10-K 1 0001.txt THE HARTFORD FINANCIAL SERVICES GROUP, INC. ================================================================================ FORM 10-K UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 0-19277 THE HARTFORD FINANCIAL SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 13-3317783 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Hartford Plaza, Hartford, Connecticut 06115-1900 (Address of principal executive offices) (860) 547-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: the following, all of which are registered on the New York Stock Exchange, Inc.: Common Stock, par value $0.01 per share 6.375% Notes due November 1, 2002 7.75% Notes due June 15, 2005 6.375% Notes due November 1, 2008 7.90% Notes due June 15, 2010 7.30% Debentures due November 1, 2015 7.70% Cumulative Quarterly Income Preferred Securities, Series A, issued by Hartford Capital I 8.35% Cumulative Quarterly Income Preferred Securities, Series B, issued by Hartford Capital II Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 28, 2001, there were outstanding 236,640,967 shares of Common Stock, $0.01 par value per share, of the registrant. The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was $15,025,144,711 based on the closing price of $63.85 per share of the Common Stock on the New York Stock Exchange on February 28, 2001. Documents Incorporated by Reference: ================================================================================ Portions of the Registrant's definitive proxy statement for its 2001 annual meeting of shareholders are incorporated by reference in Part III of this Form 10-K. ================================================================================ CONTENTS ITEM DESCRIPTION PAGE PART I 1 Business of The Hartford 2 2 Properties 13 3 Legal Proceedings 13 4 Submission of Matters to a Vote of Security Holders 13 PART II 5 Market for The Hartford's Common Stock and Related Stockholder Matters 13 6 Selected Financial Data 14 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 15 7A Quantitative and Qualitative Disclosures About Market Risk 47 8 Financial Statements and Supplementary Data 47 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 47 PART III 10 Directors and Executive Officers of The Hartford 47 11 Executive Compensation 47 12 Security Ownership of Certain Beneficial Owners and Management 47 13 Certain Relationships and Related Transactions 47 PART IV 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 47 Signatures II-1 Exhibits Index II-2 PART I ITEM 1. BUSINESS OF THE HARTFORD (Dollar amounts in millions, except for 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, 2000, total assets and total stockholders' equity of The Hartford were $171.5 billion and $7.5 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. The Hartford Financial Services Group, Inc., a Delaware corporation, was formed in December 1985 as a wholly-owned subsidiary of ITT Corporation ("ITT"). On December 19, 1995, ITT distributed all of the outstanding shares of The Hartford Financial Services Group, Inc. to ITT shareholders of record in an action known herein as the Distribution. As a result of the Distribution, The Hartford became an independent, publicly traded company. As a holding company that is separate and distinct from its insurance 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 subsidiaries, which are primarily domiciled in Connecticut, as the principal source of cash flow to meet its obligations. Additional information regarding the cash flow and liquidity needs of The Hartford Financial Services Group, Inc. may be found in the Capital Resources and Liquidity section of Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). The Company maintains a retail mutual fund operation, whereby the Company, through wholly-owned subsidiaries, provides investment management and administrative services to The Hartford Mutual Funds, Inc., a family of fourteen mutual funds. Investors can purchase "shares" in the mutual funds, all of which are registered with the Securities and Exchange Commission, in accordance with the Investment Company Act of 1940. The mutual funds are owned by the shareholders of those funds and not by the Company. Pursuant to its initial public offering of Class A common stock on May 22, 1997 (the "Offering") of Hartford Life, Inc. ("HLI"), the holding company parent of The Hartford's significant life insurance subsidiaries, HLI sold to the public 26 million shares at $28.25 per share and received proceeds, net of offering expenses, of $687. The 26 million shares sold in the Offering represented approximately 19% of the equity ownership in HLI. On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI that it did not already own ("The HLI Repurchase"). As a result, HLI again became a wholly-owned subsidiary of The Hartford. Additional information on The HLI Repurchase may be found in the Capital Resources and Liquidity section of the ("MD&A") and Note 2 of Notes to Consolidated Financial Statements. On November 16, 1998, The Hartford completed the sale of its United Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh") subsidiary. The Hartford retained ownership of Excess Insurance Company Limited, London & Edinburgh's property and casualty insurance and reinsurance subsidiary, which discontinued writing new business in 1993. On December 22, 2000, The Hartford completed the sale of its Netherlands-based Zwolsche Algemeene N.V. subsidiary to Assurances Generales de France, a subsidiary of Allianz AG. The Hartford received $547, before costs of sale. Management used the proceeds from the sale to reduce outstanding commercial paper which was issued to partially fund The HLI Repurchase. On January 25, 2001, The Hartford agreed to acquire the U.S. 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 will effect 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. The Fortis transaction, which is subject to insurance regulatory approval and other customary conditions, is expected to be completed in the second quarter of 2001. The acquisition will be recorded as a purchase transaction. On February 8, 2001, The Hartford completed the sale of its Spain-based subsidiary, Hartford Seguros, to Liberty International, a subsidiary of Liberty Mutual Group. The Hartford received $29, before costs of sale. REPORTING SEGMENTS The Hartford is organized into two major operations: Worldwide Life and Worldwide Property & Casualty. Within these operations, The Hartford conducts business principally in eight operating segments. Additionally, all activities related to The HLI Repurchase, the minority interest in HLI for pre-acquisition periods and The Hartford Bank, FSB are included in Corporate. Worldwide Life, headquartered in Simsbury, Connecticut, is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits (formerly Employee - 2 - Benefits) and Corporate Owned Life Insurance ("COLI"). Worldwide Life also includes in an Other category its international operations, which are primarily located in Latin America and the Far East, and corporate items not directly allocable to any of its reportable operating segments, principally interest expense. Worldwide Property & Casualty is organized into four reportable operating segments: the underwriting segments of Commercial, Personal and Reinsurance, and an International and Other Operations segment. Also reported within Worldwide Property & Casualty is North American, which includes the combined underwriting results of Commercial, Personal and Reinsurance along with income and expense items not directly allocable to these segments, such as net investment income. The following is a description of Worldwide Life and Worldwide 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 18 of Notes to Consolidated Financial Statements. WORLDWIDE LIFE Worldwide Life's business is conducted by HLI, a leading financial services and insurance organization. Through Worldwide Life, The Hartford provides (i) investment products, including variable annuities, fixed market value adjusted ("MVA") annuities, mutual funds and retirement plan services for the savings and retirement needs of over 1.5 million customers, (ii) life insurance for income protection and estate planning to approximately 500,000 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. According to the latest publicly available data, with respect to the United States, the Company is the largest writer of individual variable annuities based on sales for the year ended December 31, 2000 and the third largest writer of group disability insurance based on sales for the nine months ended September 30, 2000. In addition, the Company offers a retail-oriented mutual fund family that is the fastest in history to reach $10 billion in assets. The Company's strong position in each of its core businesses provides an opportunity to increase the sale of The Hartford's products and services as individuals increasingly save and plan for retirement, protect themselves and their families against disability or death and engage in estate planning. The Company is the third largest consolidated life insurance group based on statutory assets as of December 31, 1999. In the past year, Worldwide Life's total assets under management, which include $11.4 billion of third-party assets invested in the Company's mutual funds, increased 7% to $155.1 billion at December 31, 2000. Worldwide Life generated $6.0 billion in revenues and net income of $575 in 2000. CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE Worldwide Life maintains advantageous economies of scale and operating efficiencies due to its continued growth, attention to expense and claims management and commitment to customer service and technology. These advantages allow the Company to competitively price its products for its distribution network and policyholders. The Company continues to achieve operating efficiencies in its Investment Products segment. Operating expenses associated with the Company's individual annuity products as a percentage of total individual annuity account values reduced by more than half, declining from 43 basis points in 1992 to 21 basis points in 2000. In addition, the Company utilizes computer technology to enhance communications within the Company and throughout its distribution network in order to improve the Company's efficiency in marketing, selling and servicing its products and, as a result, provides high-quality customer service. In recognition of excellence in customer service for variable annuities, The Hartford was awarded the 2000 Annuity Service Award by DALBAR Inc., a recognized independent financial services research organization, for the fifth consecutive year. The Hartford is the only company to receive this prestigious award in every year of the award's existence. Also, The Hartford Mutual Funds, Inc. have been named the leading mid-sized fund complex in the industry for top service providers, according to a survey of broker-dealers conducted by DALBAR Inc. RISK MANAGEMENT Worldwide Life's product designs, prudent underwriting standards and risk management techniques protect it against disintermediation risk and greater than expected mortality and morbidity experience. As of December 31, 2000, the Company had limited exposure to disintermediation risk on approximately 98% of its domestic life insurance and annuity liabilities through the use of non-guaranteed separate accounts, MVA features, policy loans, surrender charges and non-surrenderability provisions. The Company effectively utilizes prudent underwriting to select and price insurance risks and regularly monitors mortality and morbidity assumptions to determine if experience remains consistent with these assumptions and to ensure that its product pricing remains appropriate. The Company also enforces disciplined claims management to protect itself against greater than expected morbidity experience. INVESTMENT PRODUCTS The Investment Products segment focuses, through the sale of individual variable and fixed annuities, mutual funds, retirement plan services and other investment products, on the savings and retirement needs of the growing number of individuals who are preparing for retirement or who have already retired. From December 31, 1995 to December 31, 2000, this segment's assets under management grew to $116.0 billion from $43.9 billion, a five year compounded annual growth rate of 21%. Investment Products generated revenues of $2.4 billion, $2.0 billion and $1.8 billion in 2000, 1999 and 1998, respectively, of which individual annuities accounted for $1.5 billion, $1.4 billion and $1.1 billion of total Investment Products revenues in 2000, 1999 and 1998, respectively. Net income in the Investment Products segment was $424 in 2000, a 28% increase over 1999. The Hartford sells both variable and fixed individual annuity products through a wide distribution network of national and regional broker-dealer organizations, banks and other financial institutions and independent financial advisors. The Hartford is a market leader in the annuity industry with sales of $10.7 billion, $10.9 billion and $10.0 billion in 2000, 1999 and 1998, respectively. According to Variable Annuity and Research Data - 3 - Service ("VARDS"), The Hartford was the number one writer of individual variable annuities in the United States for 2000, 1999 and 1998 with sales of $9.0 billion, $10.3 billion and $9.9 billion, respectively. In addition, the Company was the number one seller of individual variable annuities through banks in 2000, 1999 and 1998, according to Kenneth Kehrer Associates (a leading consultant to banks). The Company's total account value related to individual annuity products was $87.2 billion as of December 31, 2000. Of this total account value, $78.2 billion, or 90%, related to individual variable annuity products and $9.0 billion, or 10%, related primarily to fixed MVA annuity products. The Hartford is emerging as a significant participant in the mutual fund business. The Company is among the top providers of retirement products and services, including asset management and plan administration, to municipalities pursuant to Section 457 and plans to corporations under Section 401(k) of the Internal Revenue Code of 1986, as amended (referred to as "Section 457" and "Section 401(k)", respectively). The Company also provides structured settlement contracts, terminal funding products and other investment products such as guaranteed investment contracts ("GICs"). As previously mentioned, in January 2001, The Hartford agreed to acquire the annuity and mutual fund businesses of Fortis. This acquisition is expected to increase assets under management in the Company's fast growing mutual fund business by over 30%, as well as solidify the Company's number one position in variable annuities. (For additional information, see the Capital Resources and Liquidity section of the MD&A under "Subsequent Event".) Principal Products ------------------ Individual Variable Annuities -- The Hartford earns fees, based on policyholders' account values, for managing variable annuity assets and maintaining policyholder accounts. The Company uses specified portions of the periodic deposits paid by a customer to purchase units in one or more mutual funds as directed by the customer who then assumes the investment performance risks and rewards. As a result, variable annuities permit policyholders to choose aggressive or conservative investment strategies, as they deem appropriate, without affecting the composition and quality of assets in the Company's general account. These products offer the policyholder a variety of equity and fixed income options, as well as the ability to earn a guaranteed rate of interest in the general account of the Company. The Company offers an enhanced guaranteed rate of interest for a specified period of time (no longer than twelve months) if the policyholder elects to dollar-cost average funds from the Company's general account into one or more non-guaranteed separate accounts. Due to this enhanced rate and the volatility experienced in the overall equity markets, this option continues to be popular with policyholders. 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 ranging initially from 6% to 8% of the contract's initial deposit less withdrawals which reduce to zero on a sliding scale, usually within seven policy years. Volatility experienced by the equity markets in 2000, 1999 and 1998 did not cause a significant increase in variable annuity surrenders, demonstrating that policyholders are generally aware of the long-term nature of these products. Individual variable annuity account values of $78.2 billion as of December 31, 2000, has grown significantly from $13.1 billion as of December 31, 1994 due to strong net cash flow, the result of a high level of sales, low levels of surrenders and equity market appreciation. Approximately 96% and 95% of the individual variable annuity account values were held in non-guaranteed separate accounts as of December 31, 2000 and 1999, respectively. The assets underlying the Company's variable annuities are managed both internally and by outside money managers, while the Company provides all policy administration services. The Company utilizes a select group of money managers, such as Wellington Management Company, LLP ("Wellington"), Putnam Financial Services, Inc. ("Putnam"), American Funds, MFS Investment Management ("MFS"), Franklin Templeton Group and Morgan Stanley Dean Witter InterCapital, Inc. All have an interest in the continued growth in sales of the Company's products and greatly enhance the marketability of the Company's annuities and the strength of its product offerings. Two of the industry's top twenty leading variable annuities, (based on sales for the year ended 2000), The Director(R) and Putnam Hartford Capital Manager Variable Annuity, are sponsored by The Hartford and are managed in part by Wellington and Putnam, respectively. The Hartford Leaders, a multi-manager variable annuity introduced in July 1999, combines the product manufacturing, wholesaling and service capabilities of The Hartford with the investment management expertise of three of the nation's most successful investment management organizations, American Funds, Franklin Templeton Group and MFS. The Hartford Leaders has proved to be a strong product from inception and is poised to join The Director(R) and Putnam Hartford Capital Manager Variable Annuity as an industry leader. 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 seven years. Sales of the Company's fixed MVA annuities increased during 2000 as a result of the higher interest rate environment making 2000 the best sales year for this product since 1995. Account values of fixed MVA annuities were $9.0 billion and $8.4 billion as of December 31, 2000 and 1999, respectively. Mutual Funds -- In September 1996, the Company launched a new family of retail mutual funds. The Company provides investment management and administrative services to The Hartford Mutual Funds, Inc., a family of fourteen mutual funds. These funds are managed by Wellington and Hartford Investment Management Company, a wholly-owned subsidiary - 4 - of The Hartford. The Company has entered into agreements with over 750 financial services firms to distribute these mutual funds. The Company charges management 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 since they are not assets, liabilities and operations of the Company. According to Strategic Insight (a mutual fund research and consulting organization), The Hartford Mutual Funds, Inc. reached $10 billion in assets faster than any other retail-oriented fund family in history. Eight of the fourteen funds have Morningstar ratings and all eight have three-, four- or five- star ratings as of December 31, 2000. Total retail mutual fund sales were $5.2 billion, $3.3 billion and $1.6 billion in 2000, 1999 and 1998, respectively. Corporate -- The Company sells retirement plan products and services to corporations under Section 401(k) plans targeting the small and medium case markets since the Company believes these markets are underpenetrated in comparison to the large case market. As of December 31, 2000, the Company administered over 1,400 Section 401(k) plans. Governmental -- The Company sells retirement plan products and services to municipalities under Section 457 plans. The Company offers a number of different funds, both fixed income and equity, to the employees in Section 457 plans. Generally, the Company manages the fixed income funds and certain other outside money managers act as advisors to the equity funds offered in Section 457 plans administered by the Company. As of December 31, 2000, the Company administered over 2,000 Section 457 plans. Institutional Liabilities -- The Company also sells structured settlement contracts which provide for periodic payments to an injured person or survivor for a generally determinable number of years, typically in settlement of a claim under a liability policy in lieu of a lump sum settlement. The Company's structured settlements are sold through The Hartford's property-casualty insurance operations as well as specialty brokers. The Company also markets other annuity contracts for special purposes such as the funding of terminated defined benefit pension plans. In addition, the Company offers GICs and short-term funding agreements. Marketing and Distribution -------------------------- 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 individual annuities to customers is consummated). The Hartford maintains a distribution network of approximately 1,500 broker-dealers and approximately 500 banks. As of September 30, 2000, the Company was selling products through 24 of the 25 largest retail banks in the United States, including proprietary relationships with 10 of the top 25. The Company periodically negotiates provisions and terms of its relationships with unaffiliated parties, and there can be no assurance that such terms will remain acceptable to the Company or such third parties. In August 1998, the Company completed the purchase of all outstanding shares of PLANCO Financial Services, Inc. and its affiliate, PLANCO, Incorporated (collectively, "PLANCO"), a primary wholesaler of the Company's individual annuities and mutual funds. PLANCO is the nation's largest wholesaler of individual annuities and has played a significant role in The Hartford's growth over the past decade. As a wholesaler, PLANCO distributes The Hartford's fixed and variable annuities, mutual funds and single premium variable life insurance by providing sales support to registered representatives, financial planners and broker-dealers at brokerage firms and banks across the United States. This acquisition secured 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 market. Competition ----------- The Investment Products segment competes with numerous other insurance companies as well as certain banks, securities brokerage firms, investment advisors and other financial intermediaries marketing annuities, mutual funds and other retirement-oriented products. As a result of court decisions and regulatory actions, national banks may become more significant competitors in the future for insurers which sell annuities. The 1999 Gramm-Leach-Bliley Act ("the Financial Services Modernization Act"), which allows affiliations among banks, insurance companies and securities firms, did not precipitate any significant changes in ownership in 2000. (For additional information, see the Regulatory Matters and Contingencies section of the MD&A.) Product sales are affected by competitive factors such as investment performance ratings, product design, visibility in the marketplace, financial strength ratings, distribution capabilities, levels of charges and credited rates, reputation and customer service. INDIVIDUAL LIFE The Individual Life segment sells a variety of products including variable life, universal life, interest sensitive whole life and term life insurance primarily to the high end estate and business planning markets. Life insurance in force increased 13% to $75.1 billion as of December 31, 2000 from $66.7 billion as of December 31, 1999. Account values grew 8% to $5.8 billion as of December 31, 2000 from $5.4 billion as of December 31, 1999. The Individual Life segment generated revenues of $640, $584 and $567 in 2000, 1999 and 1998, respectively. Net income in the Individual Life segment was $79 in 2000, an 11% increase over 1999. - 5 - As previously mentioned, in January 2001, The Hartford agreed to acquire the U.S. individual life insurance business of Fortis. This acquisition will add significant scale to the Company's individual life business, and according to data provided by Tillinghast-Towers Perrin, HLI will move to third largest from fifth largest writer of variable life insurance in the United States based upon new premium sales. It will also broaden the Company's reach in the emerging affluent market with the addition of a retail broker-dealer consisting of approximately 3,000 registered representatives. (For additional information, see the Capital Resources and Liquidity section of the MD&A under "Subsequent Event".) Principal Products ------------------ The trend in the individual life industry has been a shift away from traditional products and fixed universal life insurance towards variable life (including variable universal life) insurance products, in which The Hartford has been on the leading edge. In 2000, of the Company's new sales of individual life insurance, 89% was variable life and 10% was either universal life or interest sensitive whole life. The Company also sold a small amount of term life insurance. Variable Life -- Variable life insurance provides a return linked to an underlying investment portfolio and the Company allows policyholders to determine their desired asset mix among a variety of underlying mutual funds. As the return on the investment portfolio increases or decreases, as the case may be, the death benefit or surrender value of the variable life policy may increase or decrease. The Company's single premium variable life product provides a death benefit to the policy beneficiary based on a single premium deposit. The Company's second-to-die products are distinguished from other products in that two lives are insured rather than one, and the policy proceeds are paid upon the death of both insureds. Second-to-die policies are frequently used in estate planning, often to fund estate taxes for a married couple. Variable life account values were $2.9 billion and $2.6 billion as of December 31, 2000 and 1999, respectively. Universal Life and Interest Sensitive Whole Life -- Universal life and interest sensitive whole life insurance coverages provide life insurance with adjustable rates of return based on current interest rates. The Company offers both flexible and fixed premium policies and provides policyholders with flexibility in the available coverage, the timing and amount of premium payments and the amount of the death benefit, provided there are sufficient policy funds to cover all policy charges for the coming period. The Company also sells universal life insurance policies with a second-to-die feature similar to that of the variable life insurance product offered. Universal life and interest sensitive whole life account values were $2.1 billion and $2.0 billion as of December 31, 2000 and 1999, 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 and property and casualty insurance organizations. The primary organization used to wholesale The Hartford's products to these outlets is a group of highly qualified life insurance professionals with specialized training in sophisticated life insurance sales, particularly as it pertains to estate and business planning. These individuals are generally employees of The Hartford, who are managed through a regional sales office system. The Company has grown this organization rapidly the past few years to over 210 individuals and expects to continue to increase the number of wholesalers in the future. Competition ----------- The Individual Life segment competes with approximately 1,500 life insurance companies in the United States, as well as other financial intermediaries marketing insurance products. Competitive factors related to this segment are primarily the breadth and quality of life insurance products offered, pricing, relationships with third-party distributors and the quality of underwriting and customer service. GROUP BENEFITS The Group Benefits segment sells group life and group disability insurance, as well as other products, including stop loss and supplementary medical coverage to employers and employer sponsored plans, accidental death and dismemberment, travel accident and other special risk coverages to employers and associations. The Company also offers disability underwriting, administration, claims processing services and reinsurance to other insurers and self-funded employer plans. According to the latest results published by Life Insurance Marketing and Research Association ("LIMRA"), the Company, based on sales, was the third largest provider of group disability insurance and the fourth largest writer of group term life insurance in the United States for the nine months ended September 30, 2000. Generally, policies sold in this segment are term insurance, typically with one or two year rate guarantees. These rate guarantees allow the Company to make adjustments in rate or terms of its policies in order to minimize the adverse effect of various market trends. In the disability market, the Company focuses on strong underwriting and claims management to derive a competitive advantage. As of December 31, 2000 and 1999, the Company had group disability reserves of $2.0 billion and $1.8 billion and group life reserves of $601 and $560, respectively. The Group Benefits segment generated revenues of $2.2 billion, $2.0 billion and $1.8 billion in 2000, 1999 and 1998, respectively, of which group disability insurance accounted for $939, $860 and $763 and group life insurance accounted for $687, $654 and $593 of total Group Benefits revenues in 2000, 1999 and 1998, respectively. Net income in the Group Benefits segment was $90 in 2000, a 14% increase over 1999. Principal Products ------------------ Group Disability -- The Hartford is one of the largest participants in the "large case" market of the group disability insurance business. The large case market, as defined by the Company, generally consists of group disability policies covering over 500 employees in a particular company. The Company is continuing its focus on the "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, reduction of long-term disability - 6 - claims 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 Hartford has concentrated on a managed disability approach, which emphasizes early claimant intervention in an effort to facilitate a disabled claimant's return to work and thereby contain costs. This approach, coupled with an individualized approach to claim servicing, and an incentive to contain costs, leads to an overall reduction in the cost of disability coverage for employers. 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 waivers and accidental death and dismemberment coverage to employee groups. Other -- The Hartford provides excess of loss medical coverage (known as stop loss insurance) to employers who self-fund their medical plans and pay claims using the services of a third party administrator. The Company provides Medicare Supplement, travel accident, hospital indemnity and other coverages (including group life and disability) primarily to individual members of various associations as well as employee groups. Marketing and Distribution -------------------------- The Hartford uses an experienced group of Company employees, managed through a regional sales office system, to distribute its group insurance products and services through a variety of distribution outlets. The Company expanded its sales office system during 1999, by increasing the sales force and the number of sales offices by about 25% and 15%, respectively. The Company will continue to expand the system over the coming years in areas that have the highest growth potential. The Company will also continue to develop alternative distribution channels to sell its products, such as sales to employers through brokers, consultants and third-party administrators as well as to multiple employer groups through its relationships with trade associations. In keeping with its strategy of developing multiple distribution channels, the Company signed an agreement in January 2001 with Wausau Benefits, Inc., the country's tenth largest third-party administrator, to sell its group life and group disability products. Competition ----------- Competitive factors primarily affecting Group Benefits are the variety and quality of products 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, while other major carriers have exited the market. CORPORATE OWNED LIFE INSURANCE ("COLI") The Hartford is a leader in the COLI market, which includes life insurance policies purchased by a company on the lives of its employees, with the company or a trust sponsored by the company named as the beneficiary under the policy. Until the Health Insurance Portability Act of 1996 ("HIPA Act of 1996"), 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. The HIPA Act of 1996 phased out the deductibility of interest on policy loans under leveraged COLI at the end of 1998, virtually eliminating all future sales of leveraged COLI. Variable COLI continues to be a product used by employers to fund non-qualified benefits or other postemployment benefit liabilities. Variable COLI account values were $15.9 billion and $12.4 billion as of December 31, 2000 and 1999, respectively. Leveraged COLI account values decreased to $5.0 billion as of December 31, 2000 from $5.7 billion as of December 31, 1999, primarily due to the HIPA Act of 1996. Although COLI revenues decreased in 2000 to $767 from $831 in 1999, COLI net income increased 13%, to $34 in 2000. WORLDWIDE PROPERTY & CASUALTY The Hartford has the tenth largest property and casualty insurance operation in the United States based on written premiums for the year ended December 31, 1999 according to A.M. Best. Worldwide Property & Casualty generated $8.7 billion in revenues, $7.3 billion in written premiums and $494 in net income in 2000. Total assets for Worldwide Property & Casualty were $27.1 billion as of December 31, 2000. Worldwide Property & Casualty is organized into four reportable operating segments: the underwriting segments of Commercial, Personal and Reinsurance, and an International and Other Operations segment. Also reported within Worldwide Property & Casualty is North American, which includes the combined underwriting results of Commercial, Personal and Reinsurance along with income and expense items not directly allocable to these segments, such as net investment income. COMMERCIAL The Commercial segment provides insurance coverages to commercial accounts primarily throughout the United States. Commercial is organized into three customer markets: Business Insurance, Commercial Affinity and Commercial Specialty. - 7 - Business Insurance provides standard commercial business for small accounts ("Select Customer") and mid-sized insureds ("Key Accounts"). Commercial Affinity provides commercial risk management products and services to small and mid-sized members of affinity groups and customers of financial institutions. Commercial Specialty provides insurance through retailers and wholesalers to large commercial clients ("Major/National") and insureds requiring a variety of specialized coverages. The Commercial segment had written premiums of $3.5 billion, $3.2 billion and $3.2 billion in 2000, 1999 and 1998, respectively. Underwriting losses for 2000, 1999 and 1998 were $153, $171 and $213, respectively. Principal Products ------------------ The Commercial segment offers workers' compensation, property, automobile, liability, financial products, marine, agricultural and bond coverages. Excess and surplus lines coverages not normally written by standard line insurers are also provided. Marketing and Distribution -------------------------- The Commercial segment provides insurance products and services through its home office located in Hartford, Connecticut, and multiple domestic regional and district office locations and insurance centers. The segment markets its products nationwide utilizing a variety of distribution networks including approximately 5,400 independent agents as well as wholesalers and direct marketing including trade associations, customers of financial institutions and employee groups. Independent agents, who often represent other companies as well, are compensated on a commission basis and are not employees of The Hartford. Competition ----------- The commercial insurance industry continues to be a highly challenging and competitive environment in which the Commercial segment competes with other stock insurance companies, self insurers and other underwriting organizations. This competitive environment is created by price competition, consolidation and globalization of companies, excess capital within the commercial insurance industry, exploration and utilization of alternative distribution techniques and emphasis on cost containment and reduction. In 2000, market conditions in the commercial industry have improved as a result of a firming pricing environment. PERSONAL The Hartford ranks among the largest carriers of personal lines insurance. The Personal segment provides insurance coverages to individuals throughout the United States. Personal is organized to provide customized products and services to the following markets: the membership of AARP through a direct marketing operation; customers who prefer local agent involvement through a network of independent agents in the standard personal lines market and in the non-standard automobile market through Omni Insurance Group, Inc. ("Omni"), which was acquired in 1998; customers of Sears, Roebuck & Co. ("Sears") and Ford Motor Company and Ford Motor Credit Company (collectively, "Ford") as well as customers of financial institutions through an affinity center which began in 1996; and customer service for all health insurance products offered through AARP's Health Care Options effective January 1, 1998. AARP's exclusive licensing arrangement continues through the year 2002 for automobile, homeowners and home-based business and through 2007 for Health Care Options. These agreements provide the Personal segment with an important competitive advantage. The Personal segment had written premiums of $2.6 billion, $2.5 billion and $2.2 billion in 2000, 1999 and 1998, respectively. Underwriting income for 2000, 1999 and 1998 were $2, $34 and $77, respectively. Principal Products ------------------ The Personal segment provides automobile, homeowners, home-based business and fire coverages to individuals across North America, including a special program designed exclusively for members of AARP. Marketing and Distribution -------------------------- The Personal segment reaches diverse markets through multiple distribution channels. The segment markets directly to the 33 million members of AARP, sells its products through independent agents and also markets through affinity groups, including Sears, Ford and financial institutions. Competition ----------- The personal lines marketplace continues to be competitive, especially in the personal automobile line. Over the last two years, intense price competition, upward trends in loss costs and the significant expense of establishing alternative distribution channels have caused underwriting results to decrease. The personal lines marketplace reported a combined ratio of 108.9 for the first nine months of 2000, according to A.M. Best. In the absence of renewal price increases by competitors, attracting new customers becomes more difficult, forcing companies to offer greater price incentives and product features and to increase advertising costs. A major competitive advantage of the Personal segment is the exclusive licensing arrangement with AARP to provide personal automobile, homeowners and home-based business insurance products to its members through 2002. Favorable "baby boomer" demographics are expected to increase AARP membership during this period. The Personal segment's relationship with AARP was further strengthened when it was awarded a contract, effective January 1, 1998, to provide customer service for all health insurance products offered through AARP's Health Care Options. The Hartford's contract with Sears entered into in 2000, joins two major brands in marketing automobile, homeowners, and home-based business, further enhancing The Hartford's reputation and competitive advantage. REINSURANCE The Hartford is a major global reinsurer, with operations in the United States, Canada, the United Kingdom, France, Italy, Germany, Spain, Hong Kong and Taiwan. The Reinsurance segment had written premiums of $826, $703 and $711 in 2000, 1999 and 1998, respectively. Underwriting losses for 2000, 1999 and 1998 were $73, $48 and $36, respectively. - 8 - Principal Products ------------------ The Reinsurance segment offers a full range of treaty and facultative reinsurance products including property, casualty, marine, fidelity, finite risk, including alternative risk transfer, and specialty coverages. Marketing and Distribution -------------------------- The Reinsurance segment assumes insurance from other insurers, primarily through reinsurance brokers in the worldwide reinsurance market. Competition ----------- The worldwide property and casualty reinsurance market remains extremely competitive with consolidation in the market creating fewer, but stronger, competitors. Also, nontraditional solutions are beginning to emerge, which complement traditional reinsurance products. The pricing environment in the worldwide reinsurance market continued to improve throughout 2000. INTERNATIONAL AND OTHER OPERATIONS Worldwide Property & Casualty's International operations 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 international asset accumulation businesses has resulted in the sale of the majority of its international property and casualty operations. London & Edinburgh, located in the United Kingdom, was sold by The Hartford in November 1998. Zwolsche, located in the Netherlands, Belgium and Luxembourg, was sold in December 2000. Hartford Seguros, located in Spain, was sold in February 2001. Worldwide Property & Casualty's remaining International operation is The Hartford Insurance Company (Singapore), Ltd. (formerly People's Insurance Company, Ltd. ("Singapore Insurance")), of which The Hartford owned an 80% interest at December 31, 2000, after acquiring an additional 31% in December 2000. Worldwide Property & Casualty's Other Operations consist of the property and casualty insurance operations of The Hartford which have ceased writing new business. These operations primarily include First State Insurance Company, located in Boston, Massachusetts; Heritage Reinsurance Company, Ltd., headquartered in Bermuda; and Excess Insurance Company Limited, located in the United Kingdom. The primary objectives of Other Operations are the proper disposition of claims, the resolution of disputes, and the collection of reinsurance proceeds primarily related to policies written and reinsured prior to 1985. As such, Other Operations have no new product sales, distribution systems, or competitive issues. The International and Other Operations segment generated revenues of $602, $661 and $1.8 billion in 2000, 1999 and 1998, respectively. Net income for 2000, 1999 and 1998 were $28, $33 and $97, respectively. Principal Products ------------------ Singapore Insurance writes property and casualty products, primarily automobile. Zwolsche offered property and casualty, life and asset management products and services. Hartford Seguros provided both personal and commercial lines property and casualty, and life insurance products. Methods of Distribution ----------------------- The International operations conducts its business primarily through independent brokers who are compensated on a commission basis. Zwolsche distributed its products through various financial institutions. Competition ----------- Singapore is a relatively small market with traditional local companies as well as a large foreign presence primarily through branch operations. Competition is very strong in most product lines with pricing set freely by the market. WORLDWIDE LIFE RESERVES In accordance with applicable insurance regulations under which Worldwide Life operates, life insurance subsidiaries of The Hartford establish and carry as liabilities actuarially determined reserves which are calculated to meet The Hartford's future obligations. Reserves for life insurance and disability contracts are based on actuarially recognized methods using prescribed morbidity and mortality tables in general use in the United States, which are modified to reflect The Hartford's actual experience when appropriate. These reserves are computed at amounts that, with additions from estimated premiums to be received and with interest on such reserves compounded annually at certain assumed rates, are expected to be sufficient to meet The Hartford's policy obligations at their maturities or in the event of an insured's 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 Worldwide Life Reserves may be found in the Reserves section of the MD&A. WORLDWIDE PROPERTY & CASUALTY RESERVES The Hartford establishes reserves to provide for the estimated costs of paying claims made by policyholders or against policyholders. These reserves include estimates for both claims that have been reported and those that have been incurred but not yet reported to The Hartford and include estimates of all expenses associated with processing and settling these claims. This estimation process is primarily based on historical experience and involves a variety of actuarial techniques which analyze trends and other relevant factors. For the year ended December 31, 2000, there were no changes to these reserving assumptions that had a significant impact on the reserves or results of operations. The Hartford continually reviews its estimated claims and claim adjustment expense reserves as additional experience and other relevant data become available, and reserve levels are adjusted accordingly. Such adjustments are reflected in net income of the period in which they are made. In the judgment of The - 9 - Hartford's management, all information currently available has been properly considered in establishing the reserves for unpaid claims and claim adjustment expenses. Further discussion on The Hartford's property and casualty reserves may be found in the Reserves section of the MD&A. The Hartford continues to receive claims that assert damages from environmental pollution and related clean-up costs and injuries from asbestos and asbestos-related products. Due to deviations from past experience and a variety of social, economic and legal issues, the Company's ability to estimate the future policy benefits, unpaid claims and claim adjustment expenses is significantly impacted. A study which reviewed and identified environmental and asbestos exposures in the United States was performed in 1996 and is discussed in the Environmental and Asbestos Claims section of the MD&A. Certain liabilities for unpaid claims, principally for permanently disabled claimants, terminated reinsurance treaties and certain contracts that fund loss run-offs for unrelated parties, have been discounted to present value. The amount of the discount was approximately $396 and $480 as of December 31, 2000 and 1999, respectively, and amortization of the discount had no material effect on net income during 2000, 1999 and 1998. As of December 31, 2000, statutory basis property and casualty reserves for claims and claim adjustment expenses exceeded those reported under Generally Accepted Accounting Principles ("GAAP") by $10. The primary differences resulted from the discounting of GAAP-basis workers' compensation reserves at risk free interest rates which exceeded the required statutory discount rates set by regulators, and the required exclusion from statutory reserves of assumed retroactive reinsurance. There were no significant changes in the mix of the Company's business which have impacted property and casualty claims and claim adjustment expense reserves; nor has the Company completed any significant portfolio loss transfers, structured settlements or other transactions which would change claim payment patterns. The Company had no unusually large property and casualty insurance losses or gains for the year ended December 31, 2000. A reconciliation of liabilities for unpaid claims and claim adjustment expenses is herein referenced from Note 1(h) of Notes to Consolidated Financial Statements. A table depicting the historical development of the liabilities for unpaid claims and claim adjustment expenses follows.
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - NET FOR THE YEARS ENDED DECEMBER 31, [1] 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ------------------------------------------------------------------------------------------------------------------------------------ Liabilities for unpaid claims and claim adjustment expenses [2] $8,887 $9,204 $10,498 $10,717 $10,776 $11,063 $12,242 $12,297 $12,485 $12,122 $11,963 CUMULATIVE PAID CLAIMS AND CLAIM EXPENSES One year later 2,584 2,684 2,596 2,578 2,654 2,434 2,569 2,475 2,939 2,982 -- Two years later 4,341 4,350 4,282 4,207 4,179 4,022 4,099 4,256 4,420 -- -- Three years later 5,490 5,550 5,433 5,268 5,286 5,074 5,412 5,146 -- -- -- Four years later 6,325 6,396 6,229 6,112 6,040 6,097 5,981 -- -- -- -- Five years later 6,961 7,020 6,895 6,682 6,877 6,485 -- -- -- -- -- Six years later 7,456 7,569 7,354 7,391 7,153 -- -- -- -- -- -- Seven years later 7,913 7,954 7,987 7,608 -- -- -- -- -- -- -- Eight years later 8,256 8,532 8,160 -- -- -- -- -- -- -- -- Nine years later 8,795 8,680 -- -- -- -- -- -- -- -- -- Ten years later 8,919 -- -- -- -- -- -- -- -- -- -- LIABILITIES REESTIMATED One year later 9,174 10,535 10,757 10,811 11,019 12,025 12,217 12,119 12,280 12,090 -- Two years later 10,512 10,866 10,970 11,009 12,142 12,023 12,096 11,840 12,050 -- -- Three years later 10,818 11,095 11,182 12,094 12,127 11,947 11,919 11,575 -- -- -- Four years later 11,094 11,417 12,304 12,157 12,113 11,820 11,710 -- -- -- -- Five years later 11,427 12,515 12,406 12,184 12,082 11,706 -- -- -- -- -- Six years later 12,516 12,642 12,462 12,165 11,998 -- -- -- -- -- -- Seven years later 12,619 12,757 12,414 12,127 -- -- -- -- -- -- -- Eight years later 12,739 12,710 12,409 -- -- -- -- -- -- -- -- Nine years later 12,701 12,691 -- -- -- -- -- -- -- -- -- Ten years later 12,671 -- -- -- -- -- -- -- -- -- -- DEFICIENCY (REDUNDANCY) $3,784 $3,487 $1,911 $1,410 $1,222 $643 $(532) $(722) $(435) $(32) $-- ------------------------------------------------------------------------------------------------------------------------------------
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PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS FOR THE YEARS ENDED DECEMBER 31, [1] 1994 1995 1996 1997 1998 1999 2000 ------------------------------------------------------------------------------------------------------------------------------------ NET RESERVE [2] $10,776 $11,063 $12,242 $12,297 $12,485 $12,122 $11,963 Reinsurance recoverables 5,156 4,829 4,357 3,996 3,280 3,267 3,452 ------------------------------------------------------------------------------------------------------------------------------------ GROSS RESERVE $15,932 $15,892 $16,599 $16,293 $15,765 $15,389 $15,415 ------------------------------------------------------------------------------------------------------------------------------------ NET REESTIMATED RESERVE $11,998 $11,706 $11,710 $11,575 $12,050 $12,090 Reestimated reinsurance 5,578 4,817 4,154 3,878 3,423 3,687 recoverables ------------------------------------------------------------------------------------------------------------------------------------ GROSS REESTIMATED RESERVE $17,576 $16,523 $15,864 $15,453 $15,473 $15,777 ------------------------------------------------------------------------------------------------------------------------------------ GROSS DEFICIENCY (REDUNDANCY) $1,644 $631 $(735) $(840) $(292) $388 ------------------------------------------------------------------------------------------------------------------------------------ [1] The above tables exclude Zwolsche as a result of its sale on December 22, 2000 and London & Edinburgh as a result of its sale on November 16, 1998. [2] The above tables exclude the liabilities and claim developments for reinsurance coverage written for affiliated parties.
1994 1995 1996 1997 1998 1999 2000 ------------------------------------------------------------------------------------------------------------------------------------ Liabilities, net and gross of reinsurance for unpaid claims and claim adjustment expenses excluded $495 $550 $500 $505 $501 $456 $459 ------------------------------------------------------------------------------------------------------------------------------------ Included in the tables above is the impact of the change in The Hartford's method of discounting to present value certain workers' compensation reserves, principally for permanently disabled claimants, which was effective January 1, 1994.
