UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended June 30, 2004
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.
| Delaware (State or other jurisdiction of incorporation or organization) |
13-3317783 (I.R.S. Employer Identification Number) |
Hartford Plaza, Hartford, Connecticut 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ]
Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Exchange Act). Yes [X] No [ ]
As of July 26, 2004, there were outstanding 293,188,819 shares of Common Stock, $0.01 par value per share, of the registrant.
1
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| BY-LAWS | ||||||||
| INVESTMENT AND SAVINGS PLAN | ||||||||
| RESTRICTED STOCK PLAN | ||||||||
| INCENTIVE STOCK PLAN | ||||||||
| DELOITTE & TOUCHE LLP LETTER OF AWARENESS | ||||||||
| CERTIFICATION | ||||||||
| CERTIFICATION | ||||||||
| CERTIFICATION | ||||||||
| CERTIFICATION | ||||||||
2
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
The Hartford Financial Services Group, Inc.
Hartford, Connecticut
We have reviewed the accompanying condensed consolidated balance sheet of The Hartford Financial Services Group, Inc. and subsidiaries (the “Company”) as of June 30, 2004, and the related condensed consolidated statements of operations and comprehensive income (loss) for the second quarters and six months ended June 30, 2004 and 2003, and changes in stockholders’ equity and cash flows for the six months ended June 30, 2004 and 2003. These interim financial statements are the responsibility of the Company’s management.
We conducted our reviews in accordance with standards of the Public Company Accounting Oversight Board (United States). A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with standards of the Public Company Accounting Oversight Board (United States), the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our reviews, we are not aware of any material modifications that should be made to such condensed consolidated interim financial statements for them to be in conformity with accounting principles generally accepted in the United States of America.
We have previously audited, in accordance with standards of the Public Company Accounting Oversight Board (United States), the consolidated balance sheet of the Company as of December 31, 2003, and the related consolidated statements of operations, changes in stockholders’ equity, comprehensive income, and cash flows for the year then ended (not presented herein); and in our report dated February 25, 2004, we expressed an unqualified opinion on those consolidated financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2003 is fairly stated, in all material respects, in relation to the consolidated balance sheet from which it has been derived.
DELOITTE & TOUCHE LLP
Hartford, Connecticut
August 3, 2004
3
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
| Second Quarter Ended | Six Months Ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| (In millions, except for per share data) |
2004 |
2003 |
2004 |
2003 |
||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
Revenues |
||||||||||||||||
Earned premiums |
$ | 3,323 | $ | 2,812 | $ | 6,504 | $ | 5,661 | ||||||||
Fee income |
793 | 656 | 1,579 | 1,273 | ||||||||||||
Net investment income |
1,158 | 796 | 2,675 | 1,584 | ||||||||||||
Other revenues |
118 | 147 | 222 | 269 | ||||||||||||
Net realized capital gains |
52 | 271 | 196 | 226 | ||||||||||||
Total revenues |
5,444 | 4,682 | 11,176 | 9,013 | ||||||||||||
Benefits, claims and expenses |
||||||||||||||||
Benefits, claims and claim adjustment expenses |
3,288 | 2,629 | 6,585 | 7,874 | ||||||||||||
Amortization of deferred policy acquisition costs and present value of
future profits |
701 | 557 | 1,380 | 1,121 | ||||||||||||
Insurance operating costs and expenses |
653 | 584 | 1,345 | 1,122 | ||||||||||||
Interest expense |
62 | 69 | 128 | 135 | ||||||||||||
Other expenses |
163 | 214 | 343 | 357 | ||||||||||||
Total benefits, claims and expenses |
4,867 | 4,053 | 9,781 | 10,609 | ||||||||||||
Income (loss) before income taxes and
cumulative effect of accounting change |
577 | 629 | 1,395 | (1,596 | ) | |||||||||||
Income tax expense (benefit) |
144 | 122 | 371 | (708 | ) | |||||||||||
Income (loss) before cumulative effect of accounting change |
433 | 507 | 1,024 | (888 | ) | |||||||||||
Cumulative effect of accounting change, net of tax |
— | — | (23 | ) | — | |||||||||||
Net income (loss) |
$ | 433 | $ | 507 | $ | 1,001 | $ | (888 | ) | |||||||
Basic earnings (loss) per share |
||||||||||||||||
Income (loss) before cumulative effect of accounting change |
$ | 1.48 | $ | 1.89 | 3.52 | $ | (3.39 | ) | ||||||||
Cumulative effect of accounting change, net of tax |
— | — | (0.08 | ) | — | |||||||||||
Net income (loss) |
$ | 1.48 | $ | 1.89 | $ | 3.44 | $ | (3.39 | ) | |||||||
Diluted earnings (loss) per share |
||||||||||||||||
Income (loss) before cumulative effect of accounting change |
$ | 1.46 | $ | 1.88 | $ | 3.46 | $ | (3.39 | ) | |||||||
Cumulative effect of accounting change, net of tax |
— | — | (0.08 | ) | — | |||||||||||
Net income (loss) |
$ | 1.46 | $ | 1.88 | $ | 3.38 | $ | (3.39 | ) | |||||||
Weighted average common shares outstanding |
292.3 | 268.8 | 291.1 | 262.1 | ||||||||||||
Weighted average common shares outstanding and dilutive potential
common shares |
297.5 | 270.2 | 296.2 | 262.1 | ||||||||||||
Cash dividends declared per share |
$ | 0.28 | $ | 0.27 | $ | 0.56 | $ | 0.54 | ||||||||
See Notes to Condensed Consolidated Financial Statements.
