-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, T9/6KEL/tlE7da4dlpUwSpdHMybbnJRoBFlq9DJuDwAZ7jAxAOiJsP67sXsRUYFE M7PiO2t/iJ9UgWO8hCfZPQ== 0000948572-02-000009.txt : 20020415 0000948572-02-000009.hdr.sgml : 20020415 ACCESSION NUMBER: 0000948572-02-000009 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 12 CONFORMED PERIOD OF REPORT: 20011231 FILED AS OF DATE: 20020320 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARTFORD FINANCIAL SERVICES GROUP INC/DE CENTRAL INDEX KEY: 0000874766 STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411] IRS NUMBER: 133317783 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-13958 FILM NUMBER: 02579593 BUSINESS ADDRESS: STREET 1: HARTFORD PLZ CITY: HARTFORD STATE: CT ZIP: 06115 BUSINESS PHONE: 8605475000 MAIL ADDRESS: STREET 1: HARTFORD PLAZA T-15 CITY: HARTFORD STATE: CT ZIP: 06115 FORMER COMPANY: FORMER CONFORMED NAME: ITT HARTFORD GROUP INC /DE DATE OF NAME CHANGE: 19930328 10-K 1 b10kdec01.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, 2001 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 7.45% Trust Originated Preferred Securities, Series C, issued by Hartford Capital III 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, 2002, there were outstanding 246,259,394 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 $16,099,428,325 based on the closing price of $67.00 per share of the Common Stock on the New York Stock Exchange on February 28, 2002. Documents Incorporated by Reference: Portions of the Registrant's definitive proxy statement for its 2002 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 14 3 Legal Proceedings 14 4 Submission of Matters to a Vote of Security Holders 14 PART II 5 Market for The Hartford's Common Stock and Related Stockholder Matters 14 6 Selected Financial Data 15 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 16 7A Quantitative and Qualitative Disclosures About Market Risk 53 8 Financial Statements and Supplementary Data 53 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 53 PART III 10 Directors and Executive Officers of The Hartford 53 11 Executive Compensation 53 12 Security Ownership of Certain Beneficial Owners and Management 53 13 Certain Relationships and Related Transactions 53 PART IV 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 53 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, 2001, total assets and total stockholders' equity of The Hartford were $181.2 billion and $9.0 billion, respectively. ORGANIZATION The Hartford strives to maintain and enhance its position as a market leader within the financial services industry and to maximize shareholder value. The Company pursues a strategy of developing and selling diverse and innovative products through multiple distribution channels, continuously developing and expanding those distribution channels, achieving cost efficiencies through economies of scale and improved technology, maintaining effective risk management and prudent underwriting techniques and capitalizing on its brand name and customer recognition of The Hartford Stag Logo, one of the most recognized symbols in the financial services industry. As a holding company that is separate and distinct from its 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 21 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 16 of Notes to Consolidated Financial Statements. On April 2, 2001, The Hartford acquired the United States individual life insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as "Fortis Financial Group", or "Fortis") for $1.12 billion in cash. The Company effected the acquisition through several reinsurance agreements with subsidiaries of Fortis and the purchase of 100% of the stock of Fortis Advisors, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis. (For additional information, see the Capital Resources and Liquidity section of the MD&A and Note 18(a) of Notes to Consolidated Financial Statements.) The Company has exited its international property and casualty businesses. Accordingly, in September 2001, The Hartford entered into an agreement to sell Hartford Insurance Company (Singapore), Ltd. (formerly People's Insurance Company, Ltd. ("Singapore Insurance")). The sale was completed in January 2002. On February 8, 2001, The Hartford completed the sale of its Spain-based subsidiary, Hartford Seguros. On December 22, 2000, The Hartford completed the sale of its Netherlands-based Zwolsche Algemeene N.V. ("Zwolsche") subsidiary. On November 16, 1998, The Hartford completed the sale of its United Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh") subsidiary. REPORTING SEGMENTS The Hartford is organized into two major operations: Life and Property & Casualty. Within these operations, The Hartford conducts business principally in ten operating segments. Additionally, all activities related to The HLI Repurchase and the minority interest in HLI for pre-acquisition periods are included in Corporate. Life, headquartered in Simsbury, Connecticut, is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI"). Life also includes in an Other category its international operations, which are primarily located in Latin America and Japan, as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. Property & Casualty, headquartered in Hartford, Connecticut, was reorganized into six reportable operating segments and, effective January 1, 2001, is reported as the North American underwriting segments of Business Insurance, Affinity Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance; and the Other Operations segment, formerly "International and Other Operations". The following is a description of Life and Property & Casualty along with each of their segments, including a discussion of principal products, marketing and distribution and competitive environments. Additional information on The Hartford's reporting segments may be found in the MD&A and Note 17 of Notes to Consolidated Financial Statements. - 2 - LIFE Life's business is conducted by HLI, a leading financial services and insurance organization. Through Life, The Hartford provides (i) investment products, including variable annuities, fixed market value adjusted ("MVA") annuities, mutual funds and retirement plan services for the savings and retirement needs of over 1.5 million customers, (ii) life insurance for income protection and estate planning to approximately 750,000 customers, (iii) group benefits products such as group life and group disability insurance for the benefit of millions of individuals and (iv) corporate owned life insurance, which includes life insurance policies purchased by a company on the lives of its employees. The Company is one of the largest sellers of individual variable annuities, variable life insurance and group disability insurance in the United States. In addition, in 2001 The Hartford Mutual Funds, Inc. reached $12 billion in assets faster than any other retail-oriented mutual fund family in history, according to Strategic Insight. 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. In an effort to advance the Company's strategy of growing its life and asset accumulation businesses, The Hartford acquired the individual life insurance, annuity and mutual fund businesses of Fortis on April 2, 2001. (For additional information, see the Capital Resources and Liquidity section of the MD&A and Note 18(a) of Notes to Consolidated Financial Statements). HLI is among the largest consolidated life insurance groups in the United States based on statutory assets as of December 31, 2000. In the past year, Life's total assets under management, which include $16.8 billion of third-party assets invested in the Company's mutual funds, increased 9% to $168.4 billion at December 31, 2001 from $155.1 billion at December 31, 2000. Life generated revenues of $6.5 billion, $6.0 billion and $5.5 billion in 2001, 2000 and 1999, respectively. Additionally Life generated net income of $685, $575 and $467 in 2001, 2000, and 1999, respectively. CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE 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 nearly half since 1992, declining from 43 basis points to 22 basis points in 2001. 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 2001 Annuity Service Award by DALBAR Inc., a recognized independent financial services research organization, for the sixth consecutive year. The Hartford is the only company to receive this prestigious award in every year of the award's existence. Also, in both 2001 and 2000, The Hartford Mutual Funds, Inc. was 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. Additionally, the Company's Individual Life Division won the DALBAR award for service of life insurance customers in 2001 and was the only life insurance operation to be recognized with this prestigious award. RISK MANAGEMENT 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, 2001, the Company had limited exposure to disintermediation risk on approximately 97% 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, 1996 to December 31, 2001, this segment's assets under management grew to $120.3 billion from $55.3 billion, a five year compounded annual growth rate of 17%. Investment Products generated revenues of $2.5 billion, $2.4 billion and $2.0 billion in 2001, 2000 and 1999, respectively, of which individual annuities accounted for $1.5 billion in 2001 and 2000, and $1.4 billion in 1999. Net income in the Investment Products segment was $463, $424 and $330 in 2001, 2000 and 1999, respectively. 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 $10.0 billion, $10.7 billion and $10.9 billion in 2001, 2000 and 1999, respectively. The Hartford was among the largest sellers of individual variable annuities in the United States for 2001, 2000 and 1999 with sales of $9.0 billion, $9.0 billion and $10.3 billion, respectively. In addition, the Company continues to be among the largest sellers of individual variable annuities through banks in the United States. The Company's total account value related to individual annuity products was $84.2 billion as of December 31, 2001. Of this total account value, $74.6 billion, or 89%, related to individual variable annuity products and $9.6 billion, or 11%, related primarily to fixed MVA annuity products. In 2000, the Company's total account values related to individual annuity products was $87.2 billion. Of this total account value, $78.2 - 3 - billion, or 90%, related to individual variable annuity products and $9.0 billion, or 10%, related primarily to fixed MVA annuity products. In addition to its leading position in individual annuities, The Hartford continues to emerge as a significant participant in the mutual fund business and is among the top providers of retirement products and services, including asset management and plan administration sold to corporations pursuant to Section 401 of the Internal Revenue Code of 1986, as amended (referred to as "401(k)") and to municipalities pursuant to Section 457 of the Internal Revenue Code of 1986, as amended (referred to as "Section 457"). The Company also provides structured settlement contracts, terminal funding products and other investment products such as guaranteed investment contracts ("GICs"). As previously mentioned, The Hartford acquired the individual annuity and mutual fund businesses of Fortis, Inc. in 2001. This acquisition increased assets under management in the Company's fast growing mutual fund business by 20%, and helped solidify the Company's strong position in variable annuities. 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. Surrender charges range initially from 5% to 8% of the contract's initial deposit less withdrawals, and reduce to zero on a sliding scale, usually within seven policy years. Volatility experienced by the equity markets over the past few years 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 $74.6 billion as of December 31, 2001, have grown significantly from $13.1 billion as of December 31, 1994, due to strong net cash flow, resulting from high levels of sales, low levels of surrenders and equity market appreciation. Approximately 94% and 96% of the individual variable annuity account values were held in non-guaranteed separate accounts as of December 31, 2001 and 2000, 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, AIM Investments ("AIM") and Morgan Stanley Investment Advisors, 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. The Director variable annuity, which is managed in part by Wellington, continues to be an industry leader in terms of sales. In addition, Hartford Leaders, which is a multi-manager variable annuity that combines the product manufacturing, wholesaling and service capabilities of The Hartford with the investment management expertise of four of the nation's most successful investment management organizations: American Funds, Franklin Templeton Group, AIM and MFS, has quickly emerged as a strong selling product for the Company. 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 eight years. Account values of fixed MVA annuities were $9.6 billion and $9.0 billion as of December 31, 2001 and 2000, respectively. Mutual Funds -- In September 1996, The Hartford launched a family of retail mutual funds for which the Company provides investment management and administrative services. The fund family has grown significantly from 8 funds at inception to the current offering of 21 funds. These funds are managed by Wellington and Hartford Investment Management Company, a wholly-owned subsidiary of The Hartford. The Company has entered into agreements with over 750 financial services firms to distribute these mutual funds. The Company charges fees to the shareholders of the mutual funds, which are recorded as revenue by the Company. Investors can purchase shares in the mutual funds, all of which are registered with the Securities and Exchange Commission, in accordance with the Investment Company Act of 1940. The mutual funds are owned by the shareholders of those funds and not by the Company. As such, the mutual fund assets and liabilities, as well as related investment returns, are not reflected in the Company's consolidated financial statements. Total retail mutual fund sales were $5.7 billion, $5.2 billion and $3.3 billion in 2001, 2000 and 1999, respectively. - 4 - Governmental -- The Company sells retirement plan products and services to municipalities under Section 457 plans. The Company offers a number of different investment products, including fixed and variable annuities, to the employees in Section 457 plans. Generally, with the variable products, 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, 2001, the Company administered over 3,000 Section 457 plans. Corporate -- The Company sells retirement plan products and services to corporations under Section 401(k) plans targeting the small and medium case markets. The Company believes these markets are under-penetrated in comparison to the large case market. As of December 31, 2001, the Company administered over 2,400 Section 401(k) plans. Institutional Liabilities -- The Company 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. Section 529 Plans - The Hartford is introducing a tax advantaged college savings product (529 plan) in early 2002 called SMART 529. SMART 529 is a state-sponsored education savings program established by the State of West Virginia which offers an easy way for both the residents of West Virginia and out-of-state participants to invest for a college education. In 1996, Congress created a tax-advantaged college savings program (529 Plan) as part of Section 529 of the Internal Revenue Code (the "Code"). The 529 Plan is an investment plan operated by a state, designed to help families save for future college costs. On January 1, 2002, 529 Plans became federal tax-exempt for qualified withdrawals. SMART 529 is designed to be flexible by allowing investors to choose from a wide variety of investment portfolios to match their risk preference to help investors accumulate savings for college. An individual can open a SMART 529 account for anyone, at any age. The SMART 529 product complements HLI's existing offering of investment products (mutual funds, variable annuities, 401 (k), 457 and 403 (b) plans). It also leverages the Company's capabilities in distribution, service and fund performance. The Hartford believes this is a significant market opportunity and the benefits of investing in 529 plans will be well received by many Americans saving for college. 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, 2001, 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. The Company's primary wholesaler of its individual annuities and mutual funds is its wholly-owned subsidiary, PLANCO Financial Services, Inc. and its affiliate, PLANCO, Incorporated (collectively "PLANCO"). PLANCO is one of the nation's largest wholesalers of individual annuities and has played a significant role in The Hartford's growth over the past decade. As a wholesaler, PLANCO distributes The Hartford's fixed and variable annuities, mutual funds, 401(k) plans 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. Owning PLANCO secures an important distribution channel for the Company and gives the Company a wholesale distribution platform which it can expand in terms of both the number of individuals wholesaling its products and the portfolio of products which they wholesale. In addition, the Company uses internal personnel with extensive experience in the Section 457 market, as well as access to the Section 401(k) market, to sell its products and services in the retirement plan 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. The 1999 Gramm-Leach-Bliley Act ("the Financial Services Modernization Act"), which allows affiliations among banks, insurance companies and securities firms, has not precipitated any significant changes in bank ownership of insurance companies. (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. The individual life business acquired from Fortis added significant scale to the Company's Individual Life segment, contributing to the significant increase in life insurance in force. As of December 31, 2001, life insurance in force increased 60% to $120.3 billion, from $75.1 billion as of December 31, 2000 and account values grew 35% to $7.9 billion as of December 31, 2001 from $5.8 billion as of December 31, 2000. Revenues were $890, $640 and $584 in 2001, 2000 and 1999, respectively. Net income in the - 5 - Individual Life segment was $121, $79 and $71 in 2001, 2000 and 1999, respectively. Principal Products - ------------------ The trend in the individual life industry has been a shift away from traditional products towards variable life (including variable universal life) insurance products, in which The Hartford has been on the leading edge. In 2001, of the Company's new sales of individual life insurance, 82% was variable life and 15% 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 $4.0 billion and $2.9 billion as of December 31, 2001 and 2000, 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 $3.1 billion and $2.1 billion as of December 31, 2001 and 2000, 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 225 individuals and expects to continue to increase the number of wholesalers in the future. The acquisition of the United States individual life insurance business of Fortis has broadened the Company's reach in the emerging affluent market with the addition of a retail broker-dealer consisting of approximately 2,300 registered representatives. Competition - ----------- The Individual Life segment competes with approximately 1,800 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 coverages to employers and employer sponsored plans, accidental death and dismemberment, travel accident and other special risk coverage to employers and associations. The Company also offers disability underwriting, administration, claims processing services and reinsurance to other insurers and self-funded employer plans. Generally, policies sold in this segment are term insurance, typically with one or two year rate guarantees. This allows the Company to adjust the rates 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, 2001 and 2000, the Company had group disability reserves of $2.4 billion and $2.0 billion and group life reserves of $706 and $601, respectively. The Group Benefits segment generated revenues of $2.5 billion, $2.2 billion and $2.0 billion in 2001, 2000 and 1999, respectively, of which group disability insurance accounted for $1.1 billion, $939 and $860 and group life insurance accounted for $763, $687 and $654, respectively. Net income in the Group Benefits segment was $106, $90 and $79 in 2001, 2000 and 1999, respectively. 