilities, and adjustments to estimated
gross profits, all of which may have a significant effect on the Company's
financial condition and results of operations.
Based on management's preliminary review of the SOP and market conditions as of
September 30, 2003, the requirement for recording a liability for variable
annuity products with a guaranteed minimum death benefit feature will have an
impact on the Company's results of operations. The determination of this
liability is based on models that involve numerous estimates and subjective
judgments, including those regarding expected market rates of return and
volatility, contract surrender rates and mortality experience. The unrecorded
GMDB liabilities, net of anticipated reinsurance recoverables of approximately
$270, are estimated to be between $60 and $70 at September 30, 2003. Net of
estimated DAC and income tax effects, the cumulative effect of establishing the
required GMDB reserves as of September 30, 2003 would result in an estimated
reduction of net income of between $30 and $40. The ultimate actual impact on
the Company's financial statements will differ from management's current
estimates and will depend in part on market conditions and other factors at the
date of adoption.
Through September 30, 2003, the Company has not recorded a liability for the
risks associated with GMDB offered on the Company's variable annuity business,
but has consistently recorded the related expenses in the period the benefits
are paid to contractholders. Net of reinsurance, the Investment Products segment
paid $12 and $43 for the third quarter and nine months ended September 30, 2003,
respectively, and $17 and $33 for the third quarter and nine months ended
September 30, 2002, respectively, in GMDB benefits to contractholders. Downturns
in the equity markets could increase these payments. At September 30, 2003, the
Investment Products segment held $68.8 billion of variable annuities in its
separate accounts. The estimate of the net amount at risk relating to these
variable annuities (the amount by which current account values of its variable
annuity contracts are not sufficient to meet its GMDB commitments) was $16.2
billion. However, at September 30, 2003, approximately 77% of the net amount at
risk was covered by reinsurance, resulting in a retained net amount at risk of
$3.7 billion.
In addition to the foregoing impact of the SOP, liabilities for certain of the
Company's fixed annuity products (primarily the Company's compound rate contract
("CRC")), of approximately $11 billion, which are currently recorded at fair
value as guaranteed separate account liabilities will be revalued at current
account value in the general account. The related guaranteed separate account
assets supporting CRC will also be reclassified to the general account as
available for sale securities and will continue to be recorded at fair value
with subsequent changes in fair value, net of amortization of deferred
acquisition costs and income taxes, recorded in other comprehensive income. Upon
adoption of the SOP, the Company will record a cumulative effect adjustment to
earnings equal to the revaluation of the liabilities from fair value to account
value plus the adjustment to record unrealized gains (losses) on the invested
assets, previously recorded as a component of net income, as other comprehensive
income. The cumulative adjustment to earnings as well as the adjustment to other
comprehensive income will be recorded net of amortization of deferred
acquisition costs. The earnings adjustment will also be recorded net of income
taxes. As of September 30, 2003, the Company is still in the process of
evaluating the impact of these changes on its consolidated financial condition
and results of operations. However, it is expected that the impact to
stockholders' equity (accumulated other comprehensive income) will be positive
and significant. Moreover, the interest rate environment at the date of the
adoption of the SOP will have a significant impact on the cumulative effect
change in earnings and other comprehensive income.
The Company's liability for variable annuity products offered in Japan, recorded
at account value in the separate account, will also be reclassified to the
general account. The related separate account assets supporting the Japanese
variable annuity liabilities will be reclassified to the general account, as
well, and recorded in accordance with the Company's investment accounting
policies. As of September 30, 2003, the Company is still in the process of
evaluating the impact of revaluing these separate account assets and liabilities
upon their movement into the general account. The Company does not expect the
impact of adopting the remaining provisions of the SOP to be significant.
In May 2003, the EITF reached a consensus in EITF Issue No. 03-4, "Determining
the Classification and Benefit Attribution Method for a Cash Balance Pension
Plan", that cash balance plans should be considered defined benefit plans for
purposes of applying SFAS No. 87, "Employers' Accounting for Pension Plans". The
EITF also concluded that the attribution method used to determine the benefit
for the entire plan for certain cash balance plans should be the traditional
unit credit method. The consensus is effective as of the next measurement date
of the plan, which is December 31, 2003, for the Company's cash balance plan.
Any difference between the valuation under the previous attribution method and
the new attribution method should be recognized as an actuarial gain or loss.
Adoption of this issue is not expected to have a material impact on the
Company's consolidated financial condition or results of operations.
In April 2003, the FASB issued guidance in Statement 133 Implementation Issue
No. B36, "Embedded Derivatives: Modified Coinsurance Arrangements and Debt
Instruments That Incorporate Credit Risk Exposures That Are Unrelated or Only
Partially Related to the Creditworthiness of the Obligor under Those
Instruments", ("DIG B36") that addresses the instances in which bifurcation of
an instrument into a debt host contract and an embedded credit derivative is
required. DIG B36 indicates that bifurcation is necessary in a modified
coinsurance arrangement
- 10 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED)
(F) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED)
when the yield on the receivable and payable is based on a specified proportion
of the ceding company's return on either its general account assets or a
specified block of those assets, rather than the overall creditworthiness of the
ceding company. The Company believes that the majority of its modified
coinsurance and funds withheld agreements are not impacted by DIG B36 as they
were entered into prior to the Company's "grandfather" date for embedded
derivatives, without substantive modifications, or the "modco" payable or
receivable is recorded in the separate account, and is already recorded at fair
value with changes in fair value recorded in net income. The Company has
determined that one of its modified coinsurance does contain an embedded
derivative. The Company believes the embedded derivative is akin to a total
return swap and is in the process of determining the fair value for the swap.
DIG B36 is also applicable to corporate issued debt securities that incorporate
credit risk exposures that are unrelated or only partially related to the
creditworthiness of the obligor. The Company is currently evaluating the impact
of DIG B36 on such corporate issued debt securities. The Company does not
believe the adoption of DIG B36 will have a material effect on the Company's
consolidated financial condition or results of operations.
