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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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 No.)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act: the following, all
of which are listed on the New York Stock Exchange, Inc.:
Common Stock, par value $0.01 per share
7.45% Trust Originated Preferred Securities, Series C, issued by Hartford
Capital III
6% Equity Units
7% Equity Units
Securities registered pursuant to Section 12(g) of the Act:
7.75% Notes due June 15, 2005 6.375% Notes due November 1, 2008
2.375% Notes due June 1, 2006 4.1% Equity Unit Notes due November 16, 2008
4.7% Notes due September 1, 2007 7.9% Notes due June 15, 2010
2.56% Equity Unit Notes due August 4.625% Notes due July 15, 2013
16, 2008 7.3% Debentures due November 1, 2015
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
Indicate by check mark whether the registrant is an accelerated filer (as
defined in Rule 12b-2 of the Act) Yes [X] No [ ].
The aggregate market value of the shares of Common Stock held by non-affiliates
of the registrant as of June 30, 2003, was $14,167,000,000 based on the closing
price of $50.36 per share of the Common Stock on the New York Stock Exchange on
June 30, 2003.
As of February 20, 2004, there were outstanding 291,345,148 shares of Common
Stock, $0.01 par value per share, of the registrant.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 2004 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business 2
2 Properties 14
3 Legal Proceedings 14
4 Submission of Matters to a Vote of Security Holders 16
PART II 5 Market for The Hartford's Common Equity and Related
Stockholder Matters 16
6 Selected Financial Data 18
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 19
7A Quantitative and Qualitative Disclosures About Market Risk 80
8 Financial Statements and Supplementary Data 80
9 Changes in and Disagreements With Accountants on Accounting
and Financial Disclosure 80
9A Controls and Procedures 80
PART III 10 Directors and Executive Officers of The Hartford 80
11 Executive Compensation 81
12 Security Ownership of Certain Beneficial Owners and
Management 81
13 Certain Relationships and Related Transactions 81
14 Principal Accounting Fees and Services 81
PART IV 15 Exhibits, Financial Statement Schedules, and Reports
on Form 8-K 81
Signatures II-1
Exhibits Index II-2
PART I
ITEM 1. BUSINESS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT FOR PER SHARE DATA, UNLESS OTHERWISE STATED)
GENERAL
The Hartford Financial Services Group, Inc. (together with its subsidiaries,
"The Hartford" or the "Company") is a diversified insurance and financial
services company. The Hartford, headquartered in Connecticut, is among the
largest providers of investment products, individual life, group life and group
disability insurance products, and property and casualty insurance products in
the United States. Hartford Fire Insurance Company, founded in 1810, is the
oldest of The Hartford's subsidiaries. The Hartford writes insurance and
reinsurance in the United States and internationally. At December 31, 2003,
total assets and total stockholders' equity of The Hartford were $225.9 billion
and $11.6 billion, respectively.
ORGANIZATION
The Hartford strives to maintain and enhance its position as a market leader
within the financial services industry and to maximize shareholder value. The
Company pursues a strategy of developing and selling diverse and innovative
products through multiple distribution channels, continuously developing and
expanding those distribution channels, achieving cost efficiencies through
economies of scale and improved technology, maintaining effective risk
management and prudent underwriting techniques and capitalizing on its brand
name and customer recognition of The Hartford Stag Logo, one of the most
recognized symbols in the financial services industry.
As a holding company that is separate and distinct from its subsidiaries, The
Hartford Financial Services Group, Inc. has no significant business operations
of its own. Therefore, it relies on the dividends from its insurance company and
other subsidiaries as the principal source of cash flow to meet its obligations.
Additional information regarding the cash flow and liquidity needs of The
Hartford Financial Services Group, Inc. may be found in the Capital Resources
and Liquidity section of Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A").
The Company maintains a retail mutual fund operation, whereby the Company,
through wholly-owned subsidiaries, provides investment management and
administrative services to The Hartford Mutual Funds, Inc. and The Hartford
Mutual Funds II, Inc. ("The Hartford mutual funds"), families of 34 mutual
funds. Investors can purchase "shares" in the mutual funds, all of which are
registered with the Securities and Exchange Commission in accordance with the
Investment Company Act of 1940. The mutual funds are owned by the shareholders
of those funds and not by the Company.
On April 2, 2001, The Hartford acquired the United States individual life
insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as
"Fortis Financial Group", or "Fortis") for $1.12 billion in cash. The Company
effected the acquisition through several reinsurance agreements with
subsidiaries of Fortis and the purchase of 100% of the stock of Fortis Advisors,
Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis.
On December 31, 2003 the Company acquired certain of CNA Financial Corporation's
group life and accident, and short-term and long-term disability businesses for
$485 in cash. The purchase price paid on December 31, 2003 was based on a
September 30, 2003 valuation of the businesses acquired. During the first
quarter of 2004, the purchase price will be adjusted to reflect a December 31,
2003 valuation of the businesses acquired. Currently the Company estimates that
adjustment to the purchase price to be an increase of $51. As a result of the
acquisition being effective on December 31, 2003, there were no income statement
effects recorded for the year ended December 31, 2003, although the acquired CNA
assets and liabilities were reflected on the Company's balance sheet. For
additional information, see the Capital Resources and Liquidity section of the
MD&A and Note 18 of Notes to Consolidated Financial Statements.
REPORTING SEGMENTS
The Hartford is organized into two major operations: Life and Property &
Casualty. Within these operations, The Hartford conducts business principally in
nine operating segments. Additionally, Corporate includes certain interest
expense, capital raising and purchase accounting adjustment activities, as well
as capital raised that has not been contributed to the Company's insurance
subsidiaries.
Life is organized into four reportable operating segments: Investment Products,
Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI"). The
Company also includes in "Other" corporate items not directly allocable to any
of its reportable operating segments, principally interest expense as well as
its international operations, which are primarily located in Japan and Brazil,
realized capital gains and losses 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, other expenses including interest,
severance and income taxes.
The following is a description of Life and Property & Casualty along with each
of their segments, including a discussion of principal products, marketing and
distribution and competitive environments. Additional information on The
Hartford's reporting segments may be found in the MD&A and Note 17 of Notes to
Consolidated Financial Statements.
LIFE
Life's business is conducted by the subsidiaries of Hartford Life, Inc. ("HLI"),
a leading financial services and insurance organization. Through Life, The
Hartford provides (i) investment products, including variable annuities, fixed
market value adjusted ("MVA") annuities, mutual funds and retirement plan
services for the savings and retirement needs of over 1.5
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million customers, (ii) life insurance for wealth protection, accumulation and
transfer needs for approximately 735,000 customers, (iii) group benefits
products such as group life and group disability insurance for the benefit of
millions of individuals and (iv) corporate owned life insurance, which includes
life insurance policies purchased by a company on the lives of its employees.
The Company is one of the largest sellers of individual variable annuities,
variable universal life insurance and group disability insurance in the United
States. The Company's strong position in each of its core businesses provides an
opportunity to increase the sale of The Hartford's products and services as
individuals increasingly save and plan for retirement, protect themselves and
their families against the financial uncertainties associated with disability or
death and engage in estate planning. In an effort to advance the Company's
strategy of growing its businesses, The Hartford acquired the group life and
accident, and short-term and long-term disability businesses of CNA Financial
Corporation on December 31, 2003, and the individual life insurance, annuity and
mutual fund businesses of Fortis on April 2, 2001. For additional information,
see the Capital Resources and Liquidity section of the MD&A and Note 18 of Notes
to Consolidated Financial Statements. In addition, The Hartford's Japanese
operation achieved $3.7 billion, $1.4 billion and $462 in variable annuity sales
for the years ended December 31, 2003, 2002 and 2001, respectively. The growth
in sales was the primary reason for the increased account values related to
Japan, which grew to more than $6.2 billion as of December 31, 2003 up from $1.7
billion as of December 31, 2002.
HLI is among the largest consolidated life insurance groups in the United States
based on statutory assets as of December 31, 2003. In the past year, Life's
total assets under management, which include $22.5 billion of third-party assets
invested in the Company's mutual funds and 529 College Savings Plans, increased
27% to $210.1 billion at December 31, 2003 from $165.1 billion at December 31,
2002. Life generated revenues of $8.1 billion, $6.9 billion and $7.4 billion in
2003, 2002 and 2001, respectively. Additionally, Life generated net income of
$769, $557 and $685 in 2003, 2002 and 2001, respectively.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
Life maintains advantageous economies of scale and operating efficiencies due to
its growth, attention to expense and claims management and commitment to
customer service and technology. These advantages allow the Company to
competitively price its products for its distribution network and policyholders.
In addition, the Company utilizes computer technology to enhance communications
within the Company and throughout its distribution network in order to improve
the Company's efficiency in marketing, selling and servicing its products and,
as a result, provides high-quality customer service. In recognition of
excellence in customer service for variable annuities, HLI was awarded the 2003
Annuity Service Award by DALBAR Inc., a recognized independent financial
services research organization, for the eighth consecutive year. HLI is the only
company to receive this prestigious award in every year of the award's
existence. Also, in 2003 the Company earned its first DALBAR Awards for Mutual
Fund and Retirement Plan Service which recognize Hartford Life as the No. 1
service provider of mutual funds and retirement plans in the industry.
Additionally, the Company's Individual Life segment won its third consecutive
DALBAR award for service of life insurance customers and its second DALBAR
Intermediary Service Award in 2003.