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 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 - 6 - 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 coverages 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 also provides Medicare supplement insurance, travel accident, hospital indemnity and other coverages (including group life and disability) primarily to individual members of various associations, as well as employee groups. A significant Medicare supplement customer of the company has been the members of the Retired Officers Association, an organization consisting of retired military officers. Congress recently passed legislation, effective in the fourth quarter of 2001, whereby retired military officers age 65 and older will receive full medical insurance, eliminating the need for Medicare supplement insurance. This legislation will reduce the Company's premium revenue by approximately $131 in 2002. 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 intends to continue to expand the system over the coming years in areas that have the highest growth potential and also will 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., 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 and Accountability 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 $18.0 billion and $15.9 billion as of December 31, 2001 and 2000, respectively. Leveraged COLI account values decreased to $4.3 billion as of December 31, 2001 from $5.0 billion as of December 31, 2000, primarily due to the continuing effects of the HIPA Act of 1996. COLI generated revenues of $719, $767 and $831 in 2001, 2000 and 1999, respectively. COLI generated net income of $37, $34 and $30 in 2001, 2000 and 1999, respectively. PROPERTY & CASUALTY - ------------------- Property & Casualty provides (1) workers' compensation, property, automobile, liability, marine, agricultural and bond coverages to commercial accounts throughout the United States; (2) professional liability coverage and directors and officers liability coverage, as well as excess and surplus lines business not normally written by standard lines insurers; (3) automobile, homeowners and home-based business coverage to individuals throughout the United States; (4) assumed reinsurance through professional reinsurance brokers covering various property, casualty, specialty and marine classes of business; and (5) insurance related services. 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, 2000 according to A.M. Best. Property & Casualty generated revenues of $8.6 billion, $8.7 billion and $8.0 billion, in 2001, 2000 and 1999, respectively. Written premiums for 2001, 2000 and 1999 were $7.6 billion, $7.0 billion and $6.4 billion, respectively. Additionally, net income (loss) was $(115), $494 and $481 for 2001, 2000 and 1999, respectively. Excluding the impact of the September 11 terrorist attack ("September 11"), Property & Casualty generated $8.7 billion in revenues, $7.7 billion in written premiums and $305 in net income in 2001. Total assets for Property & Casualty were $28.8 billion as of December 31, 2001. (For a discussion of the impact of September 11 and terrorism exposures, see MD&A under Property & Casualty and Capital Resources and Liquidity sections.) - 7 - The Hartford's Property & Casualty operation was reorganized into six reportable operating segments and, effective January 1, 2001, is reported as the North American underwriting segments of Business Insurance, Affinity Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance; and the Other Operations segment, formerly "International and Other Operations". Also reported within Property & Casualty is North American, which includes the combined underwriting results of the North American underwriting segments along with income and expense items not directly allocable to these segments, such as net investment income, net realized capital gains and losses, other expenses including interest, and income taxes. BUSINESS INSURANCE Business Insurance provides standard commercial insurance coverage to small ("Select Customer") and mid-sized ("Key Accounts") commercial businesses throughout the United States. This segment also provides commercial risk management products and services to small and mid-sized members of affinity groups in addition to marine coverage. The segment had written premiums of $2.9 billion, $2.4 billion and $2.2 billion in 2001, 2000 and 1999, respectively, and underwriting losses of $242 ($3 of underwriting income excluding the impact of September 11), $50 and $123 in 2001, 2000 and 1999, respectively. Principal Products - ------------------ The Business Insurance segment offers workers' compensation, property, automobile, liability, umbrella and marine coverages. Commercial risk management products and services are also provided to small and mid-sized members of affinity groups. Marketing and Distribution - -------------------------- Business Insurance provides insurance products and services through its home office located in Hartford, Connecticut, and multiple domestic regional office locations and insurance centers. The segment markets its products nationwide utilizing a variety of distribution networks including independent agents as well as wholesalers and direct marketing through 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. AFFINITY PERSONAL LINES Affinity Personal Lines provides insurance coverage to individuals throughout the United States. Affinity Personal Lines is organized to provide customized products and services to the following markets: the membership of AARP through a direct marketing operation; 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. Affinity Personal Lines also operates a member contact center for health insurance products offered through AARP's Health Care Options. The Hartford's exclusive licensing arrangement with AARP, which was renewed during the fourth quarter of 2001, continues through January 1, 2010 for automobile, homeowners and home-based business. The Health Care Options agreement continues through 2007. These agreements provide Affinity Personal Lines with an important competitive advantage. Affinity Personal Lines had written premiums of $1.8 billion, $1.7 billion and $1.5 billion in 2001, 2000 and 1999, respectively. Underwriting income (loss) for 2001, 2000 and 1999 was $(39), ($(36) excluding the impact of September 11), $17 and $19, respectively. Principal Products - ------------------ Affinity Personal Lines provides automobile, homeowners and home-based business coverages to individuals across the United States, including a special program designed exclusively for members of AARP. Marketing and Distribution - -------------------------- Affinity Personal Lines reaches diverse markets through multiple distribution channels including direct mail, the Internet and advertising in publications. The segment markets directly to the over 34 million members of AARP as well as other affinity groups. PERSONAL INSURANCE Personal Insurance provides insurance coverage to individuals throughout the United States. Personal Insurance is organized to provide customized products and services to 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 the Company's Omni Insurance Group, Inc. ("Omni") subsidiary. Personal Insurance had written premiums of $1.0 billion, $988 and $943 in 2001, 2000 and 1999, respectively. Underwriting income (loss) for 2001, 2000 and 1999 was $(48) (($42) excluding the impact of September 11), $(15) and $15, respectively. Principal Products - ------------------ Personal Insurance provides standard and non-standard automobile, homeowners and home-based business coverages to individuals across North America. Marketing and Distribution - -------------------------- Personal Insurance provides customized products and services to customers through a network of independent agents in the standard personal lines market and in the non-standard automobile market through Omni. Independent agents, who often represent other companies as well, are compensated on a commission basis and are not employees of The Hartford. SPECIALTY COMMERCIAL Specialty Commercial provides a wide variety of property and casualty insurance products and services through retailers and wholesalers to large commercial clients and insureds requiring a variety of specialized coverages. Excess and surplus lines coverages not normally written by standard line insurers are also provided, primarily through wholesale brokers. Specialty Commercial had written premiums of $989 ($996 excluding the impact of September 11), $1.1 billion and $954 in 2001, 2000 and 1999, respectively, and underwriting losses of $262 ($95 excluding the impact of September 11), $103 and $48 in 2001, 2000 and 1999, respectively. - 8 - Principal Products - ------------------ The Specialty Commercial segment offers a variety of customized insurance products and risk management services in addition to standard commercial insurance including workers' compensation, casualty, automobile and liability coverages to large-sized companies. Specialty Commercial also provides bond, professional liability and agricultural coverages, as well as excess and surplus lines coverages not normally written by standard lines insurers. Marketing and Distribution - -------------------------- Specialty Commercial provides insurance products and services through its home office located in Hartford, Connecticut and multiple domestic regional and district office locations. The segment markets its products nationwide utilizing a variety of distribution networks including independent agents and brokers as well as wholesalers. Independent agents, who often represent other companies as well, are compensated on a commission basis and are not employees of The Hartford. REINSURANCE The Hartford assumed reinsurance worldwide through its thirteen Hartford Reinsurance Company ("HartRe") offices and wrote treaty reinsurance through professional reinsurance brokers covering various property, casualty, specialty and marine classes of business until the fourth quarter of 2001. In October 2001, HartRe announced a centralization of all underwriting and claims operations in Hartford, Connecticut. While exiting most international lines, HartRe will continue to write worldwide catastrophe, Alternative Risk Transfer ("ART") and marine from Hartford. The Reinsurance segment had written premiums of $849 ($918 excluding the impact of September 11), $826 and $703 in 2001, 2000 and 1999, respectively, and underwriting losses of $375 ($149 excluding the impact of September 11), $73 and $48 in 2001, 2000 and 1999, respectively. Principal Products - ------------------ The Reinsurance segment offers a full range of treaty and facultative reinsurance products including property, casualty, marine and alternative risk transfer which includes non-traditional reinsurance products. Marketing and Distribution - -------------------------- The Reinsurance segment assumes insurance from other insurers, primarily through reinsurance brokers in the worldwide reinsurance market. OTHER OPERATIONS Property & Casualty's Other Operations currently consist of certain 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. Also included in Other Operations are Property & Casualty's international businesses up until their dates of sales. Property & Casualty's international businesses have historically consisted primarily of Western European companies offering a variety of insurance products designed to meet the needs of local customers. The Company's strategic shift to emphasize growth opportunities in asset accumulation businesses has resulted in the sale of all of its international property and casualty businesses. London & Edinburgh, located in the United Kingdom, was sold 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. In September 2001, The Hartford entered into an agreement to sell The Hartford Insurance Company (Singapore), Ltd. (formerly People's Insurance Company, Ltd. ("Singapore Insurance")). The sale was completed in January 2002. 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 has no new product sales, distribution systems, or competitive issues. The Other Operations segment generated revenues of $168, $602 and $661 in 2001, 2000 and 1999, respectively. Net income for 2001, 2000 and 1999 was $10, $28 and $33, respectively. PROPERTY & CASUALTY COMPETITION The commercial insurance industry continues to be a highly challenging and competitive environment in which The Hartford competes with other insurance companies, self insurers and other underwriting organizations. This competitive environment is created by price competition, consolidation and globalization of companies, exploration and utilization of alternative distribution techniques and emphasis on cost containment and reduction. Additionally, September 11 has created an ambiguous environment and economic uncertainty as federal backing in the event of future terrorist attacks remains uncertain. In 2001, market conditions in the commercial industry have continued to improve as a result of a firming pricing environment. The personal lines marketplace continues to remain competitive. Over the past few 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 111.4 for the first nine months of 2001, according to A.M. Best. A major competitive advantage of The Hartford is the exclusive licensing arrangement with AARP to provide personal automobile, homeowners and home-based business insurance products to its members through January 1, 2010. Management expects favorable "baby boom" demographics to increase AARP membership during this period. In addition, The Hartford provides customer service for all health insurance products offered through AARP's Health Care Options, with an agreement that continues through 2007. The Hartford's contracts with Ford and Sears join major brands in marketing automobile, homeowners, and home-based business insurance products. The property and casualty worldwide reinsurance market remains extremely competitive, although the pricing - 9 - environment continued to improve in 2001. As a result of September 11, however, the worldwide reinsurance market has been transformed to an environment of some uncertainty. New capital, dramatic price increases and modifications in contract terms and conditions have contributed to the uncertainty. HartRe's organizational realignment has created a centralized organization aimed at enhancing core functions consistent with the segment's return objectives. LIFE RESERVES In accordance with applicable insurance regulations under which 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 Life reserves may be found in the Reserves section of the MD&A. 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 based primarily on historical experience and involves a variety of actuarial techniques which analyze trends and other relevant factors. For the year ended December 31, 2001, there were no changes to these reserving assumptions that had a significant impact on the reserves or results of operations. The Hartford continually reviews the adequacy of its estimated claims and claim adjustment expense reserves on an overall basis. As additional experience and other relevant data become available, reserve levels are adjusted accordingly. Such adjustments are reflected in net income for the period in which they are made. In the judgment of The Hartford's management, all information currently available has been properly considered in establishing the reserves for unpaid claims and claim adjustment expenses. As a result of September 11, the Company established estimated gross reserves of $1.1 billion and estimated net reserves of $556 related to property and casualty operations. This loss estimate includes coverages related to property, business interruption, workers' compensation and other liability exposures, including those underwritten by the Company's assumed reinsurance operation. The Company based the loss estimate upon a review of insured exposures using a variety of assumptions and actuarial techniques, including estimated amounts for unknown and unreported policyholder losses and costs incurred in settling claims. Included in net reserves was an estimate of amounts recoverable under the Company's ceded reinsurance programs. As a result of the uncertainties involved in the estimation process, final claims settlement may vary from present estimates. 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 $429 and $396 as of December 31, 2001 and 2000, respectively, and amortization of the discount had no material effect on net income during 2001, 2000 and 1999. As of December 31, 2001, property and casualty reserves for claims and claim adjustment expenses reported under Generally Accepted Accounting Principles ("GAAP") exceeded those reported on a statutory basis by $26. The primary differences resulted from the required exclusion from statutory reserves of assumed retroactive reinsurance and the discounting of GAAP-basis workers' compensation reserves at risk free interest rates, which exceeded the required statutory discount rates set by regulators. 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. Further discussion on The Hartford's Property & Casualty reserves may be found in the Reserves section of the MD&A. 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. - 10 -
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - NET FOR THE YEARS ENDED DECEMBER 31, [1] 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 - ----------------------------------------------------------------------------------------------------------------------------------- Liabilities for unpaid claims and claim adjustment expenses [2] $9,204 $10,498 $10,717 $10,776 $11,024 $12,202 $12,265 $12,401 $12,020 $11,857 $12,437 CUMULATIVE PAID CLAIMS AND CLAIM EXPENSES One year later 2,684 2,596 2,578 2,654 2,434 2,551 2,447 2,903 2,929 3,183 Two years later 4,350 4,282 4,207 4,179 4,004 4,078 4,223 4,626 4,873 -- Three years later 5,550 5,433 5,268 5,286 5,056 5,390 5,363 5,972 -- -- Four years later 6,396 6,229 6,112 6,040 6,077 6,211 6,303 -- -- -- Five years later 7,020 6,895 6,682 6,877 6,717 6,922 -- -- -- -- Six years later 7,569 7,354 7,391 7,406 7,303 -- -- -- -- -- Seven years later 7,954 7,987 7,861 7,924 -- -- -- -- -- -- Eight years later 8,532 8,411 8,332 -- -- -- -- -- -- -- Nine years later 8,924 8,851 -- -- -- -- -- -- -- -- Ten years later 9,340 -- -- -- -- -- -- -- -- -- LIABILITIES REESTIMATED One year later 10,535 10,757 10,811 11,019 11,988 12,183 12,090 12,176 11,980 11,973 Two years later 10,866 10,970 11,009 12,142 11,992 12,065 11,808 12,048 11,975 -- Three years later 11,095 11,182 12,094 12,127 11,919 11,887 11,638 11,992 -- -- Four years later 11,417 12,304 12,157 12,113 11,789 11,772 11,511 -- -- -- Five years later 12,515 12,406 12,184 12,082 11,769 11,615 -- -- -- -- Six years later 12,642 12,462 12,165 12,088 11,640 -- -- -- -- -- Seven years later 12,757 12,414 12,218 11,981 -- -- -- -- -- -- Eight years later 12,710 12,500 12,154 -- -- -- -- -- -- -- Nine years later 12,789 12,472 -- -- -- -- -- -- -- -- Ten years later 12,778 -- -- -- -- -- -- -- -- -- DEFICIENCY (REDUNDANCY) $3,574 $1,974 $1,437 $1,205 $616 $(587) $(754) $(409) $(45) $116 - -----------------------------------------------------------------------------------------------------------------------------------
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 2001 - ---------------------------------------------------------------------------------------------------------------------------------- NET RESERVE [2] $ 10,776 $ 11,024 $ 12,202 $ 12,265 $ 12,401 $ 12,020 $ 11,857 $ 12,437 Reinsurance recoverables 5,156 4,829 4,357 3,996 3,275 3,264 3,452 3,818 - ---------------------------------------------------------------------------------------------------------------------------------- GROSS RESERVE $ 15,932 $ 15,853 $ 16,559 $ 16,261 $ 15,676 $ 15,284 $ 15,309 $ 16,255 - ---------------------------------------------------------------------------------------------------------------------------------- NET REESTIMATED RESERVE $ 11,981 $ 11,640 $ 11,615 $ 11,511 $ 11,992 $ 11,975 11,973 Reestimated reinsurance recoverables 5,594 4,821 4,138 3,848 3,360 3,637 3,688 - ---------------------------------------------------------------------------------------------------------------------------------- GROSS REESTIMATED RESERVE $ 17,575 $ 16,461 $ 15,753 $ 15,359 $ 15,352 $ 15,612 $ 15,661 - ---------------------------------------------------------------------------------------------------------------------------------- GROSS DEFICIENCY (REDUNDANCY) $ 1,643 $ 608 $ (806) $ (902) $ (324) $ 328 $ 352 - ---------------------------------------------------------------------------------------------------------------------------------- [1] The above tables exclude Hartford Insurance, Singapore as a result of its sale in September 2001, Hartford Seguros as a result of its sale in February 2001, Zwolsche as a result of its sale in December 2000 and London & Edinburgh as a result of its sale in November 1998. [2] The above tables exclude the liabilities and claim developments for certain reinsurance coverages written for affiliated parties.