(G) STOCK-BASED COMPENSATION
In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based
Compensation - Transition and Disclosure, an Amendment of FASB Statement No.
123", which provides three optional transition methods for entities that decide
to voluntarilyadopt the fair value recognition principles of SFAS No. 123,
"Accounting for Stock-Based Compensation", and modifies the disclosure
requirements of SFAS No. 123. In January 2003, the Company adopted the fair
value recognition provisions of accounting for employee stock compensation and
used the prospective transition method. Under the prospective method,
stock-based compensation expense is recognized for awards granted or modified
after the beginning of the fiscal year in which the change is made. The fair
value of stock-based awards granted during the nine months ended September 30,
2003 was $40, after-tax. The fair value of these awards will be recognized as
expense over the awards' vesting periods, generally three years.
All stock-based awards granted or modified prior to January 1, 2003 will
continue to be valued using the intrinsic value-based provisions set forth in
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees". Under the intrinsic value method, compensation expense is
determined on the measurement date, which is the first date on which both the
number of shares the employee is entitled to receive and the exercise price are
known. Compensation expense, if any, is measured based on the award's intrinsic
value, which is the excess of the market price of the stock over the exercise
price on the measurement date. The expense, including non-option plans, related
to stock-based employee compensation included in the determination of net income
for the third quarter and nine months ended September 30, 2003 and 2002 is less
than that which would have been recognized if the fair value method had been
applied to all awards granted since the effective date of SFAS No. 123. For
further discussion of the Company's stock-based compensation plans, see Note 11
of Notes to Consolidated Financial Statements included in The Hartford's 2002
Form 10-K Annual Report.
The following table illustrates the effect on net income (loss) and earnings
(loss) per share as if the fair value method had been applied to all outstanding
and unvested awards in each period.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -----------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss), as reported $ 343 $ 265 $ (545) $ 742
Add: Stock-based employee compensation expense included in reported net
income (loss), net of related tax effects [1] 4 2 15 4
Deduct: Total stock-based employee compensation expense determined under
the fair value method for all awards, net of related tax effects (11) (16) (37) (41)
- ------------------------------------------------------------------------------------------------------------------------------------
Pro forma net income (loss) [2] $ 336 $ 251 $ (567) $ 705
====================================================================================================================================
Earnings (loss) per share:
Basic - as reported $ 1.21 $ 1.06 $ (2.03) $ 3.00
Basic - pro forma [2] $ 1.19 $ 1.01 $ (2.11) $ 2.85
Diluted - as reported [3] $ 1.20 $ 1.06 $ (2.03) $ 2.96
Diluted - pro forma [2] [3] $ 1.18 $ 1.00 $ (2.11) $ 2.82
====================================================================================================================================
[1] Includes the impact of non-option plans of $2 and $0, respectively, for the
third quarter, and $4 and $2, respectively, for the nine months ended
September 30, 2003 and 2002.
[2] The pro forma disclosures are not representative of the effects on net
income (loss) and earnings (loss) per share in future periods.
[3] As a result of the net loss in the nine months ended September 30, 2003,
SFAS No. 128 "Earnings Per Share" requires the Company to use basic
weighted average common shares outstanding in the calculation of the nine
months ended September 30, 2003 diluted earnings (loss) per share, since
the inclusion of options of 1.5 would have been antidilutive to the
earnings per share calculation. In the absence of the net loss, weighted
average common shares outstanding and dilutive potential common shares
would have totaled 270.4.
- 11 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS
Effective January 1, 2002, the Company adopted SFAS No. 142, "Goodwill and Other
Intangible Assets", and accordingly ceased all amortization of goodwill.
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
SEPTEMBER 30, 2003 DECEMBER 31, 2002
------------------------------------------- ---------------------------------------
GROSS CARRYING ACCUMULATED NET GROSS CARRYING ACCUMULATED NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION AMOUNT AMORTIZATION
- ------------------------------------------------------------------------------------------------------------------------------------
Present value of future profits $ 1,406 $ 346 $ 1,406 $ 274
Renewal rights 46 32 42 27
Other 9 -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,461 $ 378 $ 1,448 $ 301
====================================================================================================================================
Net amortization expense for the third quarter and nine months ended September
30, 2003 was $25 and $77, respectively. Net amortization expense for the third
quarter and nine months ended September 30, 2002 was $35 and $87, respectively.
Estimated future net amortization expense for the succeeding five years is as
follows:
FOR THE YEAR ENDED DECEMBER 31,
- -----------------------------------------------------------------
2003 $ 109
2004 $ 124
2005 $ 101
2006 $ 88
2007 $ 73
=================================================================
The carrying amounts of goodwill as of September 30, 2003 and December 31, 2002,
are shown below.
SEPTEMBER 30, DECEMBER 31,
2003 2002
- -------------------------------------------------------------------
Life $ 796 $ 796
Property & Casualty 152 153
Corporate 772 772
- -------------------------------------------------------------------
Total $ 1,720 $ 1,721
===================================================================
The decrease of $1 to Property & Casualty's goodwill asset is attributable to
the sale of Trumbull Associates, LLC. For further discussion of this sale, see
Note 6.
NOTE 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS
(A) SECURITIES LENDING
The Company participates in a securities lending program to generate additional
income, whereby certain domestic fixed income securities are loaned for a short
period of time from the Company's portfolio to qualifying third parties, via a
lending agent. Borrowers of these securities provide collateral of 102% of the
market value of the loaned securities. Acceptable collateral may be in the form
of cash or U.S. Government securities. The market value of the loaned securities
is monitored and additional collateral is obtained if the market value of the
collateral falls below 100% of the market value of the loaned securities. Under
the terms of the securities lending program, the lending agent indemnifies the
Company against borrower defaults. As of September 30, 2003, the fair value of
the loaned securities wasapproximately $1.1 billion and was included in fixed
maturities. The cash collateral received as of September 30, 2003 of
approximately $1.1 billion was invested in short-term securities and was also
included in fixed maturities, with a corresponding liability for the obligation
to return the collateral recorded in other liabilities. The Company retains a
portion of the income earned from the cash collateral or receives a fee from the
borrower. The Company recorded before-tax income from securities lending
transactions, net of lending fees, of $0.5 for the third quarter and $0.8 for
the nine months ended September 30, 2003, which was included in net investment
income.