RISK MANAGEMENT
Life's product designs, prudent underwriting standards and risk management
techniques are intended to protect it against disintermediation risk, greater
than expected mortality and morbidity experience and, for certain product
features, specifically the guaranteed minimum death benefit ("GMDB") and
guaranteed minimum withdrawal benefit ("GMWB") offered with variable annuity
products, equity market volatility. As of December 31, 2003, the Company had
limited exposure to disintermediation risk on approximately 96% of its domestic
life insurance and annuity liabilities through the use of non-guaranteed
separate accounts, MVA features, policy loans, surrender charges and
non-surrenderability provisions. The Company effectively utilizes prudent
underwriting to select and price insurance risks and regularly monitors
mortality and morbidity assumptions to determine if experience remains
consistent with these assumptions and to ensure that its product pricing remains
appropriate. The Company also enforces disciplined claims management to protect
itself against greater than expected morbidity experience. The Company uses
reinsurance structures and has modified benefit features to mitigate the
mortality exposure associated with GMDB. The Company also uses reinsurance in
combination with derivative instruments to minimize the volatility associated
with the GMWB liability.
INVESTMENT PRODUCTS
The Investment Products segment focuses, through the sale of individual variable
and fixed annuities, mutual funds, retirement plan services and other investment
products, on the savings and retirement needs of the growing number of
individuals who are preparing for retirement or who have already retired. This
segment's assets under management grew to $146.5 billion at December 31, 2003
from $110.2 billion at December 31, 2002. Investment Products generated revenues
of $3.8 billion, $3.1 billion and $3.3 billion in 2003, 2002 and 2001,
respectively, of which individual annuities accounted for $1.8 billion for 2003
and $1.5 billion for 2002 and 2001. Net income in the Investment Products
segment was $510, $432 and $463 in 2003, 2002 and 2001, respectively.
The Company sells both variable and fixed individual annuity products through a
wide distribution network of national and regional broker-dealer organizations,
banks and other financial institutions and independent financial advisors. The
Company is a market leader in the annuity industry with sales of $16.5 billion,
$11.6 billion and $10.0 billion in 2003, 2002 and 2001, respectively. The
Company was the largest seller of individual retail variable annuities in the
United States with sales of $15.7 billion, $10.3 billion and $9.0 billion in
2003, 2002 and 2001, respectively. In addition, the Company continues to be the
largest seller of individual retail variable annuities through banks in the
United States.
The Company's total account value related to individual annuity products was
$97.7 billion as of December 31, 2003. Of this total account value, $86.5
billion, or 89%, related to individual variable annuity products and $11.2
billion, or 11%, related primarily to fixed MVA annuity products. At December
31, 2002, the Company's total account value related to individual
- 3 -
annuity products was $74.9 billion. Of this total account value, $64.3 billion,
or 86%, related to individual variable annuity products and $10.6 billion, or
14%, related primarily to fixed MVA annuity products.
In addition to its leading position in individual annuities, Life continues to
emerge as a significant participant in the mutual fund business. In 2003 The
Hartford mutual funds reached $20 billion in assets faster than any other
retail-oriented mutual fund family in history, according to Strategic Insight.
As of December 31, 2003, retail mutual fund assets were $20.3 billion. The
Company is also among the top providers of retirement products and services,
including asset management and plan administration sold to small and medium size
corporations pursuant to Section 401(k) of the Internal Revenue Code of 1986, as
amended (referred to as "401(k)") and to municipalities pursuant to Section 457
and 403 of the Internal Revenue Code of 1986, as amended (referred to as
"Section 457" and "403(b)", respectively). The Company also provides structured
settlement contracts, terminal funding products and other investment products
such as guaranteed investment contracts ("GICs"). In 2002, the Company began
selling 529 college savings products.
Principal Products
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Individual Variable Annuities -- Life earns fees, based on policyholders'
account values, for managing variable annuity assets and maintaining
policyholder accounts. The Company uses specified portions of the periodic
deposits paid by a customer to purchase units in one or more mutual funds as
directed by the customer, who then assumes the investment performance risks and
rewards. As a result, variable annuities permit policyholders to choose
aggressive or conservative investment strategies, as they deem appropriate,
without affecting the composition and quality of assets in the Company's general
account. These products offer the policyholder a variety of equity and fixed
income options, as well as the ability to earn a guaranteed rate of interest in
the general account of the Company. The Company offers an enhanced guaranteed
rate of interest for a specified period of time (no longer than twelve months)
if the policyholder elects to dollar-cost average funds from the Company's
general account into one or more non-guaranteed separate accounts. Additionally,
the Investment Products segment sells variable annuity contracts that offer
various guaranteed death benefits. For certain guaranteed death benefits, The
Hartford pays the greater of (1) the account value at death; (2) the sum of all
premium payments less prior withdrawals; or (3) the maximum anniversary value of
the contract, plus any premium payments since the contract anniversary, minus
any withdrawals following the contract anniversary.
Policyholders may make deposits of varying amounts at regular or irregular
intervals and the value of these assets fluctuates in accordance with the
investment performance of the funds selected by the policyholder. To encourage
persistency, many of the Company's individual variable annuities are subject to
withdrawal restrictions and surrender charges. Surrender charges range up to 8%
of the contract's deposits less withdrawals, and reduce to zero on a sliding
scale, usually within seven years from the deposit date. Individual variable
annuity account values of $86.5 billion as of December 31, 2003, have grown from
$64.3 billion as of December 31, 2002, due to strong net cash flow, resulting
from high levels of sales, low levels of surrenders and equity market
appreciation. Approximately 90% and 88% of the individual variable annuity
account values were held in non-guaranteed separate accounts as of December 31,
2003 and 2002, respectively.
In August 2002, the Company introduced Principal First, a new guaranteed
withdrawal benefit rider which is sold in conjunction with the Company's
variable annuity contracts. The Principal First rider 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 assets underlying the Company's variable annuities are managed both
internally and by independent money managers, while the Company provides all
policy administration services. The Company utilizes a select group of money
managers, such as Wellington Management Company, LLP ("Wellington"); Hartford
Investment Management Company ("Hartford Investment Management"), a wholly-owned
subsidiary of The Hartford; Putnam Financial Services, Inc. ("Putnam"); American
Funds; MFS Investment Management ("MFS"); Franklin Templeton Group; and AIM
Investments ("AIM"). All have an interest in the continued growth in sales of
the Company's products and enhance the marketability of the Company's annuities
and the strength of its product offerings. Hartford Leaders, which is a
multi-manager variable annuity that combines the product manufacturing,
wholesaling and service capabilities of the Company with the investment
management expertise of four of the nation's most successful investment
management organizations: American Funds, Franklin Templeton Group, AIM and MFS,
has emerged as the industry leader in terms of retail sales. In addition, the
Director variable annuity, which is managed in part by Wellington, ranks second
in the industry in terms of retail sales.
Fixed MVA Annuities -- Fixed MVA annuities are fixed rate annuity contracts
which guarantee a specific sum of money to be paid in the future, either as a
lump sum or as monthly income. In the event that a policyholder surrenders a
policy prior to the end of the guarantee period, the MVA feature increases or
decreases the cash surrender value of the annuity in respect of any interest
rate decreases or increases, respectively, thereby protecting the Company from
losses due to higher interest rates at the time of surrender. The amount of
payment will not fluctuate due to adverse changes in the Company's investment
return, mortality experience or expenses. The Company's primary fixed MVA
annuities have terms varying from one to ten years with an average term of
approximately four years. Account values of fixed MVA annuities were $11.2
billion and $10.6 billion as of December 31, 2003 and 2002, respectively.
Mutual Funds -- In September 1996, Life launched a family of retail mutual funds
for which the Company provides investment management and administrative
services. The fund family has grown significantly from 8 funds at inception to
the current
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offering of 34 funds, including the addition of the Hartford Equity Income Fund
introduced in 2003. The Company's funds are managed by Wellington and Hartford
Investment Management. The Company has entered into agreements with over 960
financial services firms to distribute these mutual funds.
The Company charges fees to the shareholders of the mutual funds, which are
recorded as revenue by the Company. Investors can purchase shares in the mutual
funds, all of which are registered with the Securities and Exchange Commission,
in accordance with the Investment Company Act of 1940. The mutual funds are
owned by the shareholders of those funds and not by the Company. As such, the
mutual fund assets and liabilities, as well as related investment returns, are
not reflected in the Company's consolidated financial statements. Total retail
mutual fund assets under management were $20.3 billion and $14.1 billion as of
December 31, 2003 and 2002, respectively.
Governmental -- The Company sells retirement plan products and services to
municipalities under Section 457 plans. The Company offers a number of different
investment products, including variable annuities and fixed products, to the
employees in Section 457 plans. Generally, with the variable products, Hartford
Investment Management manages the fixed income funds and certain other outside
money managers act as advisors to the equity funds offered in Section 457 plans
administered by the Company. As of December 31, 2003, the Company administered
over 3,000 plans under Section 457 and 403(b). Total governmental assets under
management were $9.7 billion and $7.9 billion as of December 31, 2003 and 2002,
respectively.
Corporate -- The Company sells retirement plan products and services to
corporations under Section 401(k) plans targeting the small and medium case
markets. The Company believes these markets are under-penetrated in comparison
to the large case market. As of December 31, 2003, the Company administered over
4,100 Section 401(k) plans. Total corporate assets under management were $5.2
billion and $3.4 billion as of December 31, 2003 and 2002, respectively.
Institutional Investment Products -- The Company sells the following products:
institutional investment products, structured settlements, GICs and other
short-term funding agreements, institutional mutual funds and other annuity
contracts for special purposes such as funding of terminated defined benefit
pension plans. Structured settlement contracts provide for periodic payments to
an injured person or survivor for a generally determinable number of years,
typically in settlement of a claim under a liability policy in lieu of a lump
sum settlement. The Company's structured settlements are sold through The
Hartford's Property & Casualty insurance operations as well as specialty
brokers. Total institutional investment products assets under management were
$13.1 billion and $9.9 billion as of December 31, 2003 and 2002, respectively.
The increase in the institutional investment products assets under management
was the result of strong sales totaling $3.4 billion, $2.0 billion and $2.6
billion for the years ended December 31, 2003, 2002 and 2001, respectively.