1994 1995 1996 1997 1998 1999 2000 2001 - ---------------------------------------------------------------------------------------------------------------------------------- Liabilities, net and gross of reinsurance for unpaid claims and claim adjustment expenses excluded $ 495 $ 550 $ 500 $ 505 $ 501 $ 456 $ 459 $ 423 ==================================================================================================================================
The following table reconciles the Loss Development Table to the Consolidated Financial Statements: - ---------------------------------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------- Loss Development Table: Gross reserves $ 16,255 $ 15,309 $ 15,284 Exclusion of international subsidiaries -- 106 274 Reinsurance - affiliated parties 423 459 456 - ---------------------------------------------------------------------- Gross reserves per Consolidated Financial Statements (see Note 1 (h)) $ 16,678 $ 15,874 $ 16,014 - ---------------------------------------------------------------------- CEDED REINSURANCE Consistent with normal industry practice, The Hartford cedes insurance risk to reinsurance companies. For Property & 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. - 11 - 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, Life is involved in both the cession and assumption of insurance with other insurance and reinsurance companies. As of December 31, 2001, the maximum amount of life insurance retained on any one life by any one of the life operations was approximately $2.5. In 2001, the Company did not make any significant changes in the terms under which reinsurance is ceded to other insurers. Also, the Company did not enter into a specific reinsurance transaction that had a material effect on earnings or reserves. However, as a result of September 11, The Hartford established estimated ceded reserves of $569 under existing reinsurance contracts and recorded premium cessions of $91 related to reinstatement and other reinsurance premiums. Also as a result of September 11, the reinsurance market has become an environment of some uncertainty. Specifically, dramatic price increases, changes in contract terms and conditions and program modifications have resulted. As a result, it has become more difficult to get selected types of reinsurance coverage at a reasonable price, particularly terrorism coverage. 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 Life and Property & Casualty. The investment activities of both the Life and Property & Casualty operations are managed based on the underlying characteristics and nature of their respective liabilities. The primary investment objective of Life's general account and guaranteed separate accounts is to maximize after-tax returns consistent with acceptable risk parameters, including the management of the interest rate sensitivity of invested assets and the generation of sufficient liquidity, relative to that of corporate and policyholder obligations. The investment objective for the majority of Property & Casualty is to maximize economic value while generating after-tax income and sufficient liquidity to meet corporate and policyholder obligations. For Property & Casualty's Other Operations segment, the investment objective is to ensure the full and timely payment of all liabilities. Property & Casualty investment strategies are developed based on a variety of factors including business needs, regulatory requirements and tax considerations. For a further discussion of The Hartford's approach to managing risks, including derivative utilization, see the 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 extent of such regulation varies, but generally has its source in statutes which delegate regulatory, supervisory and administrative powers to state insurance departments. Such powers relate to, among other things, the standards of solvency that must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; establishing premium rates; claim handling and trade practices; restrictions on the size of risks which may be insured under a single policy; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values; and the adequacy of reserves and other necessary provisions for unearned premiums, unpaid claims and claim adjustment expenses and other liabilities, both reported and unreported. 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. - 12 - 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". EMPLOYEES The Hartford had approximately 27,400 employees as of February 28, 2002. 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 2002 Proxy Statement. Set forth below is information about other executive officers of the Company: JOHN N. GIAMALIS (Senior Vice President and Controller) Mr. Giamalis, 44, is Senior Vice President and Controller of the Company. Mr. Giamalis joined the Company in January 1997 as Director, Financial Reporting and Analysis. In April 1998, he was appointed to the position of Vice President and Corporate Controller. Prior to joining the Company, Mr. Giamalis held senior financial positions in the insurance and technology industries, including Chief Financial Officer of Intelidata Technologies Corp. from March 1995 to December 1996. He also held various public accounting positions, including senior manager with responsibility for insurance, securities and middle market clients at Deloitte & Touche LLP. Mr. Giamalis is a member of the American Institute and the Connecticut Society of Certified Public Accountants. DAVID M. JOHNSON (Executive Vice President and Chief Financial Officer) Mr. Johnson, 41, has held the position of Executive Vice President and Chief Financial Officer of the Company since May 1, 2001. Prior to joining the Company, Mr. Johnson was Senior Executive Vice President and Chief Financial Officer of Cendant Corporation since November 1998 and Managing Director, Investment Banking Division, at Merrill Lynch, Pierce, Fenner and Smith, where he worked with major clients in a variety of industries including insurance, airlines and technology, as well as leveraged buyout funds, since 1986. RANDALL I. KIVIAT (Group Senior Vice President of Human Resources) Mr. Kiviat, 51, 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 and Director of Employee Benefits. He was appointed Vice President of Human Resources Services in April 1998. EDWARD L. MORGAN, JR. (Group Senior Vice President, Corporate Relations) Mr. Morgan, 58, has held the position of Group Senior Vice President, Corporate Relations, of the Company since April 1998. Previously, he was Senior Vice President, Corporate Relations and Government Affairs since December 1995. Mr. Morgan also has held the position of Senior Vice President, Corporate Relations of Hartford Fire since 1993. NEAL S. WOLIN (Executive Vice President and General Counsel) Mr. Wolin, 40, has held the position of Executive Vice President and General Counsel since joining the Company on March 20, 2001. Previously, Mr. Wolin served as General Counsel of the U.S. Treasury from 1999 to January 2001. In that capacity, he headed Treasury's legal division, composed of 2,000 lawyers providing services to all of Treasury's offices and bureaus, including the Internal Revenue Service, Customs, Secret Service, Public Debt, the Office of Thrift Supervision, the Financial Management Service, the U.S. Mint and the Bureau of Engraving and Printing. Mr. Wolin served as the Deputy General Counsel of the Department of the Treasury from 1995 to 1999. Prior to joining the Treasury Department, he served in the White House, first as the Executive Assistant to the National Security Advisor and then as the Deputy Legal Advisor to the National Security Council. Mr. Wolin joined the U.S. Government in 1991 as special assistant to the Directors of Central Intelligence, William H. Webster, Robert M. Gates and - 13 - R. James Woolsey. Mr. Wolin served on the President's Advisory Commission on Holocaust Assets in the United States from 1999 to 2000. DAVID M. ZNAMIEROWSKI (Group Senior Vice President and Chief Investment Officer) Mr. Znamierowski, 41, was appointed Group Senior Vice President and Chief Investment Officer of the Company and President of Hartford Investment Management Company ("HIMCO"), a wholly-owned subsidiary of the Company, effective November 5, 2001. Previously, he was Senior Vice President and Chief Investment Officer for the Company's life operations since May 1999, Vice President since September 1998 and Vice President, Investment Strategy since February 1997. Prior to joining the Company in April 1996, Mr. Znamierowski held a variety of positions in the investment industry, including portfolio manager and Vice President of Investment Strategy and Policy for Aetna Life & Casualty Company from 1991 to April 1996 and Vice President of Corporate Finance for Salomon Brothers, Inc. since 1986. Mr. Znamierowski is a member of the Board of Governors of the Investment Company Institute and of the policy-making investment committee of the American Council of Life Insurance. He also serves as a director and President of each of The Hartford-sponsored mutual funds. 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 6.4 million square feet throughout the United States and 32 thousand square feet in other countries. All of the properties owned or leased are used by one or more of all ten 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. With respect to these claims, The Hartford continually reviews its overall reserve levels, methodologies and reinsurance coverage. 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. - ----------------------------------------------------------------------------- 2001 Common Stock Price High $67.75 $70.46 $69.28 $62.83 Low 55.15 56.88 50.10 53.91 Dividends Declared 0.25 0.25 0.25 0.26 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 - ----------------------------------------------------------------------------- As of February 28, 2002, the Company had approximately 120,000 shareholders. The closing price of The Hartford's common stock on the NYSE on February 28, 2002 was $67.00. On October 18, 2001, The Hartford's Board of Directors declared a quarterly dividend of $0.26 per share payable on January 2, 2002 to shareholders of record as of December 3, 2001. The dividend represented a 4% increase from the prior quarter. Dividend decisions are based on and affected by a number of factors, including the operating results and financial requirements of The Hartford and the impact of regulatory restrictions discussed in the Capital Resources and Liquidity section of the MD&A under "Liquidity Requirements". There are also various legal limitations governing the extent to which The Hartford's insurance subsidiaries may extend credit, pay dividends or otherwise provide funds to The Hartford Financial Services Group, Inc. as discussed in the Capital Resources and Liquidity section of the MD&A under "Liquidity Requirements". - 14 - ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS) 2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA Total revenues [1] $ 15,147 $ 14,703 $ 13,528 $ 15,022 $ 13,461 Income before extraordinary item and cumulative effect of accounting changes [2] 549 974 862 1,015 1,332 Net income [2] [3] 507 974 862 1,015 1,332 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET AND OTHER DATA Total assets $ 181,238 $ 171,532 $ 167,051 $ 150,632 $ 131,743 Mutual fund assets [4] 16,809 11,432 6,374 2,506 972 Long-term debt 1,965 1,862 1,548 1,548 1,482 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,412 1,243 1,250 1,250 1,000 Total stockholders' equity 9,013 7,464 5,466 6,423 6,085 - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE DATA BASIC EARNINGS PER SHARE [2] Income before extraordinary item and cumulative effect of accounting changes [2] $ 2.31 $ 4.42 $ 3.83 $ 4.36 $ 5.64 Net income [2] [3] 2.13 4.42 3.83 4.36 5.64 DILUTED EARNINGS PER SHARE [2] Income before extraordinary item and cumulative effect of accounting changes [2] 2.27 4.34 3.79 4.30 5.58 Net income [2] [3] 2.10 4.34 3.79 4.30 5.58 Dividends declared per common share 1.01 0.97 0.92 0.85 0.80 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING DATA COMBINED RATIOS North American Property & Casualty [5] 112.4 102.4 103.3 102.9 102.3 ==================================================================================================================================== [1] 2001 includes a $91 reduction in premiums from reinsurance cessions related to September 11. 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, which was sold in November 1998, for 1998 and 1997 of $1,117 and $1,225, respectively. [2] 2001 includes $440 of losses ($1.85 per basic and $1.82 per diluted share) related to September 11 and a $130 tax benefit ($0.55 per basic and $0.54 per diluted share) at HLI. 1997 includes an equity gain of $368 ($1.56 per basic and $1.54 per diluted share) resulting from the initial public offering of HLI. [3] 2001 includes a $34 after-tax charge ($0.14 per basic and per diluted share) related to the cumulative effect of accounting changes for the Company's adoption of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" and EITF Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets". Also includes an $8 extraordinary after-tax loss ($0.04 per basic and $0.03 per diluted share) related to the Company's retirement of its 8.35% Cumulative Quarterly Income Preferred Securities. [4] Mutual funds are owned by the shareholders of those funds and not by the Company. As a result, they are not reflected in total assets on the Company's balance sheet. [5] 2001 includes the impact of September 11. Excluding the impact of September 11, 2001 combined ratio was 103.4.
Outlined in the table below are United States Industry Combined Ratios for each of the five years ended December 31:
2001 2000 1999 1998 1997 - ------------------------------------------------------------------------------------------------------------------------------------ United States Industry Combined Ratios [a] 117.0 110.1 107.8 105.6 101.6 ==================================================================================================================================== [a] U.S. Industry Combined Ratio information obtained from A.M. Best. Combined ratio for 2001 is an A.M. Best estimate prepared as of January 2002.
- 15 - 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, 2001, compared with December 31, 2000, and its results of operations for the three years ended December 31, 2001, 2000 and 1999. 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. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty which are, in many instances, beyond the Company's control and have been made based upon management's expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on The Hartford will be those anticipated by management. Actual results could differ materially from those expected by the Company, depending on the outcome of various factors. These factors include: the uncertain nature of damage theories and loss amounts and the development of additional facts related to the September 11 terrorist attack ("September 11"); the response of reinsurance companies under reinsurance contracts, the impact of increasing reinsurance rates, and the adequacy of reinsurance to protect the Company against losses; the possibility of more unfavorable loss experience than anticipated; the possibility of general economic and business conditions that are less favorable than anticipated; the incidence and severity of catastrophes, both natural and man-made; the effect of changes in interest rates, the stock markets or other financial markets; stronger than anticipated competitive activity; unfavorable legislative, regulatory or judicial developments; the difficulty in predicting the Company's potential exposure for environmental and asbestos claims and related litigation; the Company's ability to distribute its products through distribution channels, both current and future; the uncertain effects of emerging claim and coverage issues; the effect of assessments and other surcharges for guaranty funds and second-injury funds and other mandatory pooling arrangements; a downgrade in the Company's claims-paying, financial strength or credit ratings; the ability of the Company's subsidiaries to pay dividends to the Company; and other 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 17 Life 20 Investment Products 21 Individual Life 23 Group Benefits 24 Corporate Owned Life Insurance (COLI) 25 Property & Casualty 26 Business Insurance 27 Affinity Personal Lines 28 Personal Insurance 29 Specialty Commercial 30 Reinsurance 31 Other Operations 32 Deferred Acquisition Costs 33 Reserves 33 Environmental and Asbestos Claims 34 Investments 35 Capital Markets Risk Management 38 Capital Resources and Liquidity 48 Regulatory Matters and Contingencies 52 Effect of Inflation 52 Accounting Standards 52 - 16 - - -------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY - --------------------------------------------------------------------------------
OVERVIEW 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Earned premiums $ 9,409 $ 8,941 $ 8,342 Fee income 2,633 2,484 2,105 Net investment income 2,850 2,674 2,627 Other revenue 491 459 420 Net realized capital gains (losses) (236) 145 34 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 15,147 14,703 13,528 ---------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 9,764 8,419 7,902 Amortization of deferred policy acquisition costs and present value of future profits 2,214 2,213 2,011 Insurance operating costs and expenses 2,037 1,958 1,779 Goodwill amortization 60 28 10 Other expenses [1] 718 667 591 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 14,793 13,285 12,293 ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 354 1,418 1,235 Income tax expense (benefit) (195) 390 287 - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 549 1,028 948 Minority interest in consolidated subsidiary -- (54) (86) Extraordinary loss from early retirement of debt, net of tax [2] (8) -- -- Cumulative effect of accounting changes, net of tax [3] (34) -- -- - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME [4] 507 974 862 Less: Restructuring charges, net of tax (11) -- -- Extraordinary loss from early retirement of debt, net of tax [2] (8) -- -- Cumulative effect of accounting changes, net of tax [3] (34) -- -- Net realized capital gains (losses), after-tax (164) 12 25 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME [4] $ 724 $ 962 $ 837 ================================================================================================================================ [1] Includes restructuring charges of $16, for the year ended December 31, 2001. [2] Represents the write-off of unamortized issuance costs on the Company's 8.35% Cumulative Quarterly Income Preferred Securities which were redeemed on December 31, 2001. [3] Represents the cumulative impact of the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities" and Emerging Issues Task Force ("EITF") Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets". [4] 2001 includes $440 of losses related to September 11 and a $130 tax benefit at HLI.
The Hartford defines "operating income" (defined in previous years as "core earnings") as after-tax operational results excluding, as applicable, net realized capital gains and losses, extraordinary items, the cumulative effect of accounting changes and certain other items. Operating income is an internal performance measure 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, operating income 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. OPERATING RESULTS 2001 COMPARED TO 2000 -- Revenues increased $444, or 3%. Included in revenues in 2001 was a $91 reduction in North American Property & Casualty premiums, resulting from additional reinsurance cessions related to September 11. Also included in revenues were net realized capital losses of $236 in 2001 and net realized capital gains of $145 in 2000. These capital gains and losses related primarily to the sales of international subsidiaries and other than temporary impairments on securities. Excluding the effects of both September 11 and the net realized capital gains and losses, revenues increased $916, or 6%. The increase was related to continued new business growth in Group Benefits, increased fee income in Individual Life, primarily as a result of the April 2001 acquisition of the United States individual life insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as "Fortis" or "Fortis Financial Group") and earned premium growth in most of the Property & Casualty underwriting segments. (For further discussion of the Fortis acquisition, see Note 18 (a) of Notes to Consolidated Financial Statements). Also contributing to the increase was higher net investment income, primarily due to income earned on fixed maturities. These increases were partially offset by a decrease in revenues in the Other Operations segment, reflecting the sales of Property & Casualty's international subsidiaries. Operating income decreased $238, or 25%. Included in the Company's operating income for the year ended December 31, 2001, were $440 of losses, after-tax and net of reinsurance, related to September 11 and a $130 tax benefit at Hartford Life, Inc. ("HLI"), primarily the result of the favorable treatment of - 17 - certain tax matters related to separate account investment activity during the 1996-2000 tax years. Excluding the effects of September 11 and HLI tax benefit, operating income increased $72, or 7%. The increase reflected favorable operating performance in the Company's Business Insurance, Individual Life, Investment Products and Group Benefits segments, partially offset by higher loss costs in the Company's Affinity Personal Lines and Personal Insurance segments as well as adverse loss development in the Reinsurance segment. 2000 COMPARED TO 1999 -- Revenues increased $1.2 billion, or 9%, primarily as a result of 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. Operating income increased $125, or 15%, due to double-digit earnings growth across all segments in Life partially offset by a decline in Property & Casualty, primarily due to adverse loss development in Reinsurance, increased automobile losses in the Personal Insurance segment, expenses related to the Business Insurance field office and claim reorganizations and deteriorating underwriting results from discontinued operations (public entity ("PENCO"), Canada, Farm and Industrial Risk Insurance pool ("IRI"). SIGNIFICANT ACCOUNTING POLICIES For information on the Company's significant accounting policies, see the Deferred Acquisition Costs, Reserves and Investments sections and Note 1 of Notes to Consolidated Financial Statements. NET REALIZED CAPITAL GAINS AND LOSSES See "Investment Results" in the Investments section. INCOME TAXES The effective tax expense (benefit) rate for 2001, 2000 and 1999 was (55)%, 28% and 23%, respectively. Excluding the impacts of September 11 and the HLI federal tax benefits of $130 and $24 in 2001 and 2000, respectively, the effective tax rate for 2001 was 17% compared with 29% and 23%, respectively, for 2000 and 1999. Excluding the impact of September 11 and the HLI federal tax benefits, the decrease in the effective tax rate for 2001 was primarily due to an increase in the proportionate share of tax-exempt net investment income to total pre-tax income for 2001 compared to 2000 and taxes related to the gain on the sale of Zwolsche Algemeene N.V. ("Zwolsche") in 2000. The increase in the effective tax rate for 2000, excluding the $24 tax benefit at HLI, was primarily due to taxes related to the gain on the sale of Zwolsche. (For a further discussion on the sale of Zwolsche, see the Other Operations section and Note 18(b) of Notes to the Consolidated Financial Statements.) Tax-exempt interest earned on invested assets was the principal cause of effective rates lower than the 35% United States statutory rate in all years. Income taxes paid (received) in 2001, 2000 and 1999 were $(52), $95 and $41, respectively. (See Note 14 of Notes to Consolidated Financial Statements for further information.) MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY Prior to the June 27, 2000 acquisition of all of the outstanding shares of HLI that The Hartford did not already own ("The HLI Repurchase"), the minority interest in the consolidated subsidiary's operating results represented approximately 19%. (For additional information, see the Capital Resources and Liquidity section under "Acquisitions" and Note 16 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: 2001 2000 1999 - ------------------------------------------------------------------- Basic earnings per share $2.13 $4.42 $3.83 Diluted earnings per share $2.10 $4.34 $3.79 Weighted average common shares outstanding 237.7 220.6 224.9 Weighted average common shares outstanding and dilutive potential common shares 241.4 224.4 227.5 Return on equity excluding September 11 and Life tax benefit [1] 10.5% 15.4% 15.3% Return on equity [1] 6.6% 15.4% 15.3% - ------------------------------------------------------------------- [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: Life and Property & Casualty. Within these operations, The Hartford conducts business principally in ten operating segments. Additionally, all activities related to The HLI Repurchase and the minority interest in HLI for pre-acquisition periods are included in Corporate. Life is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI"). Life also includes in an Other category its international operations, which are primarily located in Latin America and Japan, as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. Property & Casualty was reorganized into six reportable operating segments and, effective January 1, 2001, is reported as the North American underwriting segments of Business Insurance, Affinity Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance; and the Other Operations segment, formerly "International and Other Operations". The measure of profit or loss used by The Hartford's management in evaluating performance is operating income, except for its North American underwriting segments, which are evaluated by The Hartford's management primarily based upon underwriting results. While not considered segments, the Company also reports and evaluates operating income results for Life, Property & Casualty, and North American, which includes the combined underwriting results of the North American underwriting segments along with income and expense items not directly allocable to these segments, such as - 18 - net investment income. Property & Casualty includes operating income for North American and the 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 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 Property & Casualty. Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses.