(B) DERIVATIVE INSTRUMENTS
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards, futures and options, for one of four Company-approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; to control transaction costs; or to enter
into income enhancement and replication transactions.
All of the Company's derivative transactions are permitted uses of derivatives
under the derivatives use plan filed with and/or approved by, as applicable by
the State of Connecticut and State of New York insurance departments. The
Company does not make a market or trade in these instruments for the express
purpose of earning short-term trading profits.
For a detailed discussion of the Company's use of derivative instruments, see
Note 1(h) of Notes to Consolidated Financial Statements included in The
Hartford's 2002 Form 10-K Annual Report.
As of September 30, 2003 and December 31, 2002, the Company carried $297 and
$299, respectively, of derivative assets in other investments and $228 and $208,
respectively, of derivative liabilities in other liabilities. In addition, the
Company recognized embedded derivative (assets) liabilities related to
guaranteed minimum withdrawal benefits ("GMWB") on certain of its variable
annuity contracts of $(39) and $48 at September 30, 2003 and December 31, 2002,
respectively, in other policyholder funds. The Company has entered into an
offsetting reinsurance arrangement, which is recognized as a derivative asset.
The fair value of this derivative (liability) asset, at September 30, 2003 and
December 31, 2002 was $(42) and $48, respectively, and was
- 12 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(B) DERIVATIVE INSTRUMENTS (CONTINUED)
included in reinsurance recoverables. See "Product Derivatives and Risk
Management" section below for a discussion concerning the Company's risk
management strategies for the unreinsured GMWB business.
Cash-Flow Hedges
For the third quarter ended September 30, 2003, the Company reported a net
realized loss representing the total ineffectiveness of all cash-flow hedges of
$1. For the nine months ended September 30, 2002, the Company's net gain or loss
representing the total ineffectiveness of all cash-flow hedges was immaterial.
Gains and losses on derivative contracts that are reclassified from accumulated
other comprehensive income ("AOCI") to current period earnings are included in
the line item in the statement of income in which the hedged item is recorded.
As of September 30, 2003 and 2002, the after-tax deferred net gains on
derivative instruments accumulated in AOCI that are expected to be reclassified
to earnings during the next twelve months were $8 and $5, respectively. This
expectation is based on the anticipated interest payments on hedged investments
in fixed maturity securities that will occur over the next twelve months, at
which time the Company will recognize the deferred net gains and losses as an
adjustment to interest income over the term of the investment cash flows. The
maximum term over which the Company is hedging its exposure to the variability
of future cash flows (for all forecasted transactions, excluding interest
payments on variable-rate debt) is twenty-four months. As of each of September
30, 2003 and December 31, 2002, the Company held derivative notional value
related to strategies categorized as cash-flow hedges of $3.2 billion. For the
third quarter and nine months ended September 30, 2003 and 2002, the net
reclassifications from AOCI to earnings resulting from the discontinuance of
cash-flow hedges were immaterial.
Fair-Value Hedges
During the third quarter of 2003, The Company entered into an interest rate swap
with a notional value of $250 as an economic hedge of a portion of the Company's
senior debt. The interest rate swap agreement was structured to exactly offset
the terms and conditions of the hedged senior debt (i.e., notional value,
maturity date and payment dates) and has been designated as a hedge of the
benchmark interest rate (i.e., LIBOR).
For the third quarter and nine months ended September 30, 2003 and 2002, the
Company's gross gains and losses representing the total ineffectiveness of all
fair-value hedges were immaterial, with the net impact reported as net realized
capital gains and losses. All components of each derivative's gain or loss are
included in the assessment of hedge effectiveness. As of September 30, 2003 and
December 31, 2002, the Company held $1.0 billion and $800, respectively, in
derivative notional value related to strategies categorized as fair-value
hedges.
Other Investment and Risk Management Activities
General
The Company's other investment and risk management activities primarily relate
to strategies used to reduce economic risk or enhance income, and do not receive
hedge accounting treatment. Swap agreements, interest rate cap and floor
agreements and option contracts are used to reduce economic risk. Income
enhancement and replication transactions include the use of written covered call
options, which offset embedded equity call options, total return swaps and
synthetic replication of cash market instruments. The change in the value of all
derivatives held for other investment and risk management purposes is reported
in current period earnings as net realized capital gains and losses. As of
September 30, 2003 and December 31, 2002, the Company held $7.6 billion and $6.8
billion, respectively, in derivative notional value related to strategies
categorized as Other Investment and Risk Management Activities, excluding
Product Derivatives and Risk Management activities.