4
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
| June 30, | December 31, | |||||||
| (In millions, except for share data) |
2004 |
2003 |
||||||
| (Unaudited) | ||||||||
Assets |
||||||||
Investments |
||||||||
Fixed maturities, available-for-sale, at fair value (amortized cost of $68,732 and
$58,127) |
$ | 70,703 | $ | 61,263 | ||||
Equity securities, held for trading, at fair value |
8,995 | — | ||||||
Equity securities, available-for-sale, at fair value (cost of $545 and $505) |
584 | 565 | ||||||
Policy loans, at outstanding balance |
2,650 | 2,512 | ||||||
Other investments |
1,917 | 1,507 | ||||||
Total investments |
84,849 | 65,847 | ||||||
Cash |
695 | 462 | ||||||
Premiums receivable and agents’ balances |
3,429 | 3,085 | ||||||
Reinsurance recoverables |
5,655 | 5,958 | ||||||
Deferred policy acquisition costs and present value of future profits |
8,086 | 7,599 | ||||||
Deferred income taxes |
987 | 845 | ||||||
Goodwill |
1,720 | 1,720 | ||||||
Other assets |
3,961 | 3,704 | ||||||
Separate account assets |
130,840 | 136,633 | ||||||
Total assets |
$ | 240,222 | $ | 225,853 | ||||
Liabilities |
||||||||
Reserve for future policy benefits and unpaid claims and claim adjustment expenses |
||||||||
Property and casualty |
$ | 20,562 | $ | 21,715 | ||||
Life |
11,746 | 11,402 | ||||||
Other policyholder funds and benefits payable |
46,605 | 26,185 | ||||||
Unearned premiums |
4,843 | 4,423 | ||||||
Short-term debt |
622 | 1,050 | ||||||
Long-term debt |
4,304 | 4,613 | ||||||
Other liabilities |
8,425 | 8,193 | ||||||
Separate account liabilities |
130,840 | 136,633 | ||||||
Total liabilities |
227,947 | 214,214 | ||||||
Commitments and Contingencies (Note 9) |
||||||||
Stockholders’ Equity |
||||||||
Common stock - 750,000,000 shares authorized, 296,024,430 and 286,339,430
shares issued, $0.01 par value |
3 | 3 | ||||||
Additional paid-in capital |
4,494 | 3,929 | ||||||
Retained earnings |
7,337 | 6,499 | ||||||
Treasury stock, at cost –2,989,744 and 2,959,692 shares |
(39 | ) | (38 | ) | ||||
Accumulated other comprehensive income, net of tax |
480 | 1,246 | ||||||
Total stockholders’ equity |
12,275 | 11,639 | ||||||
Total liabilities and stockholders’ equity |
$ | 240,222 | $ | 225,853 | ||||
See Notes to Condensed Consolidated Financial Statements.