UNDERWRITING RESULTS (BEFORE-TAX) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Business Insurance $ 3 $ (50) $ (123) Affinity Personal Lines (36) 17 19 Personal Insurance (42) (15) 15 Specialty Commercial (95) (103) (48) Reinsurance (149) (73) (48) - ------------------------------------------------------------------------------------------------------------------------------------ Underwriting results excluding September 11 (319) (224) (185) September 11 (647) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (966) $ (224) $ (185) ====================================================================================================================================
The following is a summary of operating income and net income.
OPERATING INCOME (LOSS) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Life Investment Products $ 463 $ 424 $ 330 Individual Life 121 79 71 Group Benefits 106 90 79 COLI 37 34 30 Other 73 5 (43) - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 800 632 467 Property & Casualty North American (20) 412 434 Other Operations 6 17 22 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty (14) 429 456 Corporate (62) (99) (86) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING INCOME $ 724 $ 962 $ 837 ====================================================================================================================================
NET INCOME (LOSS) 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Life Investment Products $ 463 $ 424 $ 330 Individual Life 121 79 71 Group Benefits 106 90 79 COLI 37 34 30 Other (42) (52) (43) - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 685 575 467 Property & Casualty North American (125) 466 448 Other Operations 10 28 33 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty (115) 494 481 Corporate (63) (95) (86) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NET INCOME $ 507 $ 974 $ 862 ====================================================================================================================================
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. - 19 - - -------------------------------------------------------------------------------- LIFE - -------------------------------------------------------------------------------- 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. 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. 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. 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. The level of assets under management is generally impacted by equity market performance, persistency of the in-force block of business, sales and other deposits, as well as any acquired blocks of business.
OPERATING SUMMARY [1] 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Fee income $ 2,633 $ 2,484 $ 2,105 Earned premiums 2,142 1,886 1,764 Net investment income 1,779 1,592 1,562 Other revenue 128 116 110 Net realized capital losses (133) (88) (5) - -------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 6,549 5,990 5,536 ---------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 3,611 3,162 3,054 Insurance operating costs and expenses 1,390 1,281 1,132 Amortization of deferred policy acquisition costs and present value of future profits 642 671 568 Goodwill amortization 24 6 6 Other expenses 117 82 90 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 5,784 5,202 4,850 ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 765 788 686 Income tax expense 54 213 219 Cumulative effect of accounting change, net of tax [2] (26) -- -- - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME 685 575 467 Less: Cumulative effect of accounting changes, net of tax [2] (26) -- -- Net realized capital losses, after-tax (89) (57) -- - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME [3] $ 800 $ 632 $ 467 ================================================================================================================================ [1] Life excludes the effect of activities related to The HLI Repurchase, along with the minority interest for pre-acquisition periods, both of which are reflected in Corporate. [2] For the year ended December 31, 2001, represents the cumulative impact of the Company's adoption of SFAS No. 133 and EITF Issue 99-20. [3] For the year ended December 31, 2001, includes $130 tax benefit related to separate account investment activity and $20 of after-tax losses related to September 11. For the year ended December 31, 2000, includes $32 tax benefit related to favorable tax items.
As discussed above, Life consists of the following reportable operating segments: Investment Products, Individual Life, Group Benefits and COLI. In addition, Life includes in an Other category its international operations, which are primarily located in Latin America and Japan, and corporate items not directly allocable to any of its reportable operating segments. On April 2, 2001, The Hartford acquired the United States individual life insurance, annuity and mutual fund businesses of Fortis. (For further discussion, see "Acquisitions" in the Capital Resources and Liquidity section and Note 18(a) of Notes to Consolidated Financial Statements.) This transaction was accounted for as a purchase and, as such, the revenues and expenses generated by this business from April 2, 2001 forward are included in Life's consolidated results of operations. 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 - 20 - under "Acquisitions" and Note 16 of Notes to Consolidated Financial Statements.) 2001 COMPARED TO 2000 -- Revenues increased $559, or 9%, primarily related to the growth across each of Life's primary operating segments, particularly the Individual Life and Group Benefits segments, where revenues increased $250, or 39%, and $300, or 14%, respectively. The revenue growth in the Individual Life segment was primarily due to higher earned fee income and net investment income resulting from the business acquired from Fortis. The Group Benefits segment experienced higher earned premiums due to strong sales and persistency. The Investment Products segment also contributed to the revenue increase as a result of higher fee income in the retail mutual fund business and higher net investment income in the institutional business. Revenues related to the Company's Individual Annuity business were down $46 or 3%, primarily due to lower fee income as a result of the lower equity markets in 2001. Additionally, COLI revenues were below prior year due to a decrease in variable COLI sales and the declining block of leveraged COLI business. Benefits claims and expenses increased $582, or 11%, primarily associated with the growth in Life revenues discussed above. Operating income increased $168, or 27%, led by the Individual Life and Group Benefits segments where operating income increased $42, or 53% and $16, or 18%, respectively. In addition, the 2001 results include a $130 federal income tax benefit primarily related to separate account investment activity and a $20 charge associated with the impact of September 11. Additionally, 2000 results include a benefit of $32 also related to favorable tax items. Excluding these tax items and the impact of September 11, operating income increased $90, or 15%, for the year ended December 31, 2001, as each of the Company's operating segments experienced growth from a year ago. 2000 COMPARED TO 1999 -- Revenues increased $454, or 8%, primarily related to the growth across each of 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. Benefits, claims and expenses increased $352, or 7%, primarily related to the growth in Life's principal operating segments described above. Operating income increased $165, or 35%, led by the Investment Products segment, where operating income increased $94, or 28%. Additionally, operating income related to each of the remaining three operating segments increased 10% or more. As discussed above, Life also recorded benefits of $32 in 2000 related to favorable tax items. Excluding these tax items, operating income increased $133, or 28%. - -------------------------------------------------------------------------------- INVESTMENT PRODUCTS - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Fee income and other $ 1,620 $ 1,639 $ 1,333 Net investment income 886 741 708 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 2,506 2,380 2,041 ---------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 819 700 668 Insurance operating costs and other expenses 608 551 440 Amortization of deferred policy acquisition costs 461 516 430 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 1,888 1,767 1,538 ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 618 613 503 Income tax expense 155 189 173 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 463 $ 424 $ 330 - -------------------------------------------------------------------------------------------------------------------------------- Individual variable annuity account values $ 74,581 $ 78,174 $ 80,588 Other individual annuity account values 9,572 9,059 8,383 Other investment products account values 19,322 17,376 16,352 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ACCOUNT VALUES 103,475 104,609 105,323 Mutual fund assets under management 16,809 11,432 6,374 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 120,284 $ 116,041 $ 111,697 ================================================================================================================================
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 is both a leading writer of individual variable annuities and a top seller of individual variable annuities through banks in the United States. In addition, in 2001 The Hartford Mutual Funds, Inc. reached $12 billion in assets faster than any other retail-oriented mutual fund family in history, according to Strategic Insight. 2001 COMPARED TO 2000 -- Revenues in the Investment Products segment increased $126, or 5%, driven primarily by other investment products. Fee income from other investment products increased $59, or 21%, principally due to growth in Life's mutual fund assets under management. Mutual fund assets increased $5.4 billion, or 47%, to $16.8 billion as of - 21 - December 31, 2001, due to strong sales and the inclusion of the mutual fund assets acquired from Fortis. Net investment income from other investment products increased $113, or 20%, due mostly to growth in the institutional business, where account values were $9.1 billion at December 31, 2001, an increase of $1.4 billion, or 18%, from a year ago. The increase in revenues from other investment products was partially offset by individual annuity revenues, which decreased $46, or 3%. Fee income and net investment income from the individual annuity business acquired from Fortis helped to partially offset lower revenues in the individual annuity operation which was primarily associated with decreased account values resulting from the lower equity markets as compared to the prior year. Individual annuity account values at December 31, 2001 were $84.2 billion, a decrease of $3.1 billion, or 4%, from December 31, 2000. Benefits, claims and expenses increased $121, or 7%, driven by higher interest credited and insurance operating expenses related to other investment products consistent with the revenue growth described above. Interest credited related to other investment products increased $83, or 18%, while insurance operating expenses increased $44, or 17%. Also, individual annuity benefits and claims expenses increased $35, or 14%, principally due to the business acquired from Fortis and higher death benefits resulting from the lower equity markets in 2001. Individual annuity's insurance operating costs increased $13, or 4%, due to the business acquired from Fortis. Excluding Fortis, individual annuity's operating expenses decreased $39, or 4%, from prior year, driven by management's continued focus on maintaining operating expense levels. Partially offsetting the increase in benefits, claims, and insurance operating costs was a decrease in amortization of deferred policy acquisition costs resulting from the lower gross profits associated with the individual annuity business. In addition, income tax expense for the twelve months ended December 31, 2001 was $118, a $45, or 28%, decrease due to lower pretax operating income and the ongoing tax impact related to separate account investment activity. Operating income increased $39, or 9%. These increases were driven by the growth in revenues in other investment products described above, the favorable impact of Fortis and the lower effective tax rate related to the individual annuity business. 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. 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. Operating income 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. 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. For example, The Hartford is introducing a tax advantaged college savings product (529 plan) in early 2002 called SMART 529. SMART 529 is a state-sponsored education savings program established by the State of West Virginia which offers an easy way for both the residents of West Virginia and out-of-state participants to invest for a college education. SMART 529 will allow investors to choose from a wide variety of investment portfolios to match their risk preference to help accumulate savings for college. The SMART 529 product complements Hartford Life's existing offering of investment products (mutual funds, variable annuities, 401 (k), 457 and 403 (b) plans). It also leverages The Company's capabilities in distribution, service and fund performance. The Hartford believes this is a significant market opportunity and the benefits of investing in 529 plans will be well received by many Americans saving for college. - 22 - - -------------------------------------------------------------------------------- INDIVIDUAL LIFE - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Fee income and other $ 647 $ 459 $ 412 Net investment income 243 181 172 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 890 640 584 ---------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 385 274 258 Amortization of deferred policy acquisition costs 168 145 129 Insurance operating costs and other expenses 159 103 88 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 712 522 475 ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 178 118 109 Income tax expense 57 39 38 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 121 $ 79 $ 71 ---------------------------------------------------------------------------------------------------------------------- Variable life account values $ 3,993 $ 2,947 $ 2,595 Total account values $ 7,868 $ 5,849 $ 5,419 - -------------------------------------------------------------------------------------------------------------------------------- Variable life insurance in force $ 61,617 $ 33,460 $ 23,854 Total life insurance in force $ 120,269 $ 75,113 $ 66,690 ================================================================================================================================
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. Additionally, the Fortis transaction, through the addition of a retail broker dealer, which has been renamed Woodbury Financial Services, has allowed the Individual Life segment to increase its reach in the emerging affluent market. 2001 COMPARED TO 2000 -- Revenues in the Individual Life segment increased $250, or 39%, primarily due to the business acquired from Fortis. Fee income, including cost of insurance charges, increased $180, or 40%, driven principally by growth in the variable life business where account values increased $1.0 billion, or 35%, and life insurance in force increased $28.2 billion, or 84%, from a year ago. In addition, net investment income on general account business (universal life, interest sensitive whole life and term life) increased $66, or 34%, consistent with the growth in related account values. Benefits, claims and expenses increased $190, or 36%, due principally to the growth in revenues described above. Although death benefits were higher in 2001 than the prior year as a result of the increase in life insurance in force, year-to-date mortality experience (expressed as death claims as a percentage of net amount at risk) for 2001 was within pricing assumptions. Operating income increased $42, or 53%, primarily due to the revenue growth described above. Individual Life incurred an after-tax loss of $3 related to September 11. Excluding this loss, operating income increased $45, or 57%, primarily due to the growth factors described above. 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%, 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. Operating income 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. 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 acquisition of the United States individual life insurance business of Fortis has increased its scale while broadening its distribution capabilities as described above. - 23 - - -------------------------------------------------------------------------------- GROUP BENEFITS - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Earned premiums and other $ 2,259 $ 1,981 $ 1,829 Net investment income 248 226 195 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 2,507 2,207 2,024 ---------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 1,874 1,643 1,507 Insurance operating costs and other expenses 498 450 415 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 2,372 2,093 1,922 ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 135 114 102 Income tax expense 29 24 23 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 106 $ 90 $ 79 ================================================================================================================================
The Hartford is a leading provider of group benefits, and through this segment sells group life and group disability insurance as well as other products, including stop loss and supplementary medical coverages 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. 2001 COMPARED TO 2000 -- Revenues in the Group Benefits segment increased $300, or 14%, driven primarily by growth in premiums, which increased $278, or 14%, due to solid persistency and increased premium rates related to the in force block of business, and strong sales to new customers. Fully insured ongoing sales for the year ended December 31, 2001 were $531, $85, or 19%, higher than the prior year. Additionally, net investment income increased $22, or 10%, due to the overall growth in the in-force business. Total benefits, claims and expenses increased $279, or 13%, driven primarily by higher benefits and claims which increased $231, or 14%. These increases are consistent with the growth in the business described above as the loss ratios (defined as benefits and claims and claim adjustment expenses as a percentage of premiums and other considerations) have remained relatively consistent with the comparable prior year periods. In addition, expenses other than benefits and claims increased $48, or 11%, for the year ended December 31, 2001, also consistent with the overall growth in the segment. Operating income increased $16, or 18%, driven by overall revenue growth and consistent loss and expense ratios as compared to the prior year. Group Benefits incurred an after-tax loss of $2 related to September 11; excluding this loss, operating income increased $18, or 20%. 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. Operating income increased $11, or 14%, primarily driven by the increased revenues described above. 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. The Group Benefits segment offered Medicare supplement insurance to members of several retired military officer associations. Federal legislation effective in the fourth quarter of 2001, now provides retired military officers age 65 and older with full medical insurance paid for by the government, eliminating the need for Medicare supplement insurance. This legislation will reduce Group Benefits premium revenues by approximately $131 in 2002. - 24 - - -------------------------------------------------------------------------------- CORPORATE OWNED LIFE INSURANCE (COLI) - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Fee income and other $ 367 $ 401 $ 400 Net investment income 352 366 431 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 719 767 831 ---------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 514 545 621 Insurance operating costs and expenses 84 102 59 Dividends to policyholders 66 67 104 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 664 714 784 ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 55 53 47 Income tax expense 18 19 17 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 37 $ 34 $ 30 ---------------------------------------------------------------------------------------------------------------------- Variable COLI account values $ 18,019 $ 15,937 $ 12,386 Leveraged COLI account values 4,315 4,978 5,729 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ACCOUNT VALUES $ 22,334 $ 20,915 $ 18,115 ================================================================================================================================
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. 2001 COMPARED TO 2000 -- COLI revenues decreased $48, or 6%, mostly due to lower fee income and net investment income. Fee income and other decreased $34, or 8%, due to a decline in variable COLI sales and deposits which were approximately $1.5 billion in 2001 as compared to $2.9 billion in 2000. In addition, net investment income decreased $14, or 4%, due primarily to lower interest rates and the decline in leveraged COLI account values. Benefits, claims and expenses decreased $50, or 7%, directly related to the decrease in revenue discussed above. Operating income increased $3, or 9%, primarily due to the overall growth in variable COLI business and earnings associated with the leveraged COLI business recaptured in 1998. COLI incurred an after-tax charge of $2 related to September 11; excluding this charge, operating income increased $5, or 15%. 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. Operating income 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. 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. - 25 - - -------------------------------------------------------------------------------- PROPERTY & CASUALTY - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Earned premiums $ 7,267 $ 7,055 $ 6,578 Net investment income 1,053 1,072 1,065 Other revenue [1] 363 343 310 Net realized capital gains (losses) (103) 234 39 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 8,580 8,704 7,992 ---------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 6,146 5,253 4,848 Amortization of deferred policy acquisition costs 1,572 1,542 1,443 Insurance operating costs and expenses 647 677 647 Goodwill amortization 3 5 4 Other expenses [2] 547 543 501 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 8,915 8,020 7,443 ----------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (335) 684 549 Income tax expense (benefit) (236) 190 68 - -------------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE (99) 494 481 Extraordinary loss from early retirement of debt, net of tax [3] (8) -- -- Cumulative effect of accounting change, net of tax [4] (8) -- -- - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) [5] (115) 494 481 Less: Restructuring charges, net of tax (10) -- -- Extraordinary loss from early retirement of debt, net of tax [3] (8) -- -- Cumulative effect of accounting change, net of tax [4] (8) -- -- Net realized capital gains (losses), after-tax (75) 65 25 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) [5] $ (14) $ 429 $ 456 ================================================================================================================================ [1] Primarily servicing revenue. [2] Includes restructuring charges of $15 for the year ended December 31, 2001. [3] Represents the write-off of unamortized issuance costs on the Company's 8.35% Cumulative Quarterly Income Preferred Securities which were redeemed on December 31, 2001. [4] Represents the cumulative impact of the Company's adoption of EITF Issue 99-20. [5] 2001 includes $420 of after-tax losses related to September 11.