Section 529 Plans - Life introduced a tax-advantaged college savings product
("529 plan") in March 2002 called SMART 529. SMART 529 is a state-sponsored
education savings program established by the State of West Virginia which offers
an easy way for both residents of West Virginia and out-of-state participants to
plan for a college education. In 1996, Congress created a tax-advantaged college
savings program as part of Section 529 of the Internal Revenue Code (the
"Code"). The 529 Plan is an investment plan operated by a state, designed to
help families save for future college costs. On January 1, 2002, 529 Plans
became federal tax-exempt for qualified withdrawals. In July 2003, the Company
began selling a multi-manager 529 product.
SMART 529 is designed to be flexible by allowing investors to choose from a wide
variety of investment portfolios to match their risk preference to help
investors accumulate savings for college. An individual can open a SMART 529
account for anyone, at any age. The SMART 529 product complements the Company's
existing offering of investment products (mutual funds, variable annuities,
401(k), 457 and 403 plans). It also leverages the Company's capabilities in
distribution, service and fund performance. Total 529 Plan assets under
management were $259 and $87 as of December 31, 2003 and 2002, respectively.
Marketing and Distribution
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The Investment Products distribution network is based on management's strategy
of utilizing multiple and competing distribution channels to achieve the
broadest distribution to reach target customers. The success of the Company's
marketing and distribution system depends on its product offerings, fund
performance, successful utilization of wholesaling organizations, quality of
customer service, and relationships with national and regional broker-dealer
firms, banks and other financial institutions, and independent financial
advisors (through which the sale of the Company's retail investment products to
customers is consummated).
Life maintains a distribution network of approximately 1,500 broker-dealers and
approximately 500 banks. As of December 31, 2003, the Company was selling
products through the 25 largest retail banks in the United States. The Company
periodically negotiates provisions and terms of its relationships with
unaffiliated parties, and there can be no assurance that such terms will remain
acceptable to the Company or such third parties. The Company's primary
wholesaler of its individual annuities and mutual funds is its wholly-owned
subsidiary, PLANCO Financial Services, Inc. and its affiliate, PLANCO,
Incorporated (collectively "PLANCO"). PLANCO is one of the nation's largest
wholesalers of individual annuities and has played a significant role in The
Hartford's growth over the past decade. As a wholesaler, PLANCO distributes the
Company's fixed and variable annuities, mutual funds, 401(k) plans and 529 Plans
by providing sales support to registered representatives, financial planners and
broker-dealers at brokerage firms and banks across the United States. Owning
PLANCO secures an important distribution channel for the Company and gives the
Company a wholesale distribution platform which it can expand in terms of both
the number of individuals wholesaling its products and the portfolio of products
which they wholesale. In addition, the Company uses internal personnel with
extensive experience in the Section 457 market, as well as access to the Section
401(k) market, to sell its products and services in the retirement plan and
institutional markets.
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Competition
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The Investment Products segment competes with numerous other insurance companies
as well as certain banks, securities brokerage firms, independent financial
advisors and other financial intermediaries marketing annuities, mutual funds
and other retirement-oriented products. Product sales are affected by
competitive factors such as investment performance ratings, product design,
visibility in the marketplace, financial strength ratings, distribution
capabilities, levels of charges and credited rates, reputation, and customer
service.
Regulatory Developments
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Recently, there has been a significant increase in federal and state regulatory
activity relating to financial services companies, particularly mutual funds
companies. These regulatory inquiries have focused on a number of mutual fund
issues. The Company, like many others in the financial services industry, has
received requests for information from the Securities and Exchange Commission
and a subpoena from the New York Attorney General's Office, in each case
requesting documentation and other information regarding various mutual fund
regulatory issues. The Company continues to cooperate fully with these
regulatory agencies in responding to these requests. In addition,
representatives from the SEC's Office of Compliance Inspections and Examinations
recently concluded an on-site compliance examination of the Company's variable
annuity and mutual fund operations.
The Company's mutual funds are available for purchase by the separate accounts
of different variable life insurance policies, variable annuity products, and
funding agreements, and they are offered directly to certain qualified
retirement plans. Although existing products contain transfer restrictions
between subaccounts, some products, particularly older variable annuity
products, do not contain restrictions on the frequency of transfers. In
addition, as a result of the settlement of litigation against the Company with
respect to certain owners of older variable annuity products, the Company's
ability to restrict transfers by these owners is limited.
A number of companies recently have announced settlements of enforcement actions
with various regulatory agencies, primarily the Securities and Exchange
Commission and the New York Attorney General's Office. No such action has been
initiated against the Company. It is possible that one or more regulatory
agencies may pursue action against the Company in the future.
INDIVIDUAL LIFE
The Individual Life segment provides life insurance solutions to a wide array of
partners to solve the wealth protection, accumulation and transfer needs of its
affluent, emerging affluent and business insurance clients. The individual life
business acquired from Fortis in 2001 added significant scale to the Company's
Individual Life segment, contributing to a significant increase in life
insurance in force in that year. As of December 31, 2003, life insurance in
force increased 3% to $130.8 billion, from $126.7 billion as of December 31,
2002. Account values increased 15% to $8.7 billion as of December 31, 2003 from
$7.6 billion as of December 31, 2002. Revenues were $982, $958 and $890 for the
years ended December 31, 2003, 2002 and 2001, respectively. Net income in the
Individual Life segment was $145, $133 and $121 for the years ended December 31,
2003, 2002 and 2001, respectively.
Principal Products
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Life holds a significant market share in the variable universal life product
market and is the number one seller of variable life insurance, according to the
Tillinghast Value Survey. In 2003, the Company's sales of individual life
insurance were 54% variable universal life, 41% universal life and other, and 5%
term life insurance.
Variable Universal Life -- Variable universal life provides life insurance with
a return linked to an underlying investment portfolio and the Company allows
policyholders to determine their desired asset mix among a variety of underlying
mutual funds. As the return on the investment portfolio increases or decreases,
the surrender value of the variable universal life policy will increase or
decrease, and, under certain policyholder options or market conditions, the
death benefit may also increase or decrease. The Company's second-to-die
products are distinguished from other products in that two lives are insured
rather than one, and the policy proceeds are paid upon the death of both
insureds. Second-to-die policies are frequently used in estate planning for a
married couple. Variable universal life account values were $4.7 billion and
$3.6 billion as of December 31, 2003 and 2002, respectively.
Universal Life and Interest Sensitive Whole Life -- Universal life and interest
sensitive whole life insurance coverages provide life insurance with adjustable
rates of return based on current interest rates. Universal life provides
policyholders with flexibility in the timing and amount of premium payments and
the amount of the death benefit, provided there are sufficient policy funds to
cover all policy charges for the coming period. The Company also sells
second-to-die universal life insurance policies similar to the variable
universal life insurance product offered. Universal life and interest sensitive
whole life account values were $3.3 and $3.1 billion as of December 31, 2003 and
2002, respectively.
Marketing and Distribution
- --------------------------
Consistent with the Company's strategy to access multiple distribution outlets,
the Individual Life distribution organization has been developed to penetrate a
multitude of retail sales channels. These include independent life insurance
sales professionals; agents of other companies; national, regional and
independent broker-dealers; banks, financial planners, certified public
accountants and property and casualty insurance organizations. The primary
organization used to wholesale Hartford Life's products to these outlets is a
group of highly qualified life insurance professionals with specialized training
in sophisticated life insurance sales. These individuals are generally employees
of the Company who are managed through a regional sales office system.
Additional distribution is provided through Woodbury Financial Services, a
subsidiary retail broker dealer and other marketing relationships.
Competition
- -----------
The Individual Life segment competes with approximately 1,200 life insurance
companies in the United States, as well as
- 6 -
other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered, pricing,
relationships with third-party distributors, effectiveness of wholesaling
support, pricing and availability of reinsurance, and the quality of
underwriting and customer service.
GROUP BENEFITS
The Group Benefits segment sells group life and group disability insurance, as
well as other products, including medical stop loss, accidental death and
dismemberment, travel accident and other special risk coverage to employers and
associations. The Company also offers disability underwriting, administration,
claims processing services and reinsurance to other insurers and self-funded
employer plans. Generally, policies sold in this segment are term insurance.
This allows the Company to adjust the rates or terms of its policies in order to
minimize the adverse effect of various market trends, including declining
interest rates and other factors. Typically policies are sold with one, two or
three year rate guarantees depending upon the product. In the disability market,
the Company focuses on strong risk and claims management to derive a competitive
advantage. The Group Benefits segment generated revenues of $2.6 billion for the
years ended December 31, 2003 and 2002, and $2.5 billion for the year ended
December 31, 2001, of which group disability insurance accounted for $1.1
billion in each of the three years and group life insurance accounted for $935,
$887 and $763, respectively. The Company held group disability reserves of $4.0
billion and $2.5 billion and group life reserves of $1.2 billion and $765, as of
December 31, 2003 and 2002, respectively. Net income in the Group Benefits
segment was $148, $128 and $106 for the years ended December 31, 2003, 2002 and
2001, respectively.
As previously mentioned, Life acquired the group life and accident, and
short-term and long-term disability businesses of CNA Financial Corporation on
December 31, 2003. This acquisition will increase the scale of the Company's
group life and disability operations, expand the Company's distribution and
enhance the Company's capability to deliver outstanding products and services.
Principal Products
- ------------------
Group Disability -- Life is one of the largest participants in the "large case"
market of the group disability insurance business. The large case market, as
defined by the Company, generally consists of group disability policies covering
over 500 employees in a particular company. The Company is continuing its focus
on the "small case" and "medium case" group markets, emphasizing name
recognition and reputation as well as the Company's managed disability approach
to claims and administration. The Company's efforts in the group disability
market focus on early intervention, return-to-work programs and successful
rehabilitation. Over the last several years, the focus of new disability
products introduced is to provide incentives for employees to return to
independence. The Company also works with disability claimants to improve the
receipt rate of Social Security offsets (i.e., reducing payment of benefits by
the amount of Social Security payments received).