5
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
| Six Months Ended | ||||||||
| June 30, |
||||||||
| (In millions, except for share data) |
2004 |
2003 |
||||||
| (Unaudited) | ||||||||
Common Stock/Additional Paid-in Capital |
||||||||
Balance at beginning of period |
$ | 3,932 | $ | 2,787 | ||||
Issuance of common stock in underwritten offering |
411 | 1,161 | ||||||
Issuance of equity units |
— | (112 | ) | |||||
Issuance of shares under incentive and stock compensation plans |
135 | 32 | ||||||
Tax benefit on employee stock options and awards |
19 | 4 | ||||||
Balance at end of period |
4,497 | 3,872 | ||||||
Retained Earnings |
||||||||
Balance at beginning of period |
6,499 | 6,890 | ||||||
Net income (loss) |
1,001 | (888 | ) | |||||
Dividends declared on common stock |
(163 | ) | (145 | ) | ||||
Balance at end of period |
7,337 | 5,857 | ||||||
Treasury Stock, at Cost |
||||||||
Balance at beginning of period |
(38 | ) | (37 | ) | ||||
Return of shares to treasury stock under incentive and stock
compensation plans |
(1 | ) | — | |||||
Balance at end of period |
(39 | ) | (37 | ) | ||||
Accumulated Other Comprehensive Income (Loss), Net of Tax |
||||||||
Balance at beginning of period |
1,246 | 1,094 | ||||||
Change in net unrealized gain/loss on securities |
(990 | ) | 732 | |||||
Cumulative effect of accounting change |
292 | — | ||||||
Change in net gain/loss on cash-flow hedging instruments |
(50 | ) | (38 | ) | ||||
Foreign currency translation adjustments |
(18 | ) | 19 | |||||
Total other comprehensive income (loss) |
(766 | ) | 713 | |||||
Balance at end of period |
480 | 1,807 | ||||||
Total stockholders’ equity |
$ | 12,275 | $ | 11,499 | ||||
Outstanding Shares (in thousands) |
||||||||
Balance at beginning of period |
283,380 | 255,241 | ||||||
Issuance of common stock in underwritten offering |
6,703 | 26,377 | ||||||
Issuance of shares under incentive and stock compensation plans |
2,982 | 581 | ||||||
Return of shares to treasury stock under incentive and stock
compensation plans |
(30 | ) | — | |||||
Balance at end of period |
293,035 | 282,199 | ||||||
Condensed Consolidated Statements of Comprehensive Income (Loss)
| Second Quarter Ended June 30, |
Six Months Ended June 30, |
|||||||||||||||
| (In millions) |
2004 |
2003 |
2004 |
2003 |
||||||||||||
| (Unaudited) | (Unaudited) | |||||||||||||||
Comprehensive Income (Loss) |
||||||||||||||||
Net income (loss) |
$ | 433 | $ | 507 | $ | 1,001 | $ | (888 | ) | |||||||
Other Comprehensive Income (Loss) |
||||||||||||||||
Change in net unrealized gain/loss on securities |
(1,564 | ) | 555 | (990 | ) | 732 | ||||||||||
Cumulative effect of accounting change |
— | — | 292 | — | ||||||||||||
Change in net gain/loss on cash-flow hedging instruments |
(109 | ) | (15 | ) | (50 | ) | (38 | ) | ||||||||
Foreign currency translation adjustments |
(15 | ) | 10 | (18 | ) | 19 | ||||||||||
Total other comprehensive income (loss) |
(1,688 | ) | 550 | (766 | ) | 713 | ||||||||||
Total comprehensive income (loss) |
$ | (1,255 | ) | $ | 1,057 | $ | 235 | $ | (175 | ) | ||||||
See Notes to Condensed Consolidated Financial Statements.