As discussed above, Property & Casualty was reorganized into six reportable operating segments and, effective January 1, 2001, is reported as the North American underwriting segments of Business Insurance, Affinity Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance; and the Other Operations segment. Also reported within Property & Casualty is North American, which includes the combined underwriting results of the North American underwriting segments along with income and expense items not directly allocable to these segments, such as net investment income, net realized capital gains and losses, other expenses including interest and income taxes. The following is a summary of Property & Casualty operating income, after-tax. Operating income excludes net realized capital gains and losses, restructuring charges, extraordinary items and the cumulative effect of accounting changes.
(after-tax) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- North American Underwriting results excluding September 11 $ (207) $ (146) $ (120) September 11 (420) -- -- - -------------------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS (627) (146) (120) Net investment income 722 695 684 Other expenses [1] (115) (137) (130) - -------------------------------------------------------------------------------------------------------------------------------- NORTH AMERICAN OPERATING INCOME (LOSS) (20) 412 434 Other Operations operating income 6 17 22 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME (LOSS) $ (14) $ 429 $ 456 ================================================================================================================================ [1] Includes interest, net servicing income and goodwill amortization.
Underwriting results are discussed in each of the Business Insurance, Affinity Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance segment sections. Net investment income and net realized capital gains and losses are - 26 - discussed in the Investments section. (For a further discussion of September 11, see Capital Resources and Liquidity section and Note 2 of Notes to Consolidated Financial Statements.) 2001 COMPARED TO 2000 -- Operating income decreased $443 as compared with 2000. Excluding the $420 impact of September 11, operating income decreased $23, or 5%. Earned premium growth in Business Insurance due to price increases, strong new business growth and improved premium renewal retention, as well as an increase in North American investment income, was offset by increased losses in the personal automobile lines of business and in Reinsurance. A decrease in underwriting results of $16, after-tax, related to Enron Corporation and lower income resulting from the sales of international subsidiaries also contributed to the decrease. 2000 COMPARED TO 1999 -- Operating income decreased $27, or 6%, primarily due to adverse loss development in Reinsurance, expenses related to the Business Insurance field office and claim reorganizations, deteriorating underwriting results from discontinued operations (PENCO, Canada, Farm and IRI) and increased automobile losses in the Personal Insurance segment. Partially offsetting this decrease was a reduction in property catastrophe losses and improvement in Business Insurance mid-market results. - -------------------------------------------------------------------------------- BUSINESS INSURANCE - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Written premiums [1] $ 2,886 $ 2,405 $ 2,227 - -------------------------------------------------------------------------------------------------------------------------------- Earned premiums [1] $ 2,645 $ 2,298 $ 2,202 Benefits, claims and claim adjustment expenses 1,704 1,506 1,525 Amortization of deferred policy acquisition costs 681 605 566 Insurance operating costs and expenses 257 237 234 - -------------------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS EXCLUDING SEPTEMBER 11 3 (50) (123) September 11 (245) -- -- ----------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS $ (242) $ (50) $ (123) ----------------------------------------------------------------------------------------------------------------------- Combined ratio excluding September 11 97.8 100.6 105.6 Combined ratio impact of September 11 9.3 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Combined ratio 107.1 100.6 105.6 ================================================================================================================================ [1] 2001 excludes $15 of reinsurance cessions related to September 11.
Business Insurance provides workers' compensation, property, automobile and liability coverages to small ("Select Customer") and mid-sized ("Key Accounts") commercial businesses primarily throughout the United States. This segment also provides commercial risk management products and services to small and mid-sized members of affinity groups in addition to marine coverage. 2001 COMPARED TO 2000 -- Written premiums increased $481, or 20%, driven by strong growth in Select Customer and Key Accounts. Select Customer increased $209, or 19%, as a result of pricing increases, strong premium renewal retention and the success of product, marketing, technology and service growth initiatives. The increase in Key Accounts of $195, or 19%, was attributable primarily to significant pricing increases and improved premium renewal retention as well as strong new business growth. Excluding the impact of September 11, underwriting results improved $53, with a corresponding 2.8 point decrease in the combined ratio. The improvement for the year was primarily due to strong pricing and decreased frequency loss costs as well as an improved expense ratio. The favorable expense ratio was the result of current year benefits of the 2000 field office reorganization and reorganization costs in 2000 not recurring in 2001. 2000 COMPARED TO 1999 -- Written premiums increased $178, or 8%, primarily as a result of strong growth in Select Customer, up $171, or 19%. Enhanced product offerings, targeted geographic strategies and new business growth coupled with mid-single digit price increases were the primary drivers of the Select Customer growth. This increase was slightly offset by a 2% decrease in Key Accounts. The decline in mid-market premiums reflected the effective execution of the Company's underwriting initiatives, although significant price increases partially mitigated this decrease. Underwriting results improved $73, or 5.0 combined ratio points, primarily the result of reduced loss ratios due to the 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. OUTLOOK Firming market conditions in the standard commercial sector are expected to continue in 2002, although price competition within many markets of the commercial industry will remain a challenge. Additionally, September 11 has created an ambiguous environment and economic uncertainty as federal backing in the event of future terrorist attacks remains uncertain. Uncertainties in the reinsurance market also may impact the segment's ability to obtain adequate reinsurance coverage for certain exposures at a reasonable price. Management expects significant growth in small commercial businesses will continue to be achieved, in part, due to continued strategic actions being implemented. This includes providing a complete product solution for the small commercial coverage needs of the - 27 - 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 middle market business should continue to have a positive impact on overall profitability in 2002. - -------------------------------------------------------------------------------- AFFINITY PERSONAL LINES - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Written premiums $ 1,839 $ 1,659 $ 1,527 - -------------------------------------------------------------------------------------------------------------------------------- Earned premiums $ 1,741 $ 1,583 $ 1,468 Benefits, claims and claim adjustment expenses 1,400 1,220 1,125 Amortization of deferred policy acquisition costs 180 164 155 Insurance operating costs and expenses 197 182 169 - -------------------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS EXCLUDING SEPTEMBER 11 (36) 17 19 September 11 (3) -- -- ----------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS $ (39) $ 17 $ 19 ----------------------------------------------------------------------------------------------------------------------- Combined ratio excluding September 11 102.8 100.0 100.2 Combined ratio impact of September 11 0.1 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Combined ratio 102.9 100.0 100.2 - -------------------------------------------------------------------------------------------------------------------------------- Other revenue [1] $ 150 $ 166 $ 162 ================================================================================================================================ [1] Primarily servicing revenue.
Affinity Personal Lines provides automobile, homeowners and home-based business coverages to individuals across the United States. Affinity Personal Lines is organized to provide customized products and services to the following markets: the membership of AARP through a direct marketing operation; 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. Affinity Personal Lines also operates a member contact center for health insurance products offered through AARP's Health Care Options. The Hartford's exclusive licensing arrangement with AARP, which was renewed during the fourth quarter of 2001, continues through January 1, 2010 for automobile, homeowners and home-based business. The Health Care Options agreement continues through 2007. 2001 COMPARED TO 2000 -- Written premiums increased $180, or 11%, driven by growth in both the AARP program and Affinity business unit. AARP increased primarily as a result of strong new business growth and continued steady premium renewal retention. The improvement in the Affinity business unit continues to reflect increased new business from the Ford and Sears accounts. Excluding the impact of September 11, underwriting results decreased $53, with a corresponding 2.8 point increase in the combined ratio. Higher automobile losses continue to adversely impact underwriting results and the combined ratio. In addition, the loss adjustment expense ratio increased, primarily as a result of higher losses and increased litigation costs. Although underwriting expenses increased, primarily due to increased written premiums, the expense ratio improved slightly as compared to the prior year, primarily as a result of prudent expense management. 2000 COMPARED TO 1999 -- Written premiums increased $132, or 9%, due primarily to policy count growth and improved renewal retention in the AARP program as well as growth in the Affinity business unit resulting from increased business from the Ford and Sears accounts. Underwriting results decreased $2, with a slight improvement in the combined ratio. The decrease in underwriting results was primarily due to increased automobile losses, partially offset by strong improvement in the AARP homeowners line. The combined ratio improvement was primarily attributable to a decrease in the expense ratio, reflecting productivity gains from prior initiatives. OUTLOOK The personal lines industry is struggling to regain its momentum towards profitability as rising loss costs resulting from inflation in both medical and automobile repair costs have adversely impacted results. In addition, September 11 will likely have negative short-term implications to the industry as a result of lower investment yields and higher reinsurance rates. More severe catastrophes could also impact future results. Management does believe, however, that with increased rate activity, the personal lines industry will be positioned for recovery. During the fourth quarter of 2001, The Hartford's exclusive licensing arrangement with AARP to offer personal insurance products to the over 34 million AARP members was renewed through January 1, 2010. This agreement provides the segment with an important competitive advantage. Favorable "baby boom" demographics as well as initiatives implemented to further strengthen the AARP relationship are expected to increase membership during this period. - 28 - - -------------------------------------------------------------------------------- PERSONAL INSURANCE - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Written premiums $ 1,021 $ 988 $ 943 - -------------------------------------------------------------------------------------------------------------------------------- Earned premiums $ 1,006 $ 964 $ 875 Benefits, claims and claim adjustment expenses 764 701 607 Amortization of deferred policy acquisition costs 205 213 193 Insurance operating costs and expenses 79 65 60 - -------------------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS EXCLUDING SEPTEMBER 11 $ (42) $ (15) $ 15 September 11 (6) -- -- ----------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS $ (48) $ (15) $ 15 ----------------------------------------------------------------------------------------------------------------------- Combined ratio excluding September 11 102.9 100.3 98.4 Combined ratio impact of September 11 0.5 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Combined ratio 103.4 100.3 98.4 ================================================================================================================================
Personal Insurance provides automobile, homeowners and home-based business coverages to individuals across the United States. Personal Insurance is organized to provide products and services to individuals who prefer local agent involvement through a network of independent agents in the standard personal lines market and through Omni Insurance Group ("Omni"), in the non-standard automobile market. 2001 COMPARED TO 2000 -- Written premiums increased $33, or 3%, primarily due to premium growth in the standard automobile and homeowners lines as a result of pricing increases and strong premium renewal retention. Premium declines in non-standard auto reflect decreased policy counts, the result of significant price increases to address loss cost issues. Excluding the impact of September 11, underwriting results decreased $27, with a corresponding 2.6 point increase in the combined ratio. Increased automobile losses in both standard and non-standard adversely impacted the underwriting results and combined ratios. In addition, higher losses and increased litigation costs resulted in an increase in the loss adjustment expense ratio. Partially offsetting the combined ratio increase was improvement in the expense ratio, primarily due to lower commissions and prudent expense management. 2000 COMPARED TO 1999 -- Written premiums increased $45, or 5%, due primarily to policy count growth and improved renewal retention in the standard automobile and homeowners' lines. Non-standard automobile written premiums through Omni decreased for the year as a result of an expected consumer reaction to rate increases in certain states. Underwriting results decreased $30, with a corresponding 1.9 point increase in the combined ratio. The decrease in underwriting results and related increase in the combined ratio were primarily due to increased standard and non-standard automobile losses. Partially offsetting this decrease was an improvement in the homeowners line of business. A 1.4 point decrease in the expense ratio for the year reflected the continued trend of productivity gains from prior initiatives. OUTLOOK The personal lines industry is struggling to regain its momentum towards profitability as rising loss costs resulting from inflation in both medical and automobile repair costs have adversely impacted results. In addition, September 11 will likely have negative short-term implications to the industry in the form of lower investment yields and higher reinsurance rates. More severe catastrophes could also impact future results. Management does believe, however, that with increased rate activity, the personal lines industry will be positioned for recovery. Strategic actions being taken by the Personal Insurance segment include unprofitable agency closures in the standard lines and a continued shift in state mix away from poor loss performing states in non-standard automobile. Additionally, further investments in technology, continued efforts to reduce expenses and improve the product line, ease of doing business and customer service capability will position Personal Insurance to take advantage of future market conditions. - 29 - - -------------------------------------------------------------------------------- SPECIALTY COMMERCIAL - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Written premiums [1] $ 996 $ 1,080 $ 954 - -------------------------------------------------------------------------------------------------------------------------------- Earned premiums [1] $ 1,029 $ 1,034 $ 928 Benefits, claims and claim adjustment expenses 766 779 630 Amortization of deferred policy acquisition costs 267 268 257 Insurance operating costs and expenses 91 90 89 - -------------------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS EXCLUDING SEPTEMBER 11 $ (95) $ (103) $ (48) September 11 (167) -- -- ------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS $ (262) $ (103) $ (48) ------------------------------------------------------------------------------------------------------------------- Combined ratio excluding September 11 108.3 107.1 105.1 Combined ratio impact of September 11 16.5 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Combined ratio 124.8 107.1 105.1 - -------------------------------------------------------------------------------------------------------------------------------- Other revenue [2] $ 213 $ 168 $ 141 ================================================================================================================================ [1] 2001 excludes $7 of reinsurance cessions related to September 11. [2] Primarily servicing revenue.
Specialty Commercial provides insurance through retailers and wholesalers to large commercial clients and insureds requiring a variety of specialized coverages. The segment's results also include the professional liability and bond lines as well as 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 in the property line of business in Specialty Commercial. 2001 COMPARED TO 2000 -- Written premiums decreased $84, or 8%, primarily due to a decrease in written premiums from sold or exited business lines which include farm, public entity and Canada. Partially offsetting the decrease was an increase in written premiums due to The Hartford's purchase, in the third quarter of 2000, of the in force, new and renewal financial products business as well as the majority of the excess and surplus lines business of Reliance Group Holdings, Inc. ("Reliance"), which resulted in $60 of additional written premiums as compared with 2000. Excluding the impact of September 11, underwriting results improved $8, with a 1.2 point increase in the combined ratio. The improved underwriting results were primarily a result of favorable results in the property lines of business and lower losses and underwriting expenses from the sold or exited business lines. Partially offsetting the improvement was deteriorating underwriting results in risk management and a decrease in underwriting results related to Enron Corporation. The increase in the combined ratio was primarily due to an increase in the commission ratio as well as additional taxes, licenses and fees in the risk management and professional liability lines of business. The increase in the commission ratio was primarily a result of lower ceding commissions. 2000 COMPARED TO 1999 -- Written premiums increased $126, or 13%, primarily due to the purchase of Reliance's in force, new and renewal financial products business as well as the majority of the excess and surplus lines in 2000, which resulted in $108 of additional written premiums for the year. Higher written premiums in the casualty line of business also contributed to the increase. Underwriting results decreased $55, impacting the combined ratio by 2.0 points, primarily the result of increased losses and loss adjustment expenses in the property and bond lines of business as well as in PENCO and Canada. The combined ratio was adversely impacted by the higher loss ratios. The increase in the combined ratio was partially offset by a decrease in the expense ratio. OUTLOOK Firming market conditions in the specialty commercial sector are expected to continue in 2002. However, September 11 has created an ambiguous environment and economic uncertainty as federal backing in the event of future terrorist attacks remains uncertain. Uncertainties in the reinsurance market also may impact the segment's ability to obtain adequate reinsurance coverage for certain exposures at a reasonable price. Strong property pricing should be even stronger in 2002 as a result of September 11. New capital is flowing into the industry as a result of a hardening market, thereby increasing capacity. Management believes, however, that strategic actions being taken which include providing innovative new products as well as expanding product lines; expanding non-traditional distribution alternatives; and further leveraging underwriting discipline and capabilities will position the segment to capitalize on a continued improving marketplace. - 30 - - -------------------------------------------------------------------------------- REINSURANCE - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Written premiums [1] $ 918 $ 826 $ 703 - -------------------------------------------------------------------------------------------------------------------------------- Earned premiums [1] $ 920 $ 809 $ 680 Benefits, claims and claim adjustment expenses 815 624 507 Amortization of deferred policy acquisition costs 239 243 211 Insurance operating costs and expenses 15 15 10 - -------------------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS EXCLUDING SEPTEMBER 11 $ (149) $ (73) $ (48) September 11 (226) -- -- ----------------------------------------------------------------------------------------------------------------------- UNDERWRITING RESULTS $ (375) $ (73) $ (48) ----------------------------------------------------------------------------------------------------------------------- Combined ratio excluding September 11 116.1 108.9 107.2 Combined ratio impact of September 11 27.8 -- -- - -------------------------------------------------------------------------------------------------------------------------------- Combined ratio 143.9 108.9 107.2 ================================================================================================================================ [1] 2001 excludes $69 of reinsurance cessions related to September 11.