The following table reconciles the Loss Development Table to the Consolidated Financial Statements: 2000 1999 1998 ------------------------------------------------------------------ Loss Development Table: Gross reserves $ 15,415 $ 15,389 $ 15,765 Exclusion of Zwolsche -- 169 183 Reinsurance - affiliated parties 459 456 501 ------------------------------------------------------------------ Gross reserves per Consolidated Financial Statements (see Note 1 (h)) $ 15,874 $ 16,014 $ 16,449 ------------------------------------------------------------------ CEDED REINSURANCE Consistent with normal industry practice, The Hartford cedes insurance risk to reinsurance companies. For property and casualty operations, these reinsurance arrangements 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. The ceding of insurance obligations does not discharge the original insurer from its primary liability to the policyholder. The original insurer would remain liable in those situations where the reinsurer is unable to meet the obligations assumed under reinsurance agreements. The Hartford has established strict standards that govern the placement of reinsurance and monitors ceded reinsurance security. Virtually all of The Hartford's property and casualty reinsurance is placed with reinsurers that meet strict financial criteria established by a credit committee. In accordance with normal industry practice, Worldwide Life is involved in both the cession and assumption of insurance with other insurance and reinsurance companies. As of December 31, 2000, the maximum amount of life insurance retained on any one life by any one of the life operations was approximately $2.5. In 2000, the Company did not make any significant changes in the terms under which reinsurance is ceded to other insurers. Also in 2000, there were no specific reinsurance transactions that had a material effect on earnings or reserves. INVESTMENT OPERATIONS An important element of the financial results of The Hartford is return on invested assets. The Hartford's investment activities are primarily divided between Worldwide Life and Worldwide Property & Casualty. The investment activities of both the Worldwide Life and Worldwide Property & Casualty operations are managed based on the underlying characteristics and nature of their respective liabilities. The primary investment objective of Worldwide 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 relative to that of policyholder obligations. The investment objective for the majority of Worldwide Property & Casualty is to maximize economic value while generating after-tax income and sufficient liquidity to meet corporate and policyholder obligations. For Worldwide Property & Casualty's Other Operations, the investment objective is to ensure the full and timely payment of all liabilities. Property and casualty investment strategies are developed based on a variety of factors including business needs, regulatory requirements and tax considerations. For a further discussion of The Hartford's approach to managing risks, including derivative utilization, see the Capital Markets Risk Management section of the MD&A, as well as Note 3 of Notes to Consolidated Financial Statements. REGULATION AND PREMIUM RATES Although there has been some deregulation with respect to large commercial insureds in recent years, insurance companies, for the most part, are still subject to comprehensive and detailed regulation and supervision throughout the United States. The - 11 - 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; 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. Regulatory requirements applying to property and casualty premium rates vary from state to state, but generally provide that rates shall not be inadequate, excessive or unfairly discriminatory. Rates for many products, including automobile and homeowners insurance, are subject to prior regulatory approval in many states. Ocean marine insurance rates are exempt from rate regulation. Subject to regulatory requirements, management determines the rates charged for its policies. Methods for arriving at rates vary by product, exposure assumed and size of risk. While premium rates in the property and casualty insurance business are for the most part subject to regulation, such rates are not in most instances uniform for all insurers within a given jurisdiction, or in all jurisdictions. The Hartford is a member of various fire, casualty and surety rating organizations. For some lines of business, The Hartford uses the rates and rating plans which are filed by these organizations in the various states, while for other lines of business it uses loss cost data published by such organizations. The Hartford also uses its own independent rates or otherwise departs from rating organization rates, where appropriate. 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. State insurance regulations require property and casualty insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms to provide risks with various basic or minimum insurance coverage when they are not available in voluntary markets. Such mechanisms are most prevalent for automobile and workers' compensation insurance, but a majority of states also mandate participation in so-called FAIR Plans or Windstorm Plans providing basic property coverage. Additionally, some states mandate such participation in facilities for providing medical malpractice insurance. Participation is based upon the amount of a company's written premiums in a particular state for the classes of insurance involved. 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. RATINGS Reference is made to the Capital Resources and Liquidity section of the MD&A under "Ratings". RISK-BASED CAPITAL Reference is made to the Capital Resources and Liquidity section of the MD&A under "Risk-based Capital". LEGISLATIVE INITIATIVES Reference is made to the Regulatory Matters and Contingencies section of the MD&A under "Legislative Initiatives". INSOLVENCY FUND Reference is made to the Regulatory Matters and Contingencies section of the MD&A under "Insolvency Fund". NAIC CODIFICATION Reference is made to the Regulatory Matters and Contingencies section of the MD&A under "NAIC Codification". YEAR 2000 Reference is made to the Regulatory Matters and Contingencies section of the MD&A under "Year 2000". EMPLOYEES The Hartford had approximately 26,600 employees as of February 28, 2001. EXECUTIVE OFFICERS OF THE HARTFORD Information about the executive officers of The Hartford who are also directors and/or nominees for election as directors is set forth in The Hartford's 2001 Proxy Statement. Set forth below is information about other executive officers of the Company: BRENDA FURLONG, 52, became Chief Investment Officer of the Company and President of Hartford Investment Management Company ("HIMCO"), a wholly-owned subsidiary of the Company, effective October 1, 1999. Previously, Ms. Furlong was Senior Vice President, Capital Planning and Development with responsibility for mergers and acquisitions, strategic - 12 - planning and capital allocation. Prior to joining the Company in 1996, she was Vice President and Treasurer of Sheraton Corp. and held senior positions at several ITT Corporation companies. Ms. Furlong began her career at State Street Bank and Trust, where she was a commercial lending officer. JOHN N. GIAMALIS, 43, is Senior Vice President and Controller of the Company. Mr. Giamalis joined the Company in January 1997, functioning as Corporate Controller and Director, Financial Reporting and Analysis. He was appointed in mid-1998 to the position of Deputy Controller. Prior to joining the Company, Mr. Giamalis held senior financial positions in the insurance and technology industries. Previously, he served in public accounting positions, including as Senior Manager with responsibility for insurance, securities and middle market clients for Deloitte & Touche. He holds a B.S. degree in business administration and a Master of professional accountancy from West Virginia University. He is a member of the American Institute and Connecticut Society of Certified Public Accountants. RANDALL I. KIVIAT, 50, has held the position of Group Senior Vice President of Human Resources for the Company since June 1999. Since joining the Company in 1982, he has held positions of increasing responsibility, including Director of Payroll, Director of Employee Benefits, and Vice President of Human Resources Services. EDWARD L. MORGAN, 57, has held the position of Group Senior Vice President, Corporate Relations and Government Affairs, of the Company since 1998. Previously, he was Senior Vice President, Corporate Relations and Public Affairs since 1995. Mr. Morgan also has held the position since 1993 of Senior Vice President, Corporate Relations and Public Affairs of Hartford Fire. 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 1.6 million square feet. In addition, The Hartford leases approximately 5.4 million square feet throughout the United States and 56 thousand square feet in other countries. All of the properties owned or leased are used by one or more of all eight 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 or may become involved in various legal actions, some of which involve claims for substantial amounts. In the opinion of management, the ultimate liability with respect to such actual and potential lawsuits, after consideration of provisions made for potential losses and costs of defense, is not expected to be material to the consolidated financial condition, results of operations or cash flows of The Hartford. The Hartford is involved in claims litigation arising in the ordinary course of business and accounts for such activity through the establishment of policy reserves. As further discussed in the MD&A under the Environmental and Asbestos Claims section, The Hartford continues to receive environmental and asbestos claims which involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels, methodologies and reinsurance coverages. 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 the fiscal year covered by this report. PART II ITEM 5. MARKET FOR THE HARTFORD'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS The Hartford's common stock is traded on the New York Stock Exchange ("NYSE") under the trading symbol "HIG". The following table presents the high and low closing prices for the common stock of The Hartford on the NYSE for the periods indicated, and the quarterly dividends declared per share. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. -------------------------- --------- --------- --------- -------- 2000 Common Stock Price High $52.75 $64.00 $73.75 $79.31 Low 29.38 44.25 56.38 65.44 Dividends Declared 0.24 0.24 0.24 0.25 1999 Common Stock Price High $58.81 $65.06 $61.94 $53.44 Low 48.31 57.13 40.88 37.31 Dividends Declared 0.22 0.23 0.23 0.24 -------------------------- --------- --------- --------- -------- As of February 28, 2001, the Company had approximately 160,000 shareholders. On October 19, 2000, The Hartford's Board of Directors approved a 4% increase in the quarterly dividend to $0.25 per share. 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". - 13 -
ITEM 6. SELECTED FINANCIAL DATA (IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS) 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA Total revenues [1] $ 14,703 $ 13,528 $ 15,022 $ 13,461 $ 12,577 Net income (loss) [2] 974 862 1,015 1,332 (99) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA Total assets $ 171,532 $ 167,051 $ 150,632 $ 131,743 $ 108,840 Long-term debt and redeemable preferred stock 1,862 1,548 1,548 1,482 1,032 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,243 1,250 1,250 1,000 1,000 Total stockholders' equity 7,464 5,466 6,423 6,085 4,520 ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS (LOSS) PER SHARE DATA Basic earnings (loss) per share [2] 4.42 3.83 4.36 5.64 (0.42) Diluted earnings (loss) per share [2] 4.34 3.79 4.30 5.58 (0.42) Dividends declared per common share 0.97 0.92 0.85 0.80 0.80 ------------------------------------------------------------------------------------------------------------------------------------ OPERATING DATA COMBINED RATIOS North American Property & Casualty [3] 102.4 103.3 102.9 102.3 105.2 ------------------------------------------------------------------------------------------------------------------------------------ [1] 1998 includes $541 related to the recapture of an in force block of Corporate Owned Life Insurance ("COLI") business from MBL Life Assurance Co. of New Jersey. Also, includes revenues from London & Edinburgh for 1998, 1997 and 1996 of $1,117, $1,225 and $1,056, respectively. [2] 1997 includes an equity gain of $368, or $1.56 basic/$1.54 diluted earnings per share, resulting from the initial public offering of HLI. 1996 includes other charges of $693, after-tax, or $2.96 basic/diluted earnings per share, consisting primarily of environmental and asbestos reserve increases and recognition of losses on guaranteed investment contract business. [3] 1996 excludes the impact of a $660, before-tax, environmental and asbestos charge. Including the impact of this charge, the combined ratio for 1996 was 116.9.
Outlined in the table below are U.S. Industry Combined Ratios for each of the five years ended December 31: 2000 1999 1998 1997 1996 ------------------------------------------------------------------------------------------------------------------------------------ U.S. Industry Combined Ratios [a] 110.3 107.8 105.6 101.6 105.9 ------------------------------------------------------------------------------------------------------------------------------------ [a] U.S. Industry Combined Ratio information obtained from A.M. Best. Combined ratio for 2000 is an A.M. Best estimate prepared as of January 2001.
- 14 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN MILLIONS, EXCEPT 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, 2000, compared with December 31, 1999, and its results of operations for the three years ended December 31, 2000, 1999 and 1998. This discussion should be read in conjunction with the Consolidated Financial Statements and related Notes beginning on page F-1. Certain of the statements contained herein or in Part I of the Company's Form 10-K (other than statements of historical fact) are forward-looking statements. Such 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 Hartford. 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 Hartford, depending on the outcome of certain factors, including the possibility of general economic and business conditions that are less favorable than anticipated, legislative developments, changes in interest rates or the stock markets, stronger than anticipated competitive activity, more frequent or severe natural catastrophes than anticipated and those factors described in such forward-looking statements. Certain reclassifications have been made to prior year financial information to conform to the current year presentation. -------------------------------------------------------------------------------- INDEX -------------------------------------------------------------------------------- Consolidated Results of Operations: Operating Summary 15 Worldwide Life 18 Investment Products 19 Individual Life 20 Group Benefits 21 Corporate Owned Life Insurance (COLI) 22 Worldwide Property & Casualty 23 Commercial 24 Personal 25 Reinsurance 26 International and Other Operations 26 Reserves 27 Environmental and Asbestos Claims 28 Investments 30 Capital Markets Risk Management 32 Capital Resources and Liquidity 42 Regulatory Matters and Contingencies 45 Effect of Inflation 46 Accounting Standards 46 -------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY --------------------------------------------------------------------------------
OVERVIEW 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 8,941 $ 8,342 $ 9,021 Fee income 2,493 2,112 2,106 Net investment income 2,674 2,627 3,102 Other revenue 450 413 489 Net realized capital gains 145 34 304 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 14,703 13,528 15,022 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 8,419 7,902 8,613 Amortization of deferred policy acquisition costs 2,213 2,011 2,020 Insurance operating costs and expenses 1,958 1,779 2,315 Other expenses 695 601 599 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 13,285 12,293 13,547 -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 1,418 1,235 1,475 Income tax expense 390 287 388 ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE MINORITY INTEREST 1,028 948 1,087 Minority interest in consolidated subsidiary (54) (86) (72) ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME 974 862 1,015 Less: Net realized capital gains, after-tax 12 25 199 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 962 $ 837 $ 816 ====================================================================================================================================
The Hartford defines "core earnings" as after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes and certain other items. Core earnings is an internal performance measure - 15 - used by the Company in the management of its operations. Management believes that this performance measure delineates the results of operations of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current business. However, core earnings should only be analyzed in conjunction with, and not in lieu of, net income and may not be comparable to other performance measures used by the Company's competitors. 2000 COMPARED TO 1999 -- Revenues increased $1.2 billion, or 9%, primarily as a result of continued strong growth in fee income in the Investment Products and Individual Life segments, along with premium growth in the Group Benefits segment and in all North American Property & Casualty underwriting segments. Core earnings increased $125, or 15%, due to earnings growth of 10% or more across all segments in Worldwide Life partially offset by a decline in Worldwide Property & Casualty, primarily due to an increase in personal automobile loss costs and adverse loss development in reinsurance. 1999 COMPARED TO 1998 -- Revenues decreased $1.5 billion, or 10%, primarily as a result of the November 1998 sale of United Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh"), which was The Hartford's largest international subsidiary, the declining block of leveraged corporate owned life insurance ("COLI") business and lower net realized capital gains. The decrease was partially offset by earned premium growth in the Personal segment of Worldwide Property & Casualty and higher fee income in the Investment Products segment of Worldwide Life as a result of increasing account values. (For an analysis of net investment income and net realized capital gains, see the Investments section.) Core earnings increased $21, or 3%, primarily due to higher fee income in the Investment Products segment as a result of increasing assets under management. Partially offsetting this increase was a decrease in Worldwide Property & Casualty results, due primarily to $55 of proceeds received in 1998 related to the Industrial Risk Insurance pool ("IRI transaction"), and lower International and Other Operations segment core earnings as a result of the sale of London & Edinburgh. NET REALIZED CAPITAL GAINS See "Investment Results" in the Investments section. INCOME TAXES The effective tax rates for 2000, 1999 and 1998 were 28%, 23% and 26%, respectively. The increase in the effective tax rate for 2000 was primarily due to taxes related to the gain on the sale of Zwolsche Algemeene N.V. ("Zwolsche") partially offset by a $24 tax benefit resulting from a settlement with the Internal Revenue Service with respect to certain tax matters for the 1993-1995 tax years. For a further discussion on the sale of Zwolsche, see the International and Other Operations section. The decrease in the effective tax rate for 1999 was due to an increase in the proportionate share of tax-exempt net investment income to total pre-tax income for 1999 compared to 1998. Tax-exempt interest earned on invested assets was the principal cause of effective rates lower than the 35% U.S. statutory rate. Income taxes paid in 2000, 1999 and 1998 were $95, $41 and $407, respectively. (For additional information, see Note 14 of Notes to Consolidated Financial Statements.) MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY Prior to the June 27, 2000 acquisition of all of the outstanding shares of Hartford Life, Inc. ("HLI") that The Hartford did not already own ("The HLI Repurchase"), the minority interest in consolidated subsidiary represented an approximate 19% minority interest in HLI's operating results. (For additional information, see the Capital Resources and Liquidity section under "Acquisitions" and Note 2 of Notes to Consolidated Financial Statements.) PER COMMON SHARE The following table represents per common share data and return on equity for the past three years: 2000 1999 1998 ----------------------------------------------------------------- Basic earnings per share $4.42 $3.83 $4.36 Weighted average common shares outstanding 220.6 224.9 232.8 Diluted earnings per share $4.34 $3.79 $4.30 Weighted average common shares outstanding and dilutive potential common shares 224.4 227.5 236.2 Return on equity [1] 15.4% 15.3% 18.7% ----------------------------------------------------------------- [1] Calculated by dividing net income by average equity excluding unrealized gain (loss), after-tax. SEGMENT RESULTS The Hartford is organized into two major operations: Worldwide Life and Worldwide Property & Casualty. Within these operations, The Hartford conducts business principally in eight operating segments. Additionally, all activities related to The HLI Repurchase, the minority interest in HLI for pre-acquisition periods and The Hartford Bank, FSB are included in Corporate. Worldwide Life is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits (formerly Employee Benefits) and Corporate Owned Life Insurance ("COLI"). Worldwide Life also includes in an Other category its international operations as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. Worldwide Property & Casualty is organized into four reportable operating segments: the underwriting segments of Commercial, Personal and Reinsurance, and an International and Other Operations segment. Also reported within Worldwide Property & Casualty is North American, which includes the combined underwriting results of Commercial, Personal and Reinsurance along with income and expense items not directly allocable to these segments, such as net investment income. While the measure of profit or loss used by The Hartford's management in evaluating performance is core earnings for its non-underwriting segments, the Commercial, Personal and Reinsurance segments are evaluated by The Hartford's management primarily based upon underwriting results. While - 16 - not considered segments, the Company also reports and evaluates core earnings results for Worldwide Life and Worldwide Property & Casualty, including North American. Worldwide Property & Casualty includes core earnings for North American and the International and Other Operations segment. Certain transactions between segments occur during the year that primarily relate to tax settlements, insurance coverage, expense reimbursements, services provided and capital contributions. Certain reinsurance stop loss agreements exist between the segments which specify that one segment will reimburse another for losses incurred in excess of a predetermined limit. Also, one segment may purchase group annuity contracts from another to fund pension costs and claim annuities to settle casualty claims. In addition, certain intersegment transactions occur in Worldwide Life. These transactions include interest income on allocated surplus and the allocation of net realized capital gains and losses through net invested income utilizing the duration of the segment's investment portfolios. The following is a summary of North American underwriting results by underwriting segment within Worldwide Property & Casualty. Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses.
UNDERWRITING RESULTS 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Commercial $ (153) $ (171) $ (213) Personal 2 34 77 Reinsurance (73) (48) (36) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (224) $ (185) $ (172) ====================================================================================================================================
The following is a summary of core earnings and net income.
CORE EARNINGS 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Life Investment Products $ 424 $ 330 $ 266 Individual Life 79 71 65 Group Benefits 90 79 71 COLI 34 30 24 Other 5 (43) (40) ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Life 632 467 386 Worldwide Property & Casualty North American 412 434 457 International and Other Operations 17 22 45 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Property & Casualty 429 456 502 Corporate (99) (86) (72) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CORE EARNINGS $ 962 $ 837 $ 816 ==================================================================================================================================== NET INCOME (LOSS) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Life Investment Products $ 424 $ 330 $ 266 Individual Life 79 71 65 Group Benefits 90 79 71 COLI 34 30 24 Other (52) (43) (40) ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Life 575 467 386 Worldwide Property & Casualty North American 466 448 604 International and Other Operations 28 33 97 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Property & Casualty 494 481 701 Corporate (95) (86) (72) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NET INCOME $ 974 $ 862 $ 1,015 ====================================================================================================================================
An analysis of the operating results summarized above is included on the following pages. Reserves, Environmental and Asbestos Claims, and Investments are discussed in separate sections. - 17 - -------------------------------------------------------------------------------- WORLDWIDE LIFE -------------------------------------------------------------------------------- Worldwide Life provides investment and retirement products such as variable and fixed annuities, mutual funds and retirement plan services; individual and corporate owned life insurance; and, group benefit products such as group life and group disability insurance. Worldwide Life derives its revenues principally from: (a) fee income, including asset management fees on separate account and mutual fund assets and mortality and expense fees, as well as cost of insurance charges; (b) fully insured premiums; (c) certain other fees; and (d) net investment income on general account assets. Asset management fees and mortality and expense fees are primarily generated from separate account assets, which are deposited with the Company through the sale of variable annuity and variable life products, and mutual funds. Cost of insurance charges are assessed on the net amount at risk for investment-oriented life insurance products. Premium revenues are derived primarily from the sale of group life and group disability insurance products. Worldwide Life's expenses essentially consist of interest credited to policyholders on general account liabilities, insurance benefits provided, dividends to policyholders, costs of selling and servicing the various products offered by the Company, and other general business expenses. Worldwide Life's profitability depends largely on the amount of assets under management, the level of fully insured premiums, the adequacy of product pricing and underwriting discipline, claims management and operating efficiencies, and its ability to earn target spreads between earned investment rates on general account assets and credited rates to customers.
OPERATING SUMMARY [1] 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Fee income $ 2,484 $ 2,105 $ 2,100 Earned premiums 1,886 1,764 1,607 Net investment income 1,592 1,562 1,955 Other revenue 116 110 126 Net realized capital losses (88) (5) -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 5,990 5,536 5,788 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 3,162 3,054 3,227 Insurance operating costs and expenses 1,281 1,132 1,440 Amortization of deferred policy acquisition costs 671 568 441 Other expenses 88 96 95 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 5,202 4,850 5,203 -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 788 686 585 Income tax expense 213 219 199 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME 575 467 386 Less: Net realized capital losses, after-tax (57) -- -- ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 632 $ 467 $ 386 ==================================================================================================================================== [1] Worldwide Life excludes the effect of activities related to The HLI Repurchase, along with minority interest for pre-acquisition periods, both of which are reflected in Corporate.
As discussed above, Worldwide Life consists of the following reportable operating segments: Investment Products, Individual Life, Group Benefits (formerly Employee Benefits) and COLI. In addition, Worldwide Life includes in an Other category its international operations, which are primarily located in Latin America and the Far East, and corporate items not directly allocable to any of its reportable operating segments. On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI that it did not already own. (For additional information, see the Capital Resources and Liquidity section under "Acquisitions".) On January 25, 2001, The Hartford agreed to acquire the U.S. individual life insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as Fortis Financial Group, or "Fortis"). This transaction is expected to be completed in the second quarter of 2001. (For additional information, see the Capital Resources and Liquidity section under "Subsequent Event".) 2000 COMPARED TO 1999 -- Revenues increased $454, or 8%, primarily related to the growth across each of Worldwide Life's primary operating segments, particularly the Investment Products and Group Benefits segments, where revenues increased $339, or 17%, and $183, or 9%, respectively. The revenue growth in the Investment Products segment was primarily due to higher fee income in the individual annuity and retail mutual fund operations as related average assets under management in 2000 were higher than 1999. The Group Benefits segment experienced higher earned premiums due to strong sales and persistency. The Individual Life segment also contributed to the revenue increase as a result of strong sales and favorable persistency. Partially offsetting the growth in revenues was the decrease in COLI revenues primarily related to the declining block of leveraged COLI business. - 18 - Benefits, claims and expenses increased $352, or 7%, primarily related to the growth in Worldwide Life's principal operating segments described above. Core earnings increased $165, or 35%, led by the Investment Products segment where core earnings increased $94, or 28%. Additionally, core earnings related to each of the remaining three operating segments increased 10% or more. Worldwide Life also recorded a benefit related to the settlement of certain federal tax matters of $24 in 2000 (see Note 15 (d) of Notes to Consolidated Financial Statements). This benefit, along with an $8 benefit related to state income taxes, resulted in $32 of tax benefits for the year ended December 31, 2000. Additionally, net realized capital losses increased due to portfolio rebalancing. Excluding the tax items and net realized capital losses, earnings increased $133, or 28%. 1999 COMPARED TO 1998 -- Revenues decreased $252, or 4%, primarily due to the declining block of leveraged COLI business. Excluding the COLI segment, revenues increased $484, or 11%, to $4.7 billion. This increase was driven primarily by the Investment Products and Group Benefits segments, where revenues increased $257, or 14%, and $215, or 12%, respectively. The revenue growth in the Investment Products segment was, for the most part, due to higher fee income in the individual annuity and mutual fund operations. Total fee income for these operations increased $301, or 33%, to $1.2 billion due to significant growth in related assets under management resulting from strong sales, favorable persistency and equity market appreciation. The Group Benefits segment experienced higher earned premiums due to strong sales and persistency. Benefits, claims and expenses decreased $353, or 7%, primarily due to the declining block of leveraged COLI business. Excluding the COLI segment, total benefits, claims and expenses increased $394, or 11%, consistent with the revenue growth described above. Core earnings increased $81, or 21%, driven mostly by increased fee income associated with higher assets under management in the Investment Products segment, as well as continued growth across its other reportable segments. -------------------------------------------------------------------------------- INVESTMENT PRODUCTS --------------------------------------------------------------------------------
OPERATING SUMMARY 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Fee income and other $ 1,639 $ 1,333 $ 1,045 Net investment income 741 708 739 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 2,380 2,041 1,784 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 700 668 671 Insurance operating costs and other expenses 551 440 376 Amortization of deferred policy acquisition costs 516 430 326 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 1,767 1,538 1,373 -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 613 503 411 Income tax expense 189 173 145 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 424 $ 330 $ 266 -------------------------------------------------------------------------------------------------------------------------- Individual variable annuity account values $ 78,174 $ 80,588 $ 62,210 Other individual annuity account values 9,059 8,383 8,574 Other investment products account values 17,376 16,352 15,389 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ACCOUNT VALUES 104,609 105,323 86,173 Mutual fund assets under management 11,432 6,374 2,506 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 116,041 $ 111,697 $ 88,679 ====================================================================================================================================
The Investment Products segment focuses on the savings and retirement needs of the growing number of individuals who are preparing for retirement or have already retired through the sale of individual variable and fixed annuities, mutual funds, retirement plan services and other investment products. The Company was ranked the number one writer of individual variable annuities in the United States for 2000 according to Variable Annuity and Research Data Service ("VARDS") and the number one seller of individual variable annuities through banks, according to Kenneth Kehrer Associates (a leading consultant to banks). In addition, The Hartford Mutual Funds, Inc. reached $10 billion in assets faster than any other retail-oriented mutual fund family in history, according to Strategic Insight. Also, eight of the fourteen retail mutual funds have Morningstar ratings and, as of December 31, 2000, all eight have three-, four- or five-star ratings. 2000 COMPARED TO 1999 -- Revenues increased $339, or 17%, primarily due to higher fee income in the individual annuity and retail mutual fund operations. Fee income generated by individual annuities increased $227, or 20%, while related average account values grew $8.2 billion, or 10%, to $88.1 billion. The growth in average account values was due, in part, to strong sales of $10.7 billion in 2000, and the significant equity market performance in 1999, partially offset by surrenders. Although average individual annuity account values in 2000 were higher than 1999, account values at December 31, 2000 declined $1.7 billion, or 2%, as compared to December 31, 1999, as strong sales were not sufficient to offset surrenders and the impact of the retreating equity markets. In addition, fee income from other investment products increased $99, or 54%, primarily driven by the Company's retail mutual fund operation, where related assets under management increased $4.0 billion, or 63%. This substantial increase in the retail mutual fund operation was due to sales of $5.2 billion in 2000, which was partially offset by redemptions. - 19 - Due to the continued growth in this segment, particularly the individual annuity and retail mutual fund operations, total benefits, claims and expenses increased $229, or 15%. This increase was driven by amortization of deferred policy acquisition costs and operating expenses, which grew $86, or 20%, and $43, or 15%, respectively, primarily related to growth in the individual annuity operation. Additionally, non-deferred commissions increased $83, or 59%, principally related to growth in the retail mutual fund operation. Core earnings increased $94, or 28%, primarily due to the growth in revenues discussed above. Additionally, the Investment Products segment continued to maintain its profit margins related to its primary businesses, thus contributing to the segment's earnings growth. In particular, its individual annuity operation's operating expenses as a percentage of average individual annuity account values remained consistent with the prior year at 21 basis points. 1999 COMPARED TO 1998 -- Revenues increased $257, or 14%, primarily driven by higher fee income in the individual annuity and retail mutual fund operations. Fee income generated by individual annuities increased $248, or 29%, as related account values grew $18.2 billion, or 26%. The growth in individual annuity account values was mostly due to strong individual annuity sales of $10.9 billion in 1999 and favorable persistency, as well as equity market appreciation. In addition, fee income from other investment products increased $68, or 59%, primarily due to the Company's continued growth in its retail mutual fund operation, where related assets under management grew $3.9 billion, or 154%. This significant growth in the retail mutual fund operation was driven by strong sales of $3.3 billion in 1999, favorable persistency and equity market appreciation. Associated with continued growth in this segment, total benefits, claims and expenses increased $165, or 12%. This increase was primarily driven by amortization of deferred policy acquisition costs, which grew $104, or 32%, and operating expenses, which increased $32, or 13%, as a result of growth in the individual annuity and retail mutual fund operations described above. Core earnings increased $64, or 24%, for the most part due to the growth in revenues discussed above. Also contributing to the higher core earnings were operating efficiencies that the segment continues to achieve, particularly in its individual variable annuity operation, where individual annuity operating expenses as a percentage of average individual annuity account values decreased from 23 basis points in 1998 to 21 basis points in 1999. OUTLOOK The market for retirement products continues to expand as individuals increasingly save and plan for retirement. Demographic trends suggest that as the "baby boom" generation matures, a significant portion of the United States population will allocate a greater percentage of their disposable incomes to saving for their retirement years due to uncertainty surrounding the Social Security system and increases in average life expectancy. As this market grows, particularly for variable annuities and mutual funds, new companies are continually entering the market, aggressively seeking distribution channels and pursuing market share. This trend is not expected to subside, particularly in light of the Gramm-Leach-Bliley Act of 1999 ("the Financial Services Modernization Act"), which permits affiliations among banks, insurance companies and securities firms. Management believes that it has developed and implemented strategies to maintain and enhance its position as a market leader in the financial services industry. -------------------------------------------------------------------------------- INDIVIDUAL LIFE --------------------------------------------------------------------------------
OPERATING SUMMARY 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Fee income and other $ 459 $ 412 $ 378 Net investment income 181 172 189 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 640 584 567 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 274 258 269 Amortization of deferred policy acquisition costs 145 129 108 Insurance operating costs and other expenses 103 88 89 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 522 475 466 -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 118 109 101 Income tax expense 39 38 36 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 79 $ 71 $ 65 -------------------------------------------------------------------------------------------------------------------------- Variable life account values $ 2,947 $ 2,595 $ 1,727 Total account values $ 5,849 $ 5,419 $ 4,512 ------------------------------------------------------------------------------------------------------------------------------------ Variable life insurance in force $ 33,460 $ 23,854 $ 16,305 Total life insurance in force $ 75,113 $ 66,690 $ 61,074 ====================================================================================================================================
The Individual Life segment sells a variety of life insurance products, including variable life, universal life, interest sensitive whole life and term life insurance primarily to the high end estate and business planning markets. 2000 COMPARED TO 1999 -- Revenues increased $56, or 10%, resulting primarily from fee income associated with the growing block of variable life insurance. Fee income increased $59, or 15%, as variable life account values increased $352, or 14%, - 20 - and variable life insurance in force increased $9.6 billion, or 40%. Benefits, claims and expenses increased $47, or 10%, primarily due to a $16, or 6%, increase in benefits, claims and claim adjustment expenses and a $16, or 12%, increase in amortization of deferred policy acquisition costs mostly associated with the growth in this segment's variable business. Additionally, insurance operating costs and other expenses increased $15, or 17%, directly associated with the growth in this segment as previously described. Core earnings increased $8, or 11%, primarily due to higher fee income as mortality experience (death claims as a percentage of net amount at risk) was consistent with prior year. 1999 COMPARED TO 1998 -- Revenues increased $17, or 3%, resulting primarily from higher fee income associated with the growing block of variable life insurance. Fee income increased $59, or 18%, as variable life account values increased $868, or 50%, and variable life insurance in force increased $7.5 billion, or 46%. The higher fee income was partially offset by a decrease in earned premiums resulting from the sale of HLI's Canadian life insurance operation in 1999. Benefits, claims and expenses increased slightly, principally due to a $21, or 19%, increase in amortization of deferred policy acquisition costs associated with the growth in this segment's revenues. The increase was partially offset by a decrease of $11, or 4%, in benefits, claims and claim adjustment expenses due to the sale of the Canadian life insurance operation and lower mortality costs. Core earnings increased $6, or 9%, essentially due to higher fee income and favorable mortality experience. OUTLOOK Management believes that the Company's strong market position will provide opportunities for growth in this segment as individuals increasingly focus on estate planning. The Hartford's agreement to acquire the U.S. individual life insurance business of Fortis is expected to increase its scale while broadening its distribution capabilities through the addition of a retail broker-dealer. It is expected that the consummation of this transaction will enhance the Company's goal of broadening its reach in the emerging affluent market. -------------------------------------------------------------------------------- GROUP BENEFITS --------------------------------------------------------------------------------
OPERATING SUMMARY 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums and other $ 1,981 $ 1,829 $ 1,629 Net investment income 226 195 180 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 2,207 2,024 1,809 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 1,643 1,507 1,335 Insurance operating costs and other expenses 450 415 376 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 2,093 1,922 1,711 -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 114 102 98 Income tax expense 24 23 27 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 90 $ 79 $ 71 ====================================================================================================================================
The Group Benefits segment sells group life and group disability insurance as well as other products, including stop loss and supplementary medical coverage to employers and employer sponsored plans, accidental death and dismemberment, travel accident and other special risk coverages to employers and associations. The Company also offers disability underwriting, administration, claims processing services and reinsurance to other insurers and self-funded employer plans. According to the latest results published by the Life Insurance Marketing and Research Association ("LIMRA"), the Company was the third largest provider of group disability insurance and the fourth largest writer of group term life insurance, based on sales, in the United States for the nine months ended September 30, 2000. 2000 COMPARED TO 1999 -- Revenues increased $183, or 9%, driven primarily by growth in fully insured premiums, excluding buyouts, which increased $182, or 10%, principally due to favorable persistency of the in force block of business, as well as new sales. Also contributing to the revenue growth was an increase in net investment income of $31, or 16%. Total benefits, claims and expenses increased $171, or 9%, primarily due to higher benefits, claims and claim adjustment expenses which, excluding buyouts, increased $168, or 12%, directly related to revenue growth in this segment. The segment's combined ratio (ratio of total benefits, claims and expenses as a percentage of earned premiums and other) was consistent with the prior year. As such, core earnings increased $11, or 14%, primarily driven by the increased revenues described above. 1999 COMPARED TO 1998 -- Revenues increased $215, or 12%, driven by growth in fully insured premiums, excluding buyouts, which increased $172, or 11%. This increase was fundamentally due to group life and group disability, where ongoing premiums increased $49, or 9%, and $63, or 11%, respectively, due to strong persistency of the in force block of business, coupled with an increase in sales to new customers. Benefits, claims and expenses increased $211, or 12%, primarily due to higher benefits, claims and claim adjustment expenses, which, excluding buyouts, increased $187, or 11%, due to the growth in this segment. The loss ratio (loss costs as a percentage of earned premiums and other), excluding buyouts, remained consistent at 82%, indicating a continuation of favorable mortality and morbidity experience. In addition, the expense ratio (ratio of insurance operating costs and other - 21 - expenses as a percentage of earned premiums and other), excluding buyouts, remained consistent at 24%. The segment's effective income tax rate was reduced to 23% in 1999 from 28% in 1998 as a result of increasing the level of investment in tax-exempt securities. As a result of increased premium revenue, consistent loss and expense ratios and increased after-tax investment income, core earnings increased $8, or 11%. OUTLOOK As employers continue to offer benefit plans in order to attract and retain valued employees, management expects that the need for group life and group disability insurance will continue to expand and believes the Company is well positioned to take advantage of this growth potential. -------------------------------------------------------------------------------- CORPORATE OWNED LIFE INSURANCE (COLI) --------------------------------------------------------------------------------
OPERATING SUMMARY 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Fee income and other $ 401 $ 400 $ 774 Net investment income 366 431 793 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 767 831 1,567 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 545 621 924 Insurance operating costs and expenses 102 59 278 Dividends to policyholders 67 104 329 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 714 784 1,531 -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 53 47 36 Income tax expense 19 17 12 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 34 $ 30 $ 24 -------------------------------------------------------------------------------------------------------------------------- Variable COLI account values $ 15,937 $ 12,386 $ 11,220 Leveraged COLI account values 4,978 5,729 9,148 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ACCOUNT VALUES $ 20,915 $ 18,115 $ 20,368 ====================================================================================================================================
The Hartford is a leader in the COLI market, which includes life insurance policies purchased by a company on the lives of its employees, with the company or a trust sponsored by the company named as beneficiary under the policy. Until the Health Insurance Portability and Accountability Act of 1996 ("HIPA Act of 1996"), the Company sold two principal types of COLI business, leveraged and variable products. Leveraged COLI is a fixed premium life insurance policy owned by a company or a trust sponsored by a company. The HIPA Act of 1996 phased out the deductibility of interest on policy loans under leveraged COLI through the end of 1998, virtually eliminating all future sales of this product. Variable COLI continues to be a product used by employers to fund non-qualified benefits or other postemployment benefit liabilities. 2000 COMPARED TO 1999 -- Revenues in the COLI segment decreased $64, or 8%, primarily due to a decline in net investment income of $65, or 15%. This decline was principally due to the leveraged COLI block of business, as related account values decreased $751, or 13%, as a result of the continued downsizing caused by the HIPA Act of 1996. Total benefits, claims and expenses decreased $70, or 9%, primarily due to the factor described above. Core earnings increased $4, or 13%, principally due to the variable COLI business where related account values increased $3.6 billion, or 29%, as well as earnings associated with a block of leveraged COLI business recaptured in 1998. For additional information on this recaptured business, see Note 13 of Notes to Consolidated Financial Statements. 1999 COMPARED TO 1998 -- Revenues decreased $736, or 47%, primarily attributable to the downsizing of the leveraged COLI business as a result of the HIPA Act of 1996. During 1999, leveraged COLI account values decreased $3.4 billion, or 37%. Consistent with the decrease in revenues, benefits, claims and expenses decreased $747, or 49%. Core earnings increased $6, or 25%, primarily due to growth in the variable COLI business, where related account values increased $1.2 billion, or 10%. Additionally, leveraged COLI core earnings increased due to earnings associated with a block of leveraged COLI business recaptured in 1998, which was partially offset by decreases associated with the downsizing of the overall leveraged COLI business. OUTLOOK The focus of this segment is variable COLI, which continues to be a product generally used by employers to fund non-qualified benefits or other postemployment benefit liabilities. The leveraged COLI product has been an important contributor to The Hartford's profitability in recent years and will continue to contribute to the profitability of The Hartford in the future, although the level of profit is expected to decline over the long run. COLI is subject to a changing legislative and regulatory environment that could have a material adverse effect on its business. - 22 - -------------------------------------------------------------------------------- WORLDWIDE PROPERTY & CASUALTY --------------------------------------------------------------------------------
OPERATING SUMMARY 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 7,055 $ 6,578 $ 7,414 Net investment income 1,072 1,065 1,147 Other revenue [1] 343 310 369 Net realized capital gains 234 39 304 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 8,704 7,992 9,234 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 5,253 4,848 5,386 Amortization of deferred policy acquisition costs 1,542 1,443 1,579 Insurance operating costs and expenses 677 647 875 Other expenses 548 505 504 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 8,020 7,443 8,344 -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 684 549 890 Income tax expense 190 68 189 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME 494 481 701 Less: Net realized capital gains, after-tax 65 25 199 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 429 $ 456 $ 502 ==================================================================================================================================== [1] Primarily servicing revenue.
As discussed above, Worldwide Property & Casualty is organized into four reportable operating segments: the underwriting segments of Commercial, Personal and Reinsurance, and an International and Other Operations segment. Also reported within Worldwide Property & Casualty is North American, which includes the combined underwriting results of Commercial, Personal and Reinsurance along with income and expense items not directly allocable to these segments, such as net investment income, net realized capital gains or losses, other expenses including interest and income taxes. The following is a summary of Worldwide Property & Casualty core earnings, after-tax. Core earnings exclude net realized capital gains.
(after-tax) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ North American Underwriting results $ (146) $ (120) $ (112) Net investment income 695 684 656 Other expenses [1] (137) (130) (87) ------------------------------------------------------------------------------------------------------------------------------------ NORTH AMERICAN CORE EARNINGS 412 434 457 ------------------------------------------------------------------------------------------------------------------------------------ International and Other Operations core earnings 17 22 45 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 429 $ 456 $ 502 ==================================================================================================================================== [1] Includes interest and net servicing income.
Underwriting results are discussed in each of the Commercial, Personal and Reinsurance segment sections. Net investment income is discussed in the Investments section. 2000 COMPARED TO 1999 -- Core earnings decreased $27, or 6%, primarily due to an increase in Personal automobile loss costs, adverse loss development in Reinsurance and expenses related to the Commercial field office and claim reorganizations. Partially offsetting this decrease was a reduction in property catastrophe losses and improvement in Commercial mid-market results. 1999 COMPARED TO 1998 -- Core earnings were $456, a decrease of $46, or 9%. The decrease was primarily the result of a $43 increase in other expenses, due primarily to proceeds received in 1998 related to the IRI transaction and an $8, or 7%, decrease in after-tax underwriting results. Partially offsetting the decrease was an increase in net investment income of $28, or 4%. - 23 - -------------------------------------------------------------------------------- COMMERCIAL --------------------------------------------------------------------------------
OPERATING SUMMARY 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Written premiums $ 3,485 $ 3,181 $ 3,188 ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 3,332 $ 3,130 $ 3,222 Benefits, claims and claim adjustment expenses 2,285 2,155 2,250 Amortization of deferred policy acquisition costs 873 823 815 Insurance operating costs and expenses 327 323 370 ------------------------------------------------------------------------------------------------------------------------------------ UNDERWRITING RESULTS $ (153) $ (171) $ (213) -------------------------------------------------------------------------------------------------------------------------- Combined ratio 102.6 105.5 106.2 ------------------------------------------------------------------------------------------------------------------------------------ Other revenue [1] $ 168 $ 141 $ 163 ==================================================================================================================================== [1] Primarily servicing revenue.
Commercial provides workers' compensation, property, automobile, liability, financial products, marine, agricultural and bond coverages to commercial accounts primarily throughout the United States. Excess and surplus lines business not normally written by standard lines insurers is also provided. Commercial is organized into three customer markets: Business Insurance, Commercial Affinity and Commercial Specialty. Business Insurance provides standard commercial business for small accounts ("Select Customer") and mid-sized insureds ("Key Accounts"). Commercial Affinity provides commercial risk management products and services to small and mid-sized members of affinity groups and customers of financial institutions in addition to marine coverage. Commercial Specialty provides insurance through retailers and wholesalers to large commercial clients ("Major/National") and insureds requiring a variety of specialized coverages. Its results also include the bond lines and First State Management Group, a leading underwriter of excess and surplus lines business produced primarily through wholesale brokers. Agricultural and livestock products are also included within Commercial Specialty. 2000 COMPARED TO 1999 -- Written premiums increased $304, or 10%, partially due to The Hartford's purchase of the in force, new and renewal financial products business as well as the majority of the excess and surplus lines of Reliance Group Holdings, Inc. ("Reliance") in 2000, which resulted in $108 of additional written premiums for the year. Continued premium growth in Select Customer, up $171, or 19%, over the prior year, also contributed to the increase in written premiums. Enhanced product offerings, targeted geographic strategies, new business growth coupled with modest price increases were the primary drivers of the Select Customer growth. These increases were slightly offset by a 2% decrease in mid-market standard commercial business. The decline in mid-market premiums continued to reflect the effective execution of the Company's underwriting initiatives, although significant price increases have partially mitigated this decrease. Underwriting results improved $18, or 2.9 combined ratio points, primarily the result of reduced loss ratios due to the continued effective execution of pricing actions and lower catastrophe losses. A decrease in the expense ratio, despite field and claim reorganization costs, also contributed to the lower combined ratio. 1999 COMPARED TO 1998 -- Written premiums decreased slightly. Solid premium growth in The Hartford's small commercial businesses resulted in growth of 15% driven by enhanced product offerings, targeted geographic strategies and partnerships with other entities. These increases, however, were more than offset by declines in the middle and large national account businesses primarily due to intense price competition in the casualty lines, where The Hartford maintained underwriting discipline, allowing business to move to other carriers while the Company's margins were preserved. Underwriting results improved $42, or 0.7 combined ratio points, attributable to a decline in the loss ratio of 1.3 points resulting from underwriting initiatives and price increases. Partially offsetting this improvement was an increase in the other underwriting expense ratio due to investments in growth areas, primarily Select Customer. OUTLOOK Market conditions in the commercial sector are expected to continue to improve in 2001 although price competition within many markets of the commercial industry will continue to remain a challenge into the foreseeable future. Management expects growth in small commercial businesses to continue to be achieved, in part, due to strategic actions being taken which include providing a complete product solution for the small commercial coverage needs of the commercial segment's customers; expanding non-traditional distribution alternatives; executing geographic market share strategies and developing technology solutions that deliver superior business tools to The Hartford's agents, alliances and policyholders. Continued pricing and underwriting actions in the mid-market standard commercial business should have a positive impact on overall profitability in 2001. The acquisition of Reliance in 2000 creates an opportunity to broaden the portfolio of products offered by the Commercial segment. Additionally, the alliance formed with USAA in late 2000, to be the exclusive provider of small business insurance to USAA members, is also expected to achieve new premium growth. - 24 - -------------------------------------------------------------------------------- PERSONAL --------------------------------------------------------------------------------
OPERATING SUMMARY 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Written premiums $ 2,647 $ 2,470 $ 2,220 ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 2,547 $ 2,343 $ 2,068 Benefits, claims and claim adjustment expenses 1,921 1,732 1,477 Amortization of deferred policy acquisition costs 377 348 265 Insurance operating costs and expenses 247 229 249 ------------------------------------------------------------------------------------------------------------------------------------ UNDERWRITING RESULTS $ 2 $ 34 $ 77 -------------------------------------------------------------------------------------------------------------------------- Combined ratio 100.1 99.6 97.1 ------------------------------------------------------------------------------------------------------------------------------------ Other revenue [1] $ 166 $ 162 $ 200 ==================================================================================================================================== [1] Primarily servicing revenue.