The Company's short-term disability benefit plans provide a weekly benefit
amount (typically 60% to 70% of the employee's earned income up to a specified
maximum benefit) to insured employees when they are unable to work due to an
accident or illness. Long-term disability insurance provides a monthly benefit
for those extended periods of time not covered by a short-term disability
benefit plan when insured employees are unable to work due to disability.
Employees may receive total or partial disability benefits. Most of these
policies begin providing benefits following a 90 or 180 day waiting period and
generally continue providing benefits until the employee reaches age 65.
Long-term disability benefits are paid monthly and are limited to a portion,
generally 50-70%, of the employee's earned income up to a specified maximum
benefit.
Group Life -- Group term life insurance provides term coverage to employees and
their dependents for a specified period and has no accumulation of cash values.
The Company offers options for its basic group life insurance coverage,
including portability of coverage and a living benefit option, whereby
terminally ill policyholders can receive death benefits prior to their deaths.
In addition, the Company offers premium waiver and accidental death and
dismemberment coverages to employee groups.
Other -- Life provides excess of loss medical coverage (known as stop loss
insurance) to employers who self-fund their medical plans and pay claims using
the services of a third party administrator. The Company also provides travel
accident, hospital indemnity and other coverages (including group life and
disability) primarily to individual membership of various associations, as well
as employee groups. A significant Medicare supplement customer of the company
had been the members of the Retired Officers Association, an organization
consisting of retired military officers. Congress passed legislation, effective
in the fourth quarter of 2001, whereby retired military officers age 65 and
older will receive full medical insurance, eliminating the need for Medicare
supplement insurance. This legislation reduced the Company's Medicare supplement
premium revenue to zero after 2001.
Marketing and Distribution
- --------------------------
The Company uses an experienced group of Company employees, managed through a
regional sales office system, to distribute its group insurance products and
services through a variety of distribution outlets, including brokers,
consultants, third-party administrators and trade associations. The Company
intends to continue to expand the system over the coming years in areas that
offer the highest growth potential.
Competition
- -----------
The Group Benefits business remains highly competitive. Competitive factors
primarily affecting Group Benefits are the variety and quality of products and
services offered, the price quoted for coverage and services, the Company's
relationships with its third-party distributors, and the quality of customer
service. Group Benefits competes with numerous other insurance companies and
other financial intermediaries marketing insurance products. However, many of
these businesses have relatively high barriers to entry and there have been very
few new entrants over the past few years.
CORPORATE OWNED LIFE INSURANCE ("COLI")
Life is a leader in the COLI market, which includes life insurance policies
purchased by a company on the lives of its employees, with the company or a
trust sponsored by the
- 7 -
company named as the beneficiary under the policy. Until the passage of Health
Insurance Portability and Accountability Act of 1996 ("HIPAA"), the Company sold
two principal types of COLI, leveraged and variable products. Leveraged COLI is
a fixed premium life insurance policy owned by a company or a trust sponsored by
a company. HIPAA phased out the deductibility of interest on policy loans under
leveraged COLI at the end of 1998, virtually eliminating all future sales of
leveraged COLI. Variable COLI continues to be a product used by employers to
fund non-qualified benefits or other post-employment benefit liabilities.
Variable COLI account values were $21.0 billion and $19.7 billion as of December
31, 2003 and 2002, respectively. Leveraged COLI account values decreased to $2.5
billion as of December 31, 2003 from $3.3 billion as of December 31, 2002,
primarily due to surrender activity. COLI generated revenues of $483, $592 and
$719 for the years ended December 31, 2003, 2002 and 2001, respectively and net
income (loss) of ($1), $32 and $37 for the years ended December 31, 2003, 2002
and 2001, respectively.
PROPERTY & CASUALTY
Property & Casualty provides (1) workers' compensation, property, automobile,
liability, umbrella, specialty casualty, marine, agricultural and bond coverages
to commercial accounts primarily throughout the United States; (2) professional
liability coverage and directors and officers liability coverage, as well as
excess and surplus lines business not normally written by standard commercial
lines insurers; (3) automobile, homeowners and home-based business coverage to
individuals throughout the United States; and (4) insurance related services.
The Hartford is the tenth largest property and casualty insurance operation in
the United States based on written premiums for the year ended December 31, 2002
according to A.M. Best Company, Inc. ("A.M. Best"). Property & Casualty
generated revenues of $10.7 billion, $9.5 billion and $8.6 billion in 2003, 2002
and 2001, respectively. Earned premiums for 2003, 2002 and 2001 were $8.8
billion, $8.1 billion and $7.3 billion, respectively. Additionally, net income
(loss) was $(811), $469 and $(115) for 2003, 2002 and 2001, respectively. The
net loss for 2003 and 2001 includes the after-tax effect of the asbestos charge
of $1,701 and $420 of after-tax losses related to the September 11 terrorist
attack ("September 11"), respectively. Total assets for Property & Casualty were
$37.2 billion and $31.1 billion as of December 31, 2003 and 2002, respectively.
BUSINESS INSURANCE
Business Insurance provides standard commercial insurance coverage to small and
middle market commercial businesses primarily throughout the United States. This
segment also provides commercial risk management products and services as well
as marine coverage. Earned premiums for 2003, 2002 and 2001 were $3.7 billion,
$3.1 billion and $2.6 billion (2001 includes $15 of reinsurance cessions related
to September 11), respectively. The segment had underwriting income (loss) of
$101, $44 and $(242) (2001includes $245 of underwriting loss related to
September 11) in 2003, 2002 and 2001, respectively.
Principal Products
- ------------------
The Business Insurance segment offers workers' compensation, property,
automobile, liability, umbrella and marine coverages. Commercial risk management
products and services are also provided.
Marketing and Distribution
- --------------------------
Business Insurance provides insurance products and services through its home
office located in Hartford, Connecticut, and multiple domestic regional office
locations and insurance centers. The segment markets its products nationwide
utilizing brokers and independent agents and involving trade associations and
employee groups. Brokers and independent agents, who often represent other
companies as well, receive commissions and other forms of incentive compensation
from the Company based on written premium, growth in written premium and
participation in underwriting profitability. Brokers and independent agents are
not employees of The Hartford.
Competition
- -----------
The commercial insurance industry is a highly competitive environment regarding
product, price, service and technology. The Hartford competes with other stock
companies, mutual companies, alternative risk sharing groups and other
underwriting organizations. These companies sell through various distribution
channels and business models, across a broad array of product lines, and with a
high level of variation regarding geographic, marketing and customer
segmentation. The Hartford is the ninth largest commercial lines insurer in the
United States based on written premiums for the year ended December 31, 2002
according to A.M. Best. The relatively large size and underwriting capacity of
The Hartford provide opportunities not available to smaller companies. In
addition, the marketplace is affected by available capacity of the insurance
industry as measured by policyholders' surplus. Surplus expands and contracts
primarily in conjunction with profit levels generated by the industry. The low
interest rate environment is impacting returns and making underwriting decisions
even more critical. Overall, in 2003, market conditions in the commercial
industry have continued to improve as a result of increased underwriting
discipline and a firmer pricing environment. Industry consolidation continues to
take place.
PERSONAL LINES
Personal Lines provides automobile, homeowners' and home-based business
coverages to the members of AARP through a direct marketing operation; to
individuals who prefer local agent involvement through a network of independent
agents in the standard personal lines market; and through the Company's Omni
Insurance Group, Inc. ("Omni") subsidiary 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 Hartford's exclusive
licensing arrangement with AARP, which was renewed during the fourth quarter of
2001, continues through January 1, 2010 for automobile, homeowners and
home-based business. The Health Care Options agreement continues through 2007.
These agreements provide Personal Lines with an important competitive advantage.
Personal lines had earned premiums of $3.2 billion, $3.0 billion and $2.7
billion in 2003,
- 8 -
2002 and 2001, respectively. Underwriting income (loss) for 2003, 2002 and 2001
was $117, $(46) and $(87) (2001 includes $9 of underwriting loss related to
September 11), respectively.
Principal Products
- ------------------
Personal Lines provides standard and non-standard automobile, homeowners and
home-based business coverages to individuals across the United States, including
a special program designed exclusively for members of AARP.
Marketing and Distribution
- --------------------------
Personal Lines reaches diverse markets through multiple distribution channels
including brokers, independent agents, direct mail, the internet and advertising
in publications. This segment provides customized products and services to
customers through a network of independent agents in the standard personal lines
market, and in the non-standard automobile market through Omni. Independent
agents, who often represent other companies as well, receive commissions and
other forms of incentive compensation from the Company based on written premium,
growth in written premium and participation in underwriting profitability.
Brokers and independent agents are not employees of The Hartford. Personal Lines
has an important relationship with AARP and markets directly to its over 35
million members.
Competition
- -----------
The personal lines automobile and homeowners businesses continue to remain
highly competitive. Personal lines insurance is written by insurance companies
of varying sizes that sell products through various distribution channels,
including independent agents, captive agents and directly to the consumer. The
personal lines market competes on the basis of price; product; service,
including claims handling; stability of the insurer and name recognition. The
Hartford is the twelfth largest personal lines insurer in the United States
based on written premiums for the year ended December 31, 2002 according to A.M.
Best. Industry consolidation continues to take place, and the effective
utilization of technology is becoming increasingly important. A major
competitive advantage of The Hartford is the exclusive licensing arrangement
with AARP to provide personal automobile, homeowners and home-based business
insurance products to its members. This arrangement was renewed during the
fourth quarter of 2001 and is in effect through January 1, 2010. Management
expects favorable "baby boom" demographics to increase AARP membership during
this period. In addition, The Hartford provides customer service for all health
insurance products offered through AARP's Health Care Options, with an agreement
that continues through 2007.
SPECIALTY COMMERCIAL
Specialty Commercial provides a wide variety of property and casualty insurance
products and services through retailers and wholesalers to large commercial
clients and insureds requiring a variety of specialized coverages. Excess and
surplus lines coverages not normally written by standard line insurers are also
provided, primarily through wholesale brokers. Specialty Commercial had earned
premiums of $1.6 billion, $1.2 billion and $1.0 billion (2001 includes $7 of
reinsurance cessions related to September 11) in 2003, 2002 and 2001,
respectively. Underwriting losses were $29, $23 and $262 (2001 includes $167 of
underwriting loss related to September 11) in 2003, 2002 and 2001, respectively.