The Hartford assumed reinsurance worldwide through its thirteen Hartford Reinsurance Company ("HartRe") offices and wrote treaty reinsurance through professional reinsurance brokers covering various property, casualty, specialty and marine classes of business until the fourth quarter of 2001. In October 2001, HartRe announced a centralization of all underwriting and claims operations in Hartford, Connecticut and an exit from all international lines except catastrophe, Alternative Risk Transfer ("ART") and marine. The exited international lines contributed $101 of written premiums in 2001. 2001 COMPARED TO 2000 -- Written premiums increased $92, or 11%, primarily due to growth in ART written premiums, driven primarily by a significant first quarter ART transaction. The achievement of double-digit pricing increases in traditional reinsurance was offset by underwriting discipline to maintain profitability targets. Excluding the impact of September 11, underwriting results decreased $76, with a corresponding 7.2 point increase in the combined ratio. The decrease in underwriting results and corresponding increase in the combined ratio were primarily attributable to continued adverse loss development on prior underwriting years. 2000 COMPARED TO 1999 -- Reinsurance written premiums increased $123, or 17%, primarily due to successful pricing increases in a firming pricing environment, as well as growth in new casualty programs business, and continued execution of new business development strategies in the ART line. Underwriting results decreased $25, with a corresponding 1.7 point increase in the combined ratio. This decrease was primarily due to adverse prior underwriting years loss development, partially offset by lower property catastrophe losses. OUTLOOK As a result of September 11, the reinsurance market has been transformed to an environment of some uncertainty. Net new capital, price increases and modifications in contract terms and conditions have contributed to the uncertainty. The property and casualty worldwide reinsurance market remains extremely competitive, although the pricing environment continued to improve in 2001. It is anticipated by management that rates and terms will continue to improve in 2002. HartRe's organizational realignment has created a centralized organization aimed at enhancing core functions consistent with the segment's return objectives. HartRe will be established as a specialized worldwide property catastrophe underwriting practice, blending technical underwriting expertise and state-of-the-art catastrophe modeling and risk portfolio analysis. - 31 - - -------------------------------------------------------------------------------- OTHER OPERATIONS - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Earned premiums $ 17 $ 367 $ 425 Net investment income 146 210 212 Other revenue -- 9 7 Net realized capital gains 5 16 17 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 168 602 661 ---------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 142 423 454 Amortization of deferred policy acquisition costs -- 49 61 Insurance operating costs and expenses 7 88 85 Other expenses 5 7 9 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 154 567 609 ---------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 14 35 52 Income tax expense 4 7 19 - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME 10 28 33 - -------------------------------------------------------------------------------------------------------------------------------- Less: Net realized capital gains, after-tax 4 11 11 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 6 $ 17 $ 22 ================================================================================================================================
The Other Operations segment, formerly International and Other Operations, consists of certain property and casualty insurance operations of The Hartford which have discontinued 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, Ltd, located in the United Kingdom. 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. Also included in Other Operations are the Company's international property and casualty businesses. During the fourth quarter 2001, the Company finalized a new management structure within its Other Operations segment that consolidates the management and claims handling responsibility of the Company's environmental and asbestos exposures. In addition, the Company consolidated its environmental and asbestos reserves into one legal entity within Other Operations. The transaction was accomplished through the use of an intercompany reinsurance agreement, and resulted in $602 of reserves, primarily related to environmental and asbestos exposures from 1986 and prior, being ceded from the Specialty Commercial segment to Other Operations. There was no impact to the Company's consolidated financial condition or results of operations as a result of this transaction. The Other Operations segment results include activity for the Company's international property and casualty businesses up until their dates of sale as discussed below. Products offered by these companies included 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 all of The Hartford's property and casualty international businesses continued the Company's strategic shift in its international operations to emphasize growth opportunities in asset accumulation business. In September 2001, The Hartford entered into an agreement to sell its Singapore-based Hartford Insurance Company (Singapore), Ltd. The Company recorded a net realized capital loss of $9 after-tax related to the sale, which was recorded in the 2001 investment results of North American. The sale was completed in January 2002. On February 8, 2001, The Hartford completed the sale of its Spain-based subsidiary, Hartford Seguros. The Hartford received $29, before costs of sale and recorded a $16 after-tax net realized capital loss which was reported in the 2001 investment results of North American. On December 22, 2000, The Hartford completed the sale of Zwolsche located in the Netherlands, Belgium and Luxembourg. The Hartford received $547, before costs of sale and recorded a $69 after-tax net realized capital gain which was reported in the 2000 investment results of North American. 2001 COMPARED TO 2000 -- Revenues were down $434, or 72%, and operating income was down $11, or 65%, primarily due to the sale of Zwolsche. 2000 COMPARED TO 1999 -- Revenues were down $59, or 9%, primarily due to lower earned premiums at Zwolsche. Operating income was down $5, or 23%, primarily due to a higher calendar year loss ratio in automobile business in Hartford Seguros and unfavorable foreign exchange impacts. OUTLOOK 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. - 32 - - -------------------------------------------------------------------------------- DEFERRED ACQUISITION COSTS - -------------------------------------------------------------------------------- Management is required to make estimates and assumptions that affect the reported amounts of 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. One of the significant estimates made includes those used in determining deferred policy acquisition costs. Although some variability is inherent in these estimates, management believes the amounts provided are adequate. LIFE Policy acquisition costs, which include commissions and certain other expenses that vary with and are primarily associated with acquiring business, are deferred and amortized over the estimated lives of the contracts, usually 20 years. Deferred policy acquisition costs related to investment contracts and universal life type contracts are deferred and amortized using the 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 re-estimated and adjusted by a cumulative charge or credit to income. The average rate of assumed future investment yield used in estimating expected gross profits related to variable annuity and variable life business was 9% at December 31, 2001 and for all other products including fixed annuities and other universal life type contracts the average assumed investment yield ranged from 5.0% - 8.5%. Deferred policy acquisition costs related to traditional policies are amortized over the premium paying period of the related policies in proportion to the ratio of the present value of annual expected premium income to the present value of total expected premium income. Adjustments are made each year to recognize actual experience as compared to assumed experience for the current period. To date, our experience has generally been consistent or favorable to the assumptions used in determining DAC amortization. However, if we were to experience a material adverse deviation in certain critical assumptions, including surrender rates, mortality experience, or investment performance, there could be a negative effect on the Company's reported earnings and stockholders' equity. PROPERTY & CASUALTY The Property & Casualty operations also incur costs related to the acquisition of new and renewal insurance policies. These costs include agent and broker commissions, premium taxes and certain other underwriting expenses. These costs are deferred and amortized over policy terms. Estimates of the present value of future revenues, including net investment income and tax benefits, are compared to estimates of the present value of future costs, including amortization of policy acquisition costs, to determine if the deferred acquisition costs are recoverable, and if not, they are charged to expense. - -------------------------------------------------------------------------------- RESERVES - -------------------------------------------------------------------------------- LIFE In accordance with applicable insurance regulations under which 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 ("IBNR") 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. Certain contracts include provisions whereby a guaranteed death benefit is provided in the event that the contractholder's account value at death is below the guaranteed value. Although the Company reinsures the majority of the death benefit guarantees associated with its in-force block of business, declines in the equity market may increase the Company's net exposure to death benefits under these contracts. The Company records the death benefit costs, net of reinsurance, as they are incurred. 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 years. Such surrender charge is initially a percentage of either the accumulation value or considerations received, which varies - 33 - 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. PROPERTY & CASUALTY 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. As a result of September 11, the Company established estimated gross reserves of $1.1 billion and estimated net reserves of $556 related to property and casualty operations. This loss estimate includes coverages related to property, business interruption, workers' compensation and other liability exposures, including those underwritten by the Company's assumed reinsurance operation. The Company based the loss estimate upon a review of insured exposures using a variety of assumptions and actuarial techniques, including estimated amounts for unknown and unreported policyholder losses and costs incurred in settling claims. Included in net reserves was an estimate of amounts recoverable under the Company's ceded reinsurance programs. As a result of the uncertainties involved in the estimation process, final claims settlement may vary from present estimates. The Hartford continually reviews the adequacy of its estimated claims and claim adjustment expense reserves on an overall basis. As additional experience and other relevant data become available, 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, 2001, 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 the Property & Casualty operation. 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 claims 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 United States exposures of The Hartford's 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. 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 - 34 - 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 continues 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, 2001, 2000 and 1999, was as follows (net of reinsurance):
ENVIRONMENTAL AND ASBESTOS CLAIMS AND CLAIM ADJUSTMENT EXPENSES ------------------------------------------------------------------------------------------------ 2001 2000 1999 ------------------------------ ------------------------------- ------------------------------- Environ. Asbestos Total Environ. Asbestos Total Environ. Asbestos Total ------------------------------------------------------------------------------------------------ Beginning liability $ 911 $ 572 $ 1,483 $ 995 $ 625 $ 1,620 $ 1,144 $ 668 $ 1,812 Claims and claim adjustment expenses incurred [1] 15 28 43 8 8 16 7 4 11 Claims and claim adjustment expenses paid (172) (84) (256) (92) (61) (153) (156) (47) (203) Other [2] (100) 100 -- -- -- -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITY [3] $ 654 $ 616 $ 1,270 $ 911 $ 572 $ 1,483 $ 995 $ 625 $ 1,620 ==================================================================================================================================== [1] For 2001, environmental and asbestos include $2 and $19, respectively, of incurred expenses related to the assumption of previously ceded reserves from commutations of reinsurance contracts. [2] 2001 includes a $100 reclassification from environmental to asbestos. [3] The ending liabilities are net of reinsurance on reported and unreported claims of $1,282, $1,506 and $1,524 for 2001, 2000 and 1999, respectively. As of December 31, 2001, 2000 and 1999, reserves for environmental and asbestos, gross of reinsurance, were $919 and $1,633, $1,483 and $1,506, and $1,609 and $1,535, respectively.
Actual claim settlements since 1996 have indicated that a smaller proportion of the total environmental and asbestos reserves should have originally been allocated to environmental, with a greater portion allocated to asbestos. As a result, during the fourth quarter of 2001, the Company reclassified $100 of environmental reserves to asbestos. With the consolidation of The Hartford's environmental and asbestos liabilities into the Other Operations segment, as previously discussed in the Other Operations section, essentially all of the Company's environmental and asbestos reserves are held within Other Operations. The Hartford believes that the environmental and asbestos reserves, reported at December 31, 2001, 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. - -------------------------------------------------------------------------------- INVESTMENTS - -------------------------------------------------------------------------------- Return on invested assets is an important element of The Hartford's financial results. Significant fluctuations in the fixed income or equity markets could weaken the Company's financial condition or its results of operations. Net investment income and net realized capital gains and losses accounted for approximately 17% and 19% of the Company's consolidated revenues for the years ended December 31, 2001 and 2000, respectively. Fluctuations in interest rates affect the Company's return on, and the fair value of, fixed maturity investments, which comprised approximately 86% and 85% of the fair value of its invested assets as of December 31, 2001 and 2000, respectively. Other events beyond the Company's control could also adversely impact the fair value of these investments. Specifically, a downgrade of an issuer's credit rating or default of payment by an issuer could reduce the Company's investment return. The Company also invests in unaffiliated limited partnership arrangements in order to further diversify its investment portfolio. These limited partnerships represent approximately 3% of the fair value of its invested assets as of December 31, 2001 and 2000. Limited partnerships are typically less liquid than direct investments in fixed income or equity investments. Market volatility and other factors beyond the Company's control can adversely affect the value of these investments. Because the Company is a limited partner, its ability to control the timing or the realization of the related investment income is restricted. A significant decrease in the fair value of any investment that is deemed other than temporary could result in the Company's recognition of a loss in its financial results prior to the actual sale of the investment. The Hartford's investment portfolios are divided between Life and Property & Casualty. The investment portfolios are - 35 - 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 Life and Property & Casualty are managed by Hartford Investment Management Company ("HIMCO"), a wholly-owned subsidiary of The Hartford. HIMCO is responsible for monitoring and managing the asset/liability profile, establishing investment objectives and guidelines, and determining, within specified risk tolerances and investment guidelines, the appropriate asset allocation, duration, convexity and other characteristics of the portfolios. Security selection and monitoring are performed by asset class specialists working within dedicated portfolio management teams. LIFE The primary investment objective of 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 and the generation of sufficient liquidity relative to that of corporate and policyholder obligations, as discussed in the Capital Markets Risk Management section under "Market Risk - Life - Interest Rate Risk". The following table identifies the invested assets by type held in the general account as of December 31, 2001 and 2000.
COMPOSITION OF INVESTED ASSETS - ------------------------------------------------------------------------------------------------------------------------ 2001 2000 AMOUNT PERCENT AMOUNT PERCENT ----------------------------------------- Fixed maturities, at fair value $ 23,301 82.1% $ 18,248 79.6% Equity securities, at fair value 428 1.5% 171 0.7% Policy loans, at outstanding balance 3,317 11.7% 3,610 15.7% Limited partnerships, at fair value 811 2.9% 668 2.9% Other investments 520 1.8% 242 1.1% - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 28,377 100.0% $ 22,939 100.0% ========================================================================================================================
During 2001, fixed maturity investments increased $5.1 billion as a result of the Fortis acquisition, increased operating cash flow and an increase in fair value due to a lower interest rate environment. The decrease in policy loans was primarily due to the decrease in leveraged COLI business, partially offset by policy loans acquired as a result of the Fortis acquisition. Policy loans are secured by the cash value of the associated life policy and do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. The following table identifies, by type, the fixed maturity securities held in the general account as of December 31, 2001 and 2000.
FIXED MATURITIES BY TYPE - ------------------------------------------------------------------------------------------------------------------------ 2001 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT ---------------------------------------------- Corporate $ 11,419 49.0% $ 7,663 42.0% Asset-backed securities (ABS) 3,427 14.7% 3,070 16.8% Commercial mortgage-backed securities (CMBS) 3,029 13.0% 2,776 15.2% Municipal - tax-exempt 1,565 6.7% 1,390 7.6% Mortgage-backed securities (MBS) - agency 981 4.2% 602 3.3% Collateralized mortgage obligations (CMO) 767 3.3% 928 5.1% Government/Government agencies - Foreign 390 1.7% 321 1.8% Government/Government agencies - United States 374 1.6% 244 1.3% Municipal - taxable 47 0.2% 83 0.5% Short-term 1,245 5.3% 975 5.3% Redeemable preferred stock 57 0.3% 196 1.1% - ------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 23,301 100.0% $ 18,248 100.0% ========================================================================================================================
During 2001, corporate and ABS fixed maturity investments increased due to the Fortis acquisition. As of December 31, 2001 and 2000, approximately 21% and 22%, respectively, of Life's fixed maturities were invested in private placement securities (including 12% and 13% of Rule 144A offerings as of December 31, 2001 and December 31, 2000, 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 Company's investment credit policies, see the Capital Markets Risk Management section under "Credit Risk".) INVESTMENT RESULTS The following table summarizes Life's investment results. - 36 -
(before-tax) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Net investment income - excluding policy loan income $ 1,472 $ 1,284 $ 1,171 Policy loan income 307 308 391 ------------------------------------------------- Net investment income - total $ 1,779 $ 1,592 $ 1,562 Yield on average invested assets [1] 7.0% 7.0% 6.7% Net realized capital losses $ (133) $ (88) $ (5) ================================================================================================================================ [1] Represents net investment income (excluding net realized capital losses) divided by average invested assets at cost (fixed maturities at amortized cost).
2001 COMPARED TO 2000 -- Net investment income, excluding policy loan income, increased $188, or 15%. The increase was primarily due to income earned on the previously discussed increase in fixed maturity investments, partially offset by lower yields on fixed maturities in the third and fourth quarters of 2001. Yields on overall average invested assets were flat. Included in 2001 net realized capital losses were write-downs for other than temporary impairments on fixed maturities of $105, including a $37 loss related to securities issued by Enron Corporation. Also included in net realized capital losses is a $35 loss recognized on the sale of the Company's interest in an Argentine insurance joint venture, in addition to losses associated with the credit deterioration of certain investments in which the Company has an indirect economic interest. These losses were partially offset by gains from the sale of fixed maturities. 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. PROPERTY & CASUALTY The investment objective for the majority of Property & Casualty is to maximize economic value while generating after-tax income and sufficient liquidity to meet corporate and policyholder obligations. For Property & Casualty's Other Operations segment, the investment objective is to ensure the full and timely payment of all liabilities. Property & Casualty's 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, 2001 and 2000.
COMPOSITION OF INVESTED ASSETS - ------------------------------------------------------------------------------------------------------------------------ 2001 2000 AMOUNT PERCENT AMOUNT PERCENT ----------------------------------------- Fixed maturities, at fair value $ 16,742 91.5% $ 16,239 91.6% Equity securities, at fair value 921 5.0% 885 5.0% Limited partnerships, at fair value 561 3.0% 470 2.7% Other investments 85 0.5% 131 0.7% - ------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 18,309 100.0% $ 17,725 100.0% ========================================================================================================================
During 2001, fixed maturity investments increased slightly, as a result of an increase in operating and financing cash flow and an increase in fair value due to a lower interest rate environment, partially offset by a decline in fixed maturities due to sales of international subsidiaries. The following table identifies, by type, the fixed maturity securities held as of December 31, 2001 and 2000.
FIXED MATURITIES BY TYPE - ------------------------------------------------------------------------------------------------------------------------ 2001 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT ---------------------------------------------- Municipal - tax-exempt $ 8,401 50.2% $ 8,527 52.5% Corporate 4,179 25.0% 3,105 19.1% Commercial mortgage-backed securities (CMBS) 1,145 6.8% 1,141 7.0% Asset-backed securities (ABS) 717 4.3% 760 4.7% Government/Government agencies - Foreign 613 3.6% 682 4.2% Mortgage-backed securities (MBS) - agency 381 2.3% 315 1.9% Government/Government agencies - United States 201 1.2% 63 0.4% Collateralized mortgage obligations (CMO) 97 0.6% 236 1.5% Municipal - taxable 47 0.3% 46 0.3% Short-term 862 5.1% 1,120 6.9% Redeemable preferred stock 99 0.6% 244 1.5% - ------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 16,742 100.0% $ 16,239 100.0% ========================================================================================================================
- 37 - During 2001, corporate fixed maturities increased primarily due to a reallocation from municipal tax-exempts, resulting from a strategy to invest in this sector during a period of wide credit spreads. INVESTMENT RESULTS The following table below summarizes Property & Casualty's investment results.
2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- Net investment income, before-tax $ 1,053 $ 1,072 $ 1,065 Net investment income, after-tax [1] $ 819 $ 836 $ 828 Yield on average invested assets, before-tax [2] 6.1% 6.2% 6.1% Yield on average invested assets, after-tax [1] [2] 4.7% 4.9% 4.6% Net realized capital gains (losses), before-tax $ (103) $ 234 $ 39 - -------------------------------------------------------------------------------------------------------------------------------- [1] Due to the significant holdings in tax-exempt investments, after-tax net investment income and yield are included. [2] Represents net investment income (losses) (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost).