Personal provides automobile, homeowners, home-based business and fire coverages to individuals across North America. Personal is organized to provide customized products and services to the following markets: the membership of AARP through a direct marketing operation; customers who prefer local agent involvement through a network of independent agents in the standard personal lines market and through Omni Insurance Group, Inc. ("Omni"), which was acquired in 1998, in the non-standard automobile market; customers of Sears, Roebuck & Co. ("Sears") and Ford Motor Company and Ford Motor Credit Company (collectively, "Ford") as well as customers of financial institutions through an affinity center; and customer service for all health insurance products offered through AARP's Health Care Options effective January 1, 1998. AARP's exclusive licensing arrangement continues through 2002 for automobile, homeowners and home-based business and through 2007 for Health Care Options, thus providing the Personal segment with an important competitive advantage. 2000 COMPARED TO 1999 -- Written premiums increased $177, or 7%. Written premiums increased $87, or 6%, in the AARP program and $57, or 8%, in the standard Agency business for the year due primarily to policy count growth and improved renewal retention. Affinity growth of $45, or 37%, for the year included increased business from the Ford and Sears accounts. Non-standard automobile written premiums through Omni decreased $12, or 5%, for the year as a result of an expected consumer reaction to rate increases in certain states. Underwriting results decreased $32 with a corresponding 0.5 point increase in the combined ratio. The decrease in underwriting results and related increase in the combined ratio were primarily due to increased Agency and Omni automobile loss costs. Partially offsetting this decrease was strong growth in Agency and AARP homeowners lines. A 1.3 point decrease in the expense ratio for the year reflected the continued trend of productivity gains from prior initiatives. 1999 COMPARED TO 1998 -- Written premiums increased $250, or 11%. Omni written premiums increased $88, or 53%, contributing 4% to the segment's total written premium growth in 1999. AARP written premiums increased $65, or 5%, contributing 3% to the segment's total written premium growth in 1999. Agency written premium growth was $31, or 5%, contributing 1% to the segment's total written premium growth in 1999. The Affinity unit experienced written premium growth of $66, or 120%, contributing 3% to the segment's total written premium growth in 1999. Written premium increases in all the units were achieved in light of very competitive pricing in the personal lines market, primarily in the personal automobile line. Servicing revenues from AARP's Health Care Options unit declined by $38 due to revenues related to the transfer of business from the prior carrier in 1998. Underwriting results decreased by $43, with a corresponding 2.5 point increase in the combined ratio. The decrease in underwriting results and increase in combined ratio resulted primarily from increased claim and claim adjustment expenses. Loss experience in the property line was higher due to increases in both frequency and severity of claims. Claim adjustment expenses increased due to investments in claim initiatives for automobile bodily injury, physical damage and property to reduce loss costs in future periods. Catastrophe losses impacted the combined ratio by 2.9 points in 1999 compared with 3.5 points in 1998. OUTLOOK The personal insurance market remains highly competitive. Management believes that market conditions in the personal industry will improve in 2001. The current environment in the personal market involves rising loss costs resulting from inflation in both medical and automobile repair costs. Management believes that the Personal segment is positioned for continued written premium growth through multiple distribution channels. Initiatives are being implemented to further strengthen the AARP relationship and attract more members to the program. In 2000, Affinity entered into an agreement with Sears to market to its customers. The Hartford expects the Sears program to be a major market in the future. In the independent agency channel, investments in agency interface, new products and agency relations continue to position The Hartford for premium growth. The segment's investments in such areas as advertising, product research and development, agency relations, technology and staff training will continue in an effort to further heighten brand awareness, increase product offerings, further develop alternative distribution channels, improve productivity and reduce the expense ratio. - 25 - -------------------------------------------------------------------------------- REINSURANCE --------------------------------------------------------------------------------
OPERATING SUMMARY 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Written premiums $ 826 $ 703 $ 711 ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 809 $ 680 $ 716 Benefits, claims and claim adjustment expenses 624 507 560 Amortization of deferred policy acquisition costs 243 211 181 Insurance operating costs and expenses 15 10 11 ------------------------------------------------------------------------------------------------------------------------------------ UNDERWRITING RESULTS $ (73) $(48) $ (36) -------------------------------------------------------------------------------------------------------------------------- Combined ratio 108.9 107.2 105.7 ====================================================================================================================================
The Hartford assumes reinsurance worldwide through its thirteen Hartford Reinsurance Company ("HartRe") offices located in the United States, Canada, the United Kingdom, France, Italy, Germany, Spain, Hong Kong and Taiwan. HartRe primarily writes treaty reinsurance through professional reinsurance brokers covering various property, casualty, specialty and marine classes of business. 2000 COMPARED TO 1999 -- Reinsurance written premiums increased $123, or 17%, primarily due to successful pricing increases in a firming pricing environment in North America, as well as growth in new casualty programs business, and continued execution of new business development strategies in the alternative risk transfer line and in Europe. Underwriting results decreased $25 with a corresponding 1.7 point increase in the combined ratio. This decrease was primarily due to continued adverse prior underwriting years loss development, partially offset by lower property catastrophe losses. 1999 COMPARED TO 1998 -- Written premiums decreased $8, or 1%, primarily due to an increase in ceded reinsurance premium, principally as a result of cessions under an aggregate stop loss treaty in 1999, and the non-recurrence of a significant single finite risk account written in 1998. These decreases were partially offset by the first quarter 1999 acquisition of renewal rights for the reinsurance business of Vesta Fire Insurance Corp., a subsidiary of Vesta Insurance Group Inc. Underwriting results decreased $12, with a corresponding 1.5 point increase in the combined ratio. Excluding the finite risk account referred to above, which had no significant impact on underwriting results in 1998, the decrease in underwriting results was due primarily to loss development in 1999 from business written principally in 1998, partially offset by recoveries under the aggregate stop loss treaty. OUTLOOK The worldwide reinsurance market remains highly competitive. Market pricing improved during 2000 in the worldwide reinsurance sector, and management expects that this pricing will continue to firm in 2001. HartRe is committed to the effective execution of its pricing strategy in both traditional and alternative risk transfer products and is prepared to capitalize on new business opportunities resulting from the changing marketplace. -------------------------------------------------------------------------------- INTERNATIONAL AND OTHER OPERATIONS --------------------------------------------------------------------------------
OPERATING SUMMARY 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 367 $ 425 $ 1,408 Net investment income 210 212 323 Fee income 9 7 6 Net realized capital gains 16 17 73 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 602 661 1,810 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 423 454 1,099 Amortization of deferred policy acquisition costs 49 61 318 Insurance operating costs and expenses 88 85 245 Other expenses 7 9 18 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 567 609 1,680 -------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 35 52 130 Income tax expense 7 19 33 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME 28 33 97 LESS: Net realized capital gains, after-tax 11 11 52 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 17 $ 22 $ 45 ====================================================================================================================================
- 26 - The International and Other Operations segment results for 2000 and 1999 include activity for Zwolsche located in the Netherlands, Belgium and Luxembourg until its sale on December 22, 2000 (discussed below), Hartford Seguros in Spain (formerly ITT Ercos), which was sold in February 2001 (discussed below) and The Hartford Insurance Company (Singapore), Ltd. (formerly People's Insurance Company, Ltd. ("Singapore Insurance")), of which The Hartford acquired a 49% interest in January 1998 and an additional 31% interest in December 2000. In addition, segment results for 1998, also include London & Edinburgh in the United Kingdom, until its sale by The Hartford in November 1998, (discussed below). Products offered by these companies include property and casualty products in both personal and commercial lines as well as life insurance products and services designed to meet the needs of local customers. The sale of the majority of The Hartford's International Operations continued the company's strategic shift in its International Operations to emphasize growth opportunities in asset accumulation business. On February 8, 2001, The Hartford completed the sale of Hartford Seguros to Liberty International, a subsidiary of Liberty Mutual Group. The Hartford received $29, before costs of sale. On December 22, 2000, The Hartford completed the sale of Zwolsche to Assurances Generales de France, a subsidiary of Allianz AG. The Hartford received $547, before costs of sale, for Zwolsche. The gain from the sale of Zwolsche of $69, after-tax, has been reported in the 2000 investment results of North American Property & Casualty. Zwolsche's operating results are included in the International and Other Operations segment through the date of sale. On November 16, 1998, The Hartford completed the sale of London & Edinburgh. The Hartford received approximately $525, before costs of sale, for the ongoing operations of London & Edinburgh. The Hartford retained ownership of Excess Insurance Co. Ltd. ("Excess"), London & Edinburgh's property and casualty insurance and reinsurance subsidiary, which discontinued writing new business in 1993. Excess is included in Other Operations. The gain from the sale of London & Edinburgh of $33, after-tax, has been reported in the 1998 investment results of North American Property & Casualty. London & Edinburgh's operating results are included in the International and Other Operations segment 1998 results through the date of sale and, therefore, are not comparable to current and prior year results. Other Operations consist of the property and casualty insurance operations of The Hartford which have discontinued writing new business. These operations primarily include First State Insurance Company, Heritage Reinsurance Company, Ltd. and Excess. The main focus of these operations is the proper disposition of claims, resolving disputes and collecting reinsurance proceeds related largely to business underwritten and reinsured prior to 1985. 2000 COMPARED TO 1999 -- Revenues were down $59, or 9%, primarily due to lower earned premiums at Zwolsche. Core earnings were down $5, or 23%, primarily due to a higher calendar year loss ratio in automobile business in Hartford Seguros and unfavorable foreign exchange impacts. 1999 COMPARED TO 1998 -- Revenues of $661 were down $1.1 billion, or 63%, primarily due to the sale of London & Edinburgh, while core earnings were down $23 or 51% also as a result of the sale of London & Edinburgh. OUTLOOK The Hartford continues to explore acquisition opportunities in Latin America and Asia with an emphasis on asset accumulation businesses. Except for the uncertainties related to dispute resolution, reinsurance collection and those discussed in the Environmental and Asbestos Claims section, management does not anticipate the future financial performance of Other Operations to have a material effect on the future operating results of the Company. -------------------------------------------------------------------------------- RESERVES -------------------------------------------------------------------------------- In accordance with applicable insurance regulations under which Worldwide Life operates, life insurance subsidiaries of The Hartford establish and carry as liabilities actuarially determined reserves which are calculated to meet The Hartford's future obligations. Reserves for life insurance and disability contracts are based on actuarially recognized methods using prescribed morbidity and mortality tables in general use in the United States, which are modified to reflect The Hartford's actual experience when appropriate. These reserves are computed at amounts that, with additions from estimated premiums to be received and with interest on such reserves compounded annually at certain assumed rates, are expected to be sufficient to meet The Hartford's policy obligations at their maturities or in the event of an insured's 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. The liability for policy benefits for universal life-type contracts and interest-sensitive whole life policies is equal to the balance that accrues to the benefit of policyholders, including credited interest, amounts that have been assessed to compensate the Company for services to be performed over future periods, and any amounts previously assessed against policyholders that are refundable on termination of the contract. For investment contracts, policyholder liabilities are equal to the accumulated policy account values, which consist of an accumulation of deposit payments plus credited interest, less withdrawals and amounts assessed through the end of the period. For the Company's group disability policies, the level of reserves is based on a variety of factors including particular diagnoses, termination rates and benefit levels. The persistency of The Hartford's annuity and other interest-sensitive life insurance reserves is enhanced by policy restrictions on the withdrawal of funds. Withdrawals in excess of allowable penalty-free amounts are assessed a surrender charge during a penalty period, which is usually at least seven - 27 - years. Such surrender charge is initially a percentage of either the accumulation value or considerations received, which varies by product, and generally decreases gradually during the penalty period. Surrender charges are set at levels to protect The Hartford from loss on early terminations and to reduce the likelihood of policyholders terminating their policies during periods of increasing interest rates, thereby lengthening the effective duration of policy liabilities and improving the Company's ability to maintain profitability on such policies. The Hartford establishes property and casualty reserves to provide for the estimated costs of paying claims made by policyholders or against policyholders. These reserves include estimates for both claims that have been reported and those that have been incurred but not reported, and include estimates of all expenses associated with processing and settling these claims. Estimating the ultimate cost of future claims and claim adjustment expenses is an uncertain and complex process. This estimation process is based largely on the assumption that past developments are an appropriate predictor of future events, and involves a variety of actuarial techniques that analyze experience, trends and other relevant factors. The uncertainties involved with the reserving process have become increasingly unpredictable due to a number of complex factors including social and economic trends and changes in the concepts of legal liability and damage awards. Accordingly, final claim settlements may vary from the present estimates, particularly when those payments may not occur until well into the future. The Hartford continually reviews its estimated claims and claim adjustment expense reserves as additional experience and other relevant data become available, and reserve levels are adjusted accordingly. Adjustments to previously established reserves, if any, will be reflected in the operating results of the period in which the adjustment is made. For the year ended December 31, 2000, there were no changes to these reserving assumptions that had a significant impact on the reserves or results of operations. In the judgment of management, all information currently available has been properly considered in the reserves established for claims and claim adjustment expenses. For a discussion of environmental and asbestos claims and the uncertainties related to these reserves, refer to the next section. -------------------------------------------------------------------------------- ENVIRONMENTAL AND ASBESTOS CLAIMS -------------------------------------------------------------------------------- The Hartford continues to receive claims that assert damages from environmental exposures and for injuries from asbestos and asbestos-related products, both of which affect North American Property & Casualty and the International and Other Operations segment. Environmental claims relate primarily to pollution and related clean-up costs. With regard to these claims, uncertainty exists which impacts the ability of insurers and reinsurers to estimate the ultimate reserves for unpaid losses and related settlement expenses. The Hartford finds that conventional reserving techniques cannot estimate the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. The majority of environmental claims and many types of asbestos claims, differ from any other type of contractual claim because there is almost no agreement or consistent precedent to determine what, if any, coverage exists or which, if any, policy years and insurers or reinsurers may be liable. Further uncertainty arises with environmental claims since claims are often made under policies, the existence of which may be in dispute, the terms of which may have changed over many years, which may or may not provide for legal defense costs, and which may or may not contain environmental exclusion clauses that may be absolute or allow for fortuitous events. Courts in different jurisdictions have reached disparate conclusions on similar issues and in certain situations have broadened the interpretation of policy coverage and liability issues. In light of the extensive claim settlement process for environmental and asbestos claims, which involves comprehensive fact gathering, subject matter expertise and intensive litigation, The Hartford established an environmental claims facility in 1992 to defend itself aggressively against unwarranted claims and to minimize costs. Within the property and casualty insurance industry in the mid-1990s, progress was made in developing sophisticated, alternative methodologies utilizing company experience and supplemental databases to assess environmental and asbestos liabilities. Consistent with The Hartford's practice of using the best techniques to estimate the Company's environmental and asbestos exposures, a study was initiated in April 1996 based on known cases. The Hartford, utilizing internal staff supplemented by outside legal and actuarial consultants, completed the study in October 1996. The study included a review of identified environmental and asbestos exposures of North American Property & Casualty, along with the U.S. exposures of The Hartford's International and Other Operations segment. The methodology utilized a ground-up analysis of policy, site and exposure level data for a representative sample of The Hartford's claims. The results of the evaluation were extrapolated against the balance of the claim population to estimate the Company's overall exposure for reported claims. In addition to estimating liabilities on reported environmental and asbestos claims, The Hartford estimated reserves for claims incurred but not reported ("IBNR"). The IBNR reserve was estimated using information on reporting patterns of known insureds, characteristics of insureds such as limits exposed, attachment points and number of coverage years involved, third party costs and closed claims. Included in The Hartford's analysis of environmental and asbestos exposures was a review of applicable reinsurance coverage. Reinsurance coverage applicable to the sample was used to estimate the reinsurance coverage that applied to the balance of the reported environmental and asbestos claims and to the IBNR estimates. An international actuarial firm reviewed The Hartford's approach and concluded that the way the Company studied its exposures, the thoroughness of its analysis and the way The Hartford came to its estimates were reasonable and comprehensive. The Company believes that its methodology and estimates continue to be reasonable and comprehensive. Reserve activity for both reported and unreported environmental and asbestos claims, including reserves for legal defense costs, for the years ended December 31, 2000, 1999 and 1998, was as follows (net of reinsurance): - 28 -
ENVIRONMENTAL AND ASBESTOS CLAIMS AND CLAIM ADJUSTMENT EXPENSES 2000 1999 1998 -------------------------------- -------------------------------- ------------------------------ Environ. Asbestos Total Environ. Asbestos Total Environ. Asbestos Total -------------------------------------------------------------------------------------------------- Beginning liability [1] $ 995 $ 625 $ 1,620 $ 1,144 $ 668 $ 1,812 $ 1,312 $ 708 $ 2,020 Claims and claim adjustment expenses incurred 8 8 16 7 4 11 -- 6 6 Claims and claim adjustment expenses paid (92) (61) (153) (156) (47) (203) (150) (64) (214) Other [2] -- -- -- -- -- -- (18) 18 -- ----------------------------------------------------------------------------------------------------------------------------------- ENDING LIABILITY [3] $ 911 $ 572 $ 1,483 $ 995 $ 625 $ 1,620 $ 1,144 $ 668 $ 1,812 ----------------------------------------------------------------------------------------------------------------------------------- [1] Prior years have been restated to include additional asbestos reserves that were reclassified from non-asbestos reserves. [2] Other represents reclassifications of beginning reserves between environmental and asbestos for 1998. [3] The ending liabilities are net of reinsurance on reported and unreported claims of $1,506, $1,524 and $1,730 for 2000, 1999 and 1998, respectively. As of December 31, 2000, 1999 and 1998, reserves for environmental and asbestos, gross of reinsurance, were $1,483 and $1,506, $1,609 and $1,535, and $1,850 and $1,692, respectively.
The Hartford believes that the environmental and asbestos reserves reported at December 31, 2000 are a reasonable estimate of the ultimate remaining liability for these claims based upon known facts, current assumptions and The Hartford's methodologies. Future social, economic, legal or legislative developments may alter the original intent of policies and the scope of coverage. The Hartford will continue to evaluate new methodologies and developments, such as the increasing level of asbestos claims being tendered under the comprehensive general liability operations (non-product) section of policies, as they arise in order to supplement the Company's ongoing analysis and review of its environmental and asbestos exposures. These future reviews may result in a change in reserves, impacting The Hartford's results of operations in the period in which the reserve estimates are changed. While the impact of these changes could have a material effect on future results of operations, The Hartford does not expect such changes would have a material effect on its liquidity or financial condition. - 29 - -------------------------------------------------------------------------------- INVESTMENTS -------------------------------------------------------------------------------- An important element of the financial results of The Hartford is return on invested assets. The Hartford's investment portfolios are divided between Worldwide Life and Worldwide 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. (For a further discussion on The Hartford's approach to managing risks, see the Capital Markets Risk Management section.) The investment portfolios of Worldwide Life and Worldwide Property & Casualty are managed by distinct investment strategy groups. They are 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. Hartford Investment Management Company, a wholly-owned subsidiary of The Hartford executes the investment plan of the strategy groups for Worldwide Life and Worldwide Property & Casualty, including the identification and purchase of securities that fulfill the objectives of the strategy groups. WORLDWIDE LIFE The primary investment objective of Worldwide Life's general account is to maximize after-tax returns consistent with acceptable risk parameters, including the management of the interest rate sensitivity of invested assets relative to that of policyholder obligations, as discussed in the Capital Markets Risk Management section under "Market Risk - Worldwide Life - Interest Rate Risk". The following table identifies the invested assets by type held in the general account as of December 31, 2000 and 1999.
COMPOSITION OF INVESTED ASSETS ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 AMOUNT PERCENT AMOUNT PERCENT -------------- -------------- -------------- ----------- Fixed maturities, at fair value $ 18,248 79.6% $ 17,035 78.2% Equity securities, at fair value 171 0.7% 153 0.7% Policy loans, at outstanding balance 3,610 15.7% 4,222 19.4% Other investments 910 4.0% 376 1.7% ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 22,939 100.0% $ 21,786 100.0% ====================================================================================================================================
Policy loans are secured by the cash value of the life policy and do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. The decrease in policy loans was primarily due to the decline in leveraged COLI business, as discussed in the COLI section. The increase in other investments primarily reflects an increase in limited partnership investments. The following table identifies by type the fixed maturity securities held in the general account as of December 31, 2000 and 1999.
FIXED MATURITIES BY TYPE ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 FAIR VALUE PERCENT FAIR VALUE PERCENT --------------------------------------------------------- Corporate $ 7,663 42.0% $ 7,737 45.4% Asset-backed securities (ABS) 3,070 16.8% 2,508 14.7% Commercial mortgage-backed securities (CMBS) 2,776 15.2% 2,112 12.4% Municipal - tax-exempt 1,390 7.6% 1,108 6.5% Collateralized mortgage obligations (CMO) 928 5.1% 592 3.5% Mortgage-backed securities (MBS) - agency 602 3.3% 853 5.0% Government/Government agencies - Foreign 321 1.8% 339 2.0% Government/Government agencies - United States 244 1.3% 229 1.3% Municipal - taxable 83 0.5% 165 1.0% Short-term 975 5.3% 1,346 7.9% Redeemable preferred stock 196 1.1% 46 0.3% ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 18,248 100.0% $ 17,035 100.0% ====================================================================================================================================
During 2000, Worldwide Life continued its investment strategy of increasing its allocation to municipal tax-exempt securities with the objective of increasing after-tax yield. Short-term and corporate securities declined primarily as a result of the funding of scheduled liability maturities and reallocation into other asset sectors, particularly ABS and CMBS. Additionally, investments were shifted from MBS to CMO to increase the prepayment protection of the portfolio. As of December 31, 2000 and 1999, approximately 22.3% and 21.5%, respectively, of Worldwide Life's fixed maturities were invested in private placement securities (including 13% and 12% of Rule 144A offerings as of December 31, 2000 and December 31, 1999, respectively). Private placement securities are generally less liquid than public securities. However, private placements generally have covenants designed to compensate for liquidity risk. Most of the private placement securities in the operation's portfolio are rated by nationally recognized rating agencies. (For further discussion of the - 30 - Company's investment credit policies, see the Capital Markets Risk Management section under "Credit Risk".) INVESTMENT RESULTS The following table summarizes Worldwide Life's investment results.
(before-tax) 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Net investment income - excluding policy loan income $ 1,284 $ 1,171 $ 1,166 Policy loan income 308 391 789 ------------------------------------------------------- Net investment income - total $ 1,592 $ 1,562 $ 1,955 Yield on average invested assets [1] 7.0% 6.7% 7.9% Net realized capital losses $ (88) $ (5) $ -- ==================================================================================================================================== [1] Represents net investment income (excluding net realized capital losses) divided by average invested assets at cost (fixed maturities at amortized cost). In 1998, average invested assets were calculated assuming the recaptured leveraged COLI business proceeds were received on January 1, 1998.
2000 COMPARED TO 1999 -- Net investment income, excluding policy loan income, increased $113, or 10%. The increase was primarily due to higher yields earned on the investment of cash flow from operations and reinvestment of proceeds from sales and maturities of fixed maturity securities in a higher interest rate environment. Policy loan income decreased $83, or 21%, due to the decrease in leveraged COLI business. Net realized capital losses increased $83 primarily as a result of portfolio rebalancing in a higher interest rate environment. 1999 COMPARED TO 1998 -- Total net investment income decreased $393, or 20%, primarily due to a decrease in policy loan income resulting from the decrease in leveraged COLI business. The decline in yield on average invested assets was due to the decrease in policy loan income and the decline in the policy loan weighted average interest rate to 7.5% for 1999 from 9.9% for 1998. Net realized capital gains on the sale of equity securities and fixed maturities for the year ended December 31, 1999 partially offset a $32, after-tax, other than temporary impairment and sale of asset-backed securities securitized and serviced by Commercial Financial Services, Inc. ("CFS"). WORLDWIDE PROPERTY & CASUALTY The investment objective for the majority of Worldwide Property & Casualty is to maximize economic value while generating after-tax income and sufficient liquidity to meet corporate and policyholder obligations. For Worldwide Property & Casualty's Other Operations, the investment objective is to ensure the full and timely payment of all liabilities. Property and casualty investment strategies are developed based on a variety of factors including business needs, regulatory requirements and tax considerations. The following table identifies the invested assets by type held as of December 31, 2000 and 1999.
COMPOSITION OF INVESTED ASSETS ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 AMOUNT PERCENT AMOUNT PERCENT -------------- -------------- -------------- ----------- Fixed maturities, at fair value $ 16,239 91.6% $ 15,840 91.3% Equity securities, at fair value 885 5.0% 1,133 6.5% Other investments 601 3.4% 382 2.2% ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 17,725 100.0% $ 17,355 100.0% ====================================================================================================================================
The following table identifies by type the fixed maturity securities held as of December 31, 2000 and 1999.
FIXED MATURITIES BY TYPE ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 FAIR VALUE PERCENT FAIR VALUE PERCENT -------------- -------------- -------------- ----------- Municipal - tax-exempt $ 8,527 52.5% $ 8,160 51.5% Corporate 3,105 19.1% 3,104 19.6% Commercial mortgage-backed securities (CMBS) 1,141 7.0% 881 5.6% Asset-backed securities (ABS) 760 4.7% 596 3.8% Government/Government agencies - Foreign 682 4.2% 1,140 7.2% Mortgage-backed securities (MBS) - agency 315 1.9% 445 2.8% Collateralized mortgage obligations (CMO) 236 1.5% 240 1.5% Government/Government agencies - United States 63 0.4% 101 0.6% Municipal - taxable 46 0.3% 54 0.4% Short-term 1,120 6.9% 1,003 6.3% Redeemable preferred stock 244 1.5% 116 0.7% ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 16,239 100.0% $ 15,840 100.0% ====================================================================================================================================
- 31 - Foreign government and foreign government agency securities declined due to the December 2000 sale of Zwolsche. INVESTMENT RESULTS The following table below summarizes Worldwide Property & Casualty's investment results.
2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Net investment income, before-tax $ 1,072 $ 1,065 $ 1,147 Net investment income, after-tax [1] $ 836 $ 828 $ 877 Yield on average invested assets, before-tax [2] 6.2% 6.1% 6.2% Yield on average invested assets, after-tax [1] [2] 4.9% 4.6% 4.7% Net realized capital gains, before-tax $ 234 $ 39 $ 304 ==================================================================================================================================== [1] Due to the significant holdings in tax-exempt investments, after-tax net investment income and yield are included. [2] Represents net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost).
2000 COMPARED TO 1999 -- Both before- and after-tax net investment income and yields were relatively flat compared to the prior year. Net realized capital gains increased by $195 for 2000 primarily as a result of the $242 before-tax gain recognized on the sale of Zwolsche, partially offset by net realized losses in the investment portfolio. 1999 COMPARED TO 1998 -- Before-tax net investment income decreased by $82, or 7% and after-tax net investment income decreased by $49, or 6%. These decreases were primarily due to the effects of the London & Edinburgh sale in November 1998, partially offset by increases in income from limited partnership investments. Net realized capital gains decreased $265, primarily as a result of opportunities taken in 1998 in a strong equity market. Net realized capital gains for 1999 were partially offset by a $9, after-tax, other than temporary impairment and sale of asset-backed securities securitized and serviced by CFS. SEPARATE ACCOUNT PRODUCTS Separate account products are those for which a separate investment and liability account is maintained on behalf of the policyholder. The Company's separate accounts reflect two categories of risk assumption: non-guaranteed separate accounts totaling $104.3 billion and $102.6 billion as of December 31, 2000 and 1999, respectively, wherein the policyholder assumes substantially all the risk and reward; and guaranteed separate accounts totaling $9.8 billion and $9.1 billion as of December 31, 2000 and 1999, respectively, wherein The Hartford contractually guarantees either a minimum return or the account value to the policyholder. The primary investment objective of 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 relative to that of policyholder obligations, as discussed in the Capital Markets Risk Management section under "Market Risk - Worldwide Life - Interest Rate Risk." Investment objectives for non-guaranteed separate accounts vary by fund account type, as outlined in the applicable fund prospectus or separate account plan of operations. Non-guaranteed separate account products include variable annuities, variable life insurance contracts and variable COLI. Guaranteed separate account products primarily consist of modified guaranteed individual annuities and modified guaranteed life insurance, and generally include market value adjustment features and surrender charges to mitigate the risk of disintermediation. CORPORATE In connection with The HLI Repurchase, the carrying value of the purchased fixed maturity security investments was adjusted to fair market value as of the date of the repurchase. This adjustment was reported in Corporate. The amortization of the adjustment to the fixed maturity security investment's carrying values is reported in Corporate's net investment income. The total amount of amortization for the year ended December 31, 2000 was $10, before-tax. Also reported in Corporate are $5 of fixed maturity security investments of The Hartford Bank, FSB. -------------------------------------------------------------------------------- CAPITAL MARKETS RISK MANAGEMENT -------------------------------------------------------------------------------- The Hartford has a disciplined approach to managing risks associated with its capital markets and asset/liability management activities. Investment portfolio management is organized to focus investment management expertise on specific classes of investments, while asset/liability management is the responsibility of separate and distinct risk management units supporting Worldwide Life and Worldwide Property & Casualty operations. Derivative instruments are utilized in compliance with established Company policy and regulatory requirements and are monitored internally and reviewed by senior management. The Company is exposed to two primary sources of investment and asset/liability management risk: credit risk, relating to the uncertainty associated with the ability of an obligor or counterparty to make timely payments of principal and/or interest, and market risk, relating to the market price and/or cash flow variability associated with changes in interest rates, securities prices, market indices, yield curves or currency exchange rates. The Company does not hold any financial instruments purchased for trading purposes. CREDIT RISK - 32 - The Hartford has established investment credit policies that focus on the credit quality of obligors and counterparties, limit credit concentrations, encourage diversification and require frequent creditworthiness reviews. Investment activity, including setting of policy and defining acceptable risk levels, is subject to regular review and approval by senior management and by the Company's Finance Committee. The Company invests primarily in securities which are rated investment grade and has established exposure limits, diversification standards and review procedures for all credit risks including borrower, issuer and counterparty. Creditworthiness of specific obligors is determined by an internal credit evaluation supplemented by consideration of external determinants of creditworthiness, typically ratings assigned by nationally recognized ratings agencies. Obligor, asset sector and industry concentrations are subject to established limits and monitored on a regular interval. The Company's derivatives counterparty exposure policy establishes market-based credit limits, favors long-term financial stability and creditworthiness, and typically requires credit enhancement/credit risk reducing agreements. Credit risk is measured as the amount owed to the Company based on current market conditions and potential payment obligations between the Company and its counterparties. Credit exposures are generally quantified weekly and netted, and collateral is pledged to and held by, or on behalf of, the Company to the extent the current value of derivatives exceeds exposure policy thresholds. The Hartford is not exposed to any significant credit concentration risk of a single issuer. The following tables identify fixed maturity securities for Worldwide Life, including guaranteed separate accounts, and Worldwide Property & Casualty by credit quality. The ratings referenced in the tables are based on the ratings of a nationally recognized rating organization or, if not rated, assigned based on the Company's internal analysis of such securities. WORLDWIDE LIFE As of December 31, 2000 and 1999, over 97% of the fixed maturity portfolio was invested in securities rated investment grade.
FIXED MATURITIES BY CREDIT QUALITY ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 FAIR VALUE PERCENT FAIR VALUE PERCENT --------------------------------------------------------- United States Government/Government agencies $ 2,329 8.4% $ 2,404 9.3% AAA 4,896 17.6% 3,535 13.6% AA 3,546 12.7% 3,199 12.3% A 9,675 34.7% 8,731 33.6% BBB 5,633 20.2% 5,816 22.4% BB & below 708 2.5% 559 2.1% Short-term 1,085 3.9% 1,728 6.7% ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 27,872 100.0% $ 25,972 100.0% ====================================================================================================================================
WORLDWIDE PROPERTY & CASUALTY As of December 31, 2000 and 1999, over 95% of the fixed maturity portfolio was invested in securities rated investment grade.
FIXED MATURITIES BY CREDIT QUALITY ------------------------------------------------------------------------------------------------------------------------------------ 2000 1999 FAIR VALUE PERCENT FAIR VALUE PERCENT --------------------------------------------------------- United States Government/Government agencies $ 516 3.2% $ 650 4.1% AAA 6,414 39.5% 6,378 40.3% AA 3,414 21.0% 3,298 20.8% A 2,664 16.4% 2,613 16.5% BBB 1,442 8.9% 1,240 7.8% BB & below 669 4.1% 658 4.2% Short-term 1,120 6.9% 1,003 6.3% ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 16,239 100.0% $ 15,840 100.0% ====================================================================================================================================
MARKET RISK The Hartford has several objectives in managing market risk associated with Worldwide Life and Worldwide Property & Casualty. Worldwide Life is responsible for maximizing after-tax returns within acceptable risk parameters, including the management of the interest rate sensitivity of invested assets to that of policyholder obligations. Worldwide Life's fixed maturity portfolios have material market exposure to interest rate risk. Worldwide Property & Casualty attempts to maximize economic value while generating appropriate after-tax income and sufficient liquidity to meet corporate and policyholder obligations. Worldwide Property & Casualty has material exposure to interest rate and equity market risk. The Company continually monitors these exposures and makes portfolio adjustments to manage these risks within established limits. Downward movement in market interest rates during 2000 resulted in a significant increase in the unrealized appreciation of the fixed maturity security portfolio from 1999. However, The Hartford's asset allocation and its exposure to market risk have not changed materially from its position at December 31, - 33 - 1999. The Company analyzes interest rate risk using various models, including multi-scenario cash flow projection models that forecast cash flows of the liabilities and their supporting investments, including derivative instruments. DERIVATIVE INSTRUMENTS The Hartford utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options, in compliance with Company policy and regulatory requirements in order to achieve one of three Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transaction costs. The Company does not make a market or trade derivatives for the express purpose of earning trading profits. The Company uses derivative instruments in its management of market risk consistent with four risk management strategies: hedging anticipated transactions, hedging liability instruments, hedging invested assets and hedging portfolios of assets and/or liabilities. (For additional information on these strategies along with tables reflecting outstanding derivative instruments, see the Worldwide Life and Worldwide Property & Casualty discussions below.) Derivative activities are monitored by an internal compliance unit, reviewed frequently by senior management and reported to the Company's Finance Committee. The notional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. Notional amounts pertaining to derivative instruments for both general and guaranteed separate accounts at December 31, 2000 and 1999 totaled $8.8 billion and $9.8 billion, respectively. The following discussions focus on the key market risk exposures within Worldwide Life and Worldwide Property & Casualty. WORLDWIDE LIFE Interest Rate Risk ------------------ Worldwide Life's general account and guaranteed separate account exposure to interest rate risk relates to the market price and/or cash flow variability associated with changes in market interest rates. Changes in interest rates can potentially impact Worldwide Life's profitability. Under certain circumstances of interest rate volatility, Worldwide Life could be exposed to disintermediation risk and reduction in net interest rate spread or profit margins. For Worldwide Life's non-guaranteed separate accounts, the Company's exposure is not significant, as the policyholder assumes substantially all of the investment risk. Worldwide Life's general account and guaranteed separate account investment portfolios primarily consist of investment grade, fixed maturity securities, including corporate bonds, asset-backed securities, commercial mortgage-backed securities, tax-exempt municipal securities and collateralized mortgage obligations. The fair value of these and Worldwide Life's other invested assets fluctuates depending on the interest rate environment and other general economic conditions. During periods of declining interest rates, paydowns on mortgage-backed securities and collateralized mortgage obligations increase as the underlying mortgages are prepaid. During such periods, the Company generally will not be able to reinvest the proceeds of any such prepayments at comparable yields. Conversely, during periods of rising interest rates, the rate of prepayments generally declines, exposing the Company to the possibility of asset/liability cash flow and yield mismatch. (For further discussion of the Company's risk management techniques to manage this market risk, see the "Asset and Liability Management Strategies Used to Manage Market Risk" discussed below.) As described above, Worldwide Life holds a significant fixed maturity portfolio that includes both fixed and variable rate features. The following table reflects the principal amounts of Worldwide Life's general and guaranteed separate account fixed and variable rate fixed maturity portfolios, along with the respective weighted average coupons by estimated maturity year at December 31, 2000. Comparative totals are included as of December 31, 1999. Expected maturities differ from contractual maturities due to call or prepayment provisions. The weighted average coupon ("WAC") on variable rate securities is based on spot rates as of December 31, 2000 and 1999, and is primarily based on London Interbank Offered Rate ("LIBOR"). Callable bonds and notes are distributed to either call dates or maturity, depending on which date produces the most conservative yield. Asset-backed securities, collateralized mortgage obligations and mortgage-backed securities are distributed based on estimates of the rate of future prepayments of principal over the remaining life of the securities. These estimates are developed using prepayment speeds provided in broker consensus data. Such estimates are derived from prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. Actual prepayment experience may vary from these estimates. Financial instruments with certain leverage features have been included in each of the fixed maturity categories. These instruments have not been separately displayed because they were immaterial to the Worldwide Life investment portfolio. - 34 -
2000 1999 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ CALLABLE BONDS Fixed Rate Par value $ 5 $ 50 $ 14 $ 27 $ 7 $ 1,355 $ 1,458 $ 1,076 WAC 7.0% 6.4% 6.4% 4.6% 6.1% 5.5% 5.5% 5.6% Fair value $ 1,439 $ 1,016 Variable Rate Par value $ 1 $ 11 $ 22 $ 38 $ 1 $ 1,085 $ 1,158 $ 1,363 WAC 7.4% 7.5% 6.6% 7.3% 7.3% 7.1% 7.1% 6.6% Fair value $ 1,075 $ 1,256 ------------------------------------------------------------------------------------------------------------------------------------ BONDS - OTHER Fixed Rate Par value $ 724 $ 1,580 $ 1,286 $ 1,162 $ 1,154 $ 8,793 $ 14,699 $ 15,724 WAC 7.3% 6.2% 7.2% 6.9% 6.2% 5.7% 6.1% 6.2% Fair value $ 13,409 $ 14,044 Variable Rate Par value $ 2 $ 116 $ 158 $ 166 $ 87 $ 706 $ 1,235 $ 920 WAC 4.8% 6.5% 7.0% 7.2% 6.5% 7.8% 7.4% 5.7% Fair value $ 1,108 $ 827 ------------------------------------------------------------------------------------------------------------------------------------ ASSET-BACKED SECURITIES Fixed Rate Par value $ 731 $ 433 $ 305 $ 261 $ 178 $ 435 $ 2,343 $ 2,199 WAC 6.7% 6.3% 6.9% 7.0% 7.2% 7.6% 6.9% 6.8% Fair value $ 2,342 $ 2,045 Variable Rate Par value $ 214 $ 300 $ 298 $ 218 $ 335 $ 759 $ 2,124 $ 1,677 WAC 7.3% 7.2% 7.3% 7.1% 7.2% 7.4% 7.3% 6.6% Fair value $ 2,099 $ 1,540 ------------------------------------------------------------------------------------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATIONS Fixed Rate Par value $ 157 $ 133 $ 113 $ 99 $ 111 $ 485 $ 1,098 $ 1,138 WAC 6.4% 6.5% 6.4% 6.5% 6.3% 6.4% 6.4% 6.5% Fair value $ 1,087 $ 1,022 Variable Rate Par value $ 4 $ 2 $ 1 $ 2 $ 1 $ 102 $ 112 $ 128 WAC 9.4% 11.6% 12.7% 8.9% 10.4% 4.8% 5.3% 5.8% Fair value $ 101 $ 117 ------------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 50 $ 79 $ 52 $ 100 $ 54 $ 2,271 $ 2,606 $ 2,096 WAC 7.3% 7.1% 7.1% 7.2% 7.1% 7.3% 7.3% 7.2% Fair value $ 2,674 $ 1,922 Variable Rate Par value $ 323 $ 266 $ 268 $ 240 $ 89 $ 544 $ 1,730 $ 1,433 WAC 7.8% 7.7% 7.9% 7.7% 7.9% 8.0% 7.9% 7.5% Fair value $ 1,738 $ 1,228 ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 72 $ 80 $ 80 $ 71 $ 63 $ 426 $ 792 $ 1,288 WAC 7.2% 7.3% 7.2% 7.2% 7.2% 7.2% 7.2% 7.5% Fair value $ 800 $ 994 Variable Rate Par value $ 1 $ 1 $ -- $ -- $ -- $ 1 $ 3 $ 4 WAC 7.2% 7.2% -- -- -- 6.9% 7.0% 6.4% Fair value $ 3 $ 4 ====================================================================================================================================
- 35 - The table below provides information as of December 31, 2000 on debt obligations and TruPS and reflects principal cash flows and related weighted average interest rates by maturity year. Comparative totals are included as of December 31, 1999.
2000 1999 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT Fixed Rate Amount $ -- $ -- $ -- $ 200 $ -- $ 450 $ 650 $ 650 Weighted average interest rate -- -- -- 7.0% -- 7.5% 7.4% 7.4% Fair value $ 658 $ 633 TRUST PREFERRED SECURITIES (TRUPS) [1] Fixed Rate Amount $ -- $ -- $ -- $ -- $ -- $ 250 $ 250 $ 250 Weighted average interest rate -- -- -- -- -- 7.4% 7.4% 7.4% Fair value $ 245 $ 203 ==================================================================================================================================== [1] Represents Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures.
Asset and Liability Management Strategies Used to Manage Market Risk -------------------------------------------------------------------- Worldwide Life employs several risk management tools to quantify and manage market risk arising from their investments and interest sensitive liabilities. For certain portfolios, management monitors the changes in present value between assets and liabilities resulting from various interest rate scenarios using integrated asset/liability measurement systems and a proprietary system that simulates the impacts of parallel and non-parallel yield curve shifts. Based on this current and prospective information, management implements risk reducing techniques to improve the match between assets and liabilities. Derivatives play an important role in facilitating the management of interest rate risk, creating opportunities to efficiently fund obligations, hedge against risks that affect the value of certain liabilities and adjust broad investment risk characteristics as a result of any significant changes in market risks. As an end-user of derivatives, Worldwide Life uses a variety of derivatives, including swaps, caps, floors, forwards and exchange-traded financial futures and options, in order to hedge exposure primarily to interest rate risk on anticipated investment purchases or existing assets and liabilities. At December 31, 2000, notional amounts pertaining to derivatives totaled $8.5 billion ($6.5 billion related to insurance investments and $2.0 billion related to life insurance liabilities). Notional amounts pertaining to derivatives totaled $9.6 billion at December 31, 1999 ($6.3 billion related to insurance investments and $3.3 billion related to life insurance liabilities). The strategies described below are used to manage the aforementioned risks. Anticipatory Hedging -- For certain liabilities, Worldwide Life commits to the price of the product prior to receipt of the associated premium or deposit. Anticipatory hedges are executed to offset the impact of changes in asset prices arising from interest rate changes pending the receipt of premium or deposit and the subsequent purchase of an asset. These hedges involve taking a long position in interest rate futures or entering into an interest rate swap with duration characteristics equivalent to the associated liabilities or anticipated investments. The notional amounts of anticipatory hedges as of December 31, 2000 and 1999 were $144 and $314, respectively. Liability Hedging -- Several products obligate Worldwide Life to credit a return to the contractholder which is indexed to a market rate. To hedge risks associated with these products, Worldwide Life enters into various derivative contracts. Interest rate swaps are used to convert the contract rate into a rate that trades in a more liquid and efficient market. This hedging strategy enables Worldwide Life to customize contract terms and conditions to customer objectives and satisfies the operation's asset/liability matching policy. Interest rate swaps are used to convert certain fixed contract rates into floating rates, thereby allowing them to be appropriately matched against floating rate assets. Additionally, interest rate caps are used to hedge against the risk of contractholder disintermediation in a rising interest rate environment. The notional amounts of derivatives used for liability hedging as of December 31, 2000 and 1999 were $2.0 billion and $3.3 billion, respectively. Asset Hedging -- To meet the various policyholder obligations and to provide cost-effective prudent investment risk diversification, Worldwide Life may combine two or more financial instruments to achieve the investment characteristics of a fixed maturity security or that match an associated liability. The use of derivative instruments in this regard effectively transfers unwanted investment risks or attributes to others. The selection of the appropriate derivative instruments depends on the investment risk, the liquidity and efficiency of the market, and the asset and liability characteristics. The notional amounts of asset hedges as of December 31, 2000 and 1999, were $5.4 billion and $4.8 billion, respectively. Portfolio Hedging -- Worldwide Life periodically compares the duration and convexity of its portfolios of assets to its corresponding liabilities and enters into portfolio hedges to reduce any difference to desired levels. Portfolio hedges reduce the mismatch between assets and liabilities and offset the potential impact to cash flows caused by changes in interest rates. The notional amounts of portfolio hedges as of December 31, 2000 and 1999, were $1.0 billion and $1.2 billion, respectively. The following tables provide information as of December 31, 2000 with comparative totals for December 31, 1999 on derivative instruments used in accordance with the - 36 - aforementioned hedging strategies. For interest rate swaps, caps and floors, the tables present notional amounts with weighted average pay and receive rates for swaps and weighted average strike rates for caps and floors by maturity year. For interest rate futures, the table presents contract amount and weighted average settlement price by expected maturity year.