Product Derivatives and Risk Management
The Company offers certain variable annuity products with a GMWB rider. The GMWB
provides the policyholder with a guaranteed remaining balance ("GRB") if the
account value is reduced to zero through a combination of market declines and
withdrawals. The GRB is generally equal to premiums less withdrawals. However,
annual withdrawals that exceed 7% of the premiums paid may reduce the GRB by an
amount greater than the withdrawals and may also impact the guaranteed annual
withdrawal amount that subsequently applies after the excess annual withdrawals
occur. The policyholder also has the option, after a specified time period, to
reset the GRB to the then-current account value, if greater. The GMWB represents
an embedded derivative in the variable annuity contract that is required to be
reported separately from the host variable annuity contract. It is carried at
fair value and reported in other policyholder funds. The fair value of the GMWB
obligations is calculated based on actuarial assumptions related to the
projected cash flows, including benefits and related contract charges, over the
lives of the contracts, incorporating expectations concerning policyholder
behavior. Because of the dynamic and complex nature of these cash flows,
stochastic techniques under a variety of market return scenarios and other best
estimate assumptions are used. Estimating these cash flows involves numerous
estimates and subjective judgments including those regarding expected market
rates of return, market volatility, correlations of market returns and discount
rates. In valuing the embedded derivative, the Company attributes a portion of
the fees collected from the policyholder equal to the present value of future
GMWB claims (the "Attributed Fees"). All changes in the fair value of the
embedded derivative are recorded in net realized capital gains and losses. The
excess of fees collected from the policyholder for the GMWB over the Attributed
Fees is recorded in fee income.
For all contracts in effect through July 6, 2003, the Company entered into a
reinsurance arrangement to offset its exposure to the GMWB for the lives of
those contracts. This arrangement is recognized as a derivative and carried at
fair value in reinsurance recoverables. Changes in the fair value of both the
derivative
- 13 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(B) DERIVATIVE INSTRUMENTS (CONTINUED)
assets and liabilities related to the reinsured GMWB are recorded in net
realized capital gains and losses. As of July 6, 2003, the Company exhausted all
but a small portion of the reinsurance capacity under the current arrangement,
as it relates to new business, and will be ceding only a very small number of
new contracts subsequent to July 6, 2003. Substantially all new contracts with
the GMWB are not covered by reinsurance. As of September 30, 2003, $9.8 billion
out of $12.6 billion of account value with the GMWB feature was reinsured. In
order to minimize the volatility associated with the unreinsured GMWB
liabilities, the Company has established an alternative risk management
strategy. During the third quarter of 2003, the Company began hedging its
unreinsured GMWB exposure using interest rate futures, Standard and Poor's
("S&P") 500 and NASDAQ index put options and futures contracts. At September 30,
2003, the notional value of the options and futures contracts purchased was
$475. During the third quarter of 2003, net realized capital gains and losses
included the change in market value of both the value of the embedded derivative
related to the GMWB liability and the related derivative contracts that were
purchased as economic hedges, the net effect of which was a loss of less than $1
before deferred policy acquisition costs and tax effects for the quarter ended
September 30, 2003.
For further discussion of the Company's other investment and risk management
activities, see "Other Investments and Risk Management Activities" in Note 1(h)
of Notes to Consolidated Financial Statements included in The Hartford's 2002
Form 10-K Annual Report.
NOTE 4. EARNINGS (LOSS) PER SHARE
The following tables present a reconciliation of net income (loss) and shares
used in calculating basic earnings (loss) per share to those used in calculating
diluted earnings (loss) per share.
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------------------------- -------------------------------------
NET PER SHARE NET INCOME PER SHARE
SEPTEMBER 30, 2003 INCOME SHARES AMOUNT (LOSS) SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS (LOSS) PER SHARE
Income (loss) available to common shareholders $ 343 282.5 $ 1.21 $ (545) 268.9 $ (2.03)
------------- -----------
DILUTED EARNINGS (LOSS) PER SHARE [1]
Options -- 2.3 -- --
------------------------- --------------------------
Income (loss) available to common shareholders plus
assumed conversions $ 343 284.8 $ 1.20 $ (545) 268.9 $ (2.03)
====================================================================================================================================
[1] As a result of the net loss in the nine months ended September 30, 2003,
SFAS No. 128 requires the Company to use basic weighted average common
shares outstanding in the calculation of the nine months ended September
30, 2003 diluted earnings (loss) per share, since the inclusion of options
of 1.5 would have been antidilutive to the earnings per share calculation.
In the absence of the net loss, weighted average common shares outstanding
and dilutive potential common shares would have totaled 270.4.
THIRD QUARTER ENDED NINE MONTHS ENDED
-------------------------------------- -------------------------------------
NET PER SHARE NET PER SHARE
SEPTEMBER 30, 2002 INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 265 248.9 $ 1.06 $ 742 247.4 $ 3.00
------------- -----------
DILUTED EARNINGS PER SHARE
Options -- 1.6 -- 2.9
------------------------- --------------------------
Income available to common shareholders plus
assumed conversions $ 265 250.5 $ 1.06 $ 742 250.3 $ 2.96
====================================================================================================================================
Basic earnings (loss) per share reflects the actual weighted average number of
common shares outstanding during the period. Diluted earnings (loss) per share
includes the dilutive effect of outstanding options, using the treasury stock
method. Under the treasury stock method exercise of options is assumed, with the
proceeds used to repurchase common stock at the average market price for the
period.
- 14 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 5. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
The Hartford is involved in claims litigation arising in the ordinary course of
business, both as a liability insurer defending third-party claims brought
against insureds and as an insurer defending coverage claims brought against it.
The Hartford accounts for such activity through the establishment of unpaid
claim and claim adjustment expense reserves. Subject to the discussion of the
litigation below involving Mac Arthur Company and its subsidiary, Western
MacArthur Company, both former regional distributors of asbestos products
(collectively or individually, "MacArthur"), and the uncertainties discussed in
(b) below under the caption "Asbestos and Environmental Claims," management
expects that the ultimate liability, if any, with respect to such
ordinary-course claims litigation, after consideration of provisions made for
potential losses and costs of defense, will not be material to the consolidated
financial condition, results of operations or cash flows of The Hartford.