Principal Products
- ------------------
Specialty Commercial offers a variety of customized insurance products and risk
management services. Specialty Commercial provides standard commercial insurance
products including workers' compensation, automobile and liability coverages to
large-sized companies. Specialty Commercial also provides bond, professional
liability, specialty casualty and agricultural coverages, as well as core
property and excess and surplus lines coverages not normally written by standard
lines insurers. Alternative markets, within Specialty Commercial, provides
insurance products and services primarily to captive insurance companies, pools
and self-insurance groups. In addition, Specialty Commercial provides
third-party administrator services for claims administration, integrated
benefits, loss control and performance measurement through Specialty Risk
Services, a subsidiary of the Company.
Marketing and Distribution
- --------------------------
Specialty Commercial provides insurance products and services through its home
office located in Hartford, Connecticut and multiple domestic office locations.
The segment markets its products nationwide utilizing a variety of distribution
networks including independent agents and brokers as well as wholesalers.
Independent agents, who represent other companies as well, receive commissions
and other forms of incentive compensation from the Company based on written
premium, growth in written premium and participation in underwriting
profitability. Brokers and independents agents are not employees of The
Hartford.
Competition
- -----------
The commercial insurance industry is a highly competitive environment regarding
product, price, service and technology. Specialty Commercial is comprised of a
diverse group of businesses that are unique to commercial lines. Each line of
business operates independently with its own set of business objectives, and
focuses on the operational dynamics of their specific industry. These
businesses, while somewhat interrelated, have a unique business model and
operating cycle. Specialty Commercial is considered a transactional business
and, therefore, competes with other companies for business primarily on an
account by account basis due to the complex nature of each transaction.
Specialty Commercial competes with other stock companies, mutual companies,
alternative risk sharing groups and other underwriting organizations. The
relatively large size and underwriting capacity of The Hartford provide
opportunities not available to smaller companies. Overall, in 2003, market
conditions in the commercial industry have continued to improve as a result of
increased underwriting discipline and a firmer pricing environment. Industry
consolidation continues to take place.
REINSURANCE
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"),
- 9 -
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 reinsured most of the segment's assumed
reinsurance contracts that were written on or after January 1, 2002 and that had
unearned premium as of April 1, 2003. In consideration for Endurance reinsuring
the unearned premium as of April 1, 2003, the Company paid Endurance an amount
equal to unearned premium less the related unamortized commissions/deferred
acquisition costs net of 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 two year period following the
agreement. The guaranteed minimum is reflected in net income for the year ended
December 31, 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 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
Reinsurance segment had earned premiums of $352, $713, $851 (2001 includes $69
of reinsurance cessions related to September 11) in 2003, 2002 and 2001,
respectively. Underwriting losses were $125, $59 and $375 (2001 includes $226 of
underwriting loss related to September 11) in 2003, 2002 and 2001, respectively.
OTHER OPERATIONS
Property & Casualty's Other Operations consists of certain property and casualty
insurance operations of The Hartford that have ceased writing new business.
These operations primarily include First State Insurance Company, located in
Boston, Massachusetts; Heritage Reinsurance Company, Ltd., headquartered in
Bermuda; and Excess Insurance Company Limited, located in the United Kingdom.
Also included in Other Operations are Property & Casualty's international
businesses up until their dates of sales, and for 2002 and 2003, the activity in
the exited international lines of the Reinsurance segment following its
restructuring in the fourth quarter of 2001. In addition, claims for asbestos,
environmental and certain other liabilities under general liability policies are
managed in Other Operations regardless of the writing company. Most of the
policies against which these claims were made were written before 1985.
Property & Casualty's international businesses have historically consisted
primarily of Western European companies offering a variety of insurance products
designed to meet the needs of local customers. The Company's strategic shift to
emphasize growth opportunities in asset accumulation businesses has resulted in
the sale of all of its international property and casualty businesses in a
series of transactions concluded in 2001.
The Hartford was a global reinsurer through its Hartford Reinsurance Company
("HartRe") operations in the United Kingdom, France, Italy, Germany, Spain, Hong
Kong and Taiwan, writing treaty and facultative assumed reinsurance including
property, casualty, fidelity, and specialty coverages. In October 2001, HartRe
announced that it was exiting most international lines, and in January 2002,
these lines were moved to Other Operations.
The primary objectives of Other Operations are the proper disposition of claims,
the resolution of disputes, and the collection of reinsurance proceeds. As such,
Other Operations has no new product sales, distribution systems or competitive
issues.
The Other Operations segment had earned premiums of $18, $69 and $17 in 2003,
2002 and 2001, respectively, and underwriting losses of $2,716 (includes $2,604
of net asbestos reserve strengthening), $164 and $132 for each of the respective
periods.
LIFE RESERVES
In accordance with applicable insurance regulations under which the Company
operates, life insurance subsidiaries of Life establish and carry as liabilities
actuarially determined reserves which are calculated to meet the Company's
future obligations. Reserves for life insurance and disability contracts are
based on actuarially recognized methods using prescribed morbidity and mortality
tables in general use in the United States, which are modified to reflect the
Company's actual experience when appropriate. These reserves are computed at
amounts that, with additions from estimated premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's disability or death. Reserves also
include unearned premiums, premium deposits, claims incurred but not reported
and claims reported but not yet paid. Reserves for assumed reinsurance are
computed in a manner that is comparable to direct insurance reserves. Additional
information on Life reserves may be found in the Critical Accounting Estimates
section of the MD&A under "Reserves".
PROPERTY & CASUALTY RESERVES
The Hartford establishes property and casualty reserves to provide for the
estimated costs of paying claims under insurance policies written by The
Hartford. These reserves include estimates for both claims that have been
reported and those that have been incurred but not reported to The Hartford and
include estimates of all expenses associated with processing and settling these
claims. This estimation process is primarily based on historical experience and
involves a variety of actuarial techniques to analyze current trends and other
relevant factors. Examples of current trends include increases in medical cost
inflation rates and physical damage repair costs, changes in internal claim
practices, changes in the legislative and regulatory environment over workers'
compensation claims, evolving exposures to construction defects and other mass
torts and the potential for further adverse development of asbestos and
environmental claims.
- 10 -
As a result of September 11, the Company established estimated gross and net
reserves of $1.1 billion and $556 million, respectively, related to property and
casualty operations. This loss estimate includes coverages related to property,
business interruption, workers' compensation and other liability exposures,
including those underwritten by the Company's assumed reinsurance operation. The
Company based this loss estimate upon a review of insured exposures using a
variety of assumptions and actuarial techniques, including estimated amounts for
incurred but not reported policyholder losses and costs incurred in settling
claims. The Company continues to carry the original incurred amount related to
September 11, less any paid losses. Actual experience in some cases appears to
be developing favorably to our original expectations, such as the higher than
anticipated rate of participation in the victim's compensation fund. There is
still uncertainty, particularly with respect to coverage disputes and the
potential for the emergence of latent injuries. Furthermore, the deadline for
filing a liability claim with respect to September 11 has been extended to March
11, 2004. As various deadlines pass and more coverage disputes are settled
either out of court or through a court decision, the uncertainty about various
aspects of the reserves is reduced. The Company will continue to evaluate these
reserves on a quarterly basis throughout 2004 and will make appropriate
adjustments to reserve levels.
The Hartford continues to receive claims that assert damages from
asbestos-related and environmental-related exposures. Asbestos claims relate
primarily to bodily injuries asserted by those who came in contact with asbestos
or products containing asbestos.
Environmental claims relate primarily to pollution related clean-up costs. As
discussed further in the Critical Accounting Estimates and Other Operations
sections of the MD&A, significant uncertainty limits the Company's ability to
estimate the ultimate reserves necessary for unpaid losses and related expenses
with regard to environmental and particularly asbestos claims.
Most of the Company's property and casualty reserves are not discounted.
However, certain liabilities for unpaid claims, where the amount and timing of
payments are fixed and reliably determinable, principally for permanently
disabled claimants and certain structured settlement contracts that fund loss
run-offs for unrelated parties have been discounted to present value using an
average interest rate of 4.8% in 2003 and 5.0% in 2002. At December 31, 2003 and
2002, such discounted reserves totaled $799 and $720, respectively (net of
discounts of $525 and $527, respectively). Accretion of this discount did not
have a material effect on net income during 2003, 2002 and 2001, respectively.
As of December 31, 2003, net property and casualty reserves for claims and claim
adjustment expenses reported on a statutory basis exceeded those reported under
Generally Accepted Accounting Principles ("GAAP") by $61. The primary difference
resulted from the discounting of GAAP-basis workers' compensation reserves at
risk-free interest rates, which exceeded the statutory discount rates set by
regulators, partially offset by the required exclusion from statutory reserves
of assumed retroactive reinsurance and a portion of the GAAP provision for
uncollectible reinsurance.
Further discussion on The Hartford's property and casualty reserves, including
asbestos and environmental claims reserves, may be found in the Reserves section
of the MD&A- Critical Accounting Estimates.
A reconciliation of liabilities for unpaid claims and claim adjustment expenses
is herein referenced from Note 7 of Notes to Consolidated Financial Statements.
A table depicting the historical development of the liabilities for unpaid
claims and claim adjustment expenses, net of reinsurance, follows.