2000 1999 INTEREST RATE SWAPS [1] 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ Pay Fixed/Receive Variable Notional value $ 65 $ 95 $ 98 $ 35 $ 126 $ 612 $ 1,031 $ 1,694 Weighted average pay rate 6.0% 4.4% 5.9% 6.1% 7.5% 6.9% 6.6% 5.8% Weighted average receive rate 6.7% 7.0% 6.9% 6.8% 6.8% 6.8% 6.8% 6.2% Fair value $ (43) $ 76 Pay Variable/Receive Fixed Notional value $ 336 $ 372 $ 645 $ 1,198 $ 964 $ 1,371 $ 4,886 $ 4,763 Weighted average pay rate 6.7% 6.7% 6.6% 6.7% 8.1% 6.7% 7.0% 6.2% Weighted average receive rate 7.0% 6.5% 5.8% 6.1% 7.6% 6.7% 6.6% 6.2% Fair value $ 78 $ (160) Pay Variable/Receive Different Variable Notional value $ 85 $ 28 $ 4 $ 85 $ 30 $ 46 $ 278 $ 442 Weighted average pay rate 6.7% 6.8% 7.0% 6.2% 6.9% 7.2% 6.6% 6.2% Weighted average receive rate 7.8% 6.6% 6.7% 4.7% (6.6)% 7.2% 4.9% 6.0% Fair value $ (1) $ 1 ==================================================================================================================================== [1] Negative weighted average receive rate in 2005 results when payments are required on both sides of an index swap.
2000 1999 INTEREST RATE CAPS - LIBOR BASED 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ Purchased Notional value $ -- $ 10 $ 54 $ -- $ 77 $ 30 $ 171 $ 171 Weighted average strike rate (8.0 - 9.9%) -- 8.9% 8.5% -- 8.4% 8.3% 8.5% 8.5% Fair value $ 1 $ 2 Notional value $ -- $ 19 $ -- $ -- $ -- $ -- $ 19 $ 31 Weighted average strike rate (10.0 - 11.9%) -- 10.1% -- -- -- -- 10.1% 10.6% Fair value $ -- $ -- ====================================================================================================================================
2000 1999 INTEREST RATE CAPS - CMT BASED [1] 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ Purchased Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 494 Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 7.7% Fair value $ -- $ 1 Notional value $ -- $ -- $ 250 $ -- $ 250 $ -- $ 500 $ 850 Weighted average strike rate (8.0 - 9.9%) -- -- 8.7% -- 8.7% -- 8.7% 8.8% Fair value $ -- $ 4 Issued Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 244 Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 7.7% Fair value $ -- $ -- Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 100 Weighted average strike rate (8.0 - 9.9%) -- -- -- -- -- -- -- 9.5% Fair value $ -- $ -- ==================================================================================================================================== [1] CMT represents the Constant Maturity Treasury Rate.
- 37 -
2000 1999 INTEREST RATE FLOORS - LIBOR BASED 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ Purchased Notional value $ -- $ -- $ -- $ 27 $ -- $ -- $ 27 $ 27 Weighted average strike rate (6.0 - 7.9%) -- -- -- 7.9% -- -- 7.9% 7.9% Fair value $ 2 $ 2 Issued Notional value $ -- $ 28 $ 54 $ 34 $ 77 $ -- $ 193 $ 206 Weighted average strike rate (4.0 - 5.9%) -- 5.3% 5.4% 5.3% 5.3% -- 5.3% 5.3% Fair value $ (2) $ (1) Notional value $ -- $ -- $ -- $ 27 $ -- $ -- $ 27 $ 27 Weighted average strike rate (6.0 - 7.9%) -- -- -- 7.8% -- -- 7.8% 7.8% Fair value $ (2) $ (2) ====================================================================================================================================
2000 1999 INTEREST RATE FLOORS - CMT BASED [1] 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ Purchased Notional value $ -- $ -- $ 150 $ -- $ -- $ -- $ 150 $ 250 Weighted average strike rate (4.0 - 5.9%) -- -- 5.5% -- -- -- 5.5% 5.6% Fair value $ 3 $ 1 Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 10 Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 6.0% Fair value $ -- $ -- ==================================================================================================================================== [1] CMT represents the Constant Maturity Treasury Rate.
2000 1999 INTEREST RATE FUTURES 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ Long Contract amount/notional $ 198 $ -- $ -- $ -- $ -- $ -- $ 198 $ 27 Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 97 Short Contract amount/notional $ 59 $ -- $ -- $ -- $ -- $ -- $ 59 $ 51 Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 93 ====================================================================================================================================
Option Contracts ---------------- Worldwide Life uses option contracts to hedge debt instruments that totaled $951 and $254 in notional amounts and $(34) and $(50) in carrying value as of December 31, 2000 and 1999, respectively. Currency Exchange Risk ---------------------- As of December 31, 2000, Worldwide Life had immaterial currency exposures resulting from its international operations. Life Insurance Liability Characteristics ---------------------------------------- Worldwide Life's insurance liabilities, other than non-guaranteed separate accounts, include accumulation vehicles such as fixed and variable annuities, other investment and universal life-type contracts, and other insurance products such as long-term disability and term life insurance. Asset Accumulation Vehicles While interest rate risk associated with these insurance products has been reduced through the use of market value adjustment features and surrender charges, the primary risk associated with these products is that the spread between investment return and credited rate may not be sufficient to earn targeted returns. Fixed Rate -- Products in this category require the payment of a fixed rate for a certain period of time. The cash flows are not interest sensitive because the products are written with a market value adjustment feature and the liabilities have protection against the early withdrawal of funds through surrender charges. Product examples include fixed rate annuities with a market value adjustment and fixed rate guaranteed investment contracts. Contract duration is dependent on the policyholder's choice of guarantee period. Indexed -- Products in this category are similar to the fixed rate asset accumulation vehicles but require the life operations to pay a rate that is determined by an external index. The amount and/or timing of cash flows will therefore vary based on the level of the particular index. The primary risks inherent in these products are similar to the fixed rate asset accumulation vehicles, with the additional risk that changes in the index may adversely affect profitability. Product examples include indexed-guaranteed investment contracts with an estimated duration of up to two years. Interest Credited -- Products in this category credit interest to policyholders, subject to market conditions and minimum guarantees. Policyholders may surrender at book value but are subject to surrender charges for an initial period. Product examples include universal life contracts and the general account portion of Worldwide Life's variable annuity products. - 38 - Liability duration is short- to intermediate-term. Other Insurance Products Long-term Pay Out Liabilities -- Products in this category are long-term in nature and may contain significant actuarial (including mortality and morbidity) pricing and cash flow risks. The cash flows associated with these policy liabilities are not interest rate sensitive but do vary based on the timing and amount of benefit payments. The primary risks associated with these products are that the benefits will exceed expected actuarial pricing and/or that the actual timing of the cash flows differ from those anticipated, resulting in an investment return lower than that assumed in pricing. Product examples include structured settlement contracts, on-benefit annuities (i.e., the annuitant is currently receiving benefits thereon) and long-term disability contracts. Contract duration is generally five to ten years. Short-term Pay Out Liabilities -- These liabilities are short-term in nature with a duration of less than one year. The primary risks associated with these products are determined by the non-investment contingencies such as mortality or morbidity and the variability in the timing of the expected cash flows. Liquidity is of greater concern than for the long-term pay out liabilities. Products include individual and group term life insurance contracts and short-term disability contracts. Management of the duration of investments with respective policyholder obligations is an explicit objective of Worldwide Life's management strategy. The estimated cash flows of insurance policy liabilities based upon internal actuarial assumptions as of December 31, 2000 are reflected in the table below by expected maturity year. Comparative totals are included for December 31, 1999.
(dollars in billions) 2000 1999 DESCRIPTION [1] 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ Fixed rate asset accumulation vehicles $ 1.3 $ 0.8 $ 0.9 $ 2.7 $ 2.0 $ 2.7 $ 10.4 $ 9.7 Weighted average credited rate 6.5% 6.5% 5.6% 6.8% 6.9% 6.9% 6.7% 6.6% Indexed asset accumulation vehicles $ 0.6 $ 0.1 $ -- $ -- $ -- $ -- $ 0.7 $ 0.6 Weighted average credited rate 6.3% 6.2% -- -- -- -- 6.3% 6.2% Interest credited asset accumulation vehicles $ 4.1 $ 0.6 $ 0.6 $ 0.3 $ 0.3 $ 4.2 $ 10.1 $ 10.6 Weighted average credited rate 6.4% 5.4% 5.4% 5.6% 5.6% 5.6% 5.9% 5.7% Long-term pay out liabilities $ 0.8 $ 0.7 $ 0.6 $ 0.5 $ 0.4 $ 3.5 $ 6.5 $ 5.6 Short-term pay out liabilities $ 0.9 $ -- $ -- $ -- $ -- $ -- $ 0.9 $ 0.8 ==================================================================================================================================== [1] As of December 31, 2000 and 1999, the fair values of Worldwide Life's investment contracts, including guaranteed separate accounts, were $21.4 billion and $20.9 billion, respectively.
Sensitivity to Changes in Interest Rates ---------------------------------------- For liabilities whose cash flows are not substantially affected by changes in interest rates ("fixed liabilities") and where investment experience is substantially absorbed by Worldwide Life, the sensitivity of the net economic value (discounted present value of asset cash flows less the discounted present value of liability cash flows) of those portfolios to 100 basis point shifts in interest rates are shown in the following tables. These fixed liabilities represented about 60% and 55% of Worldwide Life's general and guaranteed separate account liabilities at December 31, 2000 and 1999, respectively. The remaining liabilities generally allow Worldwide Life significant flexibility to adjust credited rates to reflect actual investment experience and thereby pass through a substantial portion of actual investment experience to the policyholder. The fixed liability portfolios are managed and monitored relative to defined objectives and are analyzed regularly by management for internal risk management purposes using scenario simulation techniques, and are evaluated on an annual basis, in compliance with regulatory requirements. Change in Net Economic Value 2000 1999 ---------------------------------------- Basis point shift - 100 + 100 - 100 + 100 ------------------------------------------------------------------- Amount $ (15) $ (27) $ (4) $ (5) Percent of liability value (0.09)% (0.16)% (0.03)% (0.03)% -------------------------------------------------------------------- WORLDWIDE PROPERTY & CASUALTY Interest Rate Risk ------------------ The primary exposure to interest rate risk in Worldwide Property & Casualty relates to its fixed maturity investments. Changes in market interest rates directly impact the market value of the fixed maturity securities. In addition, but to a lesser extent, interest rate risk exists on debt issued. Derivative instruments are used periodically to manage interest rate risk and as a result, their value will change as market rates change, generally in the opposite direction of the item being hedged. The total notional amounts of derivatives used for hedging interest rate risk as of December 31, 2000 and 1999 were $318 and $136, respectively. The principal amounts of the fixed and variable rate fixed maturity portfolios, along with the respective weighted average coupons by estimated maturity year at December 31, 2000, are reflected in the following table. Comparative totals are included as of December 31, 1999. Expected maturities differ from contractual maturities due to call or prepayment provisions. The weighted average coupon on variable rate securities is based on spot rates as of December 31, 2000 and 1999, and is based primarily on LIBOR. Callable bonds and notes are primarily municipal bonds, and are distributed to either call dates or maturity depending on which date produces the most conservative yield. Asset-backed securities, collateralized mortgage obligations and mortgage-backed securities are distributed based on estimates of the rate of future prepayments - 39 - of principal over the remaining life of the securities. These estimates are developed using prepayment speeds contained in broker consensus data. Such estimates are derived from prepayment speeds previously experienced at interest rate levels projected for the underlying collateral. Actual prepayment experience may vary from these estimates. Financial instruments with certain leverage features have been included in each of the fixed maturity categories. These instruments have not been separately displayed as they were immaterial to Worldwide Property & Casualty's investment portfolio.
2000 1999 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ CALLABLE BONDS Fixed Rate Par value $ 18 $ 28 $ 46 $ 32 $ 88 $ 7,099 $ 7,311 $ 6,880 WAC 6.8% 5.5% 5.6% 5.6% 5.7% 5.4% 5.4% 5.3% Fair value $ 7,498 $ 6,662 Variable Rate Par value $ -- $ -- $ -- $ -- $ -- $ 282 $ 282 $ 389 WAC -- -- -- -- -- 6.5% 6.5% 6.2% Fair value $ 227 $ 311 ------------------------------------------------------------------------------------------------------------------------------------ BONDS - OTHER Fixed Rate Par value $ 1,055 $ 411 $ 281 $ 418 $ 540 $ 3,470 $ 6,175 $ 6,444 WAC 6.8% 5.5% 6.5% 6.5% 6.6% 6.2% 6.2% 5.9% Fair value $ 5,967 $ 6,542 Variable Rate Par value $ -- $ -- $ -- $ 2 $ -- $ 126 $ 128 $ 136 WAC -- -- -- 5.3% -- 4.8% 4.8% 9.6% Fair value $ 88 $ 143 ------------------------------------------------------------------------------------------------------------------------------------ ASSET-BACKED SECURITIES Fixed Rate Par value $ 47 $ 96 $ 97 $ 54 $ 74 $ 258 $ 626 $ 521 WAC 8.2% 6.9% 6.7% 7.1% 7.1% 7.8% 7.4% 6.7% Fair value $ 620 $ 503 Variable Rate Par value $ 6 $ 9 $ 3 $ 33 $ 8 $ 96 $ 155 $ 112 WAC 11.3% 8.7% 8.0% 7.7% 7.7% 7.7% 7.9% 6.3% Fair value $ 141 $ 113 ------------------------------------------------------------------------------------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATIONS Fixed Rate Par value $ 34 $ 27 $ 32 $ 24 $ 16 $ 89 $ 222 $ 260 WAC 6.5% 6.6% 6.5% 6.6% 6.6% 6.6% 6.6% 6.8% Fair value $ 219 $ 228 Variable Rate Par value $ 2 $ 2 $ 2 $ 1 $ 2 $ 9 $ 18 $ 13 WAC 5.4% 5.4% 5.4% 5.5% 6.3% 5.7% 5.6% 10.2% Fair value $ 17 $ 12 ------------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 24 $ 16 $ 12 $ 19 $ 12 $ 606 $ 689 $ 706 WAC 7.1% 7.1% 6.7% 7.1% 6.8% 7.2% 7.2% 7.1% Fair value $ 697 $ 633 Variable Rate Par value $ 47 $ 65 $ 60 $ 62 $ 45 $ 162 $ 441 $ 262 WAC 8.4% 8.4% 8.1% 7.7% 7.8% 8.2% 8.1% 7.8% Fair value $ 444 $ 249 ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 23 $ 28 $ 28 $ 25 $ 23 $ 186 $ 313 $ 462 WAC 7.1% 7.2% 7.2% 7.2% 7.2% 7.2% 7.2% 7.0% Fair value $ 315 $ 445 ====================================================================================================================================
- 40 - The following table provides information as of December 31, 2000 on interest rate swaps used to manage interest rate risk on fixed maturities and presents notional amounts with weighted average pay and receive rates by maturity year. Comparative totals are included as of December 31, 1999. The weighted average rates are based on spot rates as of December 31, 2000 and 1999.
2000 1999 INTEREST RATE SWAPS 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ Pay Variable/Receive Fixed Notional value $ -- $ 10 $ -- $ 35 $ -- $ -- $ 45 $ 75 Weighted average pay rate -- 6.8% -- 6.7% -- -- 6.7% 6.3% Weighted average receive rate -- 6.5% -- 6.7% -- -- 6.7% 6.6% Fair value $ 1 $ (1) Pay Variable/Receive Different Variable Notional value $ 273 $ -- $ -- $ -- $ -- $ -- $ 273 $ 61 Weighted average pay rate 6.5% -- -- -- -- -- 6.5% 6.2% Weighted average receive rate 6.9% -- -- -- -- -- 6.9% 6.7% Fair value $ 5 $ (1) ====================================================================================================================================
The table below provides information as of December 31, 2000 on debt obligations and QUIPS and reflects principal cash flows and related weighted average interest rates by maturity year. Comparative totals are included as of December 31, 1999.
2000 1999 2001 2002 2003 2004 2005 THEREAFTER TOTAL TOTAL ------------------------------------------------------------------------------------------------------------------------------------ SHORT-TERM DEBT Fixed Rate Amount $ 235 $ -- $ -- $ -- $ -- $ -- $ 235 $ 31 Weighted average interest rate 8.1% -- -- -- -- -- 8.1% 6.4% Fair value $ 238 $ 31 LONG-TERM DEBT Fixed Rate Amount $ -- $ 300 $ -- $ -- $ -- $ 400 $ 700 $ 900 Weighted average interest rate -- 6.4% -- -- -- 6.8% 6.6% 7.1% Fair value $ 689 $ 872 CUMULATIVE QUARTERLY INCOME PREFERRED SECURITIES (QUIPS) [1] Fixed Rate Amount $ -- $ -- $ -- $ -- $ -- $ 1,000 $ 1,000 $ 1,000 Weighted average interest rate -- -- -- -- -- 8.4% 8.4% 8.4% Fair value $ 988 $ 879 ==================================================================================================================================== [1] Represents Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures.
Equities Price Risk ------------------- Worldwide Property & Casualty holds a diversified portfolio of investments in equity securities representing firms in various countries, industries and market segments ranging from small market capitalization stocks to Standard & Poor's 500 stocks. The risk associated with these securities relates to potential decreases in value resulting from changes in equity prices. The following table reflects equity securities owned at December 31, 2000 and 1999, grouped by major market type. 2000 1999 FAIR VALUE PERCENT FAIR VALUE PERCENT --------------------------------------------------------------- EQUITY SECURITIES Domestic Large cap $ 521 58.9% $ 519 45.8% Midcap/small cap 179 20.2% 114 10.1% Foreign EAFE [1]/Canadian 185 20.9% 465 41.0% Emerging -- -- 35 3.1% --------------------------------------------------------------- TOTAL $ 885 100.0% $ 1,133 100.0% =============================================================== [1] Europe, Australia, Far East countries index. Currency Exchange Risk ---------------------- As of December 31, 2000, Worldwide Property & Casualty had immaterial currency exposures resulting from its international operations. - 41 - Currency exchange risk also exists with respect to investments in foreign equity securities. Forward foreign contracts with a notional amount of $8 and $48 were used to manage this risk at December 31, 2000 and 1999, respectively. CORPORATE Interest Rate Risk ------------------ The primary exposure to interest rate risk in Corporate relates to the debt issued in connection with The HLI Repurchase. Corporate also has $5 in fixed maturity security investments that represent an immaterial interest rate exposure. The table below provides information as of December 31, 2000 on Corporate's debt obligations and reflects principal cash flows and related weighted average interest rates by maturity year. Because the debt was issued in 2000, comparative totals are not presented.
2000 2001 2002 2003 2004 2005 THEREAFTER TOTAL ------------------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT Fixed Rate Amount $ -- $ -- $ -- $ -- $ 250 $ 275 $ 525 Weighted average interest rate -- -- -- -- 7.8% 7.9% 7.8% Fair value $ 554 ====================================================================================================================================
-------------------------------------------------------------------------------- CAPITAL RESOURCES AND LIQUIDITY -------------------------------------------------------------------------------- Capital resources and liquidity represent the overall financial strength of The Hartford and its ability to generate strong cash flows from each of the business segments and borrow funds at competitive rates to meet operating and growth needs. The capital structure of The Hartford as of December 31, 2000 consists of debt and equity, and as of December 31, 1999 and 1998 also consisted of minority interest, summarized as follows:
As of December 31, ----------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------------- Short-term debt $ 235 $ 31 $ 31 Long-term debt 1,862 1,548 1,548 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures (QUIPS and TruPS) 1,243 1,250 1,250 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DEBT $ 3,340 $ 2,829 $ 2,829 ------------------------------------------------------------------------------------------------------------------------------ MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ -- $ 491 $ 414 ------------------------------------------------------------------------------------------------------------------------------ Equity excluding unrealized gain (loss) on securities, net of tax $ 6,967 $ 5,664 $ 5,612 Unrealized gain (loss) on securities, net of tax 497 (198) 811 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 7,464 $ 5,466 $ 6,423 ------------------------------------------------------------------------------------------------------------------------------ TOTAL CAPITALIZATION [2] $ 10,307 $ 8,984 $ 8,855 ------------------------------------------------------------------------------------------------------------------------------ Debt to equity [2] [3] 48% 50% 50% Debt to capitalization [2] [3] 32% 31% 32% =================================================================================================================================== [1] Excludes unrealized gain (loss) on securities, net of tax, of $(62) and $51 as of December 31, 1999 and 1998, respectively. [2] Excludes unrealized gain (loss) on securities, net of tax. [3] Excluding QUIPS and TruPS, the debt to equity ratios were 30%, 28% and 28%, and the debt to capitalization ratios were 20%, 18% and 18% as of December 31, 2000, 1999 and 1998, respectively.
ACQUISITIONS On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI that it did not already own. The HLI Repurchase has been recorded as a purchase transaction. Consideration totaled $1.4 billion and resulted in recognition of goodwill (excess of the purchase price over the fair values of the net assets acquired) of $862, which is being amortized on a straight-line basis over a 25 year period. Purchase accounting for this transaction resulted in adjustments to the cost basis of certain assets and liabilities acquired based on assessments of fair value, including the recognition of an asset representing the present value of estimated net cash flows (present value of the future gross profits to be earned, PVP) embedded in HLI's existing insurance and investment contracts. The amount of the purchase price allocated to PVP was $801. PVP is amortized to expense in relation to the estimated gross profits on those contracts, and interest is accreted on the unamortized balance. For the year ended December 31, 2000, amortization of PVP amounted to $47. Amortization of all purchase adjustments, excluding goodwill, will not have a significant impact on the Company's ongoing results of operations. - 42 - Purchase consideration for the transaction was as follows: Issuance of: ----------- Common stock from treasury (7.25 million shares @ $54.90 per share) $ 398 Long-term notes: $250 7.75% notes due June 15, 2005 244 $275 7.90% notes due June 15, 2010 272 Commercial paper 400 ----------------------------------------------------------------- Consideration raised 1,314 Other, including conversion of HLI employee stock options and restricted shares 102 ----------------------------------------------------------------- Total consideration $1,416 ================================================================= CAPITALIZATION The Hartford's total capitalization, excluding unrealized gain (loss) on securities, net of tax, increased by $1.3 billion as of December 31, 2000 compared to December 31, 1999. This change was primarily the result of earnings and financing activities related to The HLI Repurchase, partially offset by dividends declared and the effect of treasury stock acquired in the first quarter of 2000. The Hartford's total capitalization, excluding unrealized gain (loss) on securities, net of tax, increased by $129 in 1999 from 1998. This change primarily was the result of earnings, partially offset by dividends declared on The Hartford's common stock and the effect of treasury stock acquired, net of reissuances for incentive and stock purchase plans. On November 9, 2000, The Hartford filed with the Securities and Exchange Commission a shelf registration statement and a prospectus, as amended on January 31, 2001, for the potential offering and sale of up to $2.6 billion in debt and equity securities. (For a further discussion of the shelf registration, see Note 6 of Notes to Consolidated Financial Statements.) DEBT On June 16, 2000, The Hartford issued and sold $525 of unsecured redeemable long-term debt. On June 23, 2000, The Hartford issued $400 of commercial paper. Proceeds from the debt issuances were used to partially fund The HLI Repurchase. The Company used proceeds from the sale of Zwolsche to pay off all the $400 of commercial paper on December 29, 2000. (For additional information regarding debt, see Note 6 of Notes to Consolidated Financial Statements.) On March 1, 2001, HLI issued and sold $400 of senior debt securities from its existing shelf registration. (For additional information, see Note 17 of Notes to Consolidated Financial Statements.) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (QUIPS AND TRUPS) On March 6, 2001, HLI issued and sold $200 of trust preferred securities from its existing shelf registration. (For additional information, see Note 17 of Notes to Consolidated Financial Statements.) For a further discussion of Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures, see Note 7 of Notes to Consolidated Financial Statements. STOCKHOLDERS' EQUITY Issuance of common stock from treasury - On June 8, 2000, The Hartford issued 7.25 million shares of common stock in a block trade to Goldman, Sachs & Co. for $398. The shares were issued out of treasury. The Hartford used the net proceeds from the issuance of the shares to partially fund The HLI Repurchase. Dividends - The Hartford declared $214 and paid $210 in dividends to shareholders in 2000 and declared $209 and paid $207 in 1999. On October 19, 2000, The Hartford declared a dividend on its common stock of $0.25 per share payable on January 2, 2001 to shareholders of record as of December 1, 2000. Treasury Stock - In December 1997, The Hartford's Board of Directors authorized the repurchase of up to $1.0 billion of the Company's outstanding common stock over a three-year period beginning with the first quarter of 1998. The Hartford completed the $1.0 billion repurchase authorization during 1999 by repurchasing 9.2 million shares of its common stock in the open market at a total cost of $453. In October 1999, The Hartford's Board of Directors authorized the repurchase of up to an additional $1.0 billion of the Company's outstanding common stock. This repurchase authorization was effective in November 1999 and covers a three-year period. For the year ended December 31, 2000, The Hartford repurchased 2.8 million shares of its common stock in the open market at a total cost of $100. Since the inception of the 1999 repurchase program, The Hartford has repurchased 5.9 million shares at a total cost of $243. Certain of these repurchased shares have been reissued pursuant to certain stock-based benefit plans. During the first quarter of 2000 and in conjunction with The HLI Repurchase, management elected to discontinue repurchase activity. Unrealized Gain (Loss) - Unrealized gain (loss) on securities, net of tax, increased by $695 as of December 31, 2000 compared to December 31, 1999. The change resulted primarily from the impact of decreased interest rates on the fixed maturity portfolio. Subsequent Event - On February 16, 2001, The Hartford issued 10 million shares of common stock pursuant to an underwritten offering for net proceeds of $615. (For additional information, see Note 17 of Notes to Consolidated Financial Statements.) - 43 - RATINGS The following table summarizes The Hartford's significant U.S. member companies' financial ratings from the major independent rating organizations as of February 28, 2001. A.M. FITCH STANDARD BEST [1] & POOR'S MOODY'S ----------------------------------------------------------------- INSURANCE RATINGS: Hartford Fire A+ AA AA Aa3 Hartford Life Insurance Company A+ AA+ AA Aa3 Hartford Life & Accident A+ AA+ AA Aa3 Hartford Life & Annuity A+ AA+ AA Aa3 ----------------------------------------------------------------- OTHER RATINGS: The Hartford Financial Services Group, Inc.: Senior debt a+ A+ A A2 Commercial paper AMB-1 F-1 A-1 P-1 Hartford Capital I and II quarterly income preferred securities [2] a- A BBB+ a2 Hartford Life, Inc.: Senior debt a+ A+ A A2 Commercial paper -- F-1 A-1 P-1 Hartford Life, Inc.: Capital I trust preferred securities [2] a- A BBB+ a2 ================================================================= [1] Formerly Duff & Phelps [2] A.M. Best ratings were adjusted to reflect the integration of A.M. Best's debt and preferred stock scales. Ratings are an important factor in establishing the competitive position of an insurance company such as The Hartford. There can be no assurance that the Company's ratings will continue for any given period of time or that they will not be changed. On January 26, 2001, Moody's confirmed the insurance and debt financial ratings of The Hartford Financial Services Group, Inc. and HLI following the announcement of the Fortis acquisition, but changed the outlook on both companies' debt ratings to negative from stable. Moody's stated that the revision in debt ratings outlook was based upon Moody's concerns that the Fortis acquisition would increase The Hartford's operating and financial leverage over the medium term and fixed charge coverage would weaken. The revision in ratings outlook does not constitute a ratings "downgrade", nor has Moody's placed the Company on its "watchlist" for possible downgrade. LIQUIDITY REQUIREMENTS The liquidity requirements of The Hartford have been and will continue to be met by funds from operations as well as the issuance of commercial paper, debt securities and its credit facility. The principal sources of operating funds are premiums and investment income as well as maturities and sales of invested assets. The Hartford Financial Services Group, Inc. is a holding company which receives operating cash flow in the form of dividends from its subsidiaries, enabling it to service debt, pay dividends on its common stock and pay business expenses. Dividends to The Hartford Financial Services Group, Inc. from its subsidiaries are restricted. The payment of dividends by Connecticut-domiciled insurers is limited under the insurance holding company laws of Connecticut. Under these laws, the insurance subsidiaries may only make their dividend payments out of restricted surplus. These laws require notice to and approval by the state insurance commissioner for the declaration or payment of any dividend, which, together with other dividends or distributions made within the preceding twelve months, exceeds the greater of (i) 10% of the insurer's policyholder surplus as of December 31 of the preceding year or (ii) net income (or net gain from operations, if such company is a life insurance company) for the twelve-month period ending on the thirty-first day of December last preceding, in each case determined under statutory insurance accounting policies. In addition, if any dividend of a Connecticut-domiciled insurer exceeds the insurer's earned surplus, it requires the prior approval of the Connecticut Insurance Commissioner. The insurance holding company laws of the other jurisdictions in which The Hartford's insurance subsidiaries are incorporated (or deemed commercially domiciled) generally contain similar (although in certain instances somewhat more restrictive) limitations on the payment of dividends. As of December 31, 2000, the maximum amount of statutory dividends which may be paid to The Hartford Financial Services Group, Inc. from its insurance subsidiaries in 2001, without prior regulatory approval, is $779. The primary uses of funds are to pay claims, policy benefits, operating expenses and commissions, and to purchase new investments. In addition, The Hartford has a policy of carrying a significant short-term investment position and accordingly does not anticipate selling intermediate- and long-term fixed maturity investments to meet any liquidity needs. (For a discussion of the Company's investment objectives and strategies, see the Investments and Capital Markets Risk Management sections.) RISK-BASED CAPITAL The National Association of Insurance Commissioners ("NAIC") has regulations establishing minimum capitalization requirements based on risk-based capital ("RBC") formulas for both life and property and casualty companies. The requirements consist of formulas, which identify companies that are undercapitalized and require specific regulatory actions. The RBC formula for life companies establishes capital requirements relating to insurance, business, asset and interest rate risks. RBC is calculated for property and casualty companies after adjusting capital for certain underwriting, asset, credit and off-balance sheet risks. As of December 31, 2000, each of The Hartford's insurance subsidiaries within Worldwide Life and Worldwide Property & Casualty had more than sufficient capital to meet the NAIC's RBC requirements. - 44 - CASH FLOW 2000 1999 1998 ---------------------------------------------------------------- Net cash provided by operating activities $ 2,350 $ 891 $ 907 Net cash (used for) provided by investing activities $ (2,079) $ 2,279 $ 411 Net cash used for financing activities $ (208) $ (3,104) $ (1,340) Cash - end of year $ 227 $ 182 $ 123 ---------------------------------------------------------------- 2000 COMPARED TO 1999 -- The increase in operating cash flow was primarily the result of growth in Worldwide Life business, along with favorable underwriting cash flows in Worldwide Property & Casualty. The decrease in cash used for financing activities was attributable to net financing for The HLI Repurchase as well as a lower level of disbursements for investment type contracts related to the leveraged block of COLI business. The financing activities, along with the increase in cash provided by operating activities, accounted for the change in cash from investing activities. 1999 COMPARED TO 1998 -- Operating cash flow decreased slightly in 1999 compared to 1998. The change in both investing and financing cash flows was primarily the result of an increase in disbursements for investment type contracts related to the leveraged COLI block of business. Operating cash flows in each of the last three years have been more than adequate to meet liquidity requirements. SUBSEQUENT EVENT On January 25, 2001, The Hartford agreed to acquire the U.S. individual life insurance, annuity and mutual fund businesses of Fortis for $1.12 billion in cash. The Company will effect 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. The Fortis transaction, which is subject to insurance regulatory approval and other customary conditions, is expected to be completed in the second quarter of 2001. The acquisition will be reported as a purchase transaction. The Company plans to finance the transaction through the issuance of debt and equity securities. (For additional information, see Note 17 of Notes to Consolidated Financial Statements.) -------------------------------------------------------------------------------- REGULATORY MATTERS AND CONTINGENCIES -------------------------------------------------------------------------------- LEGISLATIVE INITIATIVES The business of insurance is primarily regulated by the states and is also affected by a range of legislative developments at the state and federal levels. Passage in November 1999 of the Financial Services Modernization Act, which permits affiliations among banks, insurance companies and securities firms, may have competitive, operational and other implications for the Company. Among other provisions, the measure includes privacy protections requiring all financial service providers to disclose their privacy policies and restrict the sharing of personal information for marketing purposes. Various states are considering even more restrictive privacy measures that could potentially affect the Company's operations. Enactment of the Financial Services Modernization Act at the federal level has also focused renewed attention on state regulation of insurance. Elements of the insurance industry are involved in a countrywide initiative to streamline regulatory procedures, notably the elimination of rate and form filing requirements for property and casualty lines. Altogether, about half the states have considered a variety of such measures, which could result in reduced transaction costs and improved speed to market. Federal measures which have been previously considered by Congress and which, if adopted, could affect the insurance business, include tax law changes pertaining to the tax treatment of insurance companies and life insurance products, as well as changes in individual income tax rates and the estate tax, a number of which changes could have an impact on the relative desirability of various personal investment vehicles. Other proposals pertain to medical testing for insurability, and the use of gender in determining insurance and pension rates and benefits. It is too early to determine whether any of these proposals will ultimately be enacted by Congress. Therefore, the potential impact to the Company's financial condition or results of operations cannot be reasonably estimated at this time. Congress is expected to continue to consider reform of the Superfund hazardous waste cleanup program and the creation of a centralized mechanism for handling asbestos injury claims. Both proposals have the potential to reduce claim exposures; however, enactment of such legislation may not occur in the current Congress. Proposed legislation to reduce abusive class-action lawsuits would also have a beneficial impact, but prospects for near-term enactment are likewise uncertain. So-called "patient protection" legislation introduced in Congress and passed in many states includes provisions permitting lawsuits against health maintenance organizations ("HMOs") for denial of coverage. Although the Company is not a health insurer or health care provider, passage of such legislation could affect medical claim costs to the extent that HMOs were constrained from actively managing care. INSOLVENCY FUND In all states, insurers licensed to transact certain classes of insurance are required to become members of an insolvency fund. In most states, in the event of the insolvency of an insurer writing any such class of insurance in the state, members of the fund are assessed to pay certain claims of the insolvent insurer. A particular state's fund assesses its members based on their respective written premiums in the state for the classes of insurance in which the insolvent insurer is engaged. Assessments are generally limited for any year to one or two percent of premiums written per year depending on the state. Such assessments paid by The Hartford approximated $2 in 2000, $4 in 1999 and $12 in 1998. - 45 - NAIC CODIFICATION The NAIC adopted the Codification of Statutory Accounting Principles ("Codification") in March 1998. The effective date for the statutory accounting guidance was January 1, 2001. Each of The Hartford's domiciliary states has adopted Codification, and the Company has made the necessary changes in its statutory reporting required for implementation. The Company has determined that the overall impact of applying the new guidance will result in a one-time statutory cumulative transition benefit of approximately $250 in statutory surplus. DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS The Company distributes its annuity, life and certain property and casualty insurance products through a variety of distribution channels, including broker-dealers, banks, wholesalers, its own internal sales force and other third party organizations. The Company periodically negotiates provisions and renewals of these relationships and there can be no assurance that such terms will remain acceptable to the Company or such third parties. An interruption in the Company's continuing relationship with certain of these third parties could materially affect the Company's ability to market its products. During the first quarter of 1999, the Company modified its existing, exclusive contract with one such third party, Putnam Mutual Funds Corp. ("Putnam") to eliminate the exclusivity provision which will allow both parties to pursue new market opportunities. Putnam is contractually obligated to support and service the related annuity in force block of business and to market, support and service new business. However, there can be no assurance that this contract modification will not adversely impact the Company's ability to distribute Putnam related products. YEAR 2000 As of December 31, 2000, The Hartford had not experienced any Year 2000-related business interruptions arising either from its own systems or those of third parties. As an insurer, The Hartford has received claims from insureds who have incurred losses as a result of Year 2000 issues. Insurance coverage, if any, will depend upon the provisions of the policies and the facts and circumstances of each claim. The Hartford does not believe that the claim and claim adjustment expenses related to such claims will have a material impact upon The Hartford's financial condition or results of operations. OTHER For further information on other contingencies, see Note 15 of Notes to Consolidated Financial Statements. -------------------------------------------------------------------------------- EFFECT OF INFLATION -------------------------------------------------------------------------------- The rate of inflation as measured by the change in the average consumer price index has not had a material effect on the revenues or operating results of The Hartford during the three most recent fiscal years. -------------------------------------------------------------------------------- ACCOUNTING STANDARDS -------------------------------------------------------------------------------- For a discussion of accounting standards, see Note 1 of Notes to Consolidated Financial Statements. - 46 - ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is said forth in the Capital Markets Risk Management section of the Management's Discussion and Analysis of Financial Condition and Results of Operations and is incorporated herein by reference. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA See Index to Consolidated Financial Statements and Schedules elsewhere herein. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE HARTFORD Certain of the information called for by Item 10 is set forth in the definitive proxy statement for the 2001 annual meeting of shareholders (the "Proxy Statement") filed or to be filed by The Hartford with the Securities and Exchange Commission within 120 days after the end of the last fiscal year covered by this Form 10-K under the caption "Item 1. Election of Directors - Directors and Nominees" and "Stock Ownership of Directors, Executive Officers and Certain Shareholders - Compliance with Section 16(a) of the Securities Exchange Act of 1934" and is incorporated herein by reference. Additional information required by Item 10 regarding The Hartford's executive officers is set forth in Item 1 of this Form 10-K under the caption "Executive Officers of The Hartford" and is incorporated herein by reference. ITEM 11. EXECUTIVE COMPENSATION The information called for by Item 11 is set forth in the Proxy Statement under the captions "Compensation of Executive Officers" and "The Board of Directors and its Committees - Directors' Compensation" and is incorporated herein by reference. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information called for by Item 12 is set forth in the Proxy Statement under the caption "Stock Ownership of Directors, Executive Officers and Certain Shareholders" and is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K (a) Documents filed as a part of this report: 1. CONSOLIDATED FINANCIAL STATEMENTS. See Index to Consolidated Financial Statements elsewhere herein. 2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. See Index to Consolidated Financial Statement Schedules elsewhere herein. 3. EXHIBITS. See Exhibit Index elsewhere herein. (b) Reports on Form 8-K - The Hartford has filed no reports on Form 8-K during the quarter ended December 31, 2000. (c) See Item 14(a)(3). (d) See Item 14(a)(2). - 47 - INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Page(s) Report of Management F-1 Report of Independent Public Accountants F-2 Consolidated Statements of Income for the three years ended December 31, 2000 F-3 Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 2000 F-5-6 Consolidated Statements of Cash Flows for the three years ended December 31, 2000 F-7 Notes to Consolidated Financial Statements F-8-31 Summary of Investments - Other Than Investments in Affiliates S-1 Condensed Financial Information of The Hartford Financial Services Group, Inc. S-2-3 Supplementary Insurance Information S-4 Reinsurance S-5 Valuation and Qualifying Accounts S-6 Supplemental Information Concerning Property and Casualty Insurance Operations S-7 REPORT OF MANAGEMENT The management of The Hartford Financial Services Group, Inc. and its subsidiaries ("The Hartford") is responsible for the preparation and integrity of information contained in the accompanying consolidated financial statements and other sections of the Annual Report. The financial statements are prepared in accordance with accounting principles generally accepted in the United States and, where necessary, include amounts that are based on management's informed judgments and estimates. Management believes these statements present fairly The Hartford's financial position and results of operation, and that any other information contained in the Annual Report is consistent with the financial statements. Management has made available The Hartford's financial records and related data to Arthur Andersen LLP, independent public accountants, in order for them to perform an audit of The Hartford's consolidated financial statements. Their report appears on page F-2. An essential element in meeting management's financial responsibilities is The Hartford's system of internal controls. These controls, which include accounting controls and the internal auditing program, are designed to provide reasonable assurance that assets are safeguarded, and transactions are properly authorized, executed and recorded. The controls, which are documented and communicated to employees in the form of written codes of conduct and policies and procedures, provide for careful selection of personnel and for appropriate division of responsibility. Management continually monitors for compliance, while The Hartford's internal auditors independently assess the effectiveness of the controls and make recommendations for improvement. Also, Arthur Andersen LLP took into consideration The Hartford's system of internal controls in determining the nature, timing and extent of their audit tests. Another important element is management's recognition of its responsibility for fostering a strong, ethical climate, thereby ensuring that The Hartford's affairs are transacted according to the highest standards of personal and professional conduct. The Hartford has a long-standing reputation of integrity in business conduct and utilizes communication and education to create and fortify a strong compliance culture. The Audit Committee of the Board of Directors of The Hartford, composed of independent directors, meets periodically with the external and internal auditors to evaluate the effectiveness of work performed by them in discharging their respective responsibilities and to ensure their independence and free access to the Committee. F-1 REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS TO THE HARTFORD FINANCIAL SERVICES GROUP, INC.: We have audited the accompanying Consolidated Balance Sheets of The Hartford Financial Services Group, Inc. (a Delaware corporation) and its subsidiaries as of December 31, 2000 and 1999, and the related Consolidated Statements of Income, Changes in Stockholders' Equity and Cash Flows for each of the three years in the period ended December 31, 2000. These consolidated financial statements and the schedules referred to below are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and the schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of The Hartford Financial Services Group, Inc. and its subsidiaries as of December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States. Our audits were made for the purpose of forming an opinion on the basic financial statements taken as a whole. The schedules listed in the Index to Consolidated Financial Statements and Schedules are presented for the purpose of complying with the Securities and Exchange Commission's rules and are not part of the basic financial statements. These schedules have been subjected to the auditing procedures applied in the audits of the basic financial statements and, in our opinion, fairly state in all material respects the financial data required to be set forth therein in relation to the basic financial statements taken as a whole. ARTHUR ANDERSEN LLP Hartford, Connecticut January 25, 2001 (except with respect to the matters discussed in Notes 6, 7, 8 and 17, as to which the date is March 6, 2001) F-2
THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME For the years ended December 31, ----------------------------------------------------- (In millions, except for per share data) 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------- REVENUES Earned premiums $ 8,941 $ 8,342 $ 9,021 Fee income 2,493 2,112 2,106 Net investment income 2,674 2,627 3,102 Other revenue 450 413 489 Net realized capital gains 145 34 304 ---------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 14,703 13,528 15,022 -------------------------------------------------------------------------------------------------------------------- BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 8,419 7,902 8,613 Amortization of deferred policy acquisition costs 2,213 2,011 2,020 Insurance operating costs and expenses 1,958 1,779 2,315 Other expenses 695 601 599 ---------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 13,285 12,293 13,547 -------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 1,418 1,235 1,475 Income tax expense 390 287 388 ---------------------------------------------------------------------------------------------------------------------------- Income before minority interest 1,028 948 1,087 Minority interest in consolidated subsidiary (54) (86) (72) ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 974 $ 862 $ 1,015 ---------------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 4.42 $ 3.83 $ 4.36 Diluted earnings per share $ 4.34 $ 3.79 $ 4.30 ---------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 220.6 224.9 232.8 Weighted average common shares outstanding and dilutive potential common shares 224.4 227.5 236.2 ---------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share $ 0.97 $ 0.92 $ 0.85 ============================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-3
THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED BALANCE SHEETS As of December 31, ---------------------------------- (In millions, except for share data) 2000 1999 ------------------------------------------------------------------------------------------- ----------------- ---------------- ASSETS Investments ----------- Fixed maturities, available for sale, at fair value (amortized cost of $33,856 and $33,653) $ 34,492 $ 32,875 Equity securities, available for sale, at fair value (cost of $921 and $937) 1,056 1,286 Policy loans, at outstanding balance 3,610 4,222 Other investments 1,511 758 ------------------------------------------------------------------------------------------- ----------------- ---------------- Total investments 40,669 39,141 Cash 227 182 Premiums receivable and agents' balances 2,295 2,071 Reinsurance recoverables 4,579 4,473 Deferred policy acquisition costs and present value of future profits 5,305 5,038 Deferred income tax 682 1,404 Other assets 3,721 3,075 Separate account assets 114,054 111,667 ------------------------------------------------------------------------------------------- ----------------- ---------------- TOTAL ASSETS $ 171,532 $ 167,051 =================================================================================== ================= ================ LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 15,874 $ 16,014 Life 7,105 6,564 Other policyholder funds and benefits payable 15,848 16,884 Unearned premiums 3,093 2,777 Short-term debt 235 31 Long-term debt 1,862 1,548 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,243 1,250 Other liabilities 4,754 4,421 Separate account liabilities 114,054 111,667 ------------------------------------------------------------------------------------------- ----------------- ---------------- 164,068 161,156 COMMITMENTS AND CONTINGENCIES, NOTE 15 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -- 429 STOCKHOLDERS' EQUITY Common stock - authorized 400,000,000, issued 238,645,675 shares, par value $0.01 2 2 Additional paid-in capital 1,686 1,551 Retained earnings 5,887 5,127 Treasury stock, at cost - 12,355,414 and 21,419,460 shares (480) (942) Accumulated other comprehensive income (loss) 369 (272) ------------------------------------------------------------------------------------------- ----------------- ---------------- TOTAL STOCKHOLDERS' EQUITY 7,464 5,466 =================================================================================== ================= ================ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 171,532 $ 167,051 =================================================================================== ================= ================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4
THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FOR THE YEAR ENDED DECEMBER 31, 2000 Accumulated Other Comprehensive Income (Loss) --------------------------------------- Common Minimum Stock/ Unrealized Pension Additional Treasury Gain (Loss) Cumulative Liability Outstanding Paid-in Retained Stock, on Securities Translation Adjustment, Shares (In millions) Capital Earnings at Cost net of taz Adjustments net of tax Total (In thousands) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF YEAR $1,553 $5,127 $(942) $(198) $(63) $(11) $5,466 217,226 Comprehensive income Net income 974 974 Other comprehensive income, net of tax [1] Unrealized gain on securities [2] 695 695 Cumulative translation adjustments (50) (50) Minimum pension liability adjustment (4) (4) ---------- Total other comprehensive income 641 ---------- Total comprehensive income 1,615 ---------- Issuance of shares under incentive and stock purchase plans (51) 212 161 4,460 Issuance of common stock from treasury 56 342 398 7,250 Conversion of Hartford Life, Inc. employee stock options and restricted shares 84 8 92 186 Tax benefit on employee stock options and awards 46 46 Treasury stock acquired (100) (100) (2,832) Dividends declared on common stock (214) (214) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF YEAR $1,688 $5,887 $(480) $497 $(113) $(15) $7,464 226,290 ====================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1999 Accumulated Other Comprehensive Income (Loss) --------------------------------------- Common Minimum Stock/ Unrealized Pension Additional Treasury Gain (Loss) Cumulative Liability Outstanding Paid-in Retained Stock, on Securities Translation Adjustment, Shares (In millions) Capital Earnings at Cost net of taz Adjustments net of tax Total (In thousands) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF YEAR $1,593 $4,474 $(455) $811 $-- $-- $6,423 227,395 Comprehensive income Net income 862 862 Other comprehensive income (loss), net of tax [1] Unrealized gain (loss) on securities [2] (1,009) (1,009) Cumulative translation adjustments (63) (63) Minimum pension liability adjustment (11) (11) ----------- Total other comprehensive income (loss) (1,083) ----------- Total comprehensive income (loss) (221) ----------- Issuance of shares under incentive and stock purchase plans (54) 106 52 2,109 Tax benefit on employee stock options and awards 17 17 Treasury stock acquired (3) (593) (596) (12,278) Dividends declared on common stock (209) (209) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF YEAR $1,553 $5,127 $(942) $(198) $(63) $(11) $5,466 217,226 ==================================================================================================================================== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Changes in Stockholders' Equity FOR THE YEAR ENDED DECEMBER 31, 1998 Accumulated Other Comprehensive Income ---------------------------------- Common Stock/ Treasury Cumulative Outstanding Additional Retained Stock, Unrealized Gain on Translation Shares (In millions) Paid-in Capital Earnings at Cost Securities, net of tax Adjustments Total (In thousands) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF YEAR $1,643 $3,658 $(48) $853 $(21) $6,085 235,952 Comprehensive income Net income 1,015 1,015 Other comprehensive income (loss), net of tax [1] Unrealized gain (loss) on securities [2] (42) (42) Cumulative translation adjustments 21 21 ----------- Total other comprehensive income (loss) (21) ----------- Total comprehensive income 994 ----------- Issuance of shares under incentive and stock purchase plans (2) 70 68 2,203 Tax benefit on employee stock options and awards 22 22 Treasury stock acquired (70) (477) (547) (10,760) Dividends declared on common stock (199) (199) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF YEAR $1,593 $4,474 $(455) $811 $-- $6,423 227,395 ==================================================================================================================================== [1] Unrealized gain (loss) on securities is net of tax of $370, $(546) and $(17) for the years ended December 31, 2000, 1999 and 1998, respectively. There is no tax effect on cumulative translation adjustments. Minimum pension liability adjustment is net of tax of $(2) and $(6) for the years ended December 31, 2000 and 1999, respectively. [2] Net of reclassification adjustment for gains (losses) realized in net income of $(57), $25 and $166 for the years ended December 31, 2000, 1999 and 1998, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6
THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, -------------------------------------------------- (In millions) 2000 1999 1998 --------------------------------------------------------------------------------- ---------------- ----------------- --------------- OPERATING ACTIVITIES Net income $ 974 $ 862 $ 1,015 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Change in receivables, payables and accruals 126 132 (28) Change in reinsurance recoverables (85) 126 622 Amortization of deferred policy acquisition costs 2,213 2,011 2,020 Additions to deferred policy acquisition costs (2,573) (2,498) (2,600) Change in accrued and deferred income taxes 398 166 (67) Increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 1,130 454 266 Minority interest in consolidated subsidiary 54 86 72 Net realized capital gains (145) (34) (304) Depreciation and amortization 63 58 89 Other, net 195 (472) (178) --------------------------------------------------------------------------------- ---------------- ----------------- --------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,350 891 907 ================================================================================= ================ ================= =============== INVESTING ACTIVITIES Purchase of investments (15,104) (13,172) (15,473) Sale of investments 11,985 13,525 13,681 Maturity of investments 2,001 2,098 2,156 Purchase of minority interest in HLI (1,329) -- -- Sale (purchase) of other affiliates 483 (52) 155 Additions to property, plant and equipment (115) (120) (108) --------------------------------------------------------------------------------- ---------------- ----------------- --------------- NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (2,079) 2,279 411 ================================================================================= ================ ================= =============== FINANCING ACTIVITIES Short-term debt, net 4 -- (60) Issuance of long-term debt 516 -- 200 Repayment of long-term debt -- -- (200) Issuance of common stock from treasury 398 -- -- Net proceeds from issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures -- -- 250 Net disbursements for investment and universal life-type contracts charged against policyholder accounts (947) (2,356) (835) Dividends paid (210) (207) (197) Acquisition of treasury stock (100) (596) (547) Proceeds from issuances of shares under incentive and stock purchase plans 131 55 49 --------------------------------------------------------------------------------- ---------------- ----------------- --------------- NET CASH USED FOR FINANCING ACTIVITIES (208) (3,104) (1,340) ================================================================================= ================ ================= =============== Foreign exchange rate effect on cash (18) (7) 5 --------------------------------------------------------------------------------- ---------------- ----------------- --------------- Net increase (decrease) in cash 45 59 (17) Cash - beginning of year 182 123 140 --------------------------------------------------------------------------------- ---------------- ----------------- --------------- CASH - END OF YEAR $ 227 $ 182 $ 123 ================================================================================= ================ ================= =============== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: ------------------------------------------------ NET CASH PAID DURING THE YEAR FOR: Income taxes $ 95 $ 41 $ 407 Interest $ 248 $ 214 $ 220 NONCASH INVESTING ACTIVITIES ---------------------------- For the year ended December 31, 1998, due to the recapture of an in force block of business previously ceded to MBL Life Assurance Co. of New Jersey, reinsurance recoverables of $4,753 were exchanged for the fair value of assets comprised of $4,310 in policy loans and $443 in other net assets.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-7 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in millions, except per share data, unless otherwise stated) 1. SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PRESENTATION The Hartford Financial Services Group, Inc. and its consolidated subsidiaries ("The Hartford" or the "Company") provide life and property and casualty insurance to both individual and commercial customers in the United States and internationally. On December 22, 2000, The Hartford completed the sale of its Netherlands-based Zwolsche Algemeene N.V. ("Zwolsche") subsidiary to Assurances Generales de France, a subsidiary of Allianz AG. For purposes of these financial statements, Zwolsche's operating results are included in The Hartford's Consolidated Statements of Income through the date of sale. On June 27, 2000, The Hartford acquired all of the outstanding shares of Hartford Life, Inc. ("HLI") that it did not already own ("The HLI Repurchase"). The accompanying consolidated financial statements reflect the minority interest in HLI of approximately 19% prior to the acquisition date. (For a further discussion of The HLI Repurchase, see Note 2.) On November 16, 1998, The Hartford completed the sale of its United Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh") subsidiary. For purposes of these financial statements, London & Edinburgh's operating results are included in The Hartford's Consolidated Statements of Income through the date of sale. (For additional information, see Note 19.) The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States which differ materially from the accounting prescribed by various insurance regulatory authorities. All material intercompany transactions and balances between The Hartford, its subsidiaries and affiliates have been eliminated. The preparation of financial statements, in conformity with accounting principles generally accepted in the United States, 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 deferred policy acquisition costs and the liability for future policy benefits, unpaid claims and claim adjustment expenses. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. Certain reclassifications have been made to prior year financial information to conform to the current year classification of transactions and accounts. (B) ADOPTION OF NEW ACCOUNTING STANDARDS In March 2000, the Financial Accounting Standards Board ("FASB") issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of APB Opinion No. 25" ("FIN 44" or "the Interpretation"). FIN 44 clarifies the application of APB Opinion No. 25 regarding the definition of employee, the criteria for determining a non-compensatory plan, the accounting for changes to the terms of a previously fixed stock option or award, the accounting for an exchange of stock compensation awards in a business combination, and other stock compensation related issues. FIN 44 became effective July 1, 2000, with respect to new awards, modifications to outstanding awards, and changes in grantee status that occur on or after that date. The adoption of FIN 44 did not have a material impact on the Company's financial condition or results of operations. Effective January 1, 2000, The Hartford adopted Statement of Position ("SOP") No. 98-7, "Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk". This SOP provides guidance on the method of accounting for insurance and reinsurance contracts that do not transfer insurance risk, defined in the SOP as the deposit method. Adoption of this SOP did not have a material impact on the Company's financial condition or results of operations. In December 1999, the staff of the Securities and Exchange Commission issued Staff Accounting Bulletin No. 101, "Revenue Recognition in Financial Statements" ("SAB 101"). SAB 101 provides that if registrants have not applied the accounting therein, they should implement the SAB and report a change in accounting principle. SAB 101, as subsequently amended, became effective for the Company in the fourth quarter of 2000. The adoption of SAB 101 did not have a material impact on the Company's financial condition or results of operations. Effective January 1, 1999, The Hartford adopted SOP No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". This SOP provides guidance on accounting for costs of internal use software and in determining whether software is for internal use. The SOP defines internal use software as software that is acquired, internally developed, or modified solely to meet internal needs and identifies stages of software development and accounting for the related costs incurred during the stages. Adoption of this SOP did not have a material impact on the Company's financial condition or results of operations. Effective January 1, 1999, The Hartford adopted SOP No. 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments". This SOP addresses accounting by insurance and other enterprises for assessments related to insurance activities including recognition, measurement and disclosure of guaranty fund or other assessments. Adoption of this SOP did not have a material impact on the Company's financial condition or results of operations. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (B) ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED) In November 1998, the Emerging Issues Task Force ("EITF") reached consensus on Issue 98-15, "Structured Notes Acquired for a Specific Investment Strategy". This pronouncement requires companies to account for structured notes acquired for a specific investment strategy as a unit. Affected companies that entered into these notes prior to September 25, 1998 are required to either restate prior period financial statements to conform with the prescribed unit accounting model, or disclose the related impact on earnings for all periods presented and cumulatively over the life of the instruments had the registrant accounted for the structure as a unit. Cumulatively, over the period that the Company held the instrument, net income would have been unchanged as the Company disposed of its remaining structured note in September 2000. The Hartford's cash flows were not impacted by adopting these changes in accounting principles. (C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS In October 2000, the FASB issued Statement of Financial Accounting Standards ("SFAS") No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a Replacement of FASB Statement No. 125". SFAS No. 140 revises the criteria for accounting for certain transfers of financial assets and the reporting and disclosure requirements for collateral arrangements. Implementation of the provisions of SFAS No. 140 is not expected to have a material impact on the Company's financial condition or results of operations. In July 2000, the EITF reached consensus on Issue No. 99-20, "Recognition of Interest Income and Impairment on Certain Investments". This pronouncement requires investors in certain asset-backed securities to record changes in their estimated yield on a prospective basis and to evaluate these securities for an other than temporary decline in value. This consensus is effective for financial statements with fiscal quarters beginning after March 15, 2001. Adoption of EITF No. 99-20 is not expected to have a material impact on the Company's financial condition or results of operations. In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amended SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133 established accounting and reporting requirements for derivative instruments, including certain derivative instruments embedded in other contracts. SFAS No. 133 requires, among other things, that all derivatives be carried on the balance sheet at fair value. SFAS No. 133 also specifies hedge accounting criteria under which a derivative can qualify for special accounting. SFAS No. 138 amended SFAS No. 133 so that for interest rate hedges, a company may designate as the hedged risk, the risk of changes only in a benchmark interest rate. Also, credit risk is newly defined as the company-specific spread over the benchmark interest rate and may be hedged separately from, or in combination with, the benchmark interest rate. Initial application of SFAS No. 133, as amended, for The Hartford began January 1, 2001. Implementation of SFAS No. 133, as amended, is expected to result in a cumulative transition adjustment, decreasing net income by $23 after-tax. However, the FASB's Derivative Implementation Group continues to deliberate on multiple issues, the resolution of which could have a significant impact on the Company's expectations. (D) INVESTMENTS The Hartford's investments in both fixed maturities, which include bonds, redeemable preferred stock and commercial paper, and equity securities, which include common and non-redeemable preferred stocks, are classified as "available for sale" in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". Accordingly, these securities are carried at fair value with the after-tax difference from cost reflected in stockholders' equity as a component of accumulated other comprehensive income. Policy loans are carried at outstanding balance which approximates fair value. Other invested assets consist primarily of partnership investments which are accounted for by the equity method. Non-partnership other invested assets are valued at amortized cost. Realized capital gains (losses) on security transactions associated with the Company's immediate participation guaranteed contracts are recorded and offset by amounts owed to policyholders and were $(9), $2 and $8 for the years ended December 31, 2000, 1999 and 1998, respectively. Under the terms of the contracts, the realized capital gains and losses will be credited to policyholders in future years as they are entitled to receive them. Net realized capital gains and losses, after deducting the life and pension policyholders' share, are reported as a component of revenues and are determined on a specific identification basis. The Company's accounting policy for impairment recognition of investments requires recognition of an other than temporary impairment charge on a security if it is determined that the Company is unable to recover all amounts due under the contractual obligations of the security. In addition, for securities expected to be sold, an other than temporary impairment charge is recognized if the Company does not expect the fair value of a security to recover to cost or amortized cost prior to the expected date of sale. Once an impairment charge has been recorded, the Company then continues to review the other than temporarily impaired securities for appropriate valuation on an ongoing basis. (E) DERIVATIVE INSTRUMENTS HEDGE ACCOUNTING - The Hartford utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options, in compliance with Company policy and in order to achieve one of three Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (E) DERIVATIVE INSTRUMENTS (CONTINUED) or to control transaction costs. The Company is considered an "end-user" of derivative instruments and as such does not make a market or trade in these instruments for the express purpose of earning trading profits. The Hartford's accounting for derivative instruments used to manage risk is in accordance with the concepts established in SFAS No. 80, "Accounting for Futures Contracts", SFAS No. 52, "Foreign Currency Translation", AICPA Issue Paper No. 86-2, "Accounting for Options", and various EITF pronouncements. Written options are used, in all cases in conjunction with other assets and derivatives, as part of the Company's asset and liability management strategy. Derivative instruments are carried at values consistent with the asset or liability being hedged. Derivative instruments used to hedge fixed maturities or equities are carried at fair value with the after-tax difference from cost reflected in stockholders' equity as a component of accumulated other comprehensive income. Derivative instruments used to hedge liabilities are carried at cost. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Initial application of SFAS No. 133, as amended, for The Hartford began for the first quarter of 2001. For further discussion of SFAS No. 133, as amended, see (c) Future Adoption of New Accounting Standards. Derivative instruments must be designated at inception as a hedge and measured for effectiveness both at inception and on an ongoing basis. The Hartford's correlation threshold for hedge designation is 80% to 120%. If correlation, which is assessed monthly or quarterly and measured based on a rolling three-month average, falls outside the range of 80% to 120%, hedge accounting is terminated. Derivative instruments used to create a synthetic asset must meet synthetic accounting criteria including designation at inception and consistency of terms between the synthetic and the instrument being replicated. Synthetic instrument accounting, consistent with industry practice, provides that the synthetic asset is accounted for like the financial instrument it is intended to replicate. Derivative instruments which fail to meet risk management criteria are marked to market with the impact reflected in the Consolidated Statements of Income. FUTURES - Gains or losses on financial futures contracts entered into in anticipation of the future receipt of product cash flows are deferred and, at the time of the ultimate purchase, reflected as an adjustment to the cost basis of the purchased asset. Gains or losses on futures used in invested asset risk management are deferred and adjusted into the cost basis of the hedged asset when the futures contracts are closed, except for futures used in duration hedging which are deferred and adjusted into the cost basis on a quarterly basis. The adjustments to the cost basis are amortized into net investment income over the remaining asset life. FORWARD COMMITMENTS - Open forward commitment contracts are marked to market through stockholders' equity as a component of accumulated other comprehensive income. Such contracts are recorded at settlement by recording the purchase of the specified securities at the previously committed price. Gains or losses resulting from the termination of the forward commitment contracts before the delivery of the securities are recognized immediately in the Consolidated Statements of Income as a component of net investment income. OPTIONS - The cost of options entered into as part of a risk management strategy are adjusted into the basis of the underlying asset or liability and amortized over the remaining life of the hedge. Gains or losses on expiration or termination are adjusted into the basis of the underlying asset or liability and amortized over the remaining life. INTEREST RATE SWAPS - Interest rate swaps involve the periodic exchange of payments without the exchange of underlying principal or notional amounts. Net receipts or payments are accrued and recognized over the life of the swap agreement as an adjustment to income. Should the swap be terminated, the gain or loss is adjusted into the basis of the asset or liability and amortized over the remaining life. Should the hedged asset be sold or liability terminated without terminating the swap position, any swap gains or losses are immediately recognized in earnings. Interest rate swaps purchased in anticipation of an asset purchase (anticipatory transaction) are recognized consistent with the underlying asset components such that the settlement component is recognized in the Consolidated Statements of Income while the change in market value is recognized as an unrealized gain or loss. INTEREST RATE CAPS AND FLOORS - Premiums paid on purchased floor or cap agreements and the premium received on issued cap or floor agreements (used for risk management) are adjusted into the basis of the applicable asset or liability and amortized over the asset or liability life. Gains or losses on termination of such positions are adjusted into the basis of the asset or liability and amortized over the remaining life. Net payments are recognized as an adjustment to income or basis adjusted and amortized depending on the specific hedge strategy. FORWARD EXCHANGE AND CURRENCY SWAPS CONTRACTS - Forward exchange contracts and foreign currency swaps are accounted for in accordance with SFAS No. 52. Changes in the spot rate of instruments designated as hedges of the net investment in a foreign subsidiary are reflected in stockholders' equity as a component of accumulated other comprehensive income. (F) SEPARATE ACCOUNTS The Company maintains separate account assets and liabilities which are reported at fair value. Separate account assets are segregated from other investments, and investment income and gains and losses accrue directly to the policyholders. Separate accounts reflect two categories of risk assumption: non- guaranteed separate accounts, wherein the policyholder assumes the investment risk, and guaranteed separate accounts, wherein the Company contractually guarantees either a minimum return or the account value to the policyholder. (G) DEFERRED POLICY ACQUISITION COSTS WORLDWIDE LIFE - Policy acquisition costs, including commissions and certain other expenses associated with acquiring business, are deferred and amortized over the estimated lives of the contracts, generally 20 years. Generally, acquisition costs are deferred and amortized using the F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (G) DEFERRED POLICY ACQUISITION COSTS (CONTINUED) retrospective deposit method. Under the retrospective deposit method, acquisition costs are amortized in proportion to the present value of expected gross profits from investment, mortality and expense margins, and surrender charges. Actual gross profits can vary from management's estimates resulting in increases or decreases in the rate of amortization. Management periodically reviews these estimates and evaluates the recoverability of the deferred acquisition cost asset. When appropriate, management revises its assumptions on the estimated gross profits of these contracts, and the cumulative amortization for the books of business are reestimated and readjusted by a cumulative charge or credit to income. WORLDWIDE PROPERTY & CASUALTY - Policy acquisition costs, representing commissions, premium taxes and certain other underwriting expenses, are deferred and amortized over policy terms. Estimates of future revenues, including net investment income and tax benefits, are compared to estimates of future costs, including amortization of policy acquisition costs, to determine if business currently in force is expected to result in a net loss. (H) FUTURE POLICY BENEFITS, UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES WORLDWIDE LIFE - Liabilities for future policy benefits are computed by the net level premium method using interest assumptions ranging from 3% to 11% and withdrawal and mortality assumptions appropriate at the time the policies were issued. Claim reserves, which are the result of sales of group long-term and short-term disability, stop loss, and Medicare supplement, are stated at amounts determined by estimates on individual cases and estimates of unreported claims based on past experience. The following table displays the development of the claim reserves (included in future policy benefits in the Consolidated Balance Sheets) resulting primarily from group disability products. For the years ended December 31, -------------------------------- 2000 1999 1998 -------------------------------- BEGINNING CLAIM RESERVES-GROSS $2,128 $1,938 $1,746 Reinsurance recoverables 125 125 71 ----------------------------------------------------------------- BEGINNING CLAIM RESERVES-NET 2,003 1,813 1,675 ----------------------------------------------------------------- INCURRED EXPENSES RELATED TO Current year 1,093 1,013 902 Prior years (11) (33) (48) ----------------------------------------------------------------- TOTAL INCURRED 1,082 980 854 ----------------------------------------------------------------- PAID EXPENSES RELATED TO Current year 410 360 334 Prior years 468 430 382 ----------------------------------------------------------------- TOTAL PAID 878 790 716 ----------------------------------------------------------------- ENDING CLAIM RESERVES-NET 2,207 2,003 1,813 Reinsurance recoverables 177 125 125 ----------------------------------------------------------------- ENDING CLAIM RESERVES-GROSS $2,384 $2,128 $1,938 ================================================================= WORLDWIDE PROPERTY & CASUALTY - The Hartford establishes reserves to provide for the estimated costs of paying claims made by policyholders or against policyholders. These reserves include estimates for both claims that have been reported and those that have been incurred but not reported to The Hartford and include estimates of all expenses associated with processing and settling these claims. This estimation process is primarily based on historical experience and involves a variety of actuarial techniques which analyze trends and other relevant factors. Certain liabilities for unpaid claims, principally for permanently disabled claimants, terminated reinsurance treaties and certain contracts that fund loss run-offs for unrelated parties, have been discounted to present value using an average interest rate of 5.7% in 2000 and 6.3% in 1999. At December 31, 2000 and 1999, such discounted reserves totaled $716 and $768, respectively (net of discounts of $396 and $480, respectively). Amortization of the discount did not have a material effect on net income during 2000, 1999 and 1998, respectively. A reconciliation of liabilities for unpaid claims and claim adjustment expenses follows: For the years ended December 31, -------------------------------- 2000 1999 1998 -------------------------------- BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $16,014 $16,449 $18,376 Reinsurance recoverables 3,271 3,286 4,348 ----------------------------------------------------------------- BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 12,743 13,163 14,028 ----------------------------------------------------------------- ADD PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Current year 5,170 4,953 5,404 Prior years [1] 27 (171) (152) ----------------------------------------------------------------- TOTAL PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES 5,197 4,782 5,252 ----------------------------------------------------------------- LESS PAYMENTS Current year 2,265 2,137 2,275 Prior years 3,069 3,024 2,876 ----------------------------------------------------------------- TOTAL PAYMENTS 5,334 5,161 5,151 ----------------------------------------------------------------- Foreign currency translation (26) (41) (1) Reserves resulting from -- -- 86 acquisitions Other [2] (158) -- (1,051) ----------------------------------------------------------------- ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 12,422 12,743 13,163 Reinsurance recoverables 3,452 3,271 3,286 ----------------------------------------------------------------- ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $15,874 $16,014 $16,449 ================================================================= [1] Excludes the effects of foreign exchange adjustments. [2] 2000 includes $161 related to the sale of Zwolsche. 1998 includes $1,067 related to the sale of London & Edinburgh. (See Note 19.) The Company has an exposure to catastrophe losses which can be caused by significant events including hurricanes, severe winter storms, earthquakes, windstorms and fires. The frequency and severity of catastrophes are unpredictable, and the exposure to a catastrophe is a function of both the total amount insured in an area affected by the event and the severity of the event. Catastrophes generally impact limited geographic areas; however, certain events may produce significant damage in heavily populated areas. The Company generally seeks to reduce its exposure to catastrophe losses through individual risk selection and the purchase of catastrophe reinsurance. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (I) OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE Other policyholder funds and benefits payable include reserves for investment contracts without life contingencies, corporate owned life insurance and universal life insurance contracts. Of the amounts included in this item, $15.6 billion and $16.6 billion, as of December 31, 2000 and 1999, respectively, represent policyholder obligations. The liability for policy benefits for universal life-type contracts is equal to the balance that accrues to the benefit of policyholders, including credited interest, amounts that have been assessed to compensate the Company for services to be performed over future periods, and any amounts previously assessed against policyholders that are refundable on termination of the contract. For investment contracts, policyholder liabilities are equal to the accumulated policy account values, which consist of an accumulation of deposit payments plus credited interest, less withdrawals and amounts assessed through the end of the period. (J) REVENUE RECOGNITION WORLDWIDE LIFE - Fee income for investment and universal life-type contracts consists of policy charges for policy administration, cost of insurance charges and surrender charges assessed against policyholders' account balances and are recognized in the period in which services are provided. Premiums for traditional life insurance are recognized as revenues when due from policyholders. Retrospective and contingent commissions and other related expenses are incurred and recorded in the same period that the retrospective premiums are recorded or other contract provisions are met. WORLDWIDE PROPERTY & CASUALTY - Property and casualty insurance premiums are earned principally on a pro rata basis over the lives of the policies and include accruals for ultimate premium revenue anticipated under auditable and retrospectively rated policies. Unearned premiums represent the portion of premiums written applicable to the unexpired terms of policies in force. Unearned premiums also include estimated and unbilled premium adjustments. Other revenue consists primarily of revenues associated with the Company's servicing businesses. Retrospective and contingent commissions and other related expenses are incurred and recorded in the same period that the retrospective premiums are recorded or other contract provisions are met. (K) FOREIGN CURRENCY TRANSLATION Foreign currency translation gains and losses are reflected in stockholders' equity as a component of accumulated other comprehensive income. Balance sheet accounts are translated at the exchange rates in effect at each year end and income statement accounts are translated at the average rates of exchange prevailing during the year. The national currencies of the international operations are generally their functional currencies. (L) DIVIDENDS TO POLICYHOLDERS Policyholder dividends are accrued using an estimate of the amount to be paid based on underlying contractual obligations under policies and applicable state laws. If limitations exist on the amount of net income from participating life insurance contracts that may be distributed to stockholders, the policyholders' share of net income on those contracts that cannot be distributed is excluded from stockholders' equity by a charge to operations and a credit to a liability. WORLDWIDE LIFE - Participating life insurance in force accounted for 17%, 20% and 22% as of December 31, 2000, 1999 and 1998, respectively, of total life insurance in force. Dividends to policyholders were $67, $104 and $330 for the years ended December 31, 2000, 1999 and 1998, respectively. There were no additional amounts of income allocated to participating policyholders. WORLDWIDE PROPERTY & CASUALTY - Net written premiums for participating property and casualty insurance policies represented 9%, 11% and 13% of total net written premiums for the years ended December 31, 2000, 1999 and 1998, respectively. Dividends to policyholders were $33, $40 and $30 for the years ended December 31, 2000, 1999 and 1998, respectively. (M) MUTUAL FUNDS The Company maintains a retail mutual fund operation, whereby the Company, through wholly-owned subsidiaries, provides investment management and administrative services to The Hartford Mutual Funds, Inc., a family of fourteen mutual funds. The Company charges management 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 and related investment returns are not reflected in the Company's consolidated financial statements since they are not assets, liabilities and operations of the Company. 2. THE HLI REPURCHASE On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI that it did not already own. The HLI Repurchase has been recorded as a purchase transaction. Consideration totaled $1.4 billion and resulted in recognition of goodwill (excess of the purchase price over the fair value of the net assets acquired) of $862, which is being amortized on a straight-line basis over a 25 year period. F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 2. THE HLI REPURCHASE (CONTINUED) Purchase consideration for the transaction was as follows: Issuance of: ----------- Common stock from treasury (7.25 million shares @ $54.90 per share) $ 398 Long-term notes: $250 7.75% notes due June 15, 2005 244 $275 7.90% notes due June 15, 2010 272 Commercial paper 400 ---------------------------------------------------------------- Consideration raised 1,314 Other, including conversion of HLI employee stock options and restricted shares 102 ---------------------------------------------------------------- Total consideration $1,416 ---------------------------------------------------------------- Purchase accounting for this transaction resulted in adjustments to the cost basis of certain assets and liabilities acquired based on assessments of fair value. These adjustments also include the recognition of an asset representing the present value of estimated net cash flows (present value of the future gross profits to be earned, "PVP") embedded in HLI's existing insurance and investment contracts. The amount of the purchase price allocated to PVP was $801. PVP is amortized to expense in relation to the estimated gross profits on those contracts, and interest is accreted on the unamortized balance. For the year ended December 31, 2000, amortization of PVP amounted to $47. Amortization of all purchase adjustments, excluding goodwill, will not have a significant impact on the Company's ongoing results of operations.
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS For the years ended December 31, (A) COMPONENTS OF NET INVESTMENT INCOME 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------------- Interest income $ 2,544 $ 2,530 $ 3,018 Dividends 27 31 32 Other investment income 142 107 91 ---------------------------------------------------------------------------------------------------------------------------------- Gross investment income 2,713 2,668 3,141 Less: Investment expenses 39 41 39 ---------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 2,674 $ 2,627 $ 3,102 ================================================================================================================================== (B) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES) ---------------------------------------------------------------------------------------------------------------------------------- Fixed maturities $ (251) $ (64) $ (64) Equity securities 148 105 302 Real estate and other [1] 239 (5) 74 Change in liability to policyholders for net realized capital (gains) losses 9 (2) (8) ---------------------------------------------------------------------------------------------------------------------------------- NET REALIZED CAPITAL GAINS $ 145 $ 34 $ 304 ================================================================================================================================== [1] 2000 includes a $242, before-tax, gain on the sale of Zwolsche. 1998 includes a $55, before-tax, gain on the sale of London & Edinburgh. ---------------------------------------------------------------------------------------------------------------------------------- (C) UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES Gross unrealized gains $ 230 $ 395 $ 283 Gross unrealized losses (95) (46) (60) Minority interest in consolidated subsidiary -- (4) (3) ---------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains 135 345 220 Deferred income taxes 45 121 76 ---------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains, net of tax 90 224 144 Balance - beginning of year 224 144 274 ---------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES $ (134) $ 80 $ (130) ================================================================================================================================== (D) UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES ---------------------------------------------------------------------------------------------------------------------------------- Gross unrealized gains $ 1,042 $ 271 $ 1,318 Gross unrealized losses (406) (1,049) (178) Minority interest in consolidated subsidiary -- 105 (77) Net unrealized (gains) losses credited to policyholders (10) 24 (32) ---------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) 626 (649) 1,031 Deferred income taxes 219 (227) 364 ---------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses), net of tax 407 (422) 667 Balance - beginning of year (422) 667 579 ---------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES $ 829 $ (1,089) $ 88 ==================================================================================================================================
F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED) (E) FIXED MATURITY INVESTMENTS As of December 31, 2000 ---------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value --------------------------------------------------------------------------------------------------------------------------------- BONDS AND NOTES U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) $ 288 $ 19 $ -- $ 307 U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) - asset-backed 1,651 42 (10) 1,683 States, municipalities and political subdivisions 9,574 502 (30) 10,046 International governments 963 54 (14) 1,003 Public utilities 869 10 (16) 863 All other corporate including international 9,399 192 (258) 9,333 All other corporate - asset-backed 8,000 206 (58) 8,148 Short-term investments 2,091 5 -- 2,096 Certificates of deposit 582 6 (15) 573 Redeemable preferred stock 439 6 (5) 440 --------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED MATURITIES $ 33,856 $ 1,042 $ (406) $ 34,492 =================================================================================================================================
As of December 31, 1999 ----------------------------------------------------------------------- Gross Gross Amortized Unrealized Unrealized Cost Gains Losses Fair Value ---------------------------------------------------------------------------------------------------------------------------------- BONDS AND NOTES U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) $ 331 $ 5 $ (6) $ 330 U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) - asset-backed 1,931 6 (54) 1,883 States, municipalities and political subdivisions 9,656 101 (270) 9,487 International governments 1,444 72 (36) 1,480 Public utilities 1,304 7 (51) 1,260 All other corporate including international 9,260 70 (398) 8,932 All other corporate - asset-backed 6,546 8 (211) 6,343 Short-term investments 2,348 1 -- 2,349 Certificates of deposit 666 -- (17) 649 Redeemable preferred stock 167 1 (6) 162 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED MATURITIES $ 33,653 $ 271 $ (1,049) $ 32,875 ==================================================================================================================================
The amortized cost and estimated fair value of fixed maturity investments at December 31, 2000 by estimated maturity year are shown below. Expected maturities differ from contractual maturities due to call or prepayment provisions. Asset-backed securities, including mortgage-backed securities and collateralized mortgage obligations, are distributed to maturity year based on the Company's estimates of the rate of future prepayments of principal over the remaining lives of the securities. These estimates are developed using prepayment speeds provided in broker consensus data. Such estimates are derived from prepayment speeds experienced at the interest rate levels projected for the applicable underlying collateral. Actual prepayment experience may vary from these estimates. Amortized MATURITY Cost Fair Value ----------------------------------------------------------------- One year or less $ 2,459 $ 2,472 Over one year through five years 9,346 9,406 Over five years through ten years 11,029 11,305 Over ten years 11,022 11,309 ----------------------------------------------------------------- TOTAL $ 33,856 $ 34,492 ================================================================= F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED) (F) SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS Sales of fixed maturities, excluding short-term fixed maturities, for the years ended December 31, 2000, 1999 and 1998 resulted in proceeds of $9.6 billion, $9.8 billion and $9.2 billion, gross gains of $187, $245 and $230 and gross losses of $(429), $(311) and $(302), respectively. Sales of equity security investments for the years ended December 31, 2000, 1999 and 1998 resulted in proceeds of $1.3 billion, $1.3 billion and $2.2 billion, gross gains of $258, $124 and $636 and gross losses of $(110), $(19) and $(334), respectively. (G) CONCENTRATION OF CREDIT RISK The Hartford is not exposed to any credit concentration risk of a single issuer greater than 10% of stockholders' equity. (H) DERIVATIVE INSTRUMENTS The Hartford utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded financial futures and options, in compliance with Company policy and in order to achieve one of three Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transactions costs. The Company is considered an "end-user" of derivative instruments and, as such, does not make a market or trade in these instruments for the express purpose of earning trading profits. The Company uses derivative instruments in its management of market risk consistent with four risk management strategies: hedging anticipated transactions, hedging liability instruments, hedging invested assets and hedging portfolios of assets and/or liabilities. The Company's derivatives counterparty exposure policy establishes market-based credit limits, favors long-term financial stability and creditworthiness, and typically requires credit enhancement/credit risk reducing agreements. Credit risk is measured as the amount owed to The Hartford based on current market conditions and potential payment obligations between the Company and its counterparties. Credit exposures are generally quantified weekly and netted, and collateral is pledged to or held by the Company to the extent that the current value of derivative instruments exceeds exposure policy thresholds. Derivative activities are monitored by an internal compliance unit, reviewed frequently by senior management and reported to The Hartford's Finance Committee. The notional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. Notional amounts pertaining to derivative instruments (excluding guaranteed separate accounts) totaled $5.3 billion at December 31, 2000 and $7.7 billion at December 31, 1999. A summary of derivative instruments for The Hartford, segregated by major investment and liability category, was as follows as of December 31, 2000 and 1999:
2000 AMOUNT HEDGED (NOTIONAL AMOUNTS) ------------------------------------------------------------------------------ Total Purchased Interest Foreign Total Carrying Issued Caps Caps, Floors & Rate Swaps Currency Notional ASSETS HEDGED Value & Floors Options Futures [1] & Forwards Swaps [2] Amount ------------------------------------------------------------------------------------------------------------------------------------ Asset-backed securities (excluding anticipatory) $ 9,831 $ -- $ 15 $ -- $ 1,791 $ -- $ 1,806 Anticipatory [3] -- -- -- 144 -- -- 144 Other bonds and notes 22,565 139 439 -- 1,967 37 2,582 Short-term investments 2,096 -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES 34,492 139 454 144 3,758 37 4,532 Equity securities, policy loans and other investments 6,177 -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 40,669 $ 139 $ 454 $ 144 $ 3,758 $ 37 $ 4,532 OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE $ 15,848 -- 650 -- 124 -- 774 ==================================================================================================================================== TOTAL DERIVATIVE INSTRUMENTS - NOTIONAL VALUE $ 139 $ 1,104 $ 144 $ 3,882 $ 37 $ 5,306 ==================================================================================================================================== TOTAL DERIVATIVE INSTRUMENTS - FAIR VALUE $ (4) $ 11 $ -- $ (2) $ -- $ 5 ====================================================================================================================================
F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED) (H) DERIVATIVE INSTRUMENTS (CONTINUED) 1999 AMOUNT HEDGED (NOTIONAL AMOUNTS) ------------------------------------------------------------------------------ Total Purchased Interest Foreign Total Carrying Issued Caps Caps, Floors & Rate Swaps & Currency Notional ASSETS HEDGED VALUE & Floors Options Futures [1] Forwards Swaps [2] Amount ------------------------------------------------------------------------------------------------------------------------------------ Asset-backed securities (excluding anticipatory) $ 8,227 $ -- $ 15 $ -- $ 1,017 $ -- $ 1,032 Anticipatory [3] -- -- -- 13 232 -- 245 Other bonds and notes 22,299 505 681 -- 3,101 83 4,370 Short-term investments 2,349 -- -- -- -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES 32,875 505 696 13 4,350 83 5,647 Equity securities, policy loans and other investments 6,266 -- -- -- 5 -- 5 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 39,141 $ 505 $ 696 $ 13 $ 4,355 $ 83 $ 5,652 OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE $ 16,884 -- 1,150 -- 848 16 2,014 ==================================================================================================================================== TOTAL DERIVATIVE INSTRUMENTS - NOTIONAL VALUE $ 505 $ 1,846 $ 13 $ 5,203 $ 99 $ 7,666 ==================================================================================================================================== TOTAL DERIVATIVE INSTRUMENTS - FAIR VALUE $ (22) $ 10 $ -- $ (24) $ 6 $ (30) ==================================================================================================================================== [1] As of December 31, 2000 and 1999, 100% of the notional futures contracts mature within one year. [2] As of December 31, 2000 and 1999, 0% and 39%, respectively, of foreign currency swaps mature within one year. In years 2007 to 2009, 80% of the notional value will mature. [3] Deferred gains and losses on anticipatory transactions are included in the carrying value of fixed maturity investments in the Consolidated Balance Sheets. At the time of the ultimate purchase, they are reflected as a basis adjustment to the purchased asset. As of December 31, 2000, the Company had $0.2 of net deferred gains for futures contracts. The Hartford expects the anticipatory transaction to occur in the first quarter of 2001 and the entire $0.2 of net deferred gains will be amortized into income as a hedge of a forecasted transaction. As of December 31, 1999, the Company had $3.4 of net deferred losses for futures contracts and interest rate swaps, which were basis adjusted in 2000.
A reconciliation between notional amounts as of December 31, 2000 and 1999 by derivative type and strategy is as follows:
December 31, 1999 Maturities/ December 31, 2000 Notional Amount Additions Terminations [1] Notional Amount ------------------------------------------------------------------------------------------------------------------------------------ BY DERIVATIVE TYPE Caps $ 1,779 $ -- $ 1,187 $ 592 Floors 405 100 210 295 Swaps/Forwards 5,302 5,403 6,786 3,919 Futures 13 357 226 144 Options 167 426 237 356 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 7,666 $ 6,286 $ 8,646 $ 5,306 ==================================================================================================================================== BY STRATEGY Liability $ 2,014 $ 1,122 $ 2,362 $ 774 Anticipatory 245 625 726 144 Asset 4,271 3,516 4,298 3,489 Portfolio 1,136 1,023 1,260 899 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 7,666 $ 6,286 $ 8,646 $ 5,306 ==================================================================================================================================== [1] During 2000, the Company had no significant gain or loss on terminations of hedge positions using derivative financial instruments.