2001 COMPARED TO 2000 -- Both before- and after-tax net investment income decreased 2% compared to the prior year. The decreases were primarily due to a reduction in investment income resulting from the sales of Zwolsche and Hartford Seguros, partially offset by higher income on taxable fixed maturities in the North American Property & Casualty operations. Yields on average invested assets declined slightly due to the lower interest rate environment. Net realized capital losses were $103 compared to net realized capital gains of $234 for the prior year. The 2001 net realized capital losses included write-downs for other than temporary impairments of $61 on fixed maturities, including a $16 loss related to securities issued by Enron Corporation, and $30 on equities and other invested assets. An additional $7 of losses were sustained on sales of Enron Corporation common stock. Also included in 2001 net realized capital losses were losses generated from the sales of international subsidiaries of $54, in addition to losses associated with the credit deterioration of certain investments in which the Company has an indirect economic interest. These losses were partially offset by gains from the sale of fixed maturities. 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 capital losses in the investment portfolio. 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 before-tax amortization for the years ended December 31, 2001 and 2000 was $18 and $10, respectively. Also reported in Corporate as of December 31, 2001 and 2000 are $3 and $5, respectively, of fixed maturity security investments. 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 $104.6 billion and $104.3 billion as of December 31, 2001 and 2000, respectively, wherein the policyholder assumes substantially all the risk and reward; and guaranteed separate accounts totaling $10.1 billion and $9.8 billion as of December 31, 2001 and 2000, respectively, wherein The Hartford contractually guarantees either a minimum return or the account value to the policyholder. 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. 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 - 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. - -------------------------------------------------------------------------------- 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 Life and 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 - 38 - 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 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 derivative 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 credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity. The following tables identify fixed maturity securities for Life, including guaranteed separate accounts, and 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. LIFE As of December 31, 2001 and 2000, over 96% and 97%, respectively, of the fixed maturity portfolio was invested in securities rated investment grade (BBB and above). During 2001, the percentage of BBB rated fixed maturity investments increased due to the Fortis acquisition and the continued active management of the general account portfolios.
FIXED MATURITIES BY CREDIT QUALITY - ------------------------------------------------------------------------------------------------------------------------ 2001 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT ---------------------------------------------- United States Government/Government agencies $ 2,639 8.0% $ 2,329 8.4% AAA 5,070 15.3% 4,896 17.6% AA 3,644 11.0% 3,546 12.7% A 11,528 34.8% 9,675 34.7% BBB 7,644 23.1% 5,633 20.2% BB & below 1,148 3.4% 708 2.5% Short-term 1,470 4.4% 1,085 3.9% - ------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 33,143 100.0% $ 27,872 100.0% ========================================================================================================================
PROPERTY & CASUALTY As of December 31, 2001 and 2000, over 94% and 95%, respectively, of the fixed maturity portfolio was invested in securities rated investment grade. During 2001, the percentage of BBB rated fixed maturity investments increased primarily due to the continued active management of the general account portfolios.
FIXED MATURITIES BY CREDIT QUALITY - ------------------------------------------------------------------------------------------------------------------------ 2001 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT ---------------------------------------------- United States Government/Government agencies $ 639 3.8% $ 516 3.2% AAA 6,160 36.8% 6,414 39.5% AA 3,126 18.7% 3,414 21.0% A 3,193 19.1% 2,664 16.4% BBB 1,876 11.2% 1,442 8.9% BB & below 886 5.3% 669 4.1% Short-term 862 5.1% 1,120 6.9% - ------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 16,742 100.0% $ 16,239 100.0% ========================================================================================================================
MARKET RISK The Hartford has several objectives in managing market risk associated with Life and Property & Casualty. Life is responsible for maximizing after-tax returns within acceptable risk parameters, including the management of the interest rate sensitivity of invested assets and the generation of sufficient liquidity to that of corporate and policyholder obligations. - 39 - Life's fixed maturity portfolios have material market exposure to interest rate risk. Property & Casualty attempts to maximize economic value while generating appropriate after-tax income and sufficient liquidity to meet corporate and policyholder obligations. 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 2001 resulted in a significant increase in the unrealized appreciation of the fixed maturity security portfolio from 2000. However, The Hartford's asset allocation and its exposure to market risk as of December 31, 2001 have not changed materially from its position at December 31, 2000. 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. Interest rate swaps involve the periodic exchange of payments with other parties, at specified intervals, calculated using the agreed upon rates and notional principal amounts. Generally, no cash or principal payments are exchanged at the inception of the contract. Typically, at the time a swap is entered into, the cash flow streams exchanged by the counterparties are equal in value. Foreign currency swaps exchange an initial principal amount in two currencies, agreeing to re-exchange the currencies at a future date, at an agreed exchange rate. There is also periodic exchange of payments at specified intervals calculated using the agreed upon rates and exchanged principal amounts. Interest rate cap and floor contracts entitle the purchaser to receive from the issuer at specified dates, the amount, if any, by which a specified market rate exceeds the cap strike rate or falls below the floor strike rate, applied to a notional principal amount. A premium payment is made by the purchaser of the contract at its inception, and no principal payments are exchanged. Forward contracts are customized commitments to either purchase or sell designated financial instruments, at a future date, for a specified price and may be settled in cash or through delivery of the underlying instrument. Financial futures are standardized commitments to either purchase or sell designated financial instruments, at a future date, for a specified price and may be settled in cash or through delivery of the underlying instrument. Futures contracts trade on organized exchanges. Margin requirements for futures are met by pledging securities, and changes in the futures' contract values are settled daily in cash. Option contracts grant the purchaser, for a premium payment, the right to either purchase from or sell to the issuer a financial instrument at a specified price, within a specified period or on a stated date. 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 Life and Property & Casualty discussions below.) Derivative activities are monitored by an internal compliance unit, reviewed frequently by senior management and reported to the Finance Committee of the Board of Directors. 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, 2001 and 2000 totaled $11.2 billion and $8.8 billion, respectively. The following discussions focus on the key market risk exposures within Life and Property & Casualty. LIFE Interest Rate Risk - ------------------ 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 Life's profitability. In certain scenarios where interest rates are volatile, Life could be exposed to disintermediation risk and reduction in net interest rate spread or profit margins. 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 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, Life holds a significant fixed maturity portfolio that includes both fixed and variable rate securities. The following table reflects the principal amounts of Life's general and guaranteed separate accounts fixed and variable rate fixed maturity portfolios, along with the respective weighted average coupons by estimated maturity year at December 31, 2001. Comparative totals are included as of December 31, 2000. - 40 - 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, 2001 and 2000, 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 Life investment portfolio.
2001 2000 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- CALLABLE BONDS Fixed Rate Par value $ 17 $ 34 $ 9 $ 52 $ 17 $ 2,795 $ 2,924 $ 1,458 WAC 6.5% 5.2% 6.7% 8.2% 8.3% 3.8% 4.0% 5.5% Fair value $ 2,445 $ 1,439 Variable Rate Par value $ 12 $ 24 $ 3 $ 37 $ 9 $ 980 $ 1,065 $ 1,158 WAC 4.0% 3.2% 3.8% 4.1% 5.7% 3.4% 3.4% 7.1% Fair value $ 972 $ 1,075 - --------------------------------------------------------------------------------------------------------------------------------- BONDS - OTHER Fixed Rate Par value $ 2,531 $ 1,521 $ 1,304 $ 1,680 $ 1,934 $ 9,275 $ 18,245 $ 14,699 WAC 5.8% 6.7% 6.1% 7.4% 6.1% 6.1% 6.2% 6.1% Fair value $ 17,424 $ 13,409 Variable Rate Par value $ 211 $ 224 $ 70 $ 248 $ 73 $ 221 $ 1,047 $ 1,235 WAC 4.6% 3.9% 5.2% 4.2% 7.7% 5.8% 4.9% 7.4% Fair value $ 947 $ 1,108 - --------------------------------------------------------------------------------------------------------------------------------- ASSET-BACKED SECURITIES Fixed Rate Par value $ 462 $ 365 $ 484 $ 264 $ 168 $ 509 $ 2,252 $ 2,343 WAC 6.9% 6.6% 6.3% 6.9% 6.5% 7.7% 6.9% 6.9% Fair value $ 2,234 $ 2,342 Variable Rate Par value $ 276 $ 305 $ 380 $ 343 $ 212 $ 880 $ 2,396 $ 2,124 WAC 2.4% 2.8% 2.8% 2.7% 2.7% 2.9% 2.8% 7.3% Fair value $ 2,333 $ 2,099 - --------------------------------------------------------------------------------------------------------------------------------- COLLATERALIZED MORTGAGE OBLIGATIONS Fixed Rate Par value $ 104 $ 116 $ 110 $ 102 $ 95 $ 441 $ 968 $ 1,098 WAC 6.7% 6.1% 6.1% 6.1% 6.1% 6.5% 6.3% 6.4% Fair value $ 960 $ 1,087 Variable Rate Par value $ 4 $ 3 $ 3 $ 2 $ 1 $ 2 $ 15 $ 112 WAC 7.9% 6.7% 6.6% 6.7% 6.7% 6.4% 6.9% 5.3% Fair value $ 16 $ 101 - --------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 85 $ 69 $ 106 $ 77 $ 198 $ 2,483 $ 3,018 $ 2,606 WAC 7.0% 6.8% 7.1% 6.9% 7.3% 7.1% 7.1% 7.3% Fair value $ 3,123 $ 2,674 Variable Rate Par value $ 274 $ 289 $ 242 $ 137 $ 118 $ 441 $ 1,501 $ 1,730 WAC 4.2% 4.1% 4.0% 5.7% 7.1% 7.9% 5.8% 7.9% Fair value $ 1,498 $ 1,738 =================================================================================================================================
- 41 -
2001 2000 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 159 $ 175 $ 158 $ 128 $ 104 $ 444 $ 1,168 $ 792 WAC 7.0% 6.9% 6.8% 6.8% 6.8% 6.7% 6.8% 7.2% Fair value $ 1,189 $ 800 Variable Rate Par value $ -- $ -- $ -- $ -- $ -- $ 2 $ 2 $ 3 WAC -- -- -- -- -- 5.4% 5.4% 7.0% Fair value $ 2 $ 3 ===================================================================================================================================
The table below provides information as of December 31, 2001 on debt obligations and trust preferred securities and reflects principal cash flows and related weighted average interest rates by maturity year. Comparative totals are included as of December 31, 2000.
2001 2000 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT Fixed Rate Amount $ -- $ -- $ 200 $ -- $ -- $ 850 $ 1,050 $ 650 Weighted average interest rate -- -- 6.9% -- -- 7.4% 7.3% 7.4% Fair value $ 1,118 $ 658 TRUST PREFERRED SECURITIES [1] Fixed Rate Amount $ -- $ -- $ -- $ -- $ -- $ 450 $ 450 $ 250 Weighted average interest rate -- -- -- -- -- 7.4% 7.4% 7.4% Fair value $ 461 $ 245 - ----------------------------------------------------------------------------------------------------------------------------------- [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 - -------------------------------------------------------------------- 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, 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, 2001, notional amounts pertaining to derivatives totaled $9.9 billion ($8.2 billion related to insurance investments and $1.7 billion related to life insurance liabilities). Notional amounts pertaining to derivatives totaled $8.5 billion at December 31, 2000 ($6.5 billion related to insurance investments and $2.0 billion related to life insurance liabilities). The economic objectives and strategies for which the Company utilizes derivatives are categorized as follows: Anticipatory Hedging -- For certain liabilities, the Company 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 (purchase) 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, 2001 and 2000 were $320 and $144, respectively. Liability Hedging -- Several products obligate the Company to credit a return to the contract holder which is indexed to a market rate. To hedge risks associated with these products, the Company 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 the Company to customize contract terms and conditions to customer objectives and satisfies the operation's asset/liability matching policy. In addition, interest rate swaps are used to convert certain variable contract rates to different variable rates, thereby allowing them to be appropriately - 42 - matched against variable rate assets. Finally, interest rate caps and option contracts are used to hedge against the risk of contract holder disintermediation in a rising interest rate environment. The notional amounts of derivatives used for liability hedging as of December 31, 2001 and 2000 were $1.7 billion and $2.0 billion, respectively. Asset Hedging -- To meet the various policyholder obligations and to provide cost-effective, prudent investment risk diversification, the Company 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, 2001 and 2000 were $6.8 billion and $5.4 billion, respectively. Portfolio Hedging -- The Company 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 duration and convexity 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, 2001 and 2000 were $1.1 and $1.0 billion, respectively. The following tables provide information as of December 31, 2001 with comparative totals for December 31, 2000 on derivative instruments used in accordance with the 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. For option contracts, the table presents contract amount by expected maturity year.
2001 2000 INTEREST RATE SWAPS 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Pay Fixed/Receive Variable Notional value $ 90 $ 198 $ 35 $ 140 $ 50 $ 794 $ 1,307 $ 1,031 Weighted average pay rate 5.9% 5.1% 6.1% 7.5% 6.7% 7.0% 6.5% 6.6% Weighted average receive rate 2.1% 2.3% 2.2% 2.2% 2.4% 2.2% 2.2% 6.8% Fair value $ (65) $ (43) Pay Variable/Receive Fixed Notional value $ 204 $ 518 $ 1,299 $ 935 $ 797 $ 1,327 $ 5,080 $ 4,886 Weighted average pay rate 2.1% 2.0% 2.2% 2.1% 2.0% 2.1% 2.1% 7.0% Weighted average receive rate 5.9% 5.4% 5.6% 6.0% 5.7% 6.3% 5.8% 6.6% Fair value $ 194 $ 78 Pay Variable/Receive Different Variable Notional value $ 5 $ 2 $ 150 $ 11 $ -- $ 251 $ 419 $ 278 Weighted average pay rate 5.4% 2.2% 3.3% 4.0% -- 3.1% 3.2% 6.6% Weighted average receive rate 3.0% 1.9% 3.0% 1.2% -- 5.5% 4.4% 4.9% Fair value $ (48) $ (1) ===================================================================================================================================
2001 2000 INTEREST RATE CAPS - LIBOR BASED 2002 2003 2004 2005 2006 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 $ 1 Notional value $ 19 $ -- $ -- $ -- $ -- $ -- $ 19 $ 19 Weighted average strike rate (10.0 - 11.9%) 10.1% -- -- -- -- -- 10.1% 10.1% Fair value $ -- $ -- ===================================================================================================================================
2001 2000 INTEREST RATE CAPS - CMT BASED [1] 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Purchased Notional value $ -- $ 250 $ -- $ 250 $ -- $ -- $ 500 $ 500 Weighted average strike rate (8.0 - 9.9%) -- 8.7% -- 8.7% -- -- 8.7% 8.7% Fair value $ 3 $ -- =================================================================================================================================== [1] CMT represents the Constant Maturity Treasury Rate.
- 43 -
2001 2000 INTEREST RATE FLOORS - LIBOR BASED 2002 2003 2004 2005 2006 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 $ 3 $ 2 Issued Notional value $ 28 $ 54 $ 34 $ 77 $ -- $ -- $ 193 $ 193 Weighted average strike rate (4.0 - 5.9%) 5.3% 5.4% 5.3% 5.3% -- -- 5.3% 5.3% Fair value $ (8) $ (2) Notional value $ -- $ -- $ 27 $ -- $ -- $ -- $ 27 $ 27 Weighted average strike rate (6.0 - 7.9%) -- -- 7.8% -- -- -- 7.8% 7.8% Fair value $ (3) $ (2) ===================================================================================================================================
2001 2000 INTEREST RATE FLOORS - CMT BASED [1] 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Purchased Notional value $ -- $ 150 $ -- $ -- $ -- $ -- $ 150 $ 150 Weighted average strike rate (4.0 - 5.9%) -- 5.5% -- -- -- -- 5.5% 5.5% Fair value $ 5 $ 3 =================================================================================================================================== [1] CMT represents the Constant Maturity Treasury Rate.
2001 2000 INTEREST RATE FUTURES 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Long Contract amount/notional $ 266 $ -- $ -- $ -- $ -- $ -- $ 266 $ 198 Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 105 Short Contract amount/notional $ 25 $ -- $ -- $ -- $ -- $ -- $ 25 $ 59 Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 105 ===================================================================================================================================
2001 2000 OPTION CONTRACTS 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Long Contract amount/notional $ -- $ 119 $ 107 $ 45 $ 324 $ 128 $ 723 $ 589 Fair value 28 $ 6 Short Contract amount/notional $ 39 $ 178 $ 427 $ 137 $ 245 $ 30 $1,056 $ 362 Fair value $ (61) $ (40) ===================================================================================================================================
Currency Exchange Risk - ---------------------- As of December 31, 2001, Life had immaterial currency exposures resulting from its international operations. Life Product Liability Characteristics - -------------------------------------- Life's product 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. - 44 - 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 Life's variable annuity products. 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 Life's management strategy. The estimated cash flows of insurance policy liabilities based upon internal actuarial assumptions as of December 31, 2001 are reflected in the table below by expected maturity year. Comparative totals are included for December 31, 2000.