- 11 -
LOSS DEVELOPMENT TABLE
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - NET OF REINSURANCE
FOR THE YEARS ENDED DECEMBER 31, [1], [2]
1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------------------------------
Liabilities for unpaid claims and
claim adjustment expenses, net of
reinsurance $11,212 $11,271 $11,574 $12,702 $12,770 $12,902 $12,476 $12,316 $12,860 $13,141 $16,218
CUMULATIVE PAID CLAIMS AND CLAIM EXPENSES
One year later 2,590 2,715 2,467 2,625 2,472 2,939 2,994 3,272 3,339 3,480
Two years later 4,281 4,273 4,126 4,188 4,300 4,733 5,019 5,315 5,621 --
Three years later 5,390 5,469 5,212 5,540 5,494 6,153 6,437 6,972 -- --
Four years later 6,306 6,258 6,274 6,418 6,508 7,141 7,652 -- -- --
Five years later 6,912 7,135 6,970 7,201 7,249 8,080 -- -- -- --
Six years later 7,662 7,721 7,630 7,800 8,036 -- -- -- -- --
Seven years later 8,174 8,311 8,147 8,499 -- -- -- -- -- --
Eight years later 8,715 8,781 8,786 -- -- -- -- -- -- --
Nine years later 9,161 9,332 -- -- -- -- -- -- -- --
Ten years later 9,701 -- -- -- -- -- -- -- -- --
LIABILITIES REESTIMATED
One year later 11,306 11,618 12,529 12,752 12,615 12,662 12,472 12,459 13,153 15,965
Two years later 11,608 12,729 12,598 12,653 12,318 12,569 12,527 12,776 16,176 --
Three years later 12,681 12,781 12,545 12,460 12,183 12,584 12,698 15,760 -- --
Four years later 12,811 12,787 12,399 12,380 12,138 12,663 15,609 -- -- --
Five years later 12,858 12,741 12,414 12,317 12,179 15,542 -- -- -- --
Six years later 12,824 12,782 12,390 12,322 15,047 -- -- -- -- --
Seven years later 12,912 12,791 12,380 15,188 -- -- -- -- -- --
Eight years later 12,960 12,775 15,253 -- -- -- -- -- -- --
Nine years later 12,955 15,604 -- -- -- -- -- -- -- --
Ten years later 15,807 -- -- -- -- -- -- -- -- --
DEFICIENCY (REDUNDANCY), NET OF
REINSURANCE $4,595 $4,333 $3,679 $2,486 $2,277 $2,640 $3,133 $3,444 $3,316 $2,824
- ------------------------------------------------------------------------------------------------------------------------------------
The table above shows the cumulative deficiency (redundancy) of the Company's
reserves, net of reinsurance, as now estimated with the benefit of additional
information. Those amounts are comprised of changes in estimates of gross losses
and changes in estimates of related reinsurance recoveries.
The table below, for the periods presented, reconciles the net reserves to the
gross reserves, as initially estimated and recorded, and as currently estimated
and recorded, and computes the cumulative deficiency (redundancy) of the
Company's reserves before reinsurance.
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS
FOR THE YEARS ENDED DECEMBER 31, [1], [2]
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003
- ------------------------------------------------------------------------------------------------------------------------------------
NET RESERVE, AS INITIALLY ESTIMATED $11,271 $11,574 $12,702 $12,770 $12,902 $12,476 $12,316 $12,860 $13,141 $16,218
Reinsurance and other recoverables, as
initially estimated 5,156 4,829 4,357 3,996 3,275 3,706 3,871 4,176 3,950 5,497
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS RESERVE, AS INITIALLY ESTIMATED $16,427 $16,403 $17,059 $16,766 $16,177 $16,182 $16,187 $17,036 $17,091 $21,715
- ------------------------------------------------------------------------------------------------------------------------------------
NET REESTIMATED RESERVE $15,604 $15,253 $15,188 $15,047 $15,542 $15,609 $15,760 $16,176 $15,965
Reestimated and other reinsurance
recoverables 6,621 6,001 5,365 5,190 4,749 5,554 5,664 5,994 5,494
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS REESTIMATED RESERVE $22,225 $21,254 $20,553 $20,237 $20,291 $21,163 $21,424 $22,170 $21,459
- ------------------------------------------------------------------------------------------------------------------------------------
GROSS DEFICIENCY (REDUNDANCY) $5,798 $4,851 $3,494 $3,471 $4,114 $4,981 $5,237 $5,134 $4,368
====================================================================================================================================
[1] The above tables exclude Hartford Insurance, Singapore as a result of its sale in September 2001, Hartford Seguros as a result
of its sale in February 2001, Zwolsche as a result of its sale in December 2000 and London & Edinburgh as a result of its sale
in November 1998.
[2] The above tables include the liabilities and claim developments for certain reinsurance coverages written for affiliated
parties.
- 12 -
The following table is derived from the Loss Reserve Development table and
summarizes the effect of reserve re-estimates, net of reinsurance, on calendar
year operations for the ten-year period ended December 31, 2003. The total of
each column details the amount of reserve re-estimates made in the indicated
calendar year and shows the accident years to which the re-estimates are
applicable. The amounts in the total accident year column on the far right
represent the cumulative reserve re-estimates during the ten year period ended
December 31, 2003 for the indicated accident year(s).
EFFECT OF NET RESERVE RE-ESTIMATES ON CALENDAR YEAR OPERATIONS
CALENDAR YEAR
---------------------------------------------------------------------------------------------------------
1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 TOTAL
- ------------------------------------------------------------------------------------------------------------------------------------
By Accident year
1993 & Prior $94 $302 $1,073 $130 $47 $(34) $88 $48 $(5) $2,852 $4,595
1994 -- 45 38 (78) (41) (12) (47) (39) (11) (23) (168)
1995 -- -- (156) 17 (59) (100) (26) (33) 6 44 (307)
1996 -- -- -- (19) (46) (47) (95) (39) 15 (7) (238)
1997 -- -- -- -- (56) (104) (55) 18 36 2 (159)
1998 -- -- -- -- -- 57 42 60 38 11 208
1999 -- -- -- -- -- -- 89 40 92 32 253
2000 -- -- -- -- -- -- -- 88 146 73 307
2001 -- -- -- -- -- -- -- -- (24) 39 15
2002 -- -- -- -- -- -- -- -- -- (199) (199)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $94 $347 $955 $50 $(155) $(240) $(4) $143 $293 $2,824 $4,307
====================================================================================================================================
CEDED REINSURANCE
Consistent with industry practice, The Hartford cedes insurance risk to
reinsurance companies. For Property & Casualty operations, these reinsurance
arrangements are intended to provide greater diversification of business and
limit The Hartford's maximum net loss arising from large risks or catastrophes.
A major portion of The Hartford's property and casualty reinsurance is effected
under general reinsurance contracts known as treaties, or, in some instances, is
negotiated on an individual risk basis, known as facultative reinsurance. The
Hartford also has in-force excess of loss contracts with reinsurers that protect
it against a specified part or all of certain losses over stipulated amounts.
Reinsurance does not relieve The Hartford of its primary liability and, as such,
failure of reinsurers to honor their obligations could result in losses to The
Hartford. The Hartford evaluates the financial condition of its reinsurers and
monitors concentrations of credit risk. The Company's monitoring procedures
include careful initial selection of its reinsurers, structuring agreements to
provide collateral funds where possible, and regularly monitoring the financial
condition and ratings of its reinsurers.
In accordance with normal industry practice, Life is involved in both the
cession and assumption of insurance with other insurance and reinsurance
companies. As of December 31, 2003, the largest amount of life insurance
retained on any one life by any one of the life operations was approximately
$2.5. In addition, the Company has reinsured the majority of the minimum death
benefit guarantees and the guaranteed minimum withdrawal benefits offered in
connection with its variable annuity contracts. The majority of variable annuity
contracts issued since August 2002 include a guaranteed minimum withdrawal
benefit ("GMWB") rider. The GMWB represents an embedded derivative in the
variable annuity contract that is required to be reported separately from the
host variable annuity contract. Beginning July 7, 2003, substantially all new
contracts with the GMWB were not covered by reinsurance as the Company had
exceeded the limit in the existing reinsurance agreement prior to that date. As
of December 31, 2003, approximately $11 billion or 64% of variable annuity
account value with GMWB was reinsured. The Company also assumes reinsurance from
other insurers. The Company evaluates the financial condition of its reinsurers
and monitors concentrations of credit risk. For the years ended December 31,
2003, 2002 and 2001, the Company did not make any significant changes in the
terms under which reinsurance is ceded to other insurers except for the
Company's recapture of a block of business previously reinsured with an
unaffiliated reinsurer. For further discussion see Note 14 of Notes to
Consolidated Financial Statements.
INVESTMENT OPERATIONS
An important element of the financial results of The Hartford is return on
invested assets. The Hartford's investment portfolios are primarily divided
between Life and Property & Casualty. The investment portfolios are managed
based on the underlying characteristics and nature of each operation's
respective liabilities and within established risk parameters.
The investment portfolios of Life and Property & Casualty are managed by
Hartford Investment Management. Hartford Investment Management is responsible
for monitoring and managing the asset/liability profile, establishing investment
objectives and guidelines and determining, within specified risk tolerances and
investment guidelines, the appropriate asset allocation, duration, convexity and
other characteristics of the portfolios. Security selection and monitoring are
performed by asset class specialists working within dedicated portfolio
management teams.
The primary investment objective of Life's general account and guaranteed
separate accounts is to maximize after-tax returns consistent with acceptable
risk parameters, including the management of the interest rate sensitivity of
invested assets and the generation of sufficient liquidity, relative to that of
policyholder and corporate obligations.
- 13 -
The investment objective for the majority of Property & Casualty is to maximize
economic value while generating after-tax income and sufficient liquidity to
meet policyholder and corporate obligations. For Property & Casualty's Other
Operations segment, the investment objective is to ensure the full and timely
payment of all liabilities. Property & Casualty investment strategies are
developed based on a variety of factors including business needs, regulatory
requirements and tax considerations.
For a further discussion of The Hartford's approach to managing risks, including
derivative utilization, see the Investments and Capital Markets Risk Management
sections, of the MD&A, as well as Note 1 of Notes to Consolidated Financial
Statements.