(I) COLLATERAL ARRANGEMENTS The Hartford entered into various collateral arrangements which require both the pledging and accepting of collateral in connection with its derivative instruments and repurchase agreements. As of December 31, 2000, collateral pledged has not been separately reported in the Consolidated Balance Sheet. The classification and carrying amounts of collateral pledged at December 31, 2000 were as follows: Carrying ASSETS Amount ----------------------------------------------------------------- U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) $ 3 U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) - asset-backed 31 ----------------------------------------------------------------- TOTAL $ 34 ================================================================= F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED) (I) COLLATERAL ARRANGEMENTS (CONTINUED) At December 31, 2000, The Hartford had accepted collateral consisting primarily of U.S. Government securities with a fair value of $252. While The Hartford is permitted by contract to sell or repledge the collateral accepted, none of the collateral had been sold or repledged at December 31, 2000. As of December 31, 2000, all collateral accepted was held in separate custodial accounts. 4. FAIR VALUE OF FINANCIAL INSTRUMENTS SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", requires disclosure of fair value information of financial instruments. For certain financial instruments where quoted market prices are not available, other independent valuation techniques and assumptions are used. Because considerable judgment is used, these estimates are not necessarily indicative of amounts that could be realized in a current market exchange. SFAS No. 107 excludes certain financial instruments from disclosure, including insurance contracts, other than financial guarantees and investment contracts. The Hartford uses the following methods and assumptions in estimating the fair value of each class of financial instrument. Fair value for fixed maturities and marketable equity securities approximates those quotations published by applicable stock exchanges or received from other reliable sources. For policy loans, carrying amounts approximate fair value. Fair value for other invested assets, which primarily consist of partnerships and trusts, is based on external market valuations from partnership and trust management. Other policyholder funds and benefits payable fair value information is determined by estimating future cash flows, discounted at the current market rate. For short-term debt, carrying amounts approximate fair value. Fair value for long-term debt and QUIPS and TruPS (which represent company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures) is based on external valuation using discounted future cash flows at current market interest rates. The fair value of derivative financial instruments, including swaps, caps, floors, futures, options and forward commitments, is determined using an internal pricing model that is similar to external valuation models. Derivative instruments are reported below as a component of other investments. The carrying amounts and fair values of The Hartford's financial instruments at December 31, 2000 and 1999 were as follows: 2000 1999 ---------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value ------------------------------------------------------------------ ASSETS Fixed maturities $34,492 $34,492 $32,875 $32,875 Equity securities 1,056 1,056 1,286 1,286 Policy loans 3,610 3,610 4,222 4,222 Other investments 1,511 1,512 758 774 LIABILITIES Other policyholder funds and benefits payable [1] $11,985 $11,607 $11,991 $11,416 Short-term debt 235 238 31 31 Long-term debt 1,862 1,901 1,548 1,505 QUIPS/TruPS 1,243 1,233 1,250 1,082 ================================================================== [1] Excludes group accident and health and universal life insurance contracts, including corporate owned life insurance. 5. SEPARATE ACCOUNTS The Hartford maintained separate account assets and liabilities totaling $114.1 billion and $111.7 billion at December 31, 2000 and 1999, respectively, which are reported at fair value. Separate account assets, which are segregated from other investments, reflect two categories of risk assumption: non-guaranteed separate accounts totaling $104.3 billion and $102.6 billion at December 31, 2000 and 1999, respectively, wherein the policyholder assumes the investment risk, and guaranteed separate accounts totaling $9.8 billion and $9.1 billion at December 31, 2000 and 1999, respectively, wherein The Hartford contractually guarantees either a minimum return or the account value to the policyholder. Included in the non-guaranteed category were policy loans totaling $697 and $860 at December 31, 2000 and 1999, respectively. Net investment income (including net realized capital gains and losses) and interest credited to policyholders on separate account assets are not reflected in the Consolidated Statements of Income. Separate account management fees and other revenues were $1.4 billion, $1.1 billion and $911 in 2000, 1999 and 1998, respectively. The guaranteed separate accounts include fixed market value adjusted ("MVA") individual annuity and modified guaranteed life insurance. The average credited interest rate on these contracts was 6.6% and 6.5% at December 31, 2000 and 1999, respectively. The assets that support these liabilities were comprised of $9.6 billion and $9.1 billion in fixed maturities as of December 31, 2000 and 1999, respectively, and $127 of other invested assets as of December 31, 2000. The portfolios are segregated from other investments and are managed to minimize liquidity and interest rate risk. In order to minimize the risk of disintermediation associated with early withdrawals, fixed MVA annuity and modified guaranteed life insurance contracts carry a graded surrender charge as well as a market value adjustment. Additional investment risk is hedged using a variety of derivatives which totaled $3 and $(96) in carrying value and $3.5 billion and $2.1 billion in notional amounts as of December 31, 2000 and 1999, respectively. F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. DEBT 2000 1999 ------------------------------------------------------------------------------------- Weighted Average Weighted Average Amount Interest Rate [1] Amount Interest Rate [1] ------------------------------------------------------------------------------------------------------------------------------------ SHORT-TERM DEBT Commercial paper $ 35 6.6% $ 31 6.4% Current maturities of long-term debt 200 8.3% -- -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM DEBT $ 235 8.1% $ 31 6.4% ==================================================================================================================================== LONG-TERM DEBT 8.3% Notes, due 2001 $ -- -- $ 200 8.4% 6.375% Notes, due 2002 300 6.6% 299 6.6% 6.9% Notes, due 2004 199 7.0% 200 7.0% 7.75% Notes, due 2005 245 8.2% -- -- 7.1% Notes, due 2007 198 7.2% 200 7.2% 6.375% Notes, due 2008 200 6.5% 200 6.5% 7.9% Notes, due 2010 274 8.4% -- -- 7.3% Notes, due 2015 199 7.4% 199 7.4% 7.65% Notes, due 2027 247 7.8% 250 7.8% ------------------------------------------------------------------------------------------------------------------------------------ TOTAL LONG-TERM DEBT $ 1,862 7.2% $ 1,548 7.2% ==================================================================================================================================== [1] Represents the effective interest rate at the end of the year.
(A) SHORT-TERM DEBT On June 23, 2000, The Hartford borrowed $400 under its commercial paper program, the proceeds of which were used to partially fund The HLI Repurchase. On December 29, 2000, the Company paid off this borrowing with proceeds received from the sale of Zwolsche (see Note 19). The Hartford's commercial paper ranks equally with its other unsecured and unsubordinated indebtedness. As of December 31, 2000, The Hartford had a $1.5 billion five-year revolving credit facility with one year remaining with twenty-six participating banks. This facility is available for general corporate purposes and to provide additional support to the Company's commercial paper program. At December 31, 2000, there were no outstanding borrowings under the facility. As of December 31, 2000, HLI maintained a $250 five-year revolving credit facility comprised of four participatory banks. This facility, which expires in 2003, is available for general corporate purposes and to provide additional support to HLI's commercial paper program. As of December 31, 2000, there were no outstanding borrowings under the facility or commercial paper program. (B) LONG-TERM DEBT The Hartford's long-term debt securities of The Hartford Financial Services Group, Inc. ("HFSG") are unsecured obligations of HFSG and rank on a parity with all other unsecured and unsubordinated indebtedness of HFSG. On November 9, 2000, The Hartford filed with the Securities and Exchange Commission a shelf registration statement and a prospectus, as amended on January 31, 2001, for the potential offering and sale of up to $2.6 billion in debt and equity securities. Specifically, the registration statement allows for the following types of securities to be offered: debt securities, preferred stock, common stock, depositary shares, warrants, stock purchase contracts, stock purchase units and junior subordinated deferrable interest debentures of the Company, preferred securities of any of one or more capital trusts organized by The Hartford ("The Hartford Trusts") and guarantees by the Company with respect to the preferred securities of any of The Hartford Trusts (see Note 7). This registration statement includes an aggregate of $127 of The Hartford securities remaining under a shelf registration statement filed by The Hartford with the Securities and Exchange Commission on October 11, 1995 and subsequently amended on October 2, 1996. The October 11, 1995 shelf registration, as amended, allowed for the potential offering and sale of up to $2.25 billion in debt and equity securities. As of December 31, 1999, The Hartford had $1.05 billion remaining under this shelf registration. On June 8, 2000, The Hartford issued 7.25 million shares of common stock under the shelf registration for $398. On June 16, 2000, The Hartford issued and sold $525 of unsecured redeemable long-term debt under this shelf. The long-term debt was issued in the form of $250 7.75% five-year notes due June 15, 2005, and $275 7.90% ten-year notes due June 15, 2010. Interest on the notes is payable semi-annually on June 15 and December 15, commencing on December 15, 2000. The Hartford used the net proceeds from the issuance of the common stock and debt to partially fund The HLI Repurchase (see Note 2). On June 8, 1998, HLI filed an omnibus registration statement with the Securities and Exchange Commission for the issuance of up to $1.0 billion of debt and equity securities, including up to $350 of previously registered but unsold securities. HLI had $750 remaining on this shelf registration on December 31, 2000. (C) SUBSEQUENT EVENT On March 1, 2001, HLI issued and sold $400 of senior debt securities from its existing shelf registration. (For additional information, see Note 17.) (D) INTEREST EXPENSE Interest expense incurred related to short- and long-term debt totaled $150, $114 and $125 for 2000, 1999 and 1998, respectively. F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (QUIPS AND TRUPS) (A) DESCRIPTION On June 29, 1998, Hartford Life Capital I, a special purpose Delaware trust formed by HLI, issued 10,000,000, 7.2% Trust Preferred Securities, Series A ("Series A Preferred Securities"). The proceeds from the sale of the Series A Preferred Securities were used to acquire $250 of 7.2% Series A Junior Subordinated Deferrable Interest Debentures ("Junior Subordinated Debentures") issued by HLI. HLI used the proceeds from the offering for the retirement of its outstanding commercial paper, for acquisitions and for other general corporate purposes. The Series A Preferred Securities represent undivided beneficial interests in Hartford Life Capital I's assets, which consist solely of the Junior Subordinated Debentures. HLI owns all of the beneficial interests represented by Series A Common Securities of Hartford Life Capital I. Holders of Series A Preferred Securities are entitled to receive cumulative cash distributions accruing from June 29, 1998, the date of issuance, and payable quarterly in arrears commencing July 15, 1998 at the annual rate of 7.2% of the stated liquidation amount of $25.00 per Series A Preferred Security. Holders of Series A Preferred Securities generally have no voting rights. The Series A Preferred Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures at maturity or upon earlier redemption. HLI has the right to redeem the Junior Subordinated Debentures (i) in whole or in part on or after June 30, 2003, or (ii) at any time, in whole but not in part, in certain circumstances upon the occurrence of certain specified events, in either case at a redemption price equal to accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to the date fixed for redemption plus the principal amount thereof. In addition, prior to June 30, 2003, HLI shall have the right to redeem the Junior Subordinated Debentures at any time, in whole or in part, at a redemption price equal to the accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to the date fixed for redemption, plus the greater of (a) the principal amount thereof or (b) an amount equal to the present value on the redemption date of the interest payments that would have been paid through June 20, 2003, after discounting that amount on a quarterly basis from the originally scheduled date for payment, and the present value on the redemption date of principal, after discounting that amount on a quarterly basis from June 30, 2003, at a discount rate tied to the interest rate on U.S. Treasury securities maturing on June 30, 2003. The Junior Subordinated Debentures bear interest at the annual rate of 7.2% of the principal amount, payable quarterly in arrears commencing June 29, 1998, and mature on June 30, 2038. The Junior Subordinated Debentures are unsecured and rank junior and subordinate in right of payment to all present and future senior debt of HLI and are effectively subordinated to all existing and future liabilities of its subsidiaries. HLI has the right at any time, and from time to time, to defer payments of interest on the Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters up to the debentures' maturity date. During any such period, interest will continue to accrue and HLI may not declare or pay any cash dividends or distributions on, or purchase, HLI's capital stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. HLI will have the right at any time to dissolve the Trust and cause the Junior Subordinated Debentures to be distributed to the holders of the Series A Preferred Securities and the Series A Common Securities. HLI has guaranteed, on a subordinated basis, all of the Hartford Life Capital I obligations under the Series A Preferred Securities, including payment of the redemption price and any accumulated and unpaid distributions upon dissolution, winding up or liquidation to the extent funds are available. On January 19, 1996, The Hartford and several wholly-owned special purpose trusts ("Hartford Trusts") formed by The Hartford filed with the Securities and Exchange Commission a shelf registration statement for the potential offering and sale of $500 of debt securities and preferred stock, including up to an aggregate $500 Junior Subordinated Deferrable Interest Debentures of The Hartford and Preferred Securities of the Hartford Trusts. On February 28, 1996, Hartford Capital I, a special purpose Delaware trust formed by The Hartford, issued 20,000,000 Series A, 7.7% Cumulative Quarterly Income Preferred Securities ("Hartford Series A Preferred Securities"). The proceeds from the sale of Hartford Series A Preferred Securities were used to acquire $500 of Junior Subordinated Deferrable Interest Debentures, Series A ("Hartford Junior Subordinated Debentures"), issued by The Hartford. The Hartford used the proceeds from the sale of such debentures for the partial repayment of outstanding commercial paper and short-term bank indebtedness. Hartford Series A Preferred Securities represent undivided beneficial interests in the assets of Hartford Capital I. The Hartford owns all of the beneficial interests represented by Series A Common Securities of Hartford Capital I. Holders of Hartford Series A Preferred Securities are entitled to receive preferential cumulative cash distributions accruing from February 28, 1996 and payable quarterly in arrears commencing March 31, 1996 at the annual rate of 7.7% of the liquidation amount of $25.00 per Hartford Series A Preferred Security. Holders of Hartford Series A Preferred Securities have limited voting rights. The Hartford Series A Preferred Securities are subject to mandatory redemption upon repayment of the Hartford Junior Subordinated Debentures at maturity or their earlier redemption. The Hartford has the right to redeem the Hartford Junior Subordinated Debentures (i) at any time, in whole or in part, at a redemption price equal to the accrued and unpaid interest on the Hartford Junior Subordinated Debentures so redeemed to the date fixed for redemption, plus the greater of (a) the principal amount thereof and (b) an amount equal to the interest and principal that would have been payable after the redemption date, discounting that amount on a U.S. Treasury rate basis to a present value, or (ii) on or after February 28, 2001, in whole or part, at a redemption price equal to the accrued and unpaid interest on the Hartford Junior Subordinated Debentures so redeemed to the date fixed for redemption plus 100% of the F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (QUIPS AND TRUPS) (CONTINUED) (A) DESCRIPTION (CONTINUED) principal amount thereof, or (iii) at any time, in whole, but not in part, upon the occurrence of certain specified events, at a redemption price equal to the accrued and unpaid interest on the Hartford Junior Subordinated Debentures so redeemed to the date fixed for redemption, plus 100% of the principal amount thereof, in each case subject to certain conditions. The Hartford Junior Subordinated Debentures bear interest at the annual rate of 7.7% of the principal amount, payable quarterly in arrears commencing March 31, 1996, and mature on February 28, 2016. The Hartford Junior Subordinated Debentures are unsecured and rank junior and subordinate in right of payment to all senior debt of The Hartford and are effectively subordinated to all existing and future liabilities of its subsidiaries. The Hartford has the right to defer payments of interest on the Hartford Junior Subordinated Debentures by extending the interest payment period for up to 20 consecutive quarters for each deferral period, up to the maturity date. During any such period, interest will continue to accrue and The Hartford may not declare or pay any cash dividends or distributions on The Hartford's common stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank pari passu with or junior to the Hartford Junior Subordinated Debentures. In the event of failure to pay interest for 30 consecutive days (subject to the deferral of any due date in the case of an extension period), the Hartford Junior Subordinated Debentures will become due and payable. The Hartford has guaranteed, on a subordinated basis, all of the Hartford Capital I obligations under the Hartford Series A Preferred Securities, including to pay the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation, but only to the extent that Hartford Capital I has funds to make such payments. On October 30, 1996, Hartford Capital II, a special purpose Delaware trust formed by The Hartford, issued 20,000,000 Series B, 8.35% Cumulative Quarterly Income Preferred Securities ("Series B Preferred Securities"). The material terms of the Series B Preferred Securities are substantially the same as the Hartford Series A Preferred Securities described above, except for the rate and maturity date. The proceeds from the sale of the Series B Preferred Securities were used to acquire $500 of Junior Subordinated Deferrable Interest Debentures, Series B ("Series B Debentures"), issued by The Hartford. The Series B Debentures bear interest at the annual rate of 8.35% of the principal amount payable quarterly in arrears commencing December 31, 1996, and mature on October 30, 2026. The Hartford used the proceeds from the sale of such debentures for general corporate purposes. (B) SUBSEQUENT EVENT On March 6, 2001, HLI issued and sold $200 of trust preferred securities from its existing shelf registration. (For additional information, see Note 17.) (C) INTEREST EXPENSE Interest expense incurred with respect to the Series A Preferred Securities and Series B Preferred Securities totaled approximately $100, $100 and $91 in 2000, 1999 and 1998, respectively. 8. STOCKHOLDERS' EQUITY (A) COMMON STOCK On June 8, 2000, The Hartford issued 7.25 million shares of common stock in a block trade to Goldman, Sachs & Co. for $398. The shares were issued out of treasury. The Hartford used the net proceeds from the issuance of the shares to partially fund The HLI Repurchase (see Note 2). On May 21, 1998, The Hartford's shareholders approved an increase in the number of authorized common shares from 200,000,000 to 400,000,000. On that date, the Board of Directors declared a two-for-one stock split effected in the form of a 100% stock dividend distributed on July 15, 1998 to shareholders of record as of June 24, 1998. Agreements concerning stock options and other commitments payable in shares of the Company's common stock either provide for the issuance of the additional shares due to the declaration of the stock split or have been modified to reflect the stock split. In addition, retroactive adjustments to treasury stock and additional paid-in capital have been made to reflect the stock split. All references to issued, outstanding and weighted average shares, as well as per share amounts, reflect the stock split in the consolidated financial statements and related notes. Par value per common share remained unchanged at $0.01. In December 1997, The Hartford's Board of Directors authorized the repurchase of up to $1.0 billion of the Company's outstanding common stock over a three-year period beginning with the first quarter of 1998. The Hartford completed the $1.0 billion repurchase authorization during 1999 by repurchasing 9.2 million shares of its common stock in the open market at a total cost of $453. In October 1999, The Hartford's Board of Directors authorized the repurchase of up to an additional $1.0 billion of the Company's outstanding common stock. This repurchase authorization was effective in November 1999 and covers a three-year period. For the year ended December 31, 2000, The Hartford repurchased 2.8 million shares of its common stock in the open market at a total cost of $100. Since the inception of the 1999 repurchase program, The Hartford has repurchased 5.9 million shares at a total cost of $243. Certain of these repurchased shares have been reissued pursuant to certain stock-based benefit plans. During the first quarter of 2000 and in conjunction with The HLI Repurchase, management elected to discontinue repurchase activity. Shares repurchased in the open market are carried at cost and reflected as a reduction to stockholders' equity. Treasury shares subsequently reissued are reduced from treasury stock on a weighted average cost basis. F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 8. STOCKHOLDERS' EQUITY (CONTINUED) (B) SUBSEQUENT EVENT On February 16, 2001, The Hartford issued 10 million shares of common stock pursuant to an underwritten offering for net proceeds of $615. (For additional information, see Note 17.) (C) PREFERRED STOCK The Company has 50,000,000 shares of preferred stock authorized, none of which have been issued. In 1995, the Company approved The Hartford Stockholder Rights Plan, pursuant to which a nonvoting right attaches to each share of common stock. Upon the occurrence of certain triggering events, the right will permit each shareholder to purchase a fraction of a share of the Series A Participating Cumulative Preferred Stock (the "Series A Preferred Stock") of The Hartford. There are 300,000 authorized shares of Series A Preferred Stock. No shares were issued or outstanding at December 31, 2000, 1999 or 1998. (D) STATUTORY RESULTS For the years ended December 31, ----------------------------------- 2000 1999 1998 ----------------------------------------------------------------- STATUTORY NET INCOME Life operations $ 422 $ 245 $ 290 Property and casualty operations 779 315 497 ----------------------------------------------------------------- TOTAL $ 1,201 $ 560 $ 787 ================================================================= STATUTORY SURPLUS Life operations $ 2,407 $ 2,356 $ 2,144 Property and casualty operations 3,495 4,678 6,705 ----------------------------------------------------------------- TOTAL $ 5,902 $ 7,034 $ 8,849 ================================================================= A significant percentage of the consolidated statutory surplus is permanently reinvested or is subject to various state and foreign government regulatory restrictions or other agreements which limit the payment of dividends without prior approval. As of December 31, 2000, the maximum amount of statutory dividends which may be paid to HFSG from its insurance subsidiaries in 2001, without prior approval, is $779. The domestic insurance subsidiaries of HFSG prepare their statutory financial statements in accordance with accounting practices prescribed by the applicable state insurance department. Prescribed statutory accounting practices include publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. The NAIC adopted the Codification of Statutory Accounting Principles ("Codification") in March 1998. The effective date for the statutory accounting guidance was January 1, 2001. Each of The Hartford's domiciliary states has adopted Codification, and the Company has made the necessary changes in its statutory reporting required for implementation. The Company has determined that the overall impact of applying the new guidance will result in a one-time statutory cumulative transition benefit of approximately $250 in statutory surplus. 9. EARNINGS PER SHARE Earnings per share amounts have been computed in accordance with the provisions of SFAS No. 128, "Earnings per Share". The following tables present a reconciliation of income and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share.
2000 Income Shares Per Share Amount ------------------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Income available to common shareholders $ 974 220.6 $ 4.42 ------------------- DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 3.8 ---------------------------- Income available to common shareholders plus assumed conversions $ 974 224.4 $ 4.34 ==================================================================================================================================== 1999 Income Shares Per Share Amount ------------------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Income available to common shareholders $ 862 224.9 $ 3.83 ------------------- DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 2.6 ---------------------------- Income available to common shareholders plus assumed conversions $ 862 227.5 $ 3.79 ==================================================================================================================================== 1998 Income Shares Per Share Amount ------------------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Income available to common shareholders $ 1,015 232.8 $ 4.36 ------------------- DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 3.4 ---------------------------- Income available to common shareholders plus assumed conversions $ 1,015 236.2 $ 4.30 ====================================================================================================================================
F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 9. EARNINGS PER SHARE (CONTINUED) Basic earnings per share are computed based on the weighted average number of shares outstanding during the year. Diluted earnings per share include the dilutive effect of outstanding options, using the treasury stock method, and also contingently issuable shares. Under the treasury stock method, exercise of options is assumed with the proceeds used to purchase common stock at the average market price for the period. The difference between the number of shares assumed issued and number of shares purchased represents the dilutive shares. Contingently issuable shares are included upon satisfaction of certain conditions related to the contingency. 10. STOCK COMPENSATION PLANS On May 18, 2000, the shareholders of The Hartford approved The Hartford 2000 Incentive Stock Plan (the "2000 Plan"), which replaced The Hartford 1995 Incentive Stock Plan (the "1995 Plan"). The terms of the 1995 Plan were substantially similar to the terms of the 2000 Plan except that the 1995 Plan had an annual award limit and a higher maximum award limit. Under the 2000 Plan, awards may be granted in the form of non-qualified or incentive stock options qualifying under Section 422A of the Internal Revenue Code, performance shares or restricted stock, or any combination of the foregoing. In addition, stock appreciation rights may be granted in connection with all or part of any stock options granted under the 2000 Plan. The aggregate number of shares of stock which may be awarded is subject to a maximum limit of 17,211,837 shares applicable to all awards for the ten-year duration of the 2000 Plan. All options granted have an exercise price equal to the market price of the Company's common stock on the date of grant, and an option's maximum term is ten years. Certain options become exercisable over a three year period commencing one year from the date of grant, while certain other options become exercisable upon the attainment of specified market price appreciation of the Company's common shares or at seven years after the date of grant. For any year, no individual employee may receive an award of options for more than 1,000,000 shares. As of December 31, 2000, The Hartford had not issued any incentive stock options under the 2000 Plan. Performance awards of common stock granted under the 2000 Plan become payable upon the attainment of specific performance goals achieved over a period of not less than two nor more than five years, and restricted stock granted is subject to a restriction period. On a cumulative basis, no more than 20% of the aggregate number of shares which may be awarded under the 2000 Plan are available for performance shares and restricted stock awards. Also, the maximum award of performance shares for any individual employee in any year is 200,000 shares. In 1997, the Company awarded special performance based options and restricted stock to certain key executives under the 1995 Plan. The awards vested only if the Company's stock traded at certain predetermined levels for ten consecutive days by March 1, 2001. Vested options could not be exercised nor restricted shares disposed of until March 1, 2001. As a result of the Company's stock trading at predetermined levels for ten consecutive days, in May 1999 and also in September 2000, the special performance based options and restricted stock vested. As a result, the Company began recognizing compensation expense in May 1999 and continued to recognize expense through March 1, 2001. In 1996, the Company established The Hartford Employee Stock Purchase Plan ("ESPP"). Under this plan, eligible employees of The Hartford may purchase common stock of the Company at a 15% discount from the lower of the market price at the beginning or end of the quarterly offering period. The Company may sell up to 5,400,000 shares of stock to eligible employees under the ESPP, and 241,742, 255,971 and 220,911 shares were sold in 2000, 1999 and 1998, respectively. The weighted average fair value of the discount under the ESPP was $14.89, $9.99 and $12.20 in 2000, 1999 and 1998, respectively. Additionally, during 1997, The Hartford established employee stock purchase plans for certain employees of the Company's international subsidiaries. Under these plans, participants may purchase common stock of The Hartford at a fixed price at the end of a three-year period. The Company applies Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. Accordingly, in the measurement of compensation expense, the Company utilizes the excess of market price over exercise price on the first date that both the number of shares and award price are known. For the years ended December 31, 2000, 1999 and 1998, compensation expense related to the Company's two stock-based compensation plans was $23, $16 and $21 after-tax, respectively. Had compensation cost for the Company's incentive stock plan and ESPP been determined based on the fair value at the grant dates for awards under those plans consistent with the method of SFAS No. 123, "Accounting for Stock-Based Compensation", the Company's net income and earnings per share would have been reduced to the pro forma amounts indicated as follows: 2000 1999 1998 -------------------------------- --------- ---------- --------- Net income: As reported $974 $862 $1,015 Pro forma [1] [2] $937 $834 $988 Basic earnings per share: As reported $4.42 $3.83 $4.36 Pro forma [1] [2] $4.25 $3.71 $4.24 Diluted earnings per share: As reported $4.34 $3.79 $4.30 Pro forma [1] [2] $4.18 $3.67 $4.19 -------------------------------- --------- ---------- --------- [1] The pro forma disclosures are not representative of the effects on net income and earnings per share in future years. [2] Includes The Hartford's ownership share of compensation costs related to HLI's incentive stock plan and employee stock purchase plan determined in accordance with SFAS No. 123. F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 10. STOCK COMPENSATION PLANS (CONTINUED) The fair value of each option grant is estimated on the date of the grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2000, 1999 and 1998: dividend yield of 1.5% for 2000, 2.1% for 1999 and 1.7% for 1998; expected price variability of 35.7% for 2000, 29.0% for 1999 and 25.7% for 1998; risk-free interest rates of 6.41% for 2000 grants, 5.08% for 1999 grants and 4.89% for 1998 grants; and expected lives of four years for 2000, seven years for 1999 and five years for 1998. A summary of the status of non-qualified options included in the Company's incentive stock plan as of December 31, 2000, 1999 and 1998 and changes during the years ended December 31, 2000, 1999 and 1998 is presented below:
2000 1999 1998 ------------------------------- ------------------------------- ------------------------------ Weighted Average Weighted Average Weighted Average (shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price ------------------------------------------------------------------------------------------------------------------------------------ Outstanding at beg. of year 12,103 $36.58 12,478 $33.89 10,350 $26.66 Granted 5,374 37.62 1,131 51.86 4,265 46.06 HLI converted options 3,770 44.00 -- -- -- -- Exercised (3,894) 30.07 (1,387) 23.79 (1,909) 20.96 Canceled/Expired (383) 40.97 (119) 44.93 (228) 40.89 ----------- ----------- ----------- Outstanding at end of year 16,970 39.96 12,103 36.58 12,478 33.89 ------------------------------------------------------------------------------------------------------------------------------------ Exercisable at end of year 7,885 37.29 6,923 29.49 5,671 23.58 Weighted average fair value of options granted $17.60 $15.83 $12.20 ====================================================================================================================================
The following table summarizes information about stock options outstanding and exercisable (shares in thousands) at December 31, 2000:
Options Outstanding Options Exercisable ----------------------------------------------------------------- ----------------------------------------- Number Outstanding Weighted Average Weighted Average Number Weighted Range of at December 31, 2000 Remaining Contractual Exercise Price Exercisable at Average Exercise Prices Life (Years) December 31, 2000 Exercise Price ------------------ ---------------------- ----------------------- ------------------ ---- --------------------- ------------------- $9.27 - $9.27 52 0.9 $9.27 52 $9.27 16.37 - 24.50 1,046 3.9 19.56 1,046 19.56 25.88 - 38.57 6,389 7.8 33.03 2,919 31.88 39.06 - 58.50 8,870 7.8 45.96 3,787 46.26 58.75 - 76.56 613 8.8 62.68 81 60.13 ------------------ ---------------------- ----------------------- ------------------ ---- --------------------- ------------------- $9.27 - $76.56 16,970 7.6 $39.96 7,885 $37.29 ================== ====================== ======================= ================== ==== ===================== ===================
11. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS The following tables set forth a reconciliation of beginning and ending balances of the benefit obligation and fair value of plan assets as well as the funded status of The Hartford's defined benefit pension and postretirement health care and life insurance benefit plans for the years ended December 31, 2000 and 1999. International plans represent an immaterial percentage of total pension assets, liabilities and expense and, for reporting purposes, are combined with domestic plans.
Pension Benefits Other Benefits ------------------------------- ------------------------------- CHANGE IN BENEFIT OBLIGATION 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Benefit obligation - beginning of year $ 1,684 $ 1,800 $ 278 $ 306 Service cost 58 63 7 8 Interest cost 136 131 23 21 Plan participants' contributions -- -- 5 3 Actuarial loss 36 78 11 -- Change in assumption: Discount rate 121 (304) 28 (46) Salary scale 1 21 -- -- Demographic -- (13) -- 3 Benefits paid (90) (92) (21) (17) Sale of Zwolsche (66) -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ BENEFIT OBLIGATION - END OF YEAR $ 1,880 $ 1,684 $ 331 $ 278 ====================================================================================================================================
F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 11. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS (CONTINUED)
Pension Benefits Other Benefits ------------------------------- ------------------------------- CHANGE IN PLAN ASSETS 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Fair value of plan assets - beginning of year $ 1,890 $ 1,795 $ 96 $ 93 Actual return on plan assets 96 179 7 7 Employer contribution 1 -- -- -- Benefits paid (88) (81) (3) (4) Expenses paid (3) (3) -- -- Sale of Zwolsche (57) -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ FAIR VALUE OF PLAN ASSETS - END OF YEAR $ 1,839 $ 1,890 $ 100 $ 96 ==================================================================================================================================== Funded status $ (41) $ 206 $ (231) $ (182) Unrecognized net actuarial (gain) loss (119) (351) 13 (29) Unrecognized prior service cost 37 49 (151) (174) Unrecognized initial obligation -- 5 -- -- ------------------------------------------------------------------------------------------------------------------------------------ ACCRUED BENEFIT COST $ (123) $ (91) $ (369) $ (385) ====================================================================================================================================
Assumptions used in the accounting for the plans were:
December 31, -------------------------------- 2000 1999 ----------------------------------------------------------------------------------------------- Benefit discount rate 7.75% 8.25% Expected long-term rate of return on plan assets 9.75% 9.75% Rate of increase in compensation levels 4.25% 4.25% -----------------------------------------------------------------------------------------------
For measurement purposes, a 6.5% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2000. The rate was assumed to decrease gradually to 5.0% for 2007 and remain at that level thereafter. Increasing (decreasing) the table of health care trend rates by one percent per year would have the effect of increasing (decreasing) the benefit obligation as of December 31, 2000 by $7 ($7) and the annual net periodic expense for the year then ended by $1 ($1), respectively, for the postretirement health care and life insurance benefit plan. Total pension cost for the years ended December 31, 2000, 1999 and 1998 include the following components:
Pension Benefits Other Benefits ----------------------------------- ---------------------------------- 2000 1999 1998 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Service cost (excludes expenses) $ 62 $ 67 $ 68 $ 7 $ 8 $ 7 Interest cost 135 131 122 23 21 20 Expected return on plan assets (159) (149) (138) (9) (9) (8) Amortization of prior service cost 6 6 8 (23) (24) (23) Amortization of unrecognized net (gains) losses 3 6 5 -- 1 -- Amortization of unrecognized net obligation arising from initial application of SFAS No. 87 1 1 1 -- -- -- Loss due to curtailment [1] -- -- 1 -- -- -- Loss due to settlement [1] -- -- 16 -- -- -- ------------------------------------------------------------------------------------------------------------------------------------ NET PENSION COST $ 48 $ 62 $ 83 $ (2) $ (3) $ (4) ==================================================================================================================================== [1] Reflects the sale of London & Edinburgh (see Note 19).
The Hartford provides certain health care and life insurance benefits for eligible retired employees. The Hartford's contribution for health care benefits will depend upon the retiree's date of retirement and years of service. In addition, the plan has a defined dollar cap which limits average Company contributions. The Hartford has prefunded a portion of the health care and life insurance obligations through trust funds where such prefunding can be accomplished on a tax effective basis. 12. INVESTMENT AND SAVINGS PLAN Substantially all U.S. employees are eligible to participate in The Hartford's Investment and Savings Plan under which designated contributions may be invested in common stock of The Hartford or certain other investments. These contributions are matched, up to 3% of compensation, by the Company. In addition, the Company allocates 0.5% of base salary to the plan for each eligible employee. Matching Company contributions are used to acquire The Hartford's common stock. The cost to The Hartford for the above plan was approximately $28, $26 and $24 for 2000, 1999 and 1998, respectively. F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 13. REINSURANCE The Hartford cedes insurance to other insurers in order to limit its maximum losses. Such transfer 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 also assumes reinsurance from other insurers. The Hartford evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. As of December 31, 2000, The Hartford had no significant reinsurance-related concentrations of credit risk. Life insurance net retained premiums were comprised of the following: For the years ended December 31, ------------------------------------- 2000 1999 1998 ----------------------------------------------------------------- Gross premiums $ 4,731 $ 4,165 $ 4,121 Assumed 137 154 98 Ceded (303) (250) (217) ----------------------------------------------------------------- NET RETAINED PREMIUMS $ 4,565 $ 4,069 $ 4,002 ================================================================= The Hartford records a receivable for reinsured benefits paid and the portion of insurance liabilities that are reinsured. The cost of reinsurance related to long-duration contracts is accounted for over the life of the underlying reinsured policies using assumptions consistent with those used to account for the underlying policies. Life insurance recoveries on ceded reinsurance contracts, which reduce death and other benefits, were $225, $168 and $119 for the years ended December 31, 2000, 1999 and 1998, respectively. In 1998, the Company recaptured an in force block of Corporate Owned Life Insurance ("COLI") business previously ceded to MBL Life Assurance Co. of New Jersey (MBL Life). The transaction was consummated through an assignment of a reinsurance arrangement between the Company and MBL Life to a subsidiary of the Company. The Company originally assumed the life insurance block in 1992 from Mutual Benefit Life, which had been placed in court-supervised rehabilitation in 1991, and reinsured a portion of those policies back to MBL Life. This recapture was effective January 1, 1998 and resulted in a decrease in ceded premiums and other considerations of $163 in 1998. Additionally, this transaction resulted in a decrease in reinsurance recoverables of $4.8 billion, which was exchanged for the fair value of assets comprised of $4.3 billion in policy loans and $443 in other net assets. The effect of reinsurance on property and casualty premiums written and earned was as follows: For the years ended December 31, -------------------------------------- 2000 1999 1998 ---------------------------------------------------------------- PREMIUMS WRITTEN Direct $ 7,108 $ 6,464 $ 7,221 Assumed 965 833 866 Ceded (826) (585) (633) ---------------------------------------------------------------- NET $ 7,247 $ 6,712 $ 7,454 ================================================================ PREMIUMS EARNED Direct $ 6,769 $ 6,189 $ 7,029 Assumed 1,001 827 872 Ceded (795) (528) (656) ---------------------------------------------------------------- NET $ 6,975 $ 6,488 $ 7,245 ================================================================ Reinsurance cessions which reduce claims and claim expenses incurred were $650, $565 and $115 for the years ended December 31, 2000, 1999 and 1998, respectively.
14. INCOME TAX For the years ended December 31, ------------------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST U.S. Federal $ 1,381 $ 1,188 $ 1,344 International 37 47 131 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME BEFORE INCOME TAXES AND MINORITY INTEREST $ 1,418 $ 1,235 $ 1,475 =================================================================================================================================== INCOME TAX EXPENSE (BENEFIT) Current - U.S. Federal $ 58 $ (28) $ 493 International 31 28 42 ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT 89 -- 535 ----------------------------------------------------------------------------------------------------------------------------------- Deferred - U.S. Federal 318 289 (145) International (17) (2) (2) ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DEFERRED 301 287 (147) ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME TAX EXPENSE $ 390 $ 287 $ 388 ===================================================================================================================================
F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 14. INCOME TAX (CONTINUED)
Deferred tax assets (liabilities) include the following as of December 31: 2000 1999 ----------------------------------------------------------------------- U.S. Federal International U.S. Federal International ------------------------------------------------------------------------------------------------------------------------------------ Discounted loss reserves $ 627 $ -- $ 769 $ -- Other insurance-related items 533 -- 478 (46) Employee benefits 214 -- 174 (3) Earnings from foreign subsidiaries 22 -- 109 -- Reserve for bad debts 25 -- 29 -- Accelerated depreciation 25 -- 22 -- Unrealized gains (262) (2) 128 (22) Other investment-related items (454) -- (490) -- Other (48) (1) 185 (4) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 682 $ (3)* $ 1,404 $ (75)* ==================================================================================================================================== * Included in other liabilities on the Consolidated Balance Sheets.