The Hartford also is involved in other kinds of legal actions, some of which
assert claims for substantial amounts. These actions include, among others,
putative state and federal class actions seeking certification of a state or
national class. Such putative class actions have alleged, for example,
underpayment of claims or improper underwriting practices in connection with
various kinds of insurance policies, such as personal and commercial automobile,
premises liability and inland marine. The Hartford also is involved in
individual actions in which punitive damages are sought, such as claims alleging
bad faith in the handling of insurance claims. Management expects that the
ultimate liability, if any, with respect to such lawsuits, after consideration
of provisions made for potential losses and costs of defense, will not be
material to the consolidated financial condition of The Hartford. Nonetheless,
given the large or indeterminate amounts sought in certain of these actions, and
the inherent unpredictability of litigation, it is possible that an adverse
outcome in certain matters could, from time to time, have a material adverse
effect on the Company's consolidated results of operations or cash flows in
particular quarterly or annual periods.
The MacArthur Litigation - Hartford Accident and Indemnity Company ("Hartford
A&I"), a subsidiary of the Company, issued primary general liability policies to
MacArthur during the period 1967 to 1976. MacArthur sought coverage for
asbestos-related claims from Hartford A&I under these policies beginning in
1978. During the period between 1978 and 1987, Hartford A&I paid its full
aggregate limits under these policies plus defense costs. In 1987, Hartford A&I
notified MacArthur that its available limits under these policies had been
exhausted, and MacArthur ceased submitting claims to Hartford A&I under these
policies.
On October 3, 2000, thirteen years after it had accepted Hartford A&I's notice
of exhaustion, MacArthur filed an action against Hartford A&I and another
insurer in the U.S. District Court for the Eastern District of New York,
seeking, for the first time, additional coverage for asbestos bodily injury
claims under the Hartford A&I primary policies on the theory that Hartford A&I
had not exhausted limits that MacArthur alleges to be available for non-products
liability. The complaint sought a declaration of coverage and unquantified
damages. On March 28, 2003, the District Court dismissed this action without
prejudice on MacArthur's motion.
On June 3, 2002, The St. Paul Companies, Inc. ("St. Paul") announced a
settlement of a coverage action brought by MacArthur against United States
Fidelity and Guaranty Company ("USF&G"), a subsidiary of St. Paul. Under the
settlement, St. Paul agreed to pay a total of $975 to resolve its asbestos
liability to MacArthur in conjunction with a proposed bankruptcy petition and
pre-packaged plan of reorganization to be filed by MacArthur. USF&G provided at
least twelve years of primary general liability coverage to MacArthur, but,
unlike Hartford A&I, had denied coverage and had refused to pay for defense or
indemnity.
On October 7, 2002, MacArthur filed an action in the Superior Court in Alameda
County, California, against Hartford A&I and two other insurers. As in the
now-dismissed New York action, MacArthur seeks a declaration of coverage and
damages for asbestos bodily injury claims. Four asbestos claimants who allegedly
have obtained default judgments against MacArthur also are joined as plaintiffs;
they seek to recover the amount of their default judgments and additional
damages directly from the defendant insurers and assert a right to an
accelerated trial.
On November 22, 2002, MacArthur filed a bankruptcy petition and proposed plan of
reorganization, which seeks to implement the terms of its settlement with St.
Paul. MacArthur asked the bankruptcy court to determine the full amount of its
current and future asbestos liability in an amount substantially more than the
alleged liquidated but unpaid claims. On October 31, 2003, the bankruptcy court
ruled that it would neither determine nor estimate the total amount of current
and future asbestos liability claims against MacArthur. The Company expects that
MacArthur will ask the Alameda County court instead to determine the total
amount of current and future asbestos liability claims against MacArthur and to
enter judgment against Hartford A&I for a substantial portion of that amount. A
confirmation trial currently is scheduled to begin November 10, 2003.
In a second amended complaint filed on July 21, 2003 in the Alameda County
action, following Hartford A&I's successful demurrer to the first two
complaints, MacArthur alleges that its liability for liquidated but unpaid
asbestos bodily injury claims is $2.5 billion, of which more than $1.8 billion
consists of unpaid judgments. The ultimate amount of MacArthur's asbestos
liability, including any unresolved present claims and future demands, is
currently unknown.
- 15 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(A) LITIGATION (CONTINUED)
Hartford A&I intends to defend the MacArthur action vigorously. In the opinion
of management, the ultimate outcome is highly uncertain for many reasons. It is
not yet known, for example, whether Hartford A&I's defenses based on MacArthur's
long delay in asserting claims for further coverage will be successful; how
other significant coverage defenses will be decided; or the extent to which the
claims and default judgments against MacArthur involve injury outside of the
products and completed operations hazard definitions of the policies. In the
opinion of management, an adverse outcome could have a material adverse effect
on the Company's results of operations, financial condition and liquidity.
Bancorp Services, LLC - In the third quarter of 2003, Hartford Life Insurance
Company ("HLIC") and its affiliate International Corporate Marketing Group, LLC
("ICMG") settled their intellectual property dispute with Bancorp Services, LLC
("Bancorp"). The dispute concerned, among other things, Bancorp's claims for
alleged patent infringement, breach of a confidentiality agreement, and
misappropriation of trade secrets related to certain stable value corporate-
owned life insurance products. The dispute was the subject of litigation in the
United States District Court for the Eastern District of Missouri, in which
Bancorp obtained in 2002 a judgment exceeding $134 against HLIC and ICMG after a
jury trial on the trade secret and breach of contract claims, and HLIC and ICMG
obtained summary judgment on the patent infringement claim. Based on the advice
of legal counsel following entry of the judgment, the Company recorded an $11
after-tax charge in the first quarter of 2002 to increase litigation reserves.
Both components of the judgment were appealed.
Under the terms of the settlement, The Hartford will pay a minimum of $70 and a
maximum of $80, depending on the outcome of the patent appeal, to resolve all
disputes between the parties. The appeal from the trade secret and breach of
contract judgment will be dismissed. The settlement resulted in the recording of
an additional charge of $40 after-tax in the third quarter of 2003, reflecting
the maximum amount payable under the settlement.