REGULATION AND PREMIUM RATES
Although there has been some deregulation with respect to large commercial
insureds in recent years, insurance companies, for the most part, are still
subject to comprehensive and detailed regulation and supervision throughout the
United States. The extent of such regulation varies, but generally has its
source in statutes which delegate regulatory, supervisory and administrative
powers to state insurance departments. Such powers relate to, among other
things, the standards of solvency that must be met and maintained; the licensing
of insurers and their agents; the nature of and limitations on investments;
establishing premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Most states have enacted legislation that regulates insurance holding company
systems such as The Hartford. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
The extent of insurance regulation on business outside the United States varies
significantly among the countries in which The Hartford operates. Some countries
have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors domiciled in that particular
jurisdiction. The Hartford's international operations are comprised of insurers
licensed in their respective countries and, therefore, are subject to the
generally less restrictive domestic insurance regulations.
EMPLOYEES
The Hartford had approximately 30,000 employees as of December 31, 2003.
AVAILABLE INFORMATION
The Hartford files annual, quarterly and current reports, proxy statements and
other documents with the Securities and Exchange Commission (the "SEC") under
the Securities Exchange Act of 1934 (the "Exchange Act"). The public may read
and copy any materials that The Hartford files with the SEC at the SEC's Public
Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may
obtain information on the operation of the Public Reference Room by calling the
SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains
reports, proxy and information statements, and other information regarding
issuers, including The Hartford, that file electronically with the SEC. The
public can obtain reports that The Hartford files with the SEC at
http://www.sec.gov.
The Hartford also makes available free of charge on or through its Internet
website (http://www.thehartford.com) The Hartford's annual report on Form 10-K,
-------------------
quarterly reports on Form 10-Q, current reports on Form 8-K, and amendments to
those reports filed or furnished pursuant to Section 13 or 15(d) of the Exchange
Act as soon as reasonably practicable after The Hartford electronically files
such material with, or furnishes it to, the SEC.
ITEM 2. PROPERTIES
The Hartford owns the land and buildings comprising its Hartford location and
other properties within the greater Hartford, Connecticut area which total
approximately 1.9 million of the 2.2 million square feet owned. In addition, The
Hartford leases approximately 5.4 million square feet throughout the United
States and 39 thousand square feet in other countries. All of the properties
owned or leased are used by one or more of all nine operating segments,
depending on the location. (For more information on operating segments see Part
1, Item 1, Business of The Hartford - Reporting Segments.) The Company believes
its properties and facilities are suitable and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
The Hartford is involved in claims litigation arising in the ordinary course of
business, both as a liability insurer defending third-party claims brought
against insureds and as an insurer defending coverage claims brought against it.
The Hartford accounts for such activity through the establishment of unpaid
claim and claim adjustment expense reserves. Subject to the uncertainties
discussed in Note 16 of Notes to Condensed Consolidated Financial Statements
under the caption "Asbestos and Environmental Claims," management expects that
the ultimate liability, if any, with respect to such ordinary-course claims
litigation, after consideration of provisions made for potential losses and
costs of defense, will not be material to the consolidated financial condition,
results of operations or cash flows of The Hartford.
- 14 -
The Hartford is also involved in other kinds of legal actions, some of which
assert claims for substantial amounts. These actions include, among others,
putative state and federal class actions seeking certification of a state or
national class. Such putative class actions have alleged, for example,
underpayment of claims or improper underwriting practices in connection with
various kinds of insurance policies, such as personal and commercial automobile,
premises liability, and inland marine, and improper sales practices in
connection with the sale of life insurance and other investment products. The
Hartford also is involved in individual actions in which punitive damages are
sought, such as claims alleging bad faith in the handling of insurance claims.
Management expects that the ultimate liability, if any, with respect to such
lawsuits, after consideration of provisions made for potential losses and costs
of defense, will not be material to the consolidated financial condition of The
Hartford. Nonetheless, given the large or indeterminate amounts sought in
certain of these actions, and the inherent unpredictability of litigation, it is
possible that an adverse outcome in certain matters could, from time to time,
have a material adverse effect on the Company's consolidated results of
operations or cash flows in particular quarterly or annual periods.
As further discussed in the MD&A under the caption "Other Operations," The
Hartford continues to receive asbestos and environmental claims that involve
significant uncertainty regarding policy coverage issues. Regarding these
claims, The Hartford continually reviews its overall reserve levels,
methodologies and reinsurance coverages.
The MacArthur Litigation - Hartford Accident and Indemnity Company ("Hartford
A&I"), a subsidiary of the Company, issued primary general liability policies to
Mac Arthur Company and its subsidiary, Western MacArthur Company, both former
regional distributors of asbestos products (collectively or individually,
"MacArthur"), during the period 1967 to 1976. In 1987, Hartford A&I notified
MacArthur that its available limits for asbestos bodily injury claims under
these policies had been exhausted, and MacArthur ceased submitting claims to
Hartford A&I under these policies. Thirteen years later, MacArthur filed an
action against Hartford A&I 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 MacArthur alleged to be
available for non-products liability. Following the voluntary dismissal of
MacArthur's original action, the coverage litigation proceeded in the Superior
Court in Alameda County, California. MacArthur sought a declaration of coverage
and damages, alleging that its liability for liquidated but unpaid asbestos
bodily injury claims was $2.5 billion, of which more than $1.8 billion consisted
of unpaid judgments, and that it had substantial additional liability for
unliquidated and future claims. Four asbestos claimants holding default
judgments against MacArthur also were joined as plaintiffs and asserted a right
to an accelerated trial. Hartford A&I has been vigorously defending that action.
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. On November 22,
2002, pursuant to the terms of its settlement with St. Paul, MacArthur filed a
bankruptcy petition and proposed plan of reorganization. A month-long
confirmation trial was held during the fourth quarter of 2003. Hartford A&I
objected to the proposed plan and took the leading role for the objectors at
trial.
On December 19, 2003, Hartford A&I entered into a settlement agreement with
MacArthur, the Official Unsecured Creditors Committee representing the asbestos
plaintiffs, the Futures Representative appointed by the court, and the
plaintiffs' lawyers representing the holders of default judgments against
MacArthur. The settlement is contingent on the occurrence of certain conditions,
including final, non-appealable court orders approving the settlement agreement
and confirming a bankruptcy plan under which, among other things, all claims
against the Company relating to the asbestos liability of MacArthur are
enjoined. If the conditions are met, the settlement will resolve all disputes
concerning Hartford A&I's alleged obligations arising from MacArthur's asbestos
liability. Under the settlement agreement, Hartford A&I will pay $1.15 billion
into an escrow account in the first quarter of 2004, and the funds will be
disbursed to a trust to be established for the benefit of present and future
asbestos claimants pursuant to the bankruptcy plan once all conditions precedent
to the settlement have occurred.
In January 2004, the bankruptcy court approved the settlement agreement and
entered an order confirming a plan of reorganization that provides for the
injunctions and other protections required under the settlement agreement. The
injunctions will become effective when they are affirmed by the district court.
Management expects that all conditions to the settlement will be satisfied, but
it is not certain whether or when those conditions will be satisfied.
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.
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. In November of 2003, the
Company paid the initial $70 of the settlement.
Reinsurance Arbitration - On March 16, 2003, a final decision and award was
issued in the previously disclosed reinsurance arbitration between subsidiaries
of The Hartford and one of their primary reinsurers relating to policies with
guaranteed death benefits written from 1994 to 1999. The arbitration involved
alleged breaches under the reinsurance treaties. Under the terms of the final
decision and award, the reinsurer's reinsurance
- 15 -
obligations to The Hartford's subsidiaries were unchanged and not limited or
reduced in any manner. The award was confirmed by the Connecticut Superior Court
on May 5, 2003.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of The Hartford during the
fourth quarter of 2003.
PART II
ITEM 5. MARKET FOR THE HARTFORD'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
The Hartford's common stock is traded on the New York Stock Exchange ("NYSE")
under the trading symbol "HIG".
The following table presents the high and low closing prices for the common
stock of The Hartford on the NYSE for the periods indicated, and the quarterly
dividends declared per share.
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- -----------------------------------------------------------------
2003
Common Stock Price
High $48.71 $51.84 $55.75 $59.03
Low 32.30 36.18 49.88 53.10
Dividends Declared 0.27 0.27 0.27 0.28
2002
Common Stock Price
High $68.56 $69.97 $58.63 $50.10
Low 59.93 58.04 41.00 37.38
Dividends Declared 0.26 0.26 0.26 0.27
=================================================================
As of February 20, 2004, the Company had approximately 126,000 shareholders. The
closing price of The Hartford's common stock on the NYSE on February 20, 2004
was $65.42.
On October 16, 2003, The Hartford's Board of Directors declared a quarterly
dividend of $0.28 per share payable on January 2, 2004 to shareholders of record
as of December 1, 2003. The dividend represented a 4% increase from the prior
quarter. Dividend decisions are based on and affected by a number of factors,
including the operating results and financial requirements of The Hartford and
the impact of regulatory restrictions discussed in the Capital Resources and
Liquidity section of the MD&A under "Liquidity Requirements".
There are also various legal limitations governing the extent to which The
Hartford's insurance subsidiaries may extend credit, pay dividends or otherwise
provide funds to The Hartford Financial Services Group, Inc. as discussed in the
Capital Resources and Liquidity section of the MD&A under "Liquidity
Requirements".
EQUITY COMPENSATION PLAN INFORMATION
The following table provides information as of December 31, 2003 about the
securities authorized for issuance under the Company's equity compensation
plans. The Company maintains The Hartford Incentive Stock Plan, The Hartford
Employee Stock Purchase Plan (the "ESPP"), and The Hartford Restricted Stock
Plan for Non-Employee Directors (the "Director's Plan"), pursuant to which it
may grant equity awards to eligible persons. In addition, the Company maintains
the 2000 PLANCO Non-employee Option Plan (the "PLANCO Plan"), pursuant to which
it may grant awards to non-employee wholesalers of PLANCO products.