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax Act of 1959 permitted the deferral from taxation of a portion of statutory income under certain circumstances. In these situations, the deferred income was accumulated in a "Policyholders' Surplus Account" and, based on current tax law, will be taxable in the future only under conditions which management considers to be remote; therefore, no federal income taxes have been provided on the balance in this account, which for tax return purposes was $104 as of December 31, 2000. No additional provision or benefit has been recognized for U.S. taxes on international losses amounting to approximately $(154) at December 31, 2000. A reconciliation of the tax provision at the U.S. Federal statutory rate to the provision for income taxes is as follows:
For the years ended December 31, ----------------------------------------------------------- 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Tax provision at U.S. Federal statutory rate $ 496 $ 432 $ 516 Tax-exempt interest (178) (146) (128) Foreign tax rate differential (3) 2 (6) Sale of Zwolsche (see Note 19(b)) 88 -- -- Internal Revenue Service audit settlement (see Note 15(d)) (24) -- -- Other 11 (1) 6 ------------------------------------------------------------------------------------------------------------------------------------ PROVISION FOR INCOME TAX $ 390 $ 287 $ 388 ====================================================================================================================================
15. COMMITMENTS AND CONTINGENCIES (A) LITIGATION The Hartford is or may become involved in various legal actions, some of which involve claims for substantial amounts. In the opinion of management, the ultimate liability with respect to such actual and potential lawsuits, after consideration of provisions made for potential losses and costs of defense, is not expected to be material to the consolidated financial condition, results of operations or cash flows of The Hartford. (B) ENVIRONMENTAL AND ASBESTOS CLAIMS Historically, The Hartford has found it difficult to estimate ultimate liabilities related to environmental and asbestos claims due to uncertainties surrounding these exposures. Within the property and casualty insurance industry, in the mid-1990s, progress was made in developing sophisticated, alternative methodologies utilizing company experience and supplemental databases to assess environmental and asbestos liabilities. A study which incorporated these methodologies was initiated by The Hartford in April 1996. The study included a review of identified environmental and asbestos exposures of North American Property & Casualty, along with U.S. exposures of The Hartford's International and Other Operations segment. The methodology utilized a ground-up analysis of policy, site and exposure level data for a representative sample of The Hartford's claims. The results of the evaluation were extrapolated against the balance of the claim population to estimate the Company's overall exposure for reported claims. In addition to estimating liabilities on reported environmental and asbestos claims, The Hartford estimated reserves for claims incurred but not reported ("IBNR"). The IBNR reserve was estimated using information on reporting patterns of known insureds, characteristics of insureds such as limits exposed, attachment points and number of coverage years involved, third party costs and closed claims. Included in The Hartford's analysis of environmental and asbestos exposures was a review of applicable reinsurance coverage. Reinsurance coverage applicable to the sample was used to estimate the reinsurance coverage that applied to the balance of the reported environmental and asbestos claims and to the IBNR estimates. F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 15. COMMITMENTS AND CONTINGENCIES (CONTINUED) (B) ENVIRONMENTAL AND ASBESTOS CLAIMS (CONTINUED) The Hartford believes that the environmental and asbestos reserves reported at December 31, 2000 are a reasonable estimate of the ultimate remaining liability for these claims based upon known facts, current assumptions and The Hartford's methodologies. Future social, economic, legal or legislative developments may alter the original intent of policies and the scope of coverage. The Hartford will continue to evaluate new methodologies and developments, such as the increasing level of asbestos claims being tendered under the comprehensive general liability operations (non-product) section of policies, as they arise in order to supplement the Company's ongoing analysis and review of its environmental and asbestos exposures. These future reviews may result in a change in reserves, impacting The Hartford's results of operations in the period in which the reserve estimates are changed. While the impact of these changes could have a material effect on future results of operations, The Hartford does not expect such changes would have a material effect on its liquidity or financial condition. (C) LEASE COMMITMENTS Total rental expense on operating leases was $214 in 2000, $187 in 1999 and $188 in 1998. Future minimum lease commitments are as follows: 2001 $ 115 2002 93 2003 79 2004 70 2005 61 Thereafter 185 ------------------------------------------------ --- ----------- TOTAL $ 603 ================================================ === =========== (D) TAX MATTERS The Hartford's federal income tax returns are routinely audited by the Internal Revenue Service ("IRS"). As of December 31, 2000, the Company's 1996-1997 federal income tax returns are under audit by the IRS. Management believes that adequate provision has been made in the financial statements for any potential assessments that may result from tax examinations and other tax related matters for all open tax years. During the second quarter of 2000, the Company reached a settlement with the IRS with respect to certain tax matters for the 1993-1995 tax years. The settlement resulted in a $24 tax benefit being recorded in the Company's second quarter results of operations. As of December 31, 2000, the same matter is under review with the IRS for the 1996-1997 tax years. (E) UNFUNDED COMMITMENTS At December 31, 2000, The Hartford has outstanding commitments to fund limited partnership investments totaling $357. These capital commitments can be called by the partnerships during the 5-year commitment period to fund working capital needs or the purchase of new investments. If the commitment period expires and the commitment has not been fully funded, The Hartford is not required to fund the remaining unfunded commitment. 16. TRANSACTIONS WITH AFFILIATES On December 19, 1995, ITT Corporation ("ITT") distributed all of the outstanding shares of common stock of The Hartford to the shareholders of ITT common stock ("the Distribution"). As a result of the Distribution, The Hartford became an independent publicly traded company. Prior to the Distribution, The Hartford had substantial dealings with ITT and its affiliates as described below. The Distribution Agreement entered into by The Hartford, ITT Destinations, Inc., and ITT Industries, Inc. (the former ITT subsidiaries) addressed the disposition of shared liabilities. A shared liability is defined as a liability arising out of, or related to, business conducted by ITT prior to the Distribution that was not otherwise specifically related to one of the former ITT subsidiaries. Under the Distribution Agreement, responsibility for shared liabilities generally will be borne equally by each of the former ITT subsidiaries (or any successor to each former ITT subsidiary), including related attorney's fees and other out-of-pocket expenses. As of December 31, 2000, accruals had been established for liabilities covered by this agreement. 17. SUBSEQUENT EVENTS (A) SALE OF HARTFORD SEGUROS On February 8, 2001, The Hartford completed the sale of its Spain-based subsidiary, Hartford Seguros, to Liberty International, a subsidiary of Liberty Mutual Group. The Hartford received $29 before costs of sale. (B) FORTIS ACQUISITION On January 25, 2001, The Hartford agreed to acquire the U.S. 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 will effect 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. The Fortis transaction, which is subject to insurance regulatory approval and other customary conditions, is expected to be completed in the second quarter of 2001. The acquisition will be reported as a purchase transaction. The Company plans to finance the acquisition through (1) its February 16, 2001, issuance of 10 million shares of common stock pursuant to an underwritten offering under its current shelf registration for net proceeds of $615, (2) proceeds from the March 1, 2001, HLI issuance of $400 of senior debt securities under HLI's shelf registration and (3) proceeds from the March 6, 2001, HLI issuance of $200 of trust preferred securities under HLI's shelf registration. F-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 18. SEGMENT INFORMATION The Hartford is organized into two major operations: Worldwide Life and Worldwide Property & Casualty. Within these operations, The Hartford conducts business principally in eight operating segments. Additionally, all activities related to The HLI Repurchase, the minority interest in HLI for pre-acquisition periods and The Hartford Bank, FSB are included in Corporate. Worldwide Life is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI"). Investment Products offers individual variable and fixed annuities, mutual funds, retirement plan services and other investment products. Individual Life sells a variety of life insurance products, including variable life, universal life, interest sensitive whole life and term life insurance. Group Benefits sells group insurance products, including group life and group disability insurance as well as other products, including stop loss and supplementary medical coverage to employers and employer sponsored plans, accidental death and dismemberment, travel accident and other special risk coverages to employers and associations. COLI primarily offers variable products used by employers to fund non-qualified benefits or other postemployment benefit obligations as well as leveraged COLI. Worldwide Life also includes in an Other category its international operations as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. Worldwide Property & Casualty is organized into four reportable operating segments: the underwriting segments of Commercial, Personal and Reinsurance, and an International and Other Operations segment. Also reported within Worldwide Property & Casualty is North American, which includes the combined underwriting results of Commercial, Personal and Reinsurance along with income and expense items not directly allocable to these segments, such as net investment income. The Commercial segment provides primarily workers' compensation, property, automobile, liability, financial products, marine, agricultural and bond coverages to commercial accounts throughout the United States. Excess and surplus lines coverages not normally written by standard lines insurers is also provided. The Personal segment provides automobile, homeowners, home-based business and fire coverages to individuals throughout the United States. The Reinsurance segment assumes reinsurance worldwide through its thirteen HartRe offices located in the United States, Canada, the United Kingdom, France, Italy, Germany, Spain, Hong Kong and Taiwan. HartRe primarily writes treaty reinsurance through professional reinsurance brokers covering various property, casualty, specialty and marine classes of business. International consists of European and Asian companies offering a variety of insurance products (primarily property and casualty products) designed to meet the needs of local customers (see Note 17 for subsequent event) and Other Operations consists of operations which have ceased writing new business. While the measure of profit or loss used by The Hartford's management in evaluating performance is core earnings for its non-underwriting segments, the Commercial, Personal and Reinsurance segments are evaluated by The Hartford's management primarily based upon underwriting results. The Hartford defines "core earnings" as after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes, allocated Distribution items (see Note 16) and certain other items. Core earnings is an internal performance measure used by the Company in the management of its operations. While not considered segments, the Company also reports and evaluates core earnings results for Worldwide Life and Worldwide Property & Casualty, including North American. Worldwide Property & Casualty includes core earnings for North American and the International and Other Operations segment. Certain transactions between segments occur during the year that primarily relate to tax settlements, insurance coverage, expense reimbursements, services provided and capital contributions. Certain reinsurance stop loss agreements exist between the segments which specify that one segment will reimburse another for losses incurred in excess of a predetermined limit. Also, one segment may purchase group annuity contracts from another to fund pension costs and claim annuities to settle casualty claims. In addition, certain intersegment transactions occur in Worldwide Life. These transactions include interest income on allocated surplus and the allocation of net realized capital gains and losses through net invested income utilizing the duration of the segment's investment portfolios. The following tables present revenues and core earnings. Underwriting results are presented for the Commercial, Personal and Reinsurance segments while core earnings are presented for the non-underwriting segments, along with Worldwide Life and Worldwide Property & Casualty, including North American. F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 18. SEGMENT INFORMATION (CONTINUED)
REPORTING SEGMENT INFORMATION For the years ended December 31, ------------------------------------------------------------ REVENUES 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Life Investment Products $ 2,380 $ 2,041 $ 1,784 Individual Life 640 584 567 Group Benefits 2,207 2,024 1,809 COLI 767 831 1,567 Other (4) 56 61 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Life 5,990 5,536 5,788 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Property & Casualty North American Earned premiums and other revenue Commercial 3,500 3,271 3,385 Personal 2,713 2,505 2,268 Reinsurance 809 680 716 ------------------------------------------------------------------------------------------------------------------------------------ Total earned premiums and other revenue from underwriting segments 7,022 6,456 6,369 Net investment income 862 853 824 Net realized capital gains 218 22 231 ------------------------------------------------------------------------------------------------------------------------------------ Total North American 8,102 7,331 7,424 International and Other Operations 602 661 1,810 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Property & Casualty 8,704 7,992 9,234 ------------------------------------------------------------------------------------------------------------------------------------ Corporate 9 -- -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 14,703 $ 13,528 $ 15,022 ====================================================================================================================================
For the years ended December 31, CORE EARNINGS AND NET INCOME 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Life Investment Products $ 424 $ 330 $ 266 Individual Life 79 71 65 Group Benefits 90 79 71 COLI 34 30 24 Other 5 (43) (40) ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Life 632 467 386 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Property & Casualty North American Underwriting results Commercial (153) (171) (213) Personal 2 34 77 Reinsurance (73) (48) (36) ------------------------------------------------------------------------------------------------------------------------------------ Total underwriting results (224) (185) (172) Net servicing and other income [1] 9 19 80 Net investment income 862 853 824 Other expenses (216) (212) (203) Income tax expense (19) (41) (72) ------------------------------------------------------------------------------------------------------------------------------------ Total North American 412 434 457 International and Other Operations 17 22 45 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Property & Casualty 429 456 502 ------------------------------------------------------------------------------------------------------------------------------------ Corporate (99) (86) (72) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CORE EARNINGS 962 837 816 Net realized capital gains, after-tax 12 25 199 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 974 $ 862 $ 1,015 ==================================================================================================================================== [1] Net of expenses related to service business.
F-29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. SEGMENT INFORMATION (CONTINUED) As of December 31, ------------------------------------------------------------ ASSETS 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Life $ 143,621 $ 139,033 $ 122,022 Worldwide Property & Casualty 27,094 28,018 28,610 Corporate 817 -- -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 171,532 $ 167,051 $ 150,632 ====================================================================================================================================
REVENUES BY PRODUCT LINE For the years ended December 31, REVENUES 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Life Investment Products Individual annuities $ 1,538 $ 1,354 $ 1,137 Other 842 687 647 ------------------------------------------------------------------------------------------------------------------------------------ Total Investment Products 2,380 2,041 1,784 Individual Life 640 584 567 Group Benefits 2,207 2,024 1,809 COLI 767 831 1,567 Other (4) 56 61 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Life 5,990 5,536 5,788 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Property & Casualty North American Commercial Workers' compensation 882 900 996 Property 1,071 964 929 Automobile 363 347 345 Liability 155 111 135 Other [1] 1,029 949 980 ------------------------------------------------------------------------------------------------------------------------------------ Total Commercial 3,500 3,271 3,385 Personal Automobile 1,936 1,784 1,553 Homeowners and other [1] 777 721 715 ------------------------------------------------------------------------------------------------------------------------------------ Total Personal 2,713 2,505 2,268 Reinsurance 809 680 716 Net investment income 862 853 824 Net realized capital gains 218 22 231 ------------------------------------------------------------------------------------------------------------------------------------ Total North American 8,102 7,331 7,424 International and Other Operations 602 661 1,810 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Property & Casualty 8,704 7,992 9,234 ------------------------------------------------------------------------------------------------------------------------------------ Corporate 9 -- -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 14,703 $ 13,528 $ 15,022 ==================================================================================================================================== [1] Includes servicing revenue.
GEOGRAPHICAL SEGMENT INFORMATION For the years ended December 31, ------------------------------------------------------------ REVENUES 2000 1999 1998 ------------------------------------------------------------------------------------------------------------------------------------ North America $ 14,062 $ 12,826 $ 13,201 United Kingdom 69 108 1,212 Other 572 594 609 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 14,703 $ 13,528 $ 15,022 ====================================================================================================================================
F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 19. ACQUISITIONS AND DISPOSITIONS (A) ACQUISITIONS On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI that it did not already own (for a description of The HLI Repurchase, see Note 2). On August 26, 1998, HLI completed the purchase of all outstanding shares of PLANCO Financial Services, Inc. ("PLANCO") and its affiliate, PLANCO, Incorporated. PLANCO is a primary distributor of HLI's annuity and investment products. As a wholesaler, PLANCO distributes HLI's annuity and investment products, including fixed and variable annuities, mutual funds and single premium variable life insurance, as well as providing sales support to registered representatives, financial planners and broker-dealers at brokerage firms and banks across the United States. The acquisition was recorded as a purchase transaction and accordingly, the results of PLANCO's operations have been included in The Hartford's consolidated financial statements from the closing date of the transaction. On February 12, 1998, The Hartford completed the purchase of all outstanding shares of Omni Insurance Group, Inc. ("Omni"), a holding company of two non-standard auto insurance subsidiaries licensed in 25 states and the District of Columbia. The Hartford paid cash of $31.75 per share, plus transaction costs, for a total of $189. The acquisition was recorded as a purchase transaction and accordingly, the results of Omni's operations have been included in The Hartford's consolidated financial statements from the closing date of the transaction. (B) DISPOSITIONS On December 22, 2000, The Hartford completed the sale of its Netherlands-based Zwolsche subsidiary to Assurances Generales de France, a subsidiary of Allianz AG. The Hartford received $547, before costs of sale, and reported an after-tax net realized capital gain of $69 related to the transaction. Management used the proceeds from the sale to reduce outstanding commercial paper which was issued to partially fund The HLI Repurchase. On November 16, 1998, The Hartford completed the sale of its United Kingdom-based London & Edinburgh subsidiary. The Hartford received approximately $525, before costs of sale, and reported an after-tax net realized capital gain of $33 related to the transaction. The Hartford retained ownership of Excess Insurance Co. Ltd., London & Edinburgh's property and casualty insurance and reinsurance subsidiary, which discontinued writing new business in 1993.
20. QUARTERLY RESULTS FOR 2000 AND 1999 (UNAUDITED) Three Months Ended ---------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, ---------------------------------------------------------------------------------------- 2000 1999 2000 1999 2000 1999 2000 1999 ---------------------------------------------------------------------------------------------------------------------------------- Revenues $ 3,499 $ 3,299 $ 3,514 $ 3,349 $ 3,791 $ 3,444 $ 3,899 $ 3,436 Benefits, claims and expenses $ 3,155 $ 2,955 $ 3,256 $ 3,042 $ 3,472 $ 3,191 $ 3,402 $ 3,105 Net income $ 238 $ 238 $ 213 $ 215 $ 250 $ 186 $ 273 $ 223 Basic earnings per share $ 1.10 $ 1.05 $ 0.98 $ 0.95 $ 1.11 $ 0.83 $ 1.21 $ 1.01 Diluted earnings per share $ 1.10 $ 1.04 $ 0.97 $ 0.93 $ 1.09 $ 0.82 $ 1.18 $ 1.00 Weighted average common shares outstanding 215.8 227.0 216.5 226.8 224.4 225.3 225.7 220.4 Weighted average common shares outstanding and dilutive potential common shares 217.3 229.9 219.9 230.0 229.3 227.8 231.0 222.3 ==================================================================================================================================
F-31 THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE I SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
(In millions) As of December 31, 2000 --------------------------------------------------------- Amount at which shown on Balance Type of Investment Cost Fair Value Sheet --------------------------------------------------------------------------------------------------------------------------------- FIXED MATURITIES Bonds and Notes U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) $ 288 $ 307 $ 307 U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) - asset-backed 1,651 1,683 1,683 States, municipalities and political subdivisions 9,574 10,046 10,046 International governments 963 1,003 1,003 Public utilities 869 863 863 All other corporate including international 9,399 9,333 9,333 All other corporate - asset-backed 8,000 8,148 8,148 Short-term investments 2,091 2,096 2,096 Certificates of deposit 582 573 573 Redeemable preferred stock 439 440 440 --------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED MATURITIES 33,856 34,492 34,492 --------------------------------------------------------------------------------------------------------------------------------- EQUITY SECURITIES Common stocks Public utilities 30 50 50 Banks, trusts and insurance companies 96 117 117 Industrial and miscellaneous 722 816 816 Nonredeemable preferred stocks 73 73 73 --------------------------------------------------------------------------------------------------------------------------------- TOTAL EQUITY SECURITIES 921 1,056 1,056 --------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED MATURITIES AND EQUITY SECURITIES 34,477 35,548 35,548 --------------------------------------------------------------------------------------------------------------------------------- REAL ESTATE 5 4 5 OTHER INVESTMENTS Mortgage loans on real estate 322 321 321 Policy loans 3,610 3,610 3,610 Investments in partnerships and trusts 1,196 1,137 1,137 Futures, options and miscellaneous 48 50 48 --------------------------------------------------------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS 5,176 5,118 5,116 --------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS $ 39,658 $ 40,670 $ 40,669 =================================================================================================================================
S-1 THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF THE HARTFORD FINANCIAL SERVICES GROUP, INC. (REGISTRANT)
(In millions) As of December 31, --------------------------------------- BALANCE SHEETS 2000 1999 ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Receivables from affiliates $ 212 $ 209 Other assets 119 112 Investment in affiliates 9,680 7,192 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 10,011 7,513 ---------------------------------------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt 235 31 Long-term debt 1,218 898 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely parent junior subordinated debentures 1,000 1,000 Other liabilities 94 118 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 2,547 2,047 TOTAL STOCKHOLDERS' EQUITY 7,464 5,466 ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 10,011 $ 7,513 ==================================================================================================================================
(In millions) STATEMENTS OF INCOME FOR THE YEARS ENDED DECEMBER 31, ---------------------------------------------------------- 2000 1999 1998 ---------------------------------------------------------------------------------------------------------------------------------- Earnings of subsidiaries $ 1,096 $ 944 $ 1,105 Interest expense (net of interest income) 186 150 149 Other expenses (income) 3 1 (9) ---------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAX BENEFIT 907 793 965 Income tax benefit (67) (69) (50) ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 974 $ 862 $ 1,015 ==================================================================================================================================
S-2 THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF THE HARTFORD FINANCIAL SERVICES GROUP, INC. (continued) (Registrant)
(In millions) CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31, ------------------------------------------------------------- 2000 1999 1998 ----------------------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 974 $ 862 $ 1,015 Undistributed earnings of subsidiaries (436) (86) (302) Change in working capital 48 (28) 2 ----------------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 586 748 715 ----------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Capital contribution to subsidiary (1,325) -- (10) ----------------------------------------------------------------------------------------------------------------------------------- CASH USED FOR INVESTING ACTIVITIES (1,325) -- (10) ----------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in debt 520 -- (10) Issuance of common stock from treasury 398 -- -- Dividends paid (210) (207) (197) Acquisition of treasury stock (100) (596) (547) Proceeds from issuances of shares under incentive and stock purchase plans 131 55 49 ----------------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 739 (748) (705) ----------------------------------------------------------------------------------------------------------------------------------- Net change in cash -- -- -- Cash - beginning of year -- -- -- ----------------------------------------------------------------------------------------------------------------------------------- CASH - END OF YEAR $ -- $ -- $ -- =================================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION ------------------------------------------------ NET CASH PAID DURING THE YEAR FOR: Interest $ 184 $ 148 $ 148
S-3
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION For the years ended December 31, 2000, 1999 and 1998 (In millions) Future Policy Benefits, Unpaid Other Deferred Claims and Policyholder Earned Policy Claim Funds and Premiums, Net Acquisition Adjustment Unearned Benefits Fee Income Investment Costs [1] Expenses Premiums Payable and Other Income ------------------------------------------------------------------------------------------------------------ 2000 Worldwide Life $ 4,527 $ 7,074 $ 54 $ 15,849 $ 4,486 $ 1,592 Worldwide P&C 777 15,934 3048 2 7,398 1,072 Corporate 1 (29) (9) (3) __ 10 ----------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS $ 5,305 $ 22,979 $ 3,093 $ 15,848 $ 11,884 $ 2,674 =========================================================================================================== 1999 Worldwide Life $ 4,210 $ 6,236 $ 48 $ 16,873 $ 3,979 $ 1,562 Worldwide P&C 828 16,342 2,729 11 6,888 1,065 Corporate __ __ __ __ __ __ ----------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS $ 5,038 $ 22,578 $ 2,777 $ 16,884 $ 10,867 $ 2,627 =========================================================================================================== 1998 Worldwide Life $ 3,842 $ 5,717 $ 42 $ 19,767 $ 3,833 $ 1,955 Worldwide P&C 737 16,820 2,436 7 7,783 1,147 Corporate __ __ __ __ __ __ ----------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS $ 4,579 $ 22,537 $ 2,478 $ 19,774 $ 11,616 $ 3,102 =========================================================================================================== [1] Includes present value of future profits for 2000. Note: Certain reclassifications have been made to prior year financial information to conform to current year presentation. N/A - Not applicable to life insurance pursuant to Regulation S-X.
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION For the years ended December 31, 2000, 1999 and 1998 (Continued) (In millions) Benefits, Amortization Claims and of Deferred Net Realized Claim Policy Capital Adjustment Acquisition Other Net Written Gains(Losses) Expenses Costs Expenses Premiums ------------------------------------------------------------------------------------------------ 2000 Worldwide Life $ (88) $ 3,162 $ 671 $ 1,369 $ N/A Worldwide P&C 234 5,253 1,542 1,225 7,248 Corporate (1) 4 __ 59 N/A ----------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS $ 145 $ 8,419 $ 2,213 $ 2,653 $ 7,248 =============================================================================================== 1999 Worldwide Life $ (5) $ 3,054 $ 568 $ 1,228 $ N/A Worldwide P&C 39 4,848 1,443 1,152 6,712 Corporate __ __ __ __ N/A ----------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS $ 34 $ 7,902 $ 2,011 $ 2,380 $ 6,712 =============================================================================================== 1998 Worldwide Life $ __ $ 3,227 $ 441 $ 1,535 $ N/A Worldwide P&C 304 5,386 1,579 1,379 7,454 Corporate __ __ __ __ N/A ----------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS $ 304 $ 8,613 $ 2,020 $ 2,914 $ 7,454 =============================================================================================== [1] Includes present value of future profits for 2000. Note: Certain reclassifications have been made to prior year financial information to conform to current year presentation. N/A - Not applicable to life insurance pursuant to Regulation S-X.
S-4
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE IV REINSURANCE Ceded to Assumed From Percentage of Gross Other Other Net Amount Assumed (In millions) Amount Companies Companies Amount to Net ---------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2000 Life insurance in force $ 567,208 $ 110,781 $ 18,374 $ 474,801 4% ---------------------------------------------------------------------------------------------------------------------------- INSURANCE REVENUES Property and casualty insurance $ 6,769 $ 795 $ 1,001 $ 6,975 14% Life insurance 3,392 197 64 3,259 2% Accident and health insurance 1,339 106 73 1,306 6% ---------------------------------------------------------------------------------------------------------------------------- TOTAL INSURANCE REVENUES $ 11,500 $ 1,098 $ 1,138 $ 11,540 10% ============================================================================================================================ FOR THE YEAR ENDED DECEMBER 31, 1999 Life insurance in force $ 527,285 $ 128,478 $ 14,916 $ 413,723 4% ---------------------------------------------------------------------------------------------------------------------------- INSURANCE REVENUES Property and casualty insurance $ 6,189 $ 528 $ 827 $ 6,488 13% Life insurance 2,999 174 54 2,879 2% Accident and health insurance 1,166 76 100 1,190 8% ---------------------------------------------------------------------------------------------------------------------------- TOTAL INSURANCE REVENUES $ 10,354 $ 778 $ 981 $ 10,557 9% ============================================================================================================================ FOR THE YEAR ENDED DECEMBER 31, 1998 Life insurance in force $ 528,608 $ 195,920 $ 11,675 $ 344,363 3% ---------------------------------------------------------------------------------------------------------------------------- INSURANCE REVENUES Property and casualty insurance $ 7,029 $ 656 $ 872 $ 7,245 12% Life insurance 3,014 157 62 2,919 2% Accident and health insurance 1,107 60 36 1,083 3% ---------------------------------------------------------------------------------------------------------------------------- TOTAL INSURANCE REVENUES $ 11,150 $ 873 $ 970 $ 11,247 9% ============================================================================================================================
S-5
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE V VALUATION AND QUALIFYING ACCOUNTS Charged to Balance Costs and Translation Write-offs/ Balance (In millions) January 1, Expenses Adjustment Payments/Other December 31, -------------------------------------------------------------------------------------------------------------------------------- 2000 ---- Allowance for doubtful accounts $ 135 $ 32 $ -- $ (40) $ 127 Accumulated depreciation of plant, property and equipment 665 94 (3) (81) 675 1999 ---- Allowance for doubtful accounts $ 131 $ 30 $ -- $ (26) $ 135 Accumulated depreciation of plant, property and equipment 595 93 (3) (20) 665 1998 ---- Allowance for doubtful accounts $ 118 $ 36 $ -- $ (23) $ 131 Accumulated depreciation of plant, property and equipment 628 84 2 (119) 595 ================================================================================================================================
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE VI SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS Claims and Claim Adjustment Expenses Discount Incurred Related to: Paid Claims and Deducted From --------------------------------------- Claim Adjustment (In millions) Liabilities [1] Current Year Prior Years Expenses ----------------------------------------------------------------------------------------------------------------------------------- Years ended December 31, 2000 $ 396 $ 5,170 $ 27 $ 5,334 1999 $ 480 $ 4,953 $ (171) $ 5,161 1998 $ 423 $ 5,404 $ (152) $ 5,151 ................................................................................................................................... [1] Reserves for permanently disabled claimants, terminated reinsurance treaties and certain reinsurance contracts have been discounted using the rate of return The Hartford could receive on risk-free investments of 5.7%, 6.3% and 5.6% for 2000, 1999 and 1998, respectively.
S-6 SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. THE HARTFORD FINANCIAL SERVICES GROUP, INC. By: /s/ John N. Giamalis ------------------------------------------- John N. Giamalis Senior Vice President and Controller Date: March 23, 2001 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons in the capacities and on the dates indicated. SIGNATURE TITLE DATE --------- ----- ---- /s/ Ramani Ayer Chairman, President, Chief March 23, 2001 ------------------------ Ramani Ayer Executive Officer and Director /s/ Lowndes A. Smith Vice Chairman and Director March 23, 2001 ------------------------ Lowndes A. Smith /s/ David K. Zwiener Executive Vice President, March 23, 2001 ------------------------ David K. Zwiener Chief Financial Officer and Director /s/ John N. Giamalis Senior Vice President March 23, 2001 ------------------------ John N. Giamalis and Controller /s/ Bette B. Anderson Director March 23, 2001 ------------------------ Bette B. Anderson /s/ Rand V. Araskog Director March 23, 2001 ------------------------ Rand V. Araskog /s/ Dina Dublon Director March 23, 2001 ------------------------ Dina Dublon /s/ Donald R. Frahm Director March 23, 2001 ------------------------ Donald R. Frahm /s/ Paul G. Kirk, Jr. Director March 23, 2001 ------------------------ Paul G. Kirk, Jr. /s/ Robert W. Selander Director March 23, 2001 ------------------------ Robert W. Selander /s/ H. Patrick Swygert Director March 23, 2001 ------------------------ H. Patrick Swygert /s/ Gordon I. Ulmer Director March 23, 2001 ------------------------ Gordon I. Ulmer II-1 THE HARTFORD FINANCIAL SERVICES GROUP, INC. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 FORM 10-K EXHIBITS INDEX The exhibits attached to this Form 10-K are those which are required by Item 601 of Regulation S-K and which have not been previously filed with the Securities and Exchange Commission. EXHIBIT # --------- 3.01 Amended and Restated Certificate of Incorporation of The Hartford Financial Services Group, Inc. ("The Hartford"), amended effective May 21, 1998, was filed as Exhibit 3.01 to The Hartford's Form 10-Q for the quarterly period ended June 30, 1998 and is incorporated herein by reference. 3.02 Amended By-Laws of The Hartford, amended effective February 18, 1999, were filed as Exhibit 3.02 to The Hartford's Form 10-K for the fiscal year ended December 31, 1998 and are incorporated herein by reference. 4.01 Amended and Restated Certificate of Incorporation and By-Laws of The Hartford (included as Exhibits 3.01 and 3.02, respectively). 4.02 Rights Agreement dated as of November 1, 1995 between The Hartford and The Bank of New York as Rights agent was filed as Exhibit 4.02 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 4.03 Form of certificate of the voting powers, preferences and relative participating, optional and other special rights, qualifications, limitations or restrictions of Series A Participating Cumulative Preferred Stock of The Hartford (attached as Exhibit A to the Rights Agreement that is incorporated by reference as Exhibit 4.02 hereto). 4.04 Form of Right Certificate (attached as Exhibit B to the Rights Agreement that is incorporated by reference as Exhibit 4.02 hereto). 4.05 Indenture dated as of May 15, 1991 between The Hartford and The Chase Manhattan Bank (National Association), as trustee, with respect to The Hartford's 8.20% Notes due October 15, 1998, 7.25% Notes due December 1, 1996, and 8.30% Notes due December 1, 2001 (incorporated by reference to Exhibit 4(b) to The Hartford's Form 10 filed on May 9, 1991, as amended, file no. 0-19277). 4.06 Forms of The Hartford's 8.20% Notes due October 15, 1998, 7.25% Notes due December 1, 1996 and 8.30% Notes due December 1, 2001(included in the Indenture incorporated by reference as Exhibit 4.05 hereto). 4.07 Senior Indenture, dated as of October 20, 1995, between The Hartford and The Chase Manhattan Bank (National Association), as trustee, with respect to The Hartford's 6.375% Notes Due November 1, 2002, 7.30% Debentures Due November 1, 2015 and 6.375% Notes Due November 1, 2008 (incorporated by reference to Exhibit 4.08 to The Hartford's Report on Form 8-K dated November 15, 1995). 4.08 Forms of The Hartford's 6.375% Notes Due November 1, 2002 and 7.30% Debentures due November 1, 2015 (incorporated by reference to Exhibits 4.09 and 4.10, respectively, of The Hartford's Report on Form 8-K dated November 15, 1995). 4.09 Form of The Hartford's 6.375% Notes due November 1, 2008 was filed as Exhibit 4.09 to The Hartford's Form 10-K for the fiscal year ended December 31, 1998 and is incorporated herein by reference. 4.10 Junior Subordinated Indenture, dated as of February 28, 1996, between The Hartford and Wilmington Trust Company, as Trustee, with respect to The Hartford's 7.70% Junior Subordinated Deferrable Interest Debentures, Series A, due February 28, 2016 ("Junior Debentures") was filed as Exhibit 4.09 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 4.11 Supplemental Indenture No. 1 dated as of February 28, 1996 between The Hartford and Wilmington Trust Company, as Trustee, with respect to the Junior Debentures, was filed as Exhibit 4.10 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. II-2 EXHIBITS INDEX (continued) EXHIBIT # --------- 4.12 Form of The Hartford's 7.70% Junior Subordinated Deferrable Interest Debenture, Series A, due February 28, 2016 (included in the Indenture incorporated by reference as Exhibit 4.10 hereto). 4.13 Amended and Restated Trust Agreement dated as of February 28, 1996 of Hartford Capital I, relating to the 7.70% Cumulative Quarterly Income Preferred Securities, Series A ("Preferred Securities") was filed as Exhibit 4.12 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 4.14 Agreement as to Expenses and Liabilities dated as of February 28, 1996 between The Hartford and Hartford Capital I was filed as Exhibit 4.13 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 4.15 Preferred Security Certificate for Hartford Capital I (included as Exhibit E of the Trust Agreement incorporated by reference as Exhibit 4.13 hereto). 4.16 Guarantee Agreement dated as of February 28, 1996 between The Hartford and Wilmington Trust, as trustee, relating to The Hartford's guarantee of the Preferred Securities, was filed as Exhibit 4.15 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 4.17 Junior Subordinated Indenture, dated as of October 30, 1996, between The Hartford and Wilmington Trust Company, as Trustee, with respect to The Hartford's 8.35% Junior Subordinated Deferrable Interest Debentures, Series B, due October 30, 2026 ("Series B Junior Debentures") was filed as Exhibit 4.16 to The Hartford's Form 10-K for the fiscal year ended December 31, 1996 and is incorporated herein by reference. 4.18 Form of The Hartford's 8.35% Junior Subordinated Deferrable Interest Debenture, Series B, due October 30, 2026 was filed as Exhibit 4.2 to The Hartford's Form 8-K dated November 4, 1996 and is incorporated herein by reference. 4.19 Amended and Restated Trust Agreement dated as of October 30, 1996 of Hartford Capital II, relating to the 8.35% Cumulative Quarterly Income Preferred Securities, Series B, ("Series B Preferred Securities") was filed as Exhibit 4.1 to The Hartford's Form 8-K dated November 4, 1996 and is incorporated herein by reference. 4.20 Agreement as to Expenses and Liabilities dated as of October 30, 1996 between The Hartford and Hartford Capital II (included as Exhibit D of Exhibit 4.19 that is incorporated by reference herein). 4.21 Preferred Security Certificate for Hartford Capital II (included as Exhibit E of Exhibit 4.19 that is incorporated by reference herein). 4.22 Guarantee Agreement dated as of October 30, 1996 between The Hartford and Wilmington Trust, as trustee, relating to The Hartford's guarantee of the Series B Preferred Securities, was filed as Exhibit 4.21 to The Hartford's Form 10-K for the fiscal year ended December 31, 1996 and is incorporated herein by reference. 4.23 Supplemental Indenture No. 1, dated as of December 27, 2000, to the Senior Indenture between The Hartford and The Chase Manhattan Bank, as Trustee, was filed as Exhibit 4.30 to The Hartford's Registration Statement on From S-3 (Registration No. 333-49666) and is incorporated herein by reference. 4.24 Form of The Hartford's 7.75% Senior Notes due June 15, 2005 is filed herewith. 4.25 Form of The Hartford's 7.90% Senior Notes due June 15, 2010 is filed herewith. 10.01 Distribution Agreement among ITT Corporation, ITT Destinations, Inc. and The Hartford was filed as Exhibit 10.01 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 10.02 Intellectual Property License Agreement among ITT Corporation, ITT Destinations, Inc. and The Hartford was filed as Exhibit 10.02 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 10.03 Tax Allocation Agreement among ITT Corporation, ITT Destinations, Inc. and The Hartford was filed as Exhibit 10.03 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. II-3 EXHIBITS INDEX (continued) EXHIBIT # --------- 10.04 Form of Trade Name and Service Mark License Agreement between ITT Corporation and The Hartford was filed as Exhibit 10.04 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 10.05 License Assignment Agreement among ITT Destinations, Inc., The Hartford and Nutmeg Insurance Company was filed as Exhibit 10.05 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 10.06 License Assignment Agreement among ITT Destinations, Inc., Nutmeg Insurance Company and Hartford Fire Insurance Company was filed as Exhibit 10.06 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 10.07 Employee Benefit Services and Liability Agreement among ITT Corporation, ITT Destinations, Inc. and The Hartford was filed as Exhibit 10.07 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is incorporated herein by reference. 10.08 Debt allocation agreement dated as of November 1, 1995 between ITT Corporation and The Hartford, and related Fourth Supplemental Indenture dated as of November 1, 1995 among ITT Corporation, The Hartford and State Street Bank and Trust Company, as successor trustee, were filed as Exhibit 10.10 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and are incorporated herein by reference. 10.09 Five-Year Competitive Advance and Revolving Credit Facility Agreement dated as of December 20, 1996 among The Hartford, the Lenders named therein and The Chase Manhattan Bank as Administrative Agent was filed as Exhibit 10.11 to The Hartford's Form 10-K for the fiscal year ended December 31, 1996 and is incorporated herein by reference. 10.10 364 Day Competitive Advance and Revolving Credit Facility Agreement dated as of December 20, 1996 among The Hartford, the lenders named therein and The Chase Manhattan Bank as Administrative Agent was filed as Exhibit 10.12 to The Hartford's Form 10-K for the fiscal year ended December 31, 1996 and is incorporated herein by reference. *10.11 Employment Agreement dated July 1, 1997 between The Hartford and Ramani Ayer was filed as Exhibit 10.01 to The Hartford's Form 10-Q for the quarterly period ended September 30, 1997 and is incorporated herein by reference. *10.12 Employment Agreement dated July 1, 1997 between Hartford Life, Inc. ("Hartford Life"), The Hartford and Lowndes A. Smith was filed as Exhibit 10.02 to The Hartford's Form 10-Q for the quarterly period ended September 30, 1997 and is incorporated herein by reference. *10.13 Employment Agreement dated July 1, 1997 between The Hartford and David K. Zwiener was filed as Exhibit 10.03 to The Hartford's Form 10-Q for the quarterly period ended September 30, 1997 and is incorporated herein by reference. *10.14 Employment Agreement dated July 1, 2000 between The Hartford and Thomas M. Marra was filed as Exhibit 10.1 to The Hartford's Form 10-Q for the quarterly period ended September 30, 2000 and is incorporated herein by reference. *10.15 Form of Employment Protection Agreement between The Hartford and certain executive officers of The Hartford was filed as Exhibit 10.15 to The Hartford's Form 10-K for the fiscal year ended December 31, 1997 and is incorporated herein by reference. *10.16 The Hartford 1996 Restricted Stock Plan for Non-Employee Directors, as amended, was filed as Exhibit 10.15 to The Hartford's Form 10-K for the fiscal year ended December 31, 1998 and is incorporated herein by reference. *10.17 The Hartford 2000 Incentive Stock Plan dated as of May 18, 2000 was filed as Exhibit 10.1 to The Hartford's Form 10-Q for the quarterly period ended June 30, 2000 and is incorporated herein by reference. *10.18 The Hartford 1996 Deferred Restricted Stock Unit Plan, as amended, was filed as Exhibit 10.17 to The Hartford's Form 10-K for the fiscal year ended December 31, 1998 and is incorporated herein by reference. *10.19 The Hartford 1996 Deferred Compensation Plan, as amended in June 2000, is filed herewith. II-4 EXHIBITS INDEX (continued) EXHIBIT # --------- *10.20 The Hartford 1997 Senior Executive Severance Pay Plan I, revised as of October 15, 1998, was filed as Exhibit 10.19 to The Hartford's Form 10-K for the fiscal year ended December 31, 1998 and is incorporated herein by reference. *10.21 The Hartford Executive Severance Pay Plan, revised as of February 1, 1999, was filed as Exhibit 10.20 to The Hartford's Form 10-K for the fiscal year ended December 31, 1998 and is incorporated herein by reference. 10.22 Master Intercompany Agreement among Hartford Life, The Hartford and with respect to Articles VI and XII, Hartford Fire Insurance Company was filed as Exhibit 10.01 to Hartford Life's Form 10-Q filed for the quarterly period ended June 30, 1997 and is incorporated herein by reference. 10.23 Tax Sharing Agreement among The Hartford and its subsidiaries, including Hartford Life, was filed as Exhibit 10.02 to Hartford Life's Form 10-Q filed for the quarterly period ended June 30, 1997 and is incorporated herein by reference. 10.24 Management Agreement between Hartford Life Insurance Company and The Hartford Investment Management Company, was filed as Exhibit 10.03 to Hartford Life's Form 10-Q filed for the quarterly period ended June 30, 1997 and is incorporated herein by reference. 10.25 Management Agreement among certain subsidiaries of Hartford Life and Hartford Investment Services, Inc., was filed as Exhibit 10.04 to Hartford Life's Form 10-Q filed for the quarterly period ended June 30, 1997 and is incorporated herein by reference. 10.26 Sublease Agreement between Hartford Fire Insurance Company and Hartford Life was filed as Exhibit 10.05 to Hartford Life's Form 10-Q filed for the quarterly period ended June 30, 1997 and is incorporated herein by reference. 12.01 Statement Re: Computation of Ratio of Earnings to Fixed Charges is filed herewith. 21.01 Subsidiaries of The Hartford Financial Services Group, Inc. is filed herewith. 23.01 Consent of Arthur Andersen LLP to the incorporation by reference into The Hartford's Registration Statements on Forms S-8 and Form S-3 of the report of Arthur Andersen LLP contained in this Form 10-K regarding the audited financial statements is filed herewith. * Management contract, compensatory plan or arrangement. II-5 EXHIBIT 4.24 THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY OR A NOMINEE OF THE DEPOSITORY TRUST COMPANY. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY TRUST COMPANY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST COMPANY TO A NOMINEE OF THE DEPOSITORY TRUST COMPANY OR BY A NOMINEE OF THE DEPOSITORY TRUST COMPANY TO THE DEPOSITORY TRUST COMPANY OR ANOTHER NOMINEE OF THE DEPOSITORY TRUST COMPANY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE HARTFORD FINANCIAL SERVICES GROUP, INC. 7.75% Senior Notes due June 15, 2005 No.1 $250,000,000 CUSIP 416515 AD 6 THE HARTFORD FINANCIAL SERVICES GROUP, INC. (formerly ITT Hartford Group, Inc.) , a corporation organized and existing under the laws of Delaware (hereinafter called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of Two Hundred Fifty Million Dollars ($250,000,000) on June 15, 2005, and to pay interest thereon from June 16, 2000 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on June 15 and December 15 in each year, commencing December 15, 2000, at the rate of 7.75% per annum, on the basis of a 360-day year consisting of twelve - 1 - 30-day months, until the principal hereof is paid or duly provided for or made available for payment, and (to the extent that the payment of such interest shall be legally enforceable) at the rate of 7.75% per annum on any overdue principal or premium and on any overdue installment of interest. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed and, upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any) and interest on this Security will be made at the office or agency of the Company maintained for that purpose in The City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of -------- ------- interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Securities Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. - 2 - IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: THE HARTFORD FINANCIAL SERVICES GROUP, INC. By: ----------------------------------------------------------------------- J. Richard Garrett Senior Vice President and Treasurer Attest: ________________________________ Michael O' Halloran Assistant Secretary - 3 - TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within mentioned Indenture. THE CHASE MANHATTAN BANK, as Trustee By: ----------------------------- Authorized officer - 4 - Reverse of Security This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under a Senior Indenture, dated as of October 20, 1995 (herein called the "Indenture"), between the Company and The Chase Manhattan Bank, as Trustee, successor to The Chase Manhattan Bank (National Association) (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, limited in aggregate principal amount to $250,000,000. The Company may, at its option, upon not less than 30 days' notice by mail, redeem the Securities of this series on any Interest Payment Date in whole at any time or in part from time to time at a redemption price equal to any accrued and unpaid interest plus the greater of the principal amount thereof or an amount equal to the Discounted Remaining Fixed Amount Payments as defined in the Indenture. For purposes of this Security, the term "Current Value" shall mean, in respect of any amount, the present value of that amount on the date fixed for redemption after discounting that amount on a semiannual basis from the originally scheduled date for payment on the basis of the Treasury Rate, all computed in accordance with generally accepted financial practice. In the event of redemption of this Security in part only, a new Security or Securities of this series for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. The Indenture contains provisions for satisfaction, discharge and defeasance of the entire indebtedness on this security, upon compliance by the Company with certain conditions set forth therein. If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this Security shall be conclusive and binding upon such Holder and upon all future Holders of - 5 - this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Securities Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of (and premium, if any) and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. - 6 - EXHIBIT 4.25 THIS SECURITY IS A GLOBAL SECURITY WITHIN THE MEANING OF THE INDENTURE HEREINAFTER REFERRED TO AND IS REGISTERED IN THE NAME OF THE DEPOSITORY TRUST COMPANY OR A NOMINEE OF THE DEPOSITORY TRUST COMPANY. THIS SECURITY IS EXCHANGEABLE FOR SECURITIES REGISTERED IN THE NAME OF A PERSON OTHER THAN THE DEPOSITORY TRUST COMPANY OR ITS NOMINEE ONLY IN THE LIMITED CIRCUMSTANCES DESCRIBED IN THE INDENTURE AND MAY NOT BE TRANSFERRED EXCEPT AS A WHOLE BY THE DEPOSITORY TRUST COMPANY TO A NOMINEE OF THE DEPOSITORY TRUST COMPANY OR BY A NOMINEE OF THE DEPOSITORY TRUST COMPANY TO THE DEPOSITORY TRUST COMPANY OR ANOTHER NOMINEE OF THE DEPOSITORY TRUST COMPANY. UNLESS THIS CERTIFICATE IS PRESENTED BY AN AUTHORIZED REPRESENTATIVE OF THE DEPOSITORY TRUST COMPANY, A NEW YORK CORPORATION ("DTC"), TO THE ISSUER OR ITS AGENT FOR REGISTRATION OF TRANSFER, EXCHANGE, OR PAYMENT, AND ANY CERTIFICATE ISSUED IS REGISTERED IN THE NAME OF CEDE & CO. OR IN SUCH OTHER NAME AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC (AND ANY PAYMENT IS MADE TO CEDE & CO. OR TO SUCH OTHER ENTITY AS IS REQUESTED BY AN AUTHORIZED REPRESENTATIVE OF DTC), ANY TRANSFER, PLEDGE, OR OTHER USE HEREOF FOR VALUE OR OTHERWISE BY OR TO ANY PERSON IS WRONGFUL INASMUCH AS THE REGISTERED OWNER HEREOF, CEDE & CO., HAS AN INTEREST HEREIN. THE HARTFORD FINANCIAL SERVICES GROUP, INC. 7.90% Senior Notes due June 15, 2010 No.1 $275,000,000 CUSIP 416515 AE 4 THE HARTFORD FINANCIAL SERVICES GROUP, INC. (formerly ITT Hartford Group, Inc.) , a corporation organized and existing under the laws of Delaware (hereinafter called the "Company", which term includes any successor corporation under the Indenture hereinafter referred to), for value received, hereby promises to pay to Cede & Co., or registered assigns, the principal sum of Two Hundred Seventy-Five Million Dollars ($275,000,000) on June 15, 2010, and to pay interest thereon from June 16, 2000 or from the most recent Interest Payment Date to which interest has been paid or duly provided for, semi-annually on June 15 and December 15 in each year, commencing December 15, 2000, at the rate of 7.90% per annum, on the basis of a 360-day year - 7 - consisting of twelve 30-day months, until the principal hereof is paid or duly provided for or made available for payment, and (to the extent that the payment of such interest shall be legally enforceable) at the rate of 7.90% per annum on any overdue principal or premium and on any overdue installment of interest. The interest so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in such Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest, which shall be the June 1 or December 1 (whether or not a Business Day), as the case may be, next preceding such Interest Payment Date. Any such interest not so punctually paid or duly provided for will forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the person in whose name this Security (or one or more Predecessor Securities) is registered at the close of business on a Special Record Date for the payment of such Defaulted Interest to be fixed by the Trustee, notice whereof shall be given to Holders of Securities of this series not less than 10 days prior to such Special Record Date, or be paid at any time in any other lawful manner not inconsistent with the requirements of any securities exchange on which the Securities of this series may be listed and, upon such notice as may be required by such exchange, all as more fully provided in said Indenture. Payment of the principal of (and premium, if any) and interest on this Security will be made at the office or agency of the Company maintained for that purpose in the City of New York, in such coin or currency of the United States of America as at the time of payment is legal tender for payment of public and private debts; provided, however, that at the option of the Company payment of -------- -------- interest may be made by check mailed to the address of the Person entitled thereto as such address shall appear in the Securities Register. Reference is hereby made to the further provisions of this Security set forth on the reverse hereof, which further provisions shall for all purposes have the same effect as if set forth at this place. Unless the certificate of authentication hereon has been executed by the Trustee referred to on the reverse hereof by manual signature, this Security shall not be entitled to any benefit under the Indenture or be valid or obligatory for any purpose. - 8 - IN WITNESS WHEREOF, the Company has caused this instrument to be duly executed under its corporate seal. Dated: THE HARTFORD FINANCIAL SERVICES GROUP, INC. By: ----------------------------------------------------------------------- J. Richard Garrett Senior Vice President and Treasurer Attest: _______________________________ Michael O' Halloran Assistant Secretary - 9 - TRUSTEE'S CERTIFICATE OF AUTHENTICATION This is one of the Securities referred to in the within mentioned Indenture. THE CHASE MANHATTAN BANK, as Trustee By: ----------------------------- Authorized officer - 10 - Reverse of Security This Security is one of a duly authorized issue of securities of the Company (herein called the "Securities"), issued and to be issued in one or more series under a Senior Indenture, dated as of October 20, 1995 (herein called the "Indenture"), between the Company and The Chase Manhattan Bank, as Trustee, successor to The Chase Manhattan Bank (National Association) (herein called the "Trustee", which term includes any successor trustee under the Indenture), to which Indenture and all indentures supplemental thereto reference is hereby made for a statement of the respective rights, limitations of rights, duties and immunities thereunder of the Company, the Trustee and the Holders of the Securities and of the terms upon which the Securities are, and are to be, authenticated and delivered. This Security is one of the series designated on the face hereof, limited in aggregate principal amount to $275,000,000. The Company may, at its option, upon not less than 30 days' notice by mail, redeem the Securities of this series on any Interest Payment Date in whole at any time or in part from time to time at a redemption price equal to any accrued and unpaid interest plus the greater of the principal amount thereof or an amount equal to the Discounted Remaining Fixed Amount Payments as defined in the Indenture, except that, for purposes of this Security, the term "Current Value" shall mean, in respect of any amount, the present value of that amount on the date fixed for redemption after discounting that amount on a semiannual basis from the originally scheduled date for payment on the basis of the Treasury Rate plus 10 basis points, all computed in accordance with generally accepted financial practice. In the event of redemption of this Security in part only, a new Security or Securities of this series for the unredeemed portion hereof will be issued in the name of the Holder hereof upon the cancellation hereof. The Indenture contains provisions for satisfaction, discharge and defeasance of the entire indebtedness on this security, upon compliance by the Company with certain conditions set forth therein. If an Event of Default with respect to Securities of this series shall occur and be continuing, the principal of the Securities of this series may be declared due and payable in the manner and with the effect provided in the Indenture. The Indenture permits, with certain exceptions as therein provided, the amendment thereof and the modification of the rights and obligations of the Company and the rights of the Holders of the Securities of each series to be affected under the Indenture at any time by the Company and the Trustee with the consent of the Holders of a majority in principal amount of the Securities at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting the Holders of specified percentages in principal amount of the Securities of each series at the time Outstanding, on behalf of the Holders of all Securities of such series, to waive compliance by the Company with certain provisions of the Indenture and certain past defaults under the Indenture and their consequences. Any such consent or waiver by the Holder of this - 11 - Security shall be conclusive and binding upon such Holder and upon all future Holders of this Security and of any Security issued upon the registration of transfer hereof or in exchange herefor or in lieu hereof, whether or not notation of such consent or waiver is made upon this Security. No reference herein to the Indenture and no provision of this Security or of the Indenture shall alter or impair the obligation of the Company, which is absolute and unconditional, to pay the principal of (and premium, if any) and interest on this Security at the times, place and rate, and in the coin or currency, herein prescribed. As provided in the Indenture and subject to certain limitations therein set forth, the transfer of this Security is registrable in the Securities Register, upon surrender of this Security for registration of transfer at the office or agency of the Company in any place where the principal of (and premium, if any) and interest on this Security are payable, duly endorsed by, or accompanied by a written instrument of transfer in form satisfactory to the Company and the Securities Registrar duly executed by, the Holder hereof or his attorney duly authorized in writing, and thereupon one or more new Securities of this series, of authorized denominations and for the same aggregate principal amount, will be issued to the designated transferee or transferees. The Securities of this series are issuable only in registered form without coupons in denominations of $1,000 and any integral multiple thereof. As provided in the Indenture and subject to certain limitations therein set forth, Securities of this series are exchangeable for a like aggregate principal amount of Securities of this series of a different authorized denomination, as requested by the Holder surrendering the same. No service charge shall be made for any such registration of transfer or exchange, but the Company may require payment of a sum sufficient to cover any tax or other governmental charge payable in connection therewith. Prior to due presentment of this Security for registration of transfer, the Company, the Trustee and any agent of the Company or the Trustee may treat the Person in whose name this Security is registered as the owner hereof for all purposes, whether or not this Security be overdue, and neither the Company, the Trustee nor any such agent shall be affected by notice to the contrary. All terms used in this Security which are defined in the Indenture shall have the meanings assigned to them in the Indenture. - 12 - EXHIBIT 10.19 THE HARTFORD 1996 DEFERRED COMPENSATION PLAN ARTICLE I PURPOSE 1.1 PURPOSE. The purpose of the Plan is to provide, in the discretion of the Committee, an opportunity for certain Key Employees to defer the receipt of certain Eligible Compensation to the extent provided herein. The Plan is intended to constitute an unfunded and unsecured deferred compensation arrangement for a select group of management or highly compensated employees for purposes of ERISA. The Plan restates the terms of certain unfunded and unsecured deferred compensation arrangements established for such employees by ITT Corporation and The Hartford in 1994 and 1995, and continued by The Hartford to the extent provided hereunder. Capitalized terms used in the Plan shall have the meanings provided herein. ARTICLE II DEFINITIONS The following terms shall have the following meanings for purposes of the Plan: "ACCOUNT" means the account maintained on behalf of a Participant pursuant to ------- the Plan. "ACT" means the Securities Exchange Act of 1934, as amended. --- "BENEFICIAL OWNER" means any Person who, directly or indirectly, has the right ----------------- to vote or dispose of or has "beneficial ownership" (within the meaning of Rule 13d-3 under the Act) of any securities of a company, including any such right pursuant to any agreement, arrangement or understanding (whether or not in writing), provided that: (A) a Person shall not be deemed the Beneficial Owner ------------- of any security as a result of an agreement, arrangement or understanding to vote such security (i) arising solely from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the Act and the applicable rules and regulations thereunder, or (ii) made in connection with, or to otherwise participate in, a proxy or consent solicitation made, or to be made, pursuant to, and in accordance with, the applicable provisions of the Act and the applicable rules and regulations thereunder, in either case described in clause (i) or (ii) above, whether or not such agreement, arrangement or understanding is also then reportable by such Person on Schedule 13D under the Act (or any comparable or successor report); and (B) a Person engaged in business as an underwriter of securities shall not be deemed to be the Beneficial Owner of any security acquired through such Person's participation in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition. "BOARD OF DIRECTORS" means the Board of Directors of The Hartford Financial ------------------- Services Group, Inc. June, 2000 Page 2 "CHANGE OF CONTROL" means: ----------------- (A) a report on Schedule 13D shall be filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Act disclosing that any Person, other than The Hartford or a subsidiary of The Hartford or any employee benefit plan sponsored by The Hartford or a subsidiary of The Hartford, is the Beneficial Owner directly or indirectly of twenty percent or more of the outstanding stock of The Hartford entitled to vote in the election of directors of The Hartford; (B) any Person, other than The Hartford or a subsidiary of The Hartford or any employee benefit plan sponsored by The Hartford or a subsidiary of The Hartford, shall purchase shares pursuant to a tender offer or exchange offer to acquire any stock of The Hartford (or securities convertible into stock) for cash, securities or any other consideration, provided that after consummation of the offer, the Person in question is the Beneficial Owner of fifteen percent or more of the outstanding stock of The Hartford entitled to vote in the election of directors of The Hartford (calculated as provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights to acquire stock); (C) the stockholders of The Hartford shall approve (1) any consolidation or merger in which The Hartford is not the continuing or surviving corporation or pursuant to which shares of stock of The Hartford entitled to vote in the election of directors of The Hartford would be converted into cash, securities or other property, other than a consolidation or merger of The Hartford in which holders of such stock of The Hartford immediately prior to the consolidation or merger have the same proportionate ownership of stock of the surviving corporation entitled to vote in the election of directors immediately after the consolidation or merger as immediately before, or (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of The Hartford; or (D) within any 12 month period, the persons who were directors of The Hartford immediately before the beginning of such period (the "Incumbent Directors of The Hartford") shall cease (for any reason other than death) to constitute at least a majority of the board of directors of The Hartford or the board of directors of any successor to The Hartford, provided that any director of The Hartford who was not a director of The Hartford at the beginning of such period shall be deemed to be an Incumbent Director of The Hartford if such director (1) was elected to the board of directors of The Hartford by, or on the recommendation of or with the approval of, at least two-thirds of the directors of The Hartford who then qualified as Incumbent Directors of The Hartford either actually or by prior operation of this clause (D), and (2) was not designated by a Person who has entered into an agreement with The Hartford to effect a transaction described in the immediately preceding clause (C) hereof. "COMMITTEE" means the Compensation and Personnel Committee of the Board of --------- Directors, or such other Committee as the Board may designate to administer the Plan pursuant to Article VII. Page 3 "ELIGIBLE COMPENSATION" means the amount of compensation of a Key Employee, if ---------------------- any, designated by the Committee in its sole discretion as eligible for deferral under the Plan, which may include (A) the cash amount, if any, which may become payable to a Key Employee pursuant to a Participating Company's executive bonus program, (B) the cash amount, if any, which may become payable to a Key Employee pursuant to a Participating Company's life sales incentive payment program, and (C) the amount of any such other compensation of a Key Employee of a Participating Company as the Committee may deem appropriate for deferral in accordance with the Plan. "ERISA" means the Employee Retirement Income Security Act of 1974, as amended ----- from time to time. "INCENTIVE STOCK PLAN" means The Hartford 1995 Incentive Stock Plan, as may be --------------------- amended from time to time, and any successor Plan thereto. "INVESTMENT AND SAVINGS PLAN" means The Hartford Investment and Savings Plan, as --------------------------- may be amended from time to time, and any successor Plan thereto. "KEY EMPLOYEE" shall have the meaning assigned by the Incentive Stock Plan. ------------ "PARTICIPANT" means a Key Employee who properly elects to participate in the ----------- Plan pursuant to Article III. "PARTICIPATING COMPANY" shall have the meaning assigned by the Incentive Stock ---------------------- Plan. "PERSON" has the meaning ascribed to such term in Section 3(a)(9) of the Act, as ------ supplemented by Section 13(d)(3) of the Act; provided, however, that Person shall not include (A) The Hartford, any subsidiary of The Hartford or any Person controlled by The Hartford, (B) any trustee or other fiduciary holding securities under any employee benefit plan of The Hartford or of any subsidiary of The Hartford, or (C) a corporation owned, directly or indirectly, by the stockholders of The Hartford in substantially the same proportions as their respective ownership of securities of The Hartford. "PHANTOM FUND" means a mutual fund or other investment vehicle or measure or ------------- index of investment performance selected by the Committee to determine the hypothetical investment experience of Participant Accounts pursuant to Article IV. "PLAN" means this plan, The Hartford 1996 Deferred Compensation Plan, as may be ---- amended from time to time. "PLAN ADMINISTRATOR" shall have the meaning assigned by Article VII of the Plan. ------------------ Page 4 "THE HARTFORD" means The Hartford Financial Services Group, Inc., or a successor ------------ by merger, purchase or otherwise. "VALUATION DATE" means the last business day of each calendar quarter in an --------------- applicable calendar year, or such other date as may be designated by the Plan Administrator. ARTICLE III PARTICIPATION 3.1 ELECTION TO PARTICIPATE. A Key Employee of a Participating Company may ------------------------ participate in the Plan by filing a properly completed election form (or such other authorization as the Plan Administrator may require) with the party and by the date designated by the Plan Administrator. The election of a Key Employee in accordance with this Article III shall apply only to the Eligible Compensation as to which the election is made, and shall have the effect, to the extent provided herein, of deferring the payment of such Eligible Compensation beyond the date that it might otherwise have become payable to the Participant. Such election shall be irrevocable, except to the extent provided herein or determined by the Committee in its sole discretion. 3.2 FORM OF ELECTION. The election form filed by a Participant pursuant to this ---------------- Article III shall (A) identify a portion of the Participant's Eligible Compensation that may become payable with respect to the Participant's services, (B) contain the Participant's election to defer the payment of such portion of such Eligible Compensation that is determinable for tax purposes in the following calendar year in accordance with the terms of the Plan, and (C) contain such other information as the Plan Administrator may require. 3.3 MAXIMUM AND MINIMUM AMOUNTS REQUIRED FOR PARTICIPATION. The Committee or the ------------------------------------------------------ Plan Administrator may designate a maximum and a minimum portion of a Key Employee's Eligible Compensation, in terms of a percentage or other amount thereof, as to which an election may be made hereunder. 3.4 NULLIFICATION OF ELECTION. Notwithstanding anything herein to the contrary, ------------------------- any election made by a Key Employee hereunder shall be deemed null and void to the extent that (A) the Eligible Compensation as to which the election applies is designated by the Committee, in its sole discretion, as not payable to such Key Employee, (B) such election applies to Eligible Compensation payable during the 12 month period during which the Key Employee ceases savings under the Investment and Savings Plan as a result of receiving a hardship withdrawal under that Plan, or (C) the Committee so determines in its sole discretion. 3.5 ESTABLISHMENT OF PARTICIPANT ACCOUNTS. An account shall be maintained on --------------------------------------- behalf of each Participant on the books of The Hartford. Amounts shall be credited to or debited from a Participant's Account as provided in Article V. The Plan Administrator shall cause each Participant's Account to be valued on the applicable Valuation Date, and shall cause records indicating such value Page 5 to be maintained. When an event requires a determination of the value of a Participant's Account, such value shall be determined as of the Valuation Date coincident with or next succeeding the date of such event. The value of a Participant's Account shall be reported to the Participant from time to time as determined appropriate by the Plan Administrator. 3.6 OBTAINING OF LIFE INSURANCE POLICIES. As a condition of participation --------------------------------------- hereunder, the Committee may require that a Participant provide assistance in obtaining a life insurance policy on the life of such Participant, such policy to be solely owned by, and solely payable to, The Hartford (or such other entity as may be designated by the Committee). Such Participant may be required to (A) complete an application for life insurance, (B) furnish underwriting information (including but not limited to submitting to medical examinations by an insurance company approved examiner), (C) authorize the release of the Participant's medical history to an insurance company underwriter, and (D) provide such other information and take such other actions relating to such life insurance policy as may be required by the Plan Administrator. A Participant as to whom a life insurance policy is obtained hereunder shall have no right to or interest in such policy or the proceeds thereof. 3.7 TERMINATION OF PARTICIPATION. The participation of a Participant in the Plan ---------------------------- shall terminate on the earlier of (A) the date that all amounts credited to the Participant's Account have been distributed pursuant to the Plan, (B) the date of termination of the Plan, or (C) such other date as may be designated by the Committee. ARTICLE IV PHANTOM FUND INVESTMENT ALLOCATIONS 4.1 SELECTION OF PHANTOM FUNDS. The Committee shall select one or more Phantom -------------------------- Funds to which a Participant may elect pursuant to the Plan to allocate all or a portion of the amount then and thereafter credited to the Participant's Account. To the extent provided herein, such Phantom Funds shall be used to measure the hypothetical investment experience of the portion of a Participant's Account that the Participant properly elects to have allocated thereto. The Committee may change the selection of Phantom Funds from time to time in its sole discretion. The selection of any such Phantom Funds shall not require the Company to invest or earmark any of its assets in any specific manner. 4.2 INVESTMENT ALLOCATION ELECTION. To the extent permitted by the Plan -------------------------------- Administrator, a Participant may elect to have the amount then and thereafter credited to his or her Account allocated among one or more of the Phantom Funds. Such election shall be made by filing a properly completed election form (or such other authorization as the Plan Administrator may require) with the party and by the date designated by the Plan Administrator. Such election shall result in the investment experience of an elected Phantom Fund being used to measure the hypothetical investment experience of the particular portion of the Participant's Account allocated to that Phantom Fund as provided herein. Page 6 Page 7 4.3 CHANGES IN INVESTMENT ALLOCATION. To the extent permitted by the Plan ----------------------------------- Administrator, a Participant may change the investment allocation previously elected by filing a properly completed change form (or such other authorization as the Plan Administrator may require) with the party and by the date designated by the Plan Administrator. Such change shall be effective as soon as practicable after the Valuation Date coincident with or next succeeding receipt of the timely filed change form by the designated party (or such other date as may be designated by the Plan Administrator), and shall apply to all amounts then and thereafter credited to the Participant's Account. 4.4 FAILURE TO MAKE PROPER ELECTION. In the event that a Participant does not -------------------------------- make a proper election pursuant to this Article IV, such Participant shall be deemed to have elected to have the entire amount (as to which no proper election is made) then and thereafter credited to the Participant's Account allocated to the Phantom Fund that the Plan Administrator determines generally to have the least risk of loss of principal. 4.5 LIMITATIONS ON INVESTMENT ALLOCATION. The Plan Administrator may (A) --------------------------------------- establish a minimum and/or a maximum portion of a Participant's Account, in terms of a percentage or other amount thereof, that a Participant may elect to allocate to a particular Phantom Fund hereunder, (B) preclude any Participant who is an executive officer of the Company from allocating any portion of his or her Account to a Phantom Fund with an investment experience determined primarily in relation to the investment performance of securities issued by the Company, and (C) establish such other limitations on investment allocations as the Plan Administrator may deem appropriate. 4.6 NO ACTUAL INVESTMENT. Notwithstanding anything herein to the contrary, no -------------------- amount of Eligible Compensation as to which an election is made hereunder, and no amount credited to a Participant's Account pursuant to the Plan, shall be set aside or invested in any actual fund on behalf of the Participant, provided, however, that nothing in the Plan shall be construed to preclude the Company from directly or indirectly making investments for its own account in any actual investment vehicle corresponding to the Phantom Funds (or otherwise) in order to assist the Company in meeting its obligations hereunder, or for any other reason whatsoever. No Participant or any other person or entity shall have by reason of the Plan any right to or in any such investment made by the Company. ARTICLE V CREDITING AND DEBITING OF PARTICIPANT ACCOUNTS 5.1 CREDITING OF ELIGIBLE COMPENSATION. Eligible Compensation as to which the ----------------------------------- Participant makes an election in accordance with the Plan shall be credited to the Participant's Account as of the last day of the month in which such Eligible Compensation would otherwise have been paid to the Participant. 5.2 CREDITING AND/OR DEBITING OF PHANTOM FUND INVESTMENT EXPERIENCE. As of any ---------------------------------------------------------------- particular Valuation Date upon which an amount is credited to a Participant's Account, such Account shall be Page 8 credited or debited, as the case may be, with an amount equal to the hypothetical net investment gain or loss that such Participant would have realized if the portion of his or her Account properly elected to be allocated to a particular Phantom Fund pursuant to Article IV were actually invested in such Phantom Fund during the period beginning with the preceding Valuation Date and ending upon such particular Valuation Date (or such other period as may be designated by the Plan Administrator). 5.3 DEBITING OF DISTRIBUTIONS. The amount of any distribution from a ---------------------------- Participant's Account pursuant to the Plan shall be debited from the Participant's Account as of the Valuation Date coincident with or next succeeding the date of such distribution. 5.4 DEBITING OF ADMINISTRATIVE EXPENSES. The Participant's allocable share (as ------------------------------------ determined by the Plan Administrator) of any administrative expenses related to the operation of the Plan that are determined by the Committee to be payable by Participants shall be debited from the Participant's Account as of the Valuation Date coincident with or next succeeding the date upon which such expenses are incurred. 5.5 VESTING OF CREDITED AMOUNTS. The rights of a Participant in regard to the ---------------------------- amounts credited to the Participant's Account hereunder shall be fully vested at all times. ARTICLE VI DISTRIBUTIONS FROM PARTICIPANT ACCOUNTS 6.1 DISTRIBUTION ELECTION. A Participant may elect, by filing a properly ---------------------- completed election form (or such other authorization as the Plan Administrator may require) with the party and by the date designated by the Plan Administrator, to have the total amount credited to the Participant's Account distributed to him or her on a date and in a manner permitted by the Plan Administrator. Distributions from a Participant's Account shall be made in accordance with the date and manner of distribution elected by the Participant hereunder, except to the extent that a different date and/or manner of distribution is required pursuant to the Plan. Distributions made in accordance with a Participant's distribution election shall be made as soon as practicable after the Valuation Date coincident with or next succeeding the date of distribution elected by the Participant. A Participant who does not file a properly completed election form in accordance with this Section shall be deemed to have elected to have such amount distributed to the Participant in a single lump sum cash payment as soon as practicable after the Valuation Date coincident with or next succeeding the date the Participant's employment with all Participating Companies terminates. The election or deemed election by a Participant of a distribution date and manner pursuant to this Section shall apply to all amounts then and thereafter credited to a Participant's Account under the Plan, and shall be irrevocable except to the extent otherwise provided herein or permitted in the discretion of the Committee or the Plan Administrator to the extent determined consistent with applicable tax laws. Page 9 6.2 DISTRIBUTION IN THE EVENT OF HARDSHIP. A Participant may request a hardship ------------------------------------- distribution from his or her Account by filing a properly completed hardship distribution form (or such other authorization as the Plan Administrator may require) by the date and with the party designated by the Plan Administrator. The Plan Administrator may, if it determines that a severe and unforeseeable financial hardship on the part of the Participant exists, permit a distribution to the Participant of an amount credited to the Participant's Account that is reasonably necessary to meet such hardship, including any amount reasonably necessary to pay any income or other taxes resulting from such distribution. 6.3 DISTRIBUTION UPON TERMINATION OF EMPLOYMENT. As soon as practicable after -------------------------------------------- the Valuation Date coincident with or next succeeding the date that a Participant's employment with all Participating Companies terminates for any reason other than Retirement, the Company shall distribute to the Participant a single lump sum cash payment equal to the total amount credited to the Participant's Account as of such Valuation Date. 6.4 DISTRIBUTION IN THE EVENT OF A TERMINATION OF THE PLAN. In the event of a -------------------------------------------------------- termination of the Plan, the entire amount credited to a Participant's Account as of the Valuation Date coincident with or next succeeding such event shall be distributed to the Participant in a single lump sum cash payment as soon as practicable after such Valuation Date. 6.5 DISTRIBUTION TO FIDUCIARY. If the Plan Administrator determines that any ------------------------- person to whom any amount is otherwise distributable hereunder is unable to care for his or her affairs, such amount (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be distributed to any person determined by the Plan Administrator to have fiduciary responsibility for such person otherwise entitled to such amount, in such manner and proportions as the Plan Administrator may deem appropriate. Any such distribution shall constitute a complete discharge of any obligation of the Company to such person under the Plan. 6.6 DISTRIBUTION IN THE EVENT OF DEATH. Notwithstanding anything herein to the ---------------------------------- contrary, in the event of a Participant's death, the entire amount credited to the Participant's Account as of the Valuation Date coincident with or next succeeding the date of the Participant's death shall be distributed in a single lump sum cash payment as soon as practicable after such Valuation Date to one or more beneficiaries, if any, properly designated by the Participant by the date and in the manner required by the Plan Administrator. If (A) no such designation is in effect at the time of the Participant's death, (B) no designated beneficiary survives the Participant, or (C) any beneficiary designation made by the Participant conflicts with applicable law, such amount shall be paid to the Participant's estate as soon as practicable after such Valuation Date. 6.7 DISTRIBUTION UPON THE OCCURRENCE OF A CHANGE OF CONTROL. ------------------------------------------------------- (A) DISTRIBUTION OF ACCOUNTS. Upon the occurrence of a Change of -------------------------- Control, all Participants shall be paid single lump sum cash payments equal to the entire amount credited Page 10 to their respective Accounts as of the date of such occurrence, such payments to be made immediately following the date of such Change of Control. (B) EXCEPTION FOR PRIOR ELECTION. Notwithstanding Section 6.7(A), if a ---------------------------- Participant who is an employed by a Participating Company immediately prior to a Change of Control has made a prior valid election to not receive a lump sum distribution of his or her Account (and therefore to continue participating in the Plan) upon a Change of Control, then such Participant's Account shall not be so distributed and shall (to the extent permitted by the Plan) continue to be maintained under the Plan, and any such Participant's Account shall be distributed to such Participant at the time and in the form otherwise required by the Plan. (C) DEATH PRIOR TO RECEIPT OF PAYMENT. In the event of the death of ------------------------------------ such a Participant before receiving a payment required by Section 6.7(A) hereof, such payment shall be made immediately following the date of the occurrence of the Change of Control to the individual or entity who would have received payment hereunder in the absence of a Change of Control. 6.8 DISTRIBUTION IN OTHER CIRCUMSTANCES. The Committee may determine in its sole ----------------------------------- discretion that a distribution of an amount credited to a Participant's Account is appropriate under the circumstances. As soon as practicable after the Valuation Date coincident with or next succeeding the date of any such determination, the Company shall distribute such amount to the Participant in a single lump sum cash payment (or in such other manner of payment as determined appropriate by the Committee). ARTICLE VII ADMINISTRATION 7.1 ADMINISTRATION BY COMMITTEE. Except as otherwise delegated by the Committee --------------------------- pursuant to the Plan, (A) the Plan shall be administered by the Committee, (B) the Committee shall have full authority to administer and interpret this Plan in any manner it deems appropriate in its sole discretion, and (C) the determinations of the Committee shall be binding on and conclusive as to all parties. 7.2 DELEGATION OF CERTAIN AUTHORITY TO PLAN ADMINISTRATOR. Except as otherwise ------------------------------------------------------ provided by the Committee in accordance with the Plan, the Plan Administrator shall be The Hartford's Group Senior Vice President, Human Resources (or other person holding a similar position). Except as otherwise provided herein, required by applicable law, or determined by the Committee, (A) the Plan Administrator shall be responsible for the performance of such administrative duties under this Plan that are not otherwise reserved to the Committee by the Plan, (B) the Plan Administrator shall have full authority to administer and interpret this Plan in any manner it deems appropriate in its sole discretion, and (C) the determinations of the Plan Administrator shall be binding and conclusive as to all parties. Page 11 7.3 LIABILITY AND INDEMNIFICATION OF COMMITTEE AND PLAN ADMINISTRATOR. In ---------------------------------------------------------------------- connection with any action or determination made in connection with the Plan, the Plan Administrator and the Committee shall be entitled to rely upon information furnished by or on behalf of the Company or any Participant. To the extent permitted by law, the Plan Administrator and the members of the Committee shall not be liable for, and The Hartford shall indemnify the Plan Administrator and the members of the Committee against any liability for, any loss sustained by reason of any act or failure to act in their administrative capacities, provided such act or failure to act does not involve willful misconduct. Such indemnification shall include attorneys' fees and other costs and expenses reasonably incurred in defense of any action brought against the Plan Administrator or any member of the Committee by reason of any such act or failure to act. The Plan Administrator and any member of the Committee shall not be liable or responsible for any act or omission of another fiduciary in relation to the Plan unless the Plan Administrator or such member (A) participates knowingly in, or knowingly undertakes to conceal, such act or omission by such other fiduciary, or (B) has knowledge of a breach of fiduciary responsibility by such other fiduciary and does not make reasonable efforts to remedy such breach. ARTICLE VIII MISCELLANEOUS 8.1 UNFUNDED AND UNSECURED PLAN. The Plan shall be unfunded and unsecured for ----------------------------- tax purposes and for purposes of ERISA. The Hartford shall have no obligation to fund its liabilities, if any, under the Plan. Nothing in the Plan and no action taken by The Hartford or its agents hereunder shall be construed to create a trust of any kind, or a fiduciary relationship between The Hartford and any other person or entity. All funds or other assets received or held by The Hartford pursuant to or in connection with the Plan may be used by The Hartford for any corporate purpose, and The Hartford shall not be obligated to segregate such amounts from its general assets. No Participant or any other person or entity shall have any claim against The Hartford or its assets other than as an unsecured and unsubordinated general creditor of The Hartford. Without limiting the generality of the foregoing, a Participant's claim hereunder shall at any time be solely for the amount then credited to the Participant's Account. Notwithstanding the foregoing, The Hartford may establish a grantor trust or purchase securities or take any other action deemed appropriate to assist The Hartford in meeting its obligations under the Plan, provided, however, that in no event shall any person or entity have any right to or interest in such trust or property by reason of the Plan. 8.2 ABSENCE OF REPRESENTATIONS. The Plan shall not be construed to provide any --------------------------- representation or guarantee by The Hartford that any particular income or other tax consequence will result from a Participant's participation in the Plan. Each Participant shall be deemed to have consulted with his or her professional tax advisor to determine the tax consequences of participation hereunder. The Plan shall not be construed to provide any representation or guarantee by The Hartford that any particular amount of a Participant's Account allocated to any of the Phantom Funds hereunder will Page 12 result in any particular investment experience related thereto, and The Hartford shall in no event be required to pay any amount to any person or entity on account of any loss suffered by reason of the operation of the Plan. 8.3 WITHHOLDING. The Plan Administrator shall have the right to make such ----------- provisions as it deems appropriate to satisfy any obligation of The Hartford to withhold federal, state or local income or other taxes incurred by reason of the operation of the Plan, including but not limited to at any time requiring a Participant to submit payment to The Hartford for such taxes, or withholding such taxes from a Participant's wages (or other amounts) due to the Participant. 8.4 NO EMPLOYMENT RIGHTS. The Plan shall not, directly or indirectly, create in -------------------- any Participant any right with respect to continuation of employment with any of the Participating Companies or to the receipt of any Eligible Compensation or other compensation. The Plan shall not interfere in any way with the rights of the applicable Participating Company to terminate, or otherwise modify, the employment of any Participant or its compensation policies at any time. 8.5 RIGHTS NOT TRANSFERABLE. The rights of a Participant under the Plan shall ------------------------ not be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of, other than (A) by will, (B) by the laws of descent or distribution, or (C) pursuant to a qualified domestic relations order as defined in the Internal Revenue Code of 1986, as amended, provided that the rights of any transferee of a Participant shall not be greater than the rights of the Participant hereunder. The foregoing restriction shall be in addition to any restrictions imposed by applicable law on a Participant's ability to dispose of any rights under the Plan. 8.6 EFFECT OF PLAN. The provisions of the Plan shall be binding upon all --------------- successors and assigns of a Participant, including without limitation the Participant's estate and the executors, administrators or trustees thereof, heirs and legatees, and any receiver, trustee in bankruptcy or representative of creditors of the Participant. 8.7 ADMINISTRATIVE EXPENSES. The Hartford shall pay for all administrative ------------------------ expenses related to the operation of the Plan, except as otherwise determined by the Committee. 8.8 AMENDMENT AND TERMINATION OF THE PLAN. The Board of Directors or the ----------------------------------------- Committee (acting on behalf of the Board of Directors) may amend or terminate the Plan or any Participant elections hereunder at any time. The Committee may at any time amend or terminate the Plan or any Participant elections hereunder if the Committee determines in its sole discretion that The Hartford will recognize income for income tax purposes with respect to any reserves accumulated under any life insurance policy obtained with respect to any Participant hereunder. The Committee or the Plan Administrator may amend the Plan to the extent (A) required by applicable law or regulation, or (B) required to maintain a favorable tax status for the Plan. 8.9 GOVERNING LAW. The laws of the State of Connecticut shall govern all matters ------------- relating to the Plan, except to the extent such laws are superseded by the laws of the United States. Page 13 8.10 SEVERABILITY OF PROVISIONS. If any provision of the Plan shall be held ---------------------------- invalid or unenforceable, such invalidity or unenforceability shall not affect any other provisions hereof, and the Plan shall be construed and enforced as if such invalid or unenforceable provisions had not been included herein. 8.11 EFFECTIVE DATE. The Effective Date of this restatement of the Plan shall be -------------- July 16, 1998, or such later date as the Plan Administrator may determine. Page 14 Page 15 PLAN HISTORY ------------ 10/17/96: Key terms of Plan formally approved by the Compensation and -------------------------------------------------------------------------------- Personnel Committee of the Board of Directors of ITT Hartford ---------------------------------------------------------------- Group, Inc., and authority to create Plan document and implement ---------------------------------------------------------------- Plan delegated to management on same date. Plan restates ---------------------------------------------------------------- essential terms of provisions of deferred compensation ---------------------------------------------------------------- arrangements established by ITT Corporation in 1994 (for 1995 ---------------------------------------------------------------- executive salary and for executive bonuses determinable and ---------------------------------------------------------------- payable in 1995), and by ITT Corporation and ITT Hartford Group, ---------------------------------------------------------------- Inc. in 1995 (for 1996 executive salary and executive bonuses ---------------------------------------------------------------- determinable and payable in 1996, and for life sales incentive ---------------------------------------------------------------- payments earned in 1996). ------------------------- 5/2/97: Plan amended to reflect Company name change from ITT Hartford -------------------------------------------------------------------------------- Group, Inc. to The Hartford Financial Services Group, Inc. No ---------------------------------------------------------------- changes determined necessary to reflect Life Company public ---------------------------------------------------------------- offerings. ---------- 10/97 No changes determined necessary to reflect committee's approval -------------------------------------------------------------------------------- at 10/16/97 meeting of reduction in threshold pay for ---------------------------------------------------------------- participation to the IRS Section 401(a)(17) amount for the year ---------------------------------------------------------------- participation is elected ($160k for 1997). Determined ---------------------------------------------------------------- unnecessary to have committee re-approve plan every year - plan ---------------------------------------------------------------- terms permit plan to be in effect until committee terminates it. ---------------------------------------------------------------- 7/98 Plan amended to include change of control provisions approved by -------------------------------------------------------------------------------- the Compensation Committee of The Hartford Financial Services ---------------------------------------------------------------- Group, Inc. ----------- 6/00 Plan amended to include additional change of control provisions -------------------------------------------------------------------------------- approved by the Compensation Committees of The Hartford ---------------------------------------------------------------- Financial Services Group, Inc. and Hartford Life, Inc. on ---------------------------------------------------------------- February 16, 2000, and also amended to reflect the merger of ---------------------------------------------------------------- Hartford Life, Inc. into a wholly owned subsidiary of The ---------------------------------------------------------------- Hartford Financial Services Group, Inc. in June, 2000. ------------------------------------------------------ Page 16 EXHIBIT 12.01
THE HARTFORD FINANCIAL SERVICES GROUP, INC. COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS [1] (In millions) 2000 1999 1998 1997 1996 --------------------------------------------------------------------------------------------------------------------------------- EARNINGS $ 1,418 $ 1,235 $ 1,475 $ 1,703 $ (318) ADD: FIXED CHARGES Interest expense 250 219 216 213 148 Interest factor attributable to rentals 67 61 54 48 36 --------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED CHARGES 317 280 270 261 184 --------------------------------------------------------------------------------------------------------------------------------- Interest credited to contractholders 1,124 1,197 1,475 1,180 1,258 --------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED CHARGES INCLUDING INTEREST CREDITED TO CONTRACTHOLDERS 1,441 1,477 1,745 1,441 1,442 --------------------------------------------------------------------------------------------------------------------------------- EARNINGS, AS DEFINED 1,735 1,515 1,745 1,964 (134) --------------------------------------------------------------------------------------------------------------------------------- EARNINGS, AS DEFINED INCLUDING INTEREST CREDITED TO CONTRACTHOLDERS $ 2,859 $ 2,712 $ 3,220 $ 3,144 $ 1,124 --------------------------------------------------------------------------------------------------------------------------------- RATIOS Earnings, as defined, to total fixed charges [2] 5.5 5.4 6.5 7.5 $ (318) --------------------------------------------------------------------------------------------------------------------------------- Earnings, as defined, including interest credited to contractholders, to total fixed charges including interest credited to contractholders [3] 2.0 1.8 1.8 2.2 $ (318) ================================================================================================================================= [1] The Company had no dividends on preferred stock for the years 1996 to 2000. [2] Excluding the equity gain on HLI initial public offering of $368, the 1997 ratio of earnings to fixed charges was 6.1. Excluding other charges of $1,061, before-tax, primarily related to environmental and asbestos reserve increases and recognition of losses on GIC, the 1996 ratio of earnings to fixed charges, was 5.0. [3] Excluding the equity gain on HLI initial public offering of $368, the 1997 ratio of earnings to fixed charges including interest credited to contractholders was 1.9. Excluding other charges of $1,061, before-tax, primarily related to environmental and asbestos reserve increases and recognition of losses on GIC, the 1996 ratio of earnings to fixed charges including interest credited to contractholders was 1.5.
EXHIBIT 21.01 SUBSIDIARIES OF THE HARTFORD FINANCIAL SERVICES GROUP, INC. JURISDICTION OF COMPANY NAME INCORPORATION ------------ ------------- American Maturity Life Insurance Company (60%) Connecticut AML Financial, Inc. Connecticut Brazilcap Capitalizacao, S.A. (17%) Brazil BMG Capital Advisers, L.L.C. Connecticut Business Management Group, Inc. Connecticut CCS Commercial, L.L.C. (50%) Delaware CLA Corporation Connecticut Dornberger/Berry & Company, Inc. South Dakota 1810 Corporation Delaware Ersatz Corporation Delaware Excess Insurance Company, Limited U.K. Fedcap Capitalizacao S.A. (25%) Brazil Fencourt Reinsurance Company, Ltd. Bermuda First State Insurance Company Connecticut First State Management Group, Inc. Delaware First State Management Group Insurance Services of Massachusetts, LLC Massachusetts First State Management Group Insurance Services of Texas, LLC Texas Four Thirty Seven Land Company, Inc. Delaware Galicia Retiro Compania de Seguros S.A. Argentina Galicia Vida Compania de Seguros, S.A., (40%) Argentina HARCO Property Services, Inc. Connecticut Hartford Accident and Indemnity Company Connecticut Hartford Casualty Insurance Company Indiana Hartford-Comprehensive Employee Benefit Service Company Connecticut Hartford Equity Sales Company, Inc. Connecticut Hartford Fianzas, S.A. de C.V. (80%) Mexico Hartford Financial Services, LLC Delaware Hartford Financial Services Life Insurance Company Connecticut Hartford Fire Insurance Company Connecticut Hartford Fire International (Germany) GMBH Germany Hartford Fire International, Ltd. Connecticut Hartford Insurance, Ltd. Bermuda Hartford Insurance Company of Canada Canada Hartford Insurance Company of Illinois Illinois Hartford Insurance Company of the Midwest Indiana Hartford Insurance Company of the Southeast Florida Hartford Integrated Technologies, Inc. Connecticut Hartford International Life Reassurance Corporation Connecticut Hartford International Management Services Company, L.L.C. Delaware Hartford Investment Financial Services Company Delaware Hartford Investment Management Company Delaware Hartford Investments Canada Corp. Canada Hartford Investment Services, Inc. Connecticut Hartford Investor Services Company, LLC Connecticut Hartford Life and Accident Insurance Company Connecticut Hartford Life and Annuity Insurance Company Connecticut Hartford Life Insurance Company Connecticut Hartford Life Insurance, KK Japan Hartford Life, Inc. Delaware EXHIBIT 21.01 Hartford Life International, Ltd. Connecticut Hartford Life, Ltd. Bermuda Hartford Lloyd's Corporation Texas Hartford Lloyd's Insurance Company (partnership) Texas Hartford Management, Ltd. Bermuda Hartford of Florida, L.L.C. Florida Hartford Re Company Connecticut Hartford Re Spain Correduria De Reaseguros S.A. Spain Hartford Risk Management, Inc. (90%) Delaware Hartford Salud, S.A. Argentina Hartford Securities Distribution Company, Inc. Connecticut Hartford Seguros de Retiro S.A. Argentina Hartford Seguros, S.A. de C.V. (80%) Mexico Hartford Seguros de Vida, S.A. Argentina Hartford Specialty Company Delaware Hartford Specialty Insurance Services of Texas, LLC Texas Hartford Technology Service Company Connecticut Hartford Technology Services Company, L.L.C. Delaware Hartford Underwriters Insurance Company Connecticut Hart Life Insurance Company Connecticut HartRe Company, L.L.C. Connecticut Hart Re Group, L.L.C. Connecticut Heritage (Bermuda), Ltd. Bermuda Heritage Holdings, Inc. Connecticut Heritage Reinsurance Company, Ltd. Bermuda HL Investment Advisors, LLC Connecticut Horizon Management Group, L.L.C. Delaware Horizon Portfolio Management Ltd U.K. HRA, Inc. Connecticut HRA Brokerage Services, Inc. Connecticut ICATU Hartford Administracao de Beneficios, Ltda. Brazil ICATU Hartford Capitalizacao, S.A. Brazil ICATU Hartford Fundo de Pensao Brazil ICATU Hartford Seguros, S.A. (45%) Brazil Instituto de Salta Compania de Seguros de Vida S.A. (90%) Argentina International Corporate Marketing Group, Inc. Connecticut ISOP Financing Company Limited Partnership Connecticut ITT Hartford International, Ltd U.K. ITT Hartford Seguros de Vida, S.A. (16.67%) Uruguay Sudamericana Holding S.A. (56.7%) Argentina ITT New England Management Company, Inc. Massachusetts New England Insurance Company Connecticut New England Reinsurance Corporation Connecticut New Ocean Insurance Company, Ltd. Bermuda Nutmeg Insurance Agency, Inc. Connecticut Nutmeg Insurance Company Connecticut Nutmeg Life Insurance Company Iowa Omni General Agency, Inc. Texas Omni Indemnity Company Illinois Omni Insurance Company Illinois Omni Insurance Group, Inc. Georgia Pacific Insurance Company, Limited Connecticut Personal Lines Insurance Center, Inc. Connecticut Planco Financial Services, Inc. Pennsylvania Planco Incorporated Pennsylvania Property and Casualty Insurance Company of Hartford Indiana EXHIBIT 21.01 Sentinel Insurance Company, Ltd. Connecticut Servus Life Insurance Company Connecticut Specialty Risk Services, Inc. Delaware Terry Associates, Inc. Connecticut The Confluence Group, Inc. Connecticut The Evergreen Group, Inc. New York The Harford Bank, FSB Federal The Hartford Club of Simsbury, Inc. Connecticut The Hartford Fidelity & Bonding Company Connecticut The Hartford Financial Services Group, Inc. Delaware The Hartford Insurance Company, (Singapore), Ltd. (80%) Singapore The Hartford International Financial Services Group Compania De Seguros Y Reaseguros S.A. (99.75%) Spain The Hartford International Financial Services Group, LLC Delaware Thesis S.A. Argentina Trumbull Finance, L.L.C. Connecticut Trumbull Insurance Company Connecticut Trumbull Recovery Services, Inc. Florida Trumbull Services, L.L.C. Connecticut Twin City Fire Insurance Company Indiana United Premium Capital, L.L.C. (50%) Connecticut EXHIBIT 23.01 CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS ----------------------------------------- To The Hartford Financial Services Group, Inc.: As independent public accountants, we hereby consent to the incorporation of our report included in this Form 10-K, into the Company's previously filed registration statements (i) on Forms S-3 (Registration Nos. 333-12617 and 333-49666) and (ii) on Forms S-8 (Registration Nos. 33-80663, 33-80665, 333-12563, 333-49170 and 333-34092). ARTHUR ANDERSEN LLP Hartford, Connecticut March 23, 2001