(B) ASBESTOS AND ENVIRONMENTAL CLAIMS
The Hartford continues to receive claims that assert damages from asbestos- and
environmental-related exposures. Asbestos claims relate primarily to bodily
injuries asserted by those who came in contact with asbestos or products
containing asbestos. Environmental claims relate primarily to pollution and the
related costs.
The Hartford wrote several different categories of insurance coverage to which
asbestos and environmental claims may apply. First, The Hartford wrote direct
policies as a primary liability insurance carrier. Second, The Hartford wrote
direct excess insurance policies providing additional coverage for insureds that
exhausted their underlying liability insurance coverage. Third, The Hartford
acted as a reinsurer assuming a portion of risks previously assumed by other
insurers writing primary, excess and reinsurance coverages. Fourth, The Hartford
participated as a London Market company that wrote both direct insurance and
assumed reinsurance business.
With regard to both environmental and particularly asbestos claims, significant
uncertainty limits the ability of insurers and reinsurers to estimate the
ultimate reserves necessary for unpaid losses and related expenses. Traditional
reserving techniques cannot reasonably estimate the ultimate cost of these
claims, particularly during periods where theories of law are in flux. As a
result of the factors discussed in the following paragraphs, the degree of
variability of reserve estimates for these exposures is significantly greater
than for other, more traditional exposures. In particular, The Hartford believes
there is a high degree of uncertainty inherent in the estimation of asbestos
loss reserves.
In the case of the reserves for asbestos exposures, factors contributing to the
high degree of uncertainty include inadequate development patterns, plaintiffs'
expanding theories of liability, the risks inherent in major litigation, and
inconsistent emerging legal doctrines. Courts have reached inconsistent
conclusions as to when losses are deemed to have occurred and which policies
provide coverage; what types of losses are covered; whether there is an insurer
obligation to defend; how policy limits are applied; whether particular injuries
are subject to the product/completed operation claims aggregate limit; and how
policy exclusions and conditions are applied and interpreted. Furthermore,
insurers in general, including The Hartford, recently have experienced an
increase in the number of asbestos-related claims due to, among other things,
more intensive advertising by lawyers seeking asbestos claimants, plaintiffs'
increased focus on new and previously peripheral defendants, and an increase in
the number of insureds seeking bankruptcy protection as a result of
asbestos-related liabilities. Plaintiffs and insureds have sought to use
bankruptcy proceedings, including "pre-packaged" bankruptcies, to accelerate and
increase loss payments by insurers. In addition, some policyholders have begun
to assert new classes of claims for so-called "non-product" coverages to which
an aggregate limit of liability may not apply. Recently, many insurers,
including The Hartford, also have been sued directly by asbestos claimants
asserting that insurers had a duty to protect the public from the dangers of
asbestos. Management believes these issues are not likely to be resolved in the
near future.
Further uncertainties include the effect of the recent acceleration in the rate
of bankruptcy filings by asbestos defendants on the rate and amount of The
Hartford's asbestos claims payments; a further increase or decrease in asbestos
and environmental claims that cannot be anticipated at this time, whether some
policyholders' liabilities will reach the umbrella or excess layer of their
coverage; the resolution or adjudication of some disputes pertaining to the
amount of available coverage for asbestos claims in a manner inconsistent with
The Hartford's previous assessment of these claims; the number and outcome of
direct actions against The Hartford; and unanticipated developments pertaining
to The Hartford's ability to recover reinsurance for asbestos and environmental
claims. It also is not possible to predict changes
- 16 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(B) ASBESTOS AND ENVIRONMENTAL CLAIMS (CONTINUED)
in the legal and legislative environment and their impact on the future
development of asbestos and environmental claims. In particular, it is unknown
whether a potential Federal bill concerning asbestos litigation approved by the
Senate Judiciary Committee, or some other potential Federal asbestos-related
legislation, will be enacted and, if so, what its effect will be on The
Hartford's aggregate asbestos liabilities. Additionally, the reporting pattern
for excess insurance and reinsurance claims is much longer than direct claims.
In many instances, it takes months or years to determine that the policyholder's
own obligations have been met and how the reinsurance in question may apply to
such claims. The delay in reporting excess and reinsurance claims and exposures
adds to the uncertainty of estimating the related reserves.
In the case of the reserves for environmental exposures, factors contributing to
the high degree of uncertainty include court decisions that have interpreted the
insurance coverage to be broader than originally intended; inconsistent
decisions, especially across jurisdictions; and uncertainty as to the monetary
amount being sought by the claimant from the insured.
Given the factors and emerging trends described above, The Hartford believes the
actuarial tools and other techniques it employs to estimate the ultimate cost of
claims for traditional kinds of insurance exposure are less precise in
estimating reserves for its asbestos and environmental exposures.
In the first quarter of 2003, several events occurred that in the Company's view
confirmed the existence of a substantial long-term deterioration in the asbestos
litigation environment. For example, in February 2003, Combustion Engineering,
long a major asbestos defendant, filed a pre-packaged bankruptcy plan under
which it proposed to emerge from bankruptcy within five weeks, before opponents
of the plan could have a meaningful opportunity to object, and included many
novel features in its plan that its insurers found objectionable. In December
2002, Halliburton had announced its intention to file a similar plan through one
or more subsidiaries, although it has not yet filed, and in January 2003,
Honeywell announced that it had reached an agreement with the plaintiffs' bar
that would enable it to file a pre-negotiated plan through its former NARCO
subsidiary, then already in bankruptcy. In January 2003, Congoleum, a floor tile
manufacturer, which previously had defended claims successfully in the tort
system, announced its intention to file a pre-packaged plan of reorganization to
be funded almost entirely with insurance proceeds. Moreover, prominent members
of the plaintiffs' and policyholders' bars announced publicly their intention to
file many more such plans. These events represented a worsening of conditions
the Company observed in 2002, which were described in the Company's 2002 Form
10-K Annual Report.