(dollars in billions) 2001 2000 DESCRIPTION [1] 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - ----------------------------------------------------------------------------------------------------------------------------------- Fixed rate asset accumulation vehicles $ 1.0 $ 1.3 $ 2.9 $ 3.0 $ 2.3 $ 5.3 $ 15.8 $ 10.4 Weighted average credited rate 5.3% 5.5% 6.5% 6.1% 5.7% 5.8% 5.9% 6.7% Indexed asset accumulation vehicles $ 0.6 $ 0.1 $ -- $ -- $ -- $ 0.1 $ 0.8 $ 0.7 Weighted average credited rate 6.5% 6.5% -- -- -- 6.5% 6.5% 6.3% Interest credited asset accumulation vehicles $ 4.7 $ 0.5 $ 0.5 $ 0.2 $ 0.2 $ 2.0 $ 8.1 $ 10.1 Weighted average credited rate 6.2% 4.6% 4.5% 5.5% 5.5% 5.4% 5.7% 5.9% Long-term pay out liabilities $ 1.0 $ 0.5 $ 0.7 $ 0.6 $ 0.5 $ 5.3 $ 8.6 $ 6.5 Short-term pay out liabilities $ 0.9 $ 0.1 $ -- $ -- $ -- $ -- $ 1.0 $ 0.9 =================================================================================================================================== [1] As of December 31, 2001 and 2000, the fair values of Life's investment contracts, including guaranteed separate accounts, were $26.0 billion and $21.4 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 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 table. Change in Net Economic Value 2001 2000 ------------------------------------------ Basis point shift - 100 + 100 - 100 + 100 - ---------------------------------------------------------------------- Amount $ 6 $ (31) $ (15) $ (27) Percent of liability value 0.03% (0.16)% (0.09)% (0.16)% ====================================================================== These fixed liabilities represented about 61% and 60% of Life's general and guaranteed separate account liabilities at December 31, 2001 and 2000, respectively. The remaining liabilities generally allow 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. PROPERTY & CASUALTY Interest Rate Risk - ------------------ The primary exposure to interest rate risk in 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 and trust preferred securities issued. Derivative instruments are used to manage interest rate risk and had a total notional amount as of December 31, 2001 and 2000 of $1.3 billion and $318, 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, 2001, are reflected in the following table. Comparative totals are included as of December 31, 2000. Expected maturities differ from contractual maturities due to call or prepayment provisions. The WAC on variable rate securities is based on spot rates as of December 31, 2001 and 2000, 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 of principal over the remaining life of the - 45 - 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 Property & Casualty's investment portfolio.
2001 2000 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - --------------------------------------------------------------------------------------------------------------------------------- CALLABLE BONDS Fixed Rate Par value $ 14 $ 12 $ 53 $ 148 $ 273 $ 7,124 $ 7,624 $ 7,311 WAC 5.9% 5.8% 5.7% 5.6% 5.5% 5.3% 5.3% 5.4% Variable Rate Par value $ 1 $ 1 $ 1 $ 15 $ 5 $ 243 $ 266 $ 282 WAC 4.0% 4.0% 4.0% 6.6% 6.1% 5.3% 5.4% 6.5% Fair value $ 214 $ 227 - --------------------------------------------------------------------------------------------------------------------------------- BONDS - OTHER Fixed Rate Par value $ 1,050 $ 311 $ 465 $ 566 $ 743 $ 3,278 $ 6,413 $ 6,175 WAC 5.9% 6.5% 6.8% 7.0% 6.2% 6.4% 6.4% 6.2% Fair value $ 6,297 $ 5,967 Variable Rate Par value $ 38 $ 2 $ 51 $ 1 $ 1 $ 175 $ 268 $ 128 WAC 4.9% 5.4% 3.2% 5.0% 5.2% 5.2% 4.8% 4.8% Fair value $ 231 $ 88 - --------------------------------------------------------------------------------------------------------------------------------- ASSET-BACKED SECURITIES Fixed Rate Par value $ 51 $ 59 $ 75 $ 95 $ 64 $ 226 $ 570 $ 626 WAC 8.0% 7.2% 6.5% 6.6% 7.0% 7.7% 7.2% 7.4% Fair value $ 549 $ 620 Variable Rate Par value $ 10 $ 5 $ 39 $ 9 $ 19 $ 109 $ 191 $ 155 WAC 5.0% 3.7% 2.9% 3.3% 3.1% 4.1% 3.8% 7.9% Fair value $ 168 $ 141 - --------------------------------------------------------------------------------------------------------------------------------- COLLATERALIZED MORTGAGE OBLIGATIONS Fixed Rate Par value $ 15 $ 14 $ 18 $ 12 $ 7 $ 21 $ 87 $ 222 WAC 6.9% 6.9% 7.1% 7.0% 6.9% 6.2% 6.8% 6.6% Fair value $ 88 $ 219 Variable Rate Par value $ 1 $ 1 $ 1 $ 1 $ 1 $ 3 $ 8 $ 18 WAC 15.5% 15.4% 15.3% 15.1% 15.0% 14.4% 15.1% 5.6% Fair value $ 9 $ 17 - --------------------------------------------------------------------------------------------------------------------------------- COMMERCIAL MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 19 $ 14 $ 19 $ 10 $ 19 $ 626 $ 707 $ 689 WAC 7.0% 6.7% 7.1% 7.1% 7.4% 7.1% 7.1% 7.2% Fair value $ 728 $ 697 Variable Rate Par value $ 84 $ 76 $ 34 $ 47 $ 21 $ 148 $ 410 $ 441 WAC 4.2% 4.2% 6.0% 6.3% 7.9% 8.3% 6.2% 8.1% Fair value $ 417 $ 444 - --------------------------------------------------------------------------------------------------------------------------------- MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 47 $ 51 $ 49 $ 39 $ 33 $ 160 $ 379 $ 313 WAC 6.8% 6.7% 6.6% 6.6% 6.6% 6.6% 6.6% 7.2% Fair value $ 381 $ 315 =================================================================================================================================
- 46 - The following table provides information as of December 31, 2001 on interest rate swaps used to manage interest rate risk on fixed maturities and trust preferred securities and presents notional amounts with weighted average pay and receive rates by maturity year. Comparative totals are included as of December 31, 2000. The weighted average rates are based on spot rates as of December 31, 2001 and 2000.
2001 2000 INTEREST RATE SWAPS 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - --------------------------------------------------------------------------------------------------------------------------------- Pay Variable/Receive Fixed Notional value $ 10 $ -- $ 35 $ -- $ -- $ 500 $ 545 $ 45 Weighted average pay rate 2.0% -- 2.0% -- -- 3.2% 3.1% 6.7% Weighted average receive rate 6.5% -- 6.7% -- -- 7.5% 7.4% 6.7% Fair value $ (29) $ 1 Pay Variable/Receive Different Variable Notional value $ 226 $ -- $ -- $ -- $ -- $ 230 $ 456 $ 273 Weighted average pay rate 1.8% -- -- -- -- 3.1% 2.5% 6.5% Weighted average receive rate 6.7% -- -- -- -- 5.5% 6.1% 6.9% Fair value $ (54) $ 5 =================================================================================================================================
Property & Casualty uses option contracts to hedge fixed maturity investments that totaled $252 in notional value and $1 in carrying value as of December 31, 2001. There were no option contracts in use as of December 31, 2000. The table below provides information as of December 31, 2001 on debt obligations and trust preferred securities and reflects principal cash flows and related weighted average interest rates by maturity year. Comparative totals are included as of December 31, 2000.
2001 2000 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - --------------------------------------------------------------------------------------------------------------------------------- SHORT-TERM DEBT Fixed Rate Amount $ 599 $ -- $ -- $ -- $ -- $ -- $ 599 $ 235 Weighted average interest rate 4.2% -- -- -- -- -- 4.2% 8.1% Fair value $ 607 $ 238 LONG-TERM DEBT Fixed Rate Amount $ -- $ -- $ -- $ -- $ -- $ 400 $ 400 $ 700 Weighted average interest rate -- -- -- -- -- 6.8% 6.8% 6.6% Fair value $ 401 $ 689 TRUST PREFERRED SECURITIES [1] Fixed Rate Amount $ -- $ -- $ -- $ -- $ -- $1,000 $1,000 $ 1,000 Weighted average interest rate -- -- -- -- -- 7.6% 7.6% 8.0% Fair value $ 968 $ 988 ================================================================================================================================= [1] Represents Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures.
Equities Price Risk - ------------------- 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, 2001 and 2000, grouped by major market type. 2001 2000 ------------------------------------------- FAIR VALUE PERCENT FAIR VALUE PERCENT - -------------------------------------------------------------------- EQUITY SECURITIES Domestic Large cap $ 393 42.7% $ 521 58.9% Midcap/small cap 342 37.1% 179 20.2% Foreign EAFE [1]/ Canadian 184 20.0% 185 20.9% Emerging 2 0.2% -- -- - -------------------------------------------------------------------- TOTAL $ 921 100.0% $ 885 100.0% ==================================================================== [1] Europe, Australia, Far East countries index. - 47 - Currency Exchange Risk - ---------------------- As of December 31, 2001, Property & Casualty had immaterial currency exposures resulting from its international operations. Currency exchange risk also exists with respect to investments in foreign equity securities. Forward foreign contracts with a notional amount of $7 and $8 were used to manage this risk at December 31, 2001 and 2000, 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 $3 in fixed maturity security investments that represent an immaterial interest rate exposure. The table below provides information as of December 31, 2001 on Corporate's debt obligations and reflects principal cash flows and related weighted average interest rates by maturity year.
2001 2000 2002 2003 2004 2005 2006 THEREAFTER TOTAL TOTAL - --------------------------------------------------------------------------------------------------------------------------------- LONG-TERM DEBT Fixed Rate Amount $ -- $ -- $ -- $ 250 $ -- $ 275 $ 525 $ 525 Weighted average interest rate -- -- -- 7.8% -- 7.9% 7.8% 7.8% Fair value $ 563 $ 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, 2001 and 2000 consisted of debt and equity, and as of December 31, 1999 also consisted of minority interest, summarized as follows:
AS OF DECEMBER 31, --------------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------------------------------ Short-term debt $ 599 $ 235 $ 31 Long-term debt 1,965 1,862 1,548 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures (trust preferred securities) 1,412 1,243 1,250 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEBT $ 3,976 $ 3,340 $ 2,829 ------------------------------------------------------------------------------------------------------------------------------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ -- $ -- $ 491 ------------------------------------------------------------------------------------------------------------------------------- Equity excluding unrealized gain (loss) on securities and other, net of tax [2] $ 8,344 $ 6,967 $ 5,664 Unrealized gain (loss) on securities and other, net of tax [2] 669 497 (198) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 9,013 $ 7,464 $ 5,466 ------------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION [3] $12,320 $10,307 $ 8,984 ------------------------------------------------------------------------------------------------------------------------------- Debt to equity [3] [4] 48% 48% 50% Debt to capitalization [3] [4] 32% 32% 31% ==================================================================================================================================== [1] Excludes unrealized gain (loss) on securities, net of tax, of $(62) as of December 31, 1999. [2] Other represents the net gain on cash-flow hedging instruments as a result of the Company's adoption of SFAS No. 133. [3] Excludes unrealized gain (loss) on securities, net of tax. [4] Excluding trust preferred securities, the debt to equity ratio was 31%, 30% and 28%, and the debt to capitalization ratio was 21%, 20% and 18% as of December 31, 2001, 2000 and 1999, respectively.
CONTRACTUAL OBLIGATION AND COMMITMENTS The following table identifies the Company's contractual obligations by payment due period.
2002 2003 2004 2005 2006 THEREAFTER TOTAL - --------------------------------------------------------------------------------------------------------------------- Short-term debt $ 599 $ -- $ -- $ -- $ -- $ -- $ 599 Long-term debt -- -- 200 250 -- 1,525 1,975 Trust preferred securities -- -- -- -- -- 1,450 1,450 - --------------------------------------------------------------------------------------------------------------------- Total debt $ 599 $ -- $ 200 $ 250 $ -- $ 2,975 $ 4,024 Operating leases 131 112 98 84 69 194 688 - --------------------------------------------------------------------------------------------------------------------- Total contractual obligations $ 730 $ 112 $ 298 $ 334 $ 69 $ 3,169 $ 4,712 =====================================================================================================================
In addition to the contractual obligations above, The Hartford had certain unfunded commitments at December 31, 2001 to fund limited partnership investments totaling $375. These capital commitments can be called by the partnerships during - 48 - the commitment period (on average, 3-6 years) 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 but may elect to do so. ACQUISITIONS Fortis On April 2, 2001, The Hartford acquired Fortis Financial Group for $1.12 billion in cash. The Company effected the acquisition through several reinsurance agreements with subsidiaries of Fortis, Inc. and the purchase of 100% of the stock of Fortis Advisers, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis, Inc. The acquisition was recorded as a purchase transaction. Purchase consideration for the transaction was as follows: Issuance of: - ------------ Common stock issuance (10 million shares @ $64.00 per share), net of transaction costs $ 615 Long-term notes: $400 7.375% notes due March 1, 2031 400 Trust preferred securities: $200 7.625% Trust Preferred Securities (Series B) due February 15, 2050 200 - ----------------------------------------------------------------------- Consideration raised $ 1,215 ======================================================================= For a further discussion of the Fortis Acquisition, see Note 18(a) of Notes to Consolidated Financial Statements. 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 was recorded as a purchase transaction. 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 - ----------------------------------------------------------------------- For a further discussion of the HLI Repurchase, see Note 16 of Notes to Consolidated Financial Statements. CAPITALIZATION The Hartford's total capitalization, excluding unrealized gain (loss) on securities and other, net of tax, increased by $2.0 billion as of December 31, 2001 compared to December 31, 2000. This change was primarily the result of earnings and financing activities related to Fortis and September 11, partially offset by dividends declared. The Hartford's total capitalization, excluding unrealized gain (loss) on securities and other, 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. SHELF REGISTRATION On May 15, 2001, HLI filed with the SEC a shelf registration statement for the potential offering and sale of up to $1.0 billion in debt and preferred securities. The registration statement was declared effective on May 29, 2001. As of December 31, 2001, HLI had $1.0 billion remaining on its shelf. 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. As of December 31, 2001, The Hartford had $1.1 billion remaining on its shelf. For a further discussion of the shelf registration statements, see Note 6 of Notes to Consolidated Financial Statements. DEBT The Hartford has a commercial paper program which allows the Company to borrow up to a maximum amount of $2.0 billion in short-term commercial paper notes. As of December 31, 2001, the Company had $299 of outstanding borrowings under the program. Effective June 20, 2001, The Hartford entered into an amended and restated five-year revolving $1.0 billion credit facility with fourteen banks. This facility is available for general corporate purposes and to provide additional support to the Company's commercial paper program. As of December 31, 2001, there were no outstanding borrowings under the facility. HLI has a commercial paper program which allows it to borrow up to a maximum amount of $250 in short-term commercial paper notes. As of December 31, 2001, HLI had no outstanding borrowings under the program. As of December 31, 2001, HLI maintained a $250 five-year revolving credit facility comprised of four participatory banks. As of December 31, 2001, there were no outstanding borrowings under the facility. On December 1, 2001, The Hartford's 8.3% medium term notes became due. The Company borrowed $200 under its commercial paper program to retire the debt. On March 1, 2001, HLI issued and sold $400 of senior debt securities to partially finance the Fortis acquisition. 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 the $400 of commercial paper on December 29, 2000. - 49 - For additional information regarding debt, see Note 6 of Notes to Consolidated Financial Statements. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST PREFERRED SECURITIES) On December 31, 2001, The Hartford redeemed its 20,000,000 Series B, 8.35% Cumulative Quarterly Income Preferred Securities due October 30, 2026 for $500. The Company used proceeds from its October 26, 2001 issuance of 7.45% Trust Originated Preferred Securities, Series C to redeem the securities. On October 26, 2001, Hartford Capital III, a Delaware statutory business trust formed by The Hartford, issued 20,000,000, 7.45% Trust Originated Preferred Securities, Series C and received proceeds before underwriting expenses of $500. On March 6, 2001, HLI issued and sold $200 of trust preferred securities to partially finance the Fortis acquisition. 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 - As a result of September 11, on October 22, 2001, The Hartford issued 7.0 million shares of common stock pursuant to an underwritten offering for net proceeds of $400. Issuance of common stock-Fortis Financial Group acquisition - On February 16, 2001, The Hartford issued 10 million shares of common stock pursuant to an underwritten offering for net proceeds of $615 to partially fund the Fortis Financial Group acquisition. 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 $242 and paid $235 in dividends to shareholders in 2001, declared $214 and paid $210 in 2000 and declared $209 and paid $207 in 1999. On October 18, 2001, The Hartford's Board of Directors declared a quarterly dividend of $0.26 per share payable on January 2, 2002 to shareholders of record as of December 3, 2001. The dividend represented a 4% increase from the prior quarter. Treasury Stock - In October 1999, The Hartford's Board of Directors authorized the repurchase of up to $1.0 billion of the Company's outstanding common stock. This repurchase authorization was effective in November 1999 and covers a three-year period. On the first two trading days following September 11, The Hartford repurchased 0.1 million shares of its common stock in the open market at a total cost of $7. These were the Company's only repurchases in 2001. Since the inception of the 1999 repurchase program, The Hartford has repurchased 6.1 million shares at a total cost of $250. Certain of these repurchased shares have been reissued pursuant to certain stock-based benefit plans. Unrealized Gain (Loss) and Other - Unrealized gain (loss) on securities and other, net of tax, increased by $172 as of December 31, 2001 compared to December 31, 2000. The change resulted primarily from the impact of decreased interest rates on the fixed maturity portfolio and the net gain on cash-flow hedging instruments. For additional information on stockholders' equity, see Note 8 of Notes to Consolidated Financial Statements. RATINGS The following table summarizes The Hartford's significant United States member companies' financial ratings from the