6
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
| Six Months Ended | ||||||||
| June 30, |
||||||||
| (In millions) |
2004 |
2003 |
||||||
| (Unaudited) | ||||||||
Operating Activities |
||||||||
Net income (loss) |
$ | 1,001 | $ | (888 | ) | |||
Adjustments to reconcile net income (loss) to net cash provided by operating
activities |
||||||||
Amortization of deferred policy acquisition costs and present value of future
profits |
1,380 | 1,121 | ||||||
Additions to deferred policy acquisition costs and present value of future profits |
(1,922 | ) | (1,568 | ) | ||||
Change in: |
||||||||
Reserve for future policy benefits and unpaid claims and claim adjustment
expenses and unearned premiums |
(387 | ) | 4,791 | |||||
Reinsurance recoverables |
424 | (1,184 | ) | |||||
Receivables |
(543 | ) | (169 | ) | ||||
Payables and accruals |
(379 | ) | (217 | ) | ||||
Accrued and deferred income taxes |
680 | (739 | ) | |||||
Net realized capital gains |
(196 | ) | (226 | ) | ||||
Net increase in equity securities, held for trading |
(2,759 | ) | — | |||||
Net receipts from investment contracts credited to policyholder accounts
associated with equity securities, held for trading |
3,072 | — | ||||||
Depreciation and amortization |
198 | 11 | ||||||
Cumulative effect of accounting change, net of tax |
23 | — | ||||||
Other, net |
39 | 404 | ||||||
Net cash provided by operating activities |
631 | 1,336 | ||||||
Investing Activities |
||||||||
Purchase of available-for-sale investments |
(11,498 | ) | (16,196 | ) | ||||
Sale of available-for-sale investments |
9,350 | 8,960 | ||||||
Maturity of available-for-sale investments |
2,478 | 1,928 | ||||||
Purchase price adjustment of business acquired |
(58 | ) | — | |||||
Additions to property, plant and equipment, net |
(77 | ) | (72 | ) | ||||
Net cash provided by (used for) investing activities |
195 | (5,380 | ) | |||||
Financing Activities |
||||||||
Repayment of short-term debt, net |
(477 | ) | — | |||||
Issuance of long-term debt |
197 | 918 | ||||||
Repayment/maturity of long-term debt |
(450 | ) | (180 | ) | ||||
Issuance of common stock in underwritten offering |
411 | 1,162 | ||||||
Net receipts (disbursements) from investment and universal life-type contracts
credited to policyholder accounts |
(227 | ) | 2,313 | |||||
Dividends paid |
(160 | ) | (138 | ) | ||||
Proceeds from issuance of shares under incentive and stock compensation plans |
115 | 17 | ||||||
Net cash provided by (used for) financing activities |
(591 | ) | 4,092 | |||||
Foreign exchange rate effect on cash |
(2 | ) | 4 | |||||
Net increase in cash |
233 | 52 | ||||||
Cash — beginning of period |
462 | 377 | ||||||
Cash — end of period |
$ | 695 | $ | 429 | ||||
| Supplemental Disclosure of Cash Flow Information: | ||||||||
Net Cash Paid (Received) During the Period For: |
||||||||
Income taxes |
$ | 44 | $ | (29 | ) | |||
Interest |
$ | 137 | $ | 133 | ||||
See Notes to Condensed Consolidated Financial Statements.
7
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Note 1. Basis of Presentation and Accounting Policies
Basis of Presentation
The Hartford Financial Services Group, Inc. and its consolidated subsidiaries (“The Hartford” or the “Company”) provide investment products, life insurance and group benefits, automobile and homeowners products, and business property-casualty insurance to both individual and business customers in the United States and internationally.
On December 31, 2003, the Company acquired the group life and accident, and short-term and long-term disability business of CNA Financial Corporation. Accordingly, the Company’s results of operations for the second quarter and six months ended June 30, 2004 reflect the inclusion of this business. For further discussion of the CNA Financial Corporation acquisition, see Note 6 of these Notes to Condensed Consolidated Financial Statements and Note 18 of Notes to Consolidated Financial Statements included in The Hartford’s 2003 Form 10-K Annual Report.
The condensed consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America, which differ materially from the accounting practices prescribed by various insurance regulatory authorities. Subsidiaries in which The Hartford has at least a 20% interest, but less than a majority ownership interest, are reported on the equity method. All material intercompany transactions and balances between The Hartford, its subsidiaries and affiliates have been eliminated.
The accompanying condensed consolidated financial statements and the condensed notes as of June 30, 2004, and for the second quarter and six months ended June 30, 2004 and 2003 are unaudited. These financial statements reflect all adjustments (consisting only of normal accruals) which are, in the opinion of management, necessary for the fair presentation of the financial position, results of operations, and cash flows for the interim periods. These condensed consolidated financial statements and condensed notes should be read in conjunction with the consolidated financial statements and notes thereto included in The Hartford’s 2003 Form 10-K Annual Report. The results of operations for the interim periods should not be considered indicative of results to be expected for the full year.
Reclassifications
Certain reclassifications have been made to prior period financial information to conform to the current period classifications.
Use of Estimates
The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining reserves for future policy benefits and unpaid claims and claim adjustment expenses; deferred policy acquisition costs and present value of future profits; investments; pension and other postretirement benefits; and contingencies.
Significant Accounting Policies
For a description of accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in The Hartford’s 2003 Form 10-K Annual Report.
Investments
As discussed in Note 4 below, on January 1, 2004, the Company reclassified certain separate account assets to the general account and classified a portion of these assets as trading securities. Trading securities are recorded at fair value with subsequent changes in fair value recognized in net investment income.