As a result of these worsening conditions, the Company conducted a
comprehensive, ground-up study of its asbestos exposures in the first quarter of
2003 in an effort to project, beginning at the individual account level, the
effect of these trends on the Company's estimated total exposure to asbestos
liability. Based on the results of the study and the Company's reevaluation of
the deteriorating conditions described above, the Company strengthened its gross
and net asbestos reserves by $3.9 billion and $2.6 billion, respectively. The
Company believes that its current asbestos reserves are reasonable and
appropriate. However, analyses of future developments could cause The Hartford
to change its estimates of its asbestos and environmental reserves, and the
effect of these changes could be material to the Company's consolidated
operating results, financial condition and liquidity.
As of September 30, 2003 and December 31, 2002, the Company reported $3.6
billion and $1.1 billion of net asbestos reserves and $517 and $591 of net
environmental reserves, respectively. Because of the significant uncertainties
previously described, principally those related to asbestos, the ultimate
liabilities may exceed the currently recorded reserves. Any such additional
liability (or any range of additional amounts) cannot be reasonably estimated
now but could be material to The Hartford's future consolidated operating
results, financial condition and liquidity. Consistent with the Company's
longstanding reserving practices, The Hartford will continue to regularly review
and monitor these reserves and, where future circumstances indicate, make
appropriate adjustments to the reserves.
(C) LEASE COMMITMENTS
On June 30, 2003, the Company entered into a sale-leaseback of certain furniture
and fixtures with a net book value of $40. The sale-leaseback resulted in a gain
of $15, which was deferred and will be amortized into earnings over the initial
lease term of three years. The lease qualifies as an operating lease for
accounting purposes. At the end of the initial lease term, the Company has the
option to purchase the leased assets, renew the lease for two one-year periods
or return the leased assets to the lessor. If the Company elects to return the
assets to the lessor at the end of the initial lease term, the assets will be
sold, and the Company has guaranteed a residual value on the furniture and
fixtures of $20.
At September 30, 2003, no liability was recorded for this guarantee, as the
expected fair value of the furniture and fixtures at the end of the initial
lease term was greater than the residual value guarantee.
(D) TAX MATTERS
The Hartford's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). The Company is currently under audit for the 1998-2001
tax years. No material issues have been raised to date by the IRS. Management
believes that adequate provision has been made in the financial statements for
any potential assessments that may result from tax examinations and other
tax-related matters for all open tax years.
The tax provision recorded during the nine months ended September 30, 2003,
reflects a benefit of $30, consisting primarily of a change in estimate of the
dividends-received deduction ("DRD") tax benefit reported during 2002. The
change in estimate was the result of actual 2002 investment performance on the
related separate accounts being unexpectedly out of pattern with past
performance, which had been the basis for the estimate. The total DRD benefit
related to the 2003 tax year for the nine months ended September 30, 2003 was
$65.
NOTE 6. SEGMENT INFORMATION
The Hartford is organized into two major operations: Life and Property &
Casualty. Within these operations, The Hartford conducts business principally in
nine operating segments. Additionally, the capital raising and purchase
accounting adjustment activities related to the June 27, 2000 acquisition of all
of the shares of Hartford Life, Inc. ("HLI") that the Company did not already
own ("the HLI Repurchase"), as well as capital raised that has not been
contributed to the Company's insurance subsidiaries are included in Corporate.
Life is organized into four reportable operating segments: Investment Products,
Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI").
Investment Products offers individual variable and fixed annuities, mutual
funds, retirement plan services and other investment products. Individual Life
sells a variety of life insurance products, including variable life, universal
life, interest-sensitive whole life and term life insurance. Group Benefits
sells group insurance products, including group life and group disability
insurance, as well as other products, including stop loss and supplementary
medical coverage to employers and employer-sponsored plans, accidental death and
dismemberment, travel accident and other special risk coverages to employers and
associations. COLI primarily offers variable products used by employers to fund
non-qualified benefits or other postemployment benefit obligations as well as
leveraged COLI. Life also includes in an Other category its
- 17 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
international operations, which are primarily located in Japan and Brazil;
realized capital gains and losses; as well as corporate items not directly
allocated to any of its reportable operating segments, principally interest
expense; and intersegment eliminations.
Property & Casualty is organized into five reportable operating segments: the
North American underwriting segments of Business Insurance, Personal Lines,
Specialty Commercial and Reinsurance; and the Other Operations segment, which
includes substantially all of the Company's asbestos and environmental
exposures. "North American" includes the combined underwriting results of the
Business Insurance, Personal Lines, Specialty Commercial and Reinsurance
underwriting segments. Property & Casualty also includes income and expense
items not directly allocated to these segments, such as net investment income,
net realized capital gains and losses, and other expenses including interest,
severance and income taxes. Included in net income for Property & Casualty for
the nine months ended September 30, 2003 is an expense of $27, after-tax,
related to severance costs associated with several expense reduction initiatives
announced in May 2003.
On September 1, 2003, the Company sold a wholly owned subsidiary, Trumbull
Associates, LLC, for $33, resulting in a gain of $15, after-tax. The gain is
included in net realized capital gains. The revenues and net income of Trumbull
Associates, LLC were not material to the Company or the Property & Casualty
operation.
Business Insurance provides standard commercial insurance coverage to small
commercial and middle market commercial business primarily throughout the United
States. This segment offers workers' compensation, property, automobile,
liability, umbrella and marine coverages. Commercial risk management products
and services also are provided.
Personal Lines provides automobile, homeowners' and home-based business
coverages to the members of AARP through a direct marketing operation; to
individuals who prefer local agent involvement through a network of independent
agents in the standard personal lines market; and through the Omni Insurance
Group in the non-standard automobile market. Personal Lines also operates a
member contact center for health insurance products offered through AARP's
Health Care Options.