(a) (b) (c)
-------------------------- ---------------------- -------------------------------------
Number of Securities to Weighted-average Number of Securities Remaining
be Issued Upon Exercise Exercise Price of Available for Future Issuance Under
of Outstanding Options, Outstanding Options, Equity Compensation Plans (Excluding
Warrants and Rights Warrants and Rights Securities Reflected in Column (a))
- ------------------------------------------------------------------------------------------------------------------------------------
Equity compensation plans approved by
stockholders 20,937,715 48.63 9,475,461 [1] [2] [3]
Equity compensation plans not
approved by stockholders 280,762 53.15 167,720
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL 21,218,477 48.69 9,643,181
====================================================================================================================================
[1] Of these shares, 3,091,671 shares remain available for purchase under the ESPP.
[2] Of these shares, a maximum of 2,933,086 shares remain available for issuance as restricted stock or performance shares under
The Hartford Incentive Stock Plan.
[3] Of these shares, 130,569 shares remain available for issuance under the Director's Plan.
- 16 -
SUMMARY DESCRIPTION OF THE 2000 PLANCO NON-EMPLOYEE OPTION PLAN
The Company's Board of Directors adopted the PLANCO Plan on July 20, 2000, and
amended it on February 20, 2003 to increase the number of shares of the
Company's common stock subject to the plan to 450,000 shares. The stockholders
of the Company have not approved the PLANCO Plan.
Eligibility - Any non-employee independent contractor serving on the wholesale
sales force as an insurance agent who is an exclusive agent of the Company or
who derives more than 50% of his or her annual income from the Company is
eligible.
Terms of options - Nonqualified stock options ("NQSOs") to purchase shares of
common stock are available for grant under the PLANCO Plan. The administrator of
the PLANCO Plan, the Compensation and Personnel Committee, (i) determines the
recipients of options under the PLANCO Plan, (ii) determines the number of
shares of common stock covered by such options, (iii) determines the dates and
the manner in which options become exercisable (which is typically in three
equal annual installments beginning on the first anniversary of the date of
grant), (iv) sets the exercise price of options (which may be less than, equal
to or greater than the fair market value of common stock on the date of grant)
and (v) determines the other terms and conditions of each option. Payment of the
exercise price may be made in cash, other shares of the Company's common stock
or through a same day sale program. The term of an NQSO may not exceed ten years
and two days from the date of grant.
If an optionee's required relationship with the Company terminates for any
reason, other than for cause, any exercisable options remain exercisable for a
fixed period of three months, not to exceed the remainder of the option's term.
Any options that are not exercisable at the time of such termination are
cancelled on the date of such termination. If the optionee's required
relationship is terminated for cause, the options are canceled immediately.
Acceleration in Connection with a Change in Control - Upon the occurrence of a
change in control, each option outstanding on the date of such change in
control, and which is not then fully vested and exercisable, shall immediately
vest and become exercisable. In general, a "Change in Control" will be deemed to
have occurred upon the acquisition of 20% or more of the outstanding voting
stock of the Company, a tender or exchange offer to acquire 15% or more of the
outstanding voting stock of the Company, certain mergers or corporate
transactions resulting in the shareholders of the Company before the
transactions owning less than 55% of the entity surviving the transactions,
certain transactions involving a transfer of substantially all of the Company's
assets or a change in greater than 50% of the Board members over a two year
period. See Note 11 of Notes to Consolidated Financial Statements for a
description of The Hartford Incentive Stock Plan and the ESPP.
PRIVATE PLACEMENTS
On July 10, 2003, the Company issued $320 in aggregate principal amount of its
unregistered 4.625% senior notes, due 2013. The unregistered senior notes were
offered and sold only to qualified institutional buyers in compliance with Rule
144A of the Securities Act of 1933 and, outside the United States, in compliance
with Regulation S of the Securities Act of 1933. The initial purchasers of the
senior notes were Banc of America Securities LLC, Wachovia Capital Markets, LLC
and Banc One Capital Markets, Inc. The net proceeds from the offering, along
with available cash, were used to redeem $320 net aggregate principal amount of
the Company's then outstanding 7.70% junior subordinated deferrable interest
debentures, series A, due February 28, 2016, underlying the 7.70% cumulative
quarterly income preferred securities, series A, originally issued by Hartford
Capital I. On January 22, 2004, pursuant to terms and conditions set forth in
the registration statement on Form S-4 (Reg. No. 333-110274) effective as of
January 20, 2004 and the related prospectus, the Company commenced an exchange
offer whereby the unregistered senior notes can be exchanged for registered
senior notes with identical terms. The exchange offer terminated on February 25,
2004.
- 17 -
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS)
2003 2002 2001 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Total revenues [1] $ 18,733 $ 16,417 $ 15,980 $ 15,312 $ 13,945
Income (loss) before cumulative effect of accounting
changes [2] (91) 1,000 541 974 862
Net income (loss) [2] [3] (91) 1,000 507 974 862
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 225,853 $ 181,975 $ 181,593 $ 171,951 $ 167,486
Long-term debt 4,613 4,064 3,377 3,105 2,798
Total stockholders' equity 11,639 10,734 9,013 7,464 5,466
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE DATA
BASIC EARNINGS (LOSS) PER SHARE [2]
Income (loss) before cumulative effect of accounting
changes [2] $ (0.33) $ 4.01 $ 2.27 $ 4.42 $ 3.83
Net income (loss) [2] [3] (0.33) 4.01 2.13 4.42 3.83
DILUTED EARNINGS (LOSS) PER SHARE [2] [4]
Income (loss) before cumulative effect of accounting
changes [2] (0.33) 3.97 2.24 4.34 3.79
Net income (loss) [2] [3] (0.33) 3.97 2.10 4.34 3.79
Dividends declared per common share 1.09 1.05 1.01 0.97 0.92
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER DATA
Mutual fund assets [5] $ 22,462 $ 15,321 $ 16,809 $ 11,432 $ 6,374
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [6] 98.0 99.8 112.5 102.9 102.7
====================================================================================================================================
[1] 2001 includes a $91 reduction in premiums from reinsurance cessions related to September 11.
[2] 2003 includes an after-tax charge of $1,701 related to the Company's 2003 asbestos reserve addition, $40 of after-tax expense
related to the settlement of the Bancorp Services, LLC litigation dispute, $30 of tax benefit in Life primarily related to the
favorable treatment of certain tax items arising during the 1996-2002 tax years, and $27 after-tax of severance charges in
Property & Casualty. 2002 includes $76 tax benefit in Life, $11 after-tax expense in Life related to Bancorp and an $8
after-tax benefit in Life's September 11 exposure. 2001 includes $440 of losses related to September 11 and a $130 tax benefit
in Life.
[3] 2001 includes a $34 after-tax charge related to the cumulative effect of accounting changes for the Company's adoption of SFAS
No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF Issue No. 99-20, "Recognition of Interest
Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets".
[4] As a result of the net loss for the year ended December 31, 2003, Statement of Financial Accounting Standards No. 128,"Earnings
per Share" requires the Company to use basic weighted average common shares outstanding in the calculation of the year ended
December 31, 2003 diluted earnings (loss) per share, since the inclusion of options of 1.8 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 274.2.
[5] Mutual funds are owned by the shareholders of those funds and not by the Company. As a result, they are not reflected in total
assets on the Company's balance sheet.
[6] 2001 includes the impact of September 11. Before the impact of September 11, the 2001 combined ratio was 103.5.
- 18 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT FOR PER SHARE DATA, UNLESS OTHERWISE STATED)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of The Hartford Financial
Services Group, Inc. and its subsidiaries (collectively, "The Hartford" or the
"Company") as of December 31, 2003, compared with December 31, 2002, and its
results of operations for each of the three years in the period ended December
31, 2003. This discussion should be read in conjunction with the Consolidated
Financial Statements and related Notes beginning on page F-1. Certain
reclassifications have been made to prior year financial information to conform
to the current year presentation.
Certain of the statements contained herein are forward-looking statements. These
forward-looking statements are made pursuant to the safe harbor provisions of
the Private Securities Litigation Reform Act of 1995 and include estimates and
assumptions related to economic, competitive and legislative developments. These
forward-looking statements are subject to change and uncertainty which are, in
many instances, beyond the Company's control and have been made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon the Company. There can be no assurance that future
developments will be in accordance with management's expectations or that the
effect of future developments on The Hartford will be those anticipated by
management. Actual results could differ materially from those expected by the
Company, depending on the outcome of various factors. These factors include: the
difficulty in predicting the Company's potential exposure for asbestos and
environmental claims and related litigation, including the Company's dispute
with Mac Arthur Company and its subsidiary, Western MacArthur Company
(collectively, or individually, "MacArthur") if the conditions to the
consummation of our settlement with MacArthur are not satisfied; the uncertain
nature of damage theories and loss amounts and the development of additional
facts related to the September 11 terrorist attack ("September 11"); the
uncertain effect on the Company of the Jobs and Growth Tax Relief Reconciliation
Act of 2003, in particular the reduction in tax rates on long-term capital gains
and most dividend distributions; the response of reinsurance companies under
reinsurance contracts, the impact of increasing reinsurance rates and the
availability and adequacy of reinsurance to protect the Company against losses;
the inability to effectively mitigate the impact of equity market volatility on
the Company's financial position and results of operations arising from
obligations under annuity product guarantees; the possibility of more
unfavorable loss experience than anticipated; the possibility of general
economic and business conditions that are less favorable than anticipated; the
incidence and severity of catastrophes, both natural and man-made; the effect of
changes in interest rates, the stock markets or other financial markets;
stronger than anticipated competitive activity; unfavorable legislative,
regulatory or judicial developments; the Company's ability to distribute its
products through distribution channels, both current and future; the uncertain
effects of emerging claim and coverage issues; the effect of assessments and
other surcharges for guaranty funds and second-injury funds and other mandatory
pooling arrangements; a downgrade in the Company's claims-paying, financial
strength or cre