Stock-Based Compensation
In January 2003, the Company began expensing all stock-based compensation awards granted or modified after January 1, 2003 under the fair value recognition provisions of Statement of Financial Accounting Standards (“SFAS”) No. 123, “Accounting for Stock-Based Compensation”. The fair value of stock-based awards granted or modified during the six months ended June 30, 2004 and 2003 was $36 and $33, after-tax, respectively. The fair value of these awards will be recognized over the awards’ vesting period, generally 3 years. Prior to January 1, 2004, the Company used the Black-Scholes model to estimate the fair value of the Company’s stock-based compensation. For all awards granted or modified on or after January 1, 2004, the Company used a binomial option-pricing model that incorporates the possibility of early exercise of options into the valuation. The binomial model also incorporates the Company’s historical forfeiture and exercise experience to determine the option value. For these reasons, the Company believes the binomial model provides a fair value that is more representative of actual historical experience than the value calculated under the Black-Scholes model.
All stock-based awards granted or modified prior to January 1, 2003 continue to be valued using the intrinsic value-based provisions set forth in Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees”. Under the intrinsic value method, compensation expense is determined on the measurement date, which is the first date on which both the number of shares the employee is entitled to receive and the exercise price are known. Compensation expense, if any, is measured based on the award’s intrinsic value, which is the excess of the market price of the stock over the exercise price on the measurement date. The expense related to stock-based employee compensation, including non-option plans, included in the determination of net income for the second quarter and six months ended June 30, 2004 and 2003 is less than
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (continued)
(Unaudited)
Note 1. Basis of Presentation and Accounting Policies (continued)
Stock-Based Compensation (continued)
that which would have been recognized if the fair value method had been applied to all awards since the effective date of SFAS No. 123. (For further discussion of the Company’s stock compensation plans, see Note 11 of Notes to Consolidated Financial Statements included in The Hartford’s 2003 Form 10-K Annual Report.)
The following table illustrates the effect on net income (loss) and earnings (loss) per share as if the fair value method had been applied to all outstanding and unvested awards in each period. The pro forma fair values disclosed below related to awards granted prior to 2004 were calculated using the Black-Scholes option-pricing model and were not recalculated using the binomial model. The change in valuation methodology would have an immaterial impact on the pro forma net income amounts disclosed.
| Second Quarter Ended | Six Months Ended | |||||||||||||||
| June 30, |
June 30, |
|||||||||||||||
| 2004 |
2003 |
2004 |
2003 |
|||||||||||||
Net income (loss), as reported |
$ | 433 | $ | 507 | $ | 1,001 | $ | (888 | ) | |||||||
Add: Stock-based employee
compensation expense included
in reported net income (loss),
net of related tax effects [1] |
9 | 9 | 13 | 11 | ||||||||||||
Deduct: Total stock-based
employee compensation expense
determined under the fair
value method for all awards,
net of related tax effects |
(12 | ) | (17 | ) | (19 | ) | (26 | ) | ||||||||
Pro forma net income (loss) [2] |
$ | 430 | $ | 499 | $ | 995 | $ | (903 | ) | |||||||
Earnings (loss) per share: |
||||||||||||||||
Basic – as reported |
$ | 1.48 | $ | 1.89 | $ | 3.44 | $ | (3.39 | ) | |||||||
Basic – pro forma [2] |
$ | 1.47 | $ | 1.86 | $ | 3.42 | $ | (3.45 | ) | |||||||
Diluted – as reported [3] |
$ | 1.46 | $ | 1.88 | $ | 3.38 | $ | (3.39 | ) | |||||||
Diluted – pro forma [2] [3] |
$ | 1.45 | $ | 1.85 | $ | 3.36 | $ | (3.45 | ) | |||||||
[1]
|
Includes the impact of non-option plans of $3 and $1, respectively, for the second quarter, and $4 and $2, respectively, for the six months ended June 30, 2004 and 2003. | |
[2]
|
The pro forma disclosures are not representative of the effects on net income (loss) and earnings (loss) per share in future periods. | |
[3]
|
As a result of the net loss in the six months ended June 30, 2003, SFAS No. 128, “Earnings Per Share”, requires the Company to use basic weighted average common shares outstanding in the calculation of the six months ended June 30, 2003 diluted earnings (loss) per share, since the inclusion of options of 1.0 would have been antidilutive to the earnings per share calculation. In the absence of the net loss, weighted average common shares outstanding and dilutive potential common shares would have totaled 263.1. |
Adoption of New Accounting Standards
FSP 97-1
In June 2004, the Financial Accounting Standards Board (“FASB”) issued FASB Staff Position (“FSP”) FAS 97-1, “Situat