The Specialty Commercial segment offers a variety of customized insurance
products and risk management services. Specialty Commercial provides standard
commercial insurance products including workers' compensation, automobile and
liability coverages to large-sized companies. Specialty Commercial also provides
bond, professional liability, specialty casualty and agricultural coverages, as
well as core property and excess and surplus lines coverages not normally
written by standard lines insurers. Alternative markets, within Specialty
Commercial, provides insurance products and services primarily to captive
insurance companies, pools and self-insurance groups. In addition, Specialty
Commercial provides third party administrator services for claims
administration, integrated benefits, loss control and performance measurement
through Specialty Risk Services, a subsidiary of the Company.
On May 16, 2003, as part of the Company's decision to withdraw from the assumed
reinsurance business, the Company entered into a quota share and purchase
agreement with Endurance Reinsurance Corporation of America ("Endurance")
whereby the Reinsurance segment retroceded the majority of its inforce book of
business as of April 1, 2003 and sold renewal rights to Endurance. Under the
quota share agreement, Endurance will reinsure most of the segment's assumed
reinsurance contracts that were written on or after January 1, 2002 and that had
unearned premium as of April 1, 2003. In consideration for Endurance reinsuring
the unearned premium as of April 1, 2003, the Company paid Endurance an amount
equal to unearned premiums less the related unamortized commissions/deferred
acquisition costs and an override commission, which was established by the
contract. In addition, Endurance will pay a profit sharing commission based on
the loss performance of property treaty, property catastrophe and aviation pool
unearned premium. Under the purchase agreement, Endurance will pay additional
amounts, subject to a guaranteed minimum of $15, based on the level of renewal
premium on the reinsured contracts over the next two years. The guaranteed
minimum is reflected in net income for the nine months ended September 30, 2003.
The Company remains subject to reserve development relating to all retained
business.
Prior to the Endurance transaction, the Reinsurance segment assumed reinsurance
in North America and primarily wrote treaty reinsurance through professional
reinsurance brokers covering various property, casualty, property catastrophe,
marine and alternative risk transfer ("ART") products. ART included
non-traditional reinsurance products such as multi-year property catastrophe
treaties, aggregate of excess of loss agreements and quota share treaties with
single event caps. International property catastrophe, marine and ART were also
written outside of North America through a London contact office.
The Other Operations segment consists of certain property and casualty insurance
operations of The Hartford which have discontinued writing new business and
includes substantially all of the Company's asbestos and environmental
exposures.
The measure of profit or loss used by The Hartford's management in evaluating
the performance of its Life segments is net income. Property & Casualty
underwriting segments are evaluated by The Hartford's management primarily based
upon underwriting results. Underwriting results represent earned premiums less
incurred claims, claim adjustment expenses and underwriting expenses.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided, security transfers and capital contributions. In addition, certain
reinsurance stop loss agreements exist between the segments which specify that
one segment will reimburse another for losses incurred in excess of a
predetermined limit. Also, one segment may purchase group annuity contracts from
another to fund pension costs and annuities to settle casualty claims. In
addition, certain intersegment transactions occur in Life. These transactions
include interest
- 18 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
income on allocated surplus and the allocation of certain net realized capital
gains and losses through net investment income utilizing the duration of the
segment's investment portfolios. During the nine months ended September 30,
2003, $1.8 billion of securities were sold by the Property & Casualty operation
to the Life operation. For segment reporting, the net gain on this sale was
deferred by the Property & Casualty operation and will be reported as realized
when the underlying securities are sold by the Life operation. On December 1,
2002, the Property & Casualty segments entered into a contract with a
subsidiary, whereby reinsurance will be provided to the Property & Casualty
operation. The financial results of this reinsurance program, net of
retrocessions to unrelated reinsurers, are included in the Specialty Commercial
segment.
The following tables present revenues and net income (loss). Underwriting
results are presented for the Business Insurance, Personal Lines, Specialty
Commercial, Reinsurance and Other Operations segments, while net income is
presented for Life and Property & Casualty.
REVENUES THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 1,182 $ 761 $ 2,832 $ 2,337
Individual Life 249 239 733 720
Group Benefits 663 645 1,968 1,943
COLI 117 145 370 451
Other [1] 37 (125) 93 (252)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 2,248 1,665 5,996 5,199
- ------------------------------------------------------------------------------------------------------------------------------------
Property & Casualty
Earned premiums and other revenues
Business Insurance 947 795 2,724 2,293
Personal Lines 837 789 2,454 2,308
Specialty Commercial 512 414 1,370 1,037
Reinsurance 82 178 296 521
Other Operations -- 19 14 58
- ------------------------------------------------------------------------------------------------------------------------------------
Total earned premiums and other revenues 2,378 2,195 6,858 6,217
Net investment income 302 262 878 787
Net realized capital gains (losses) 14 (42) 216 (80)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Property & Casualty 2,694 2,415 7,952 6,924
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate 5 5 12 14
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 4,947 $ 4,085 $ 13,960 $ 12,137
====================================================================================================================================
[1] Amounts include net realized capital gains (losses), before-tax, of $(2)
and $(118) for the third quarter ended September 30, 2003 and 2002,
respectively, and $0 and $(253) for the nine months ended September 30,
2003 and 2002, respectively.
- 19 -
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
(unaudited)
NOTE 6. SEGMENT INFORMATION (CONTINUED)
NET INCOME (LOSS) THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------- -----------------------------
2003 2002 2003 2002
- ------------------------------------------------------------------------------------------------------------------------------------
Life
Investment Products $ 129 $ 100 $ 368 $ 335
Individual Life 36 33 104 99
Group Benefits 38 34 107 92
COLI (30) 10 (11) 20
Other [1] (12) (16) (38) (114)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Life 161 161 530 432
- ------------------------------------------------------------------------------------------------------------------------------------
Property & Casualty
Underwriting results
Business Insurance 20 21 50 17
Personal Lines 37 (13) 92 (48)
Specialty Commercial (50) 3 (54) 1
Reinsurance (10) (4) (105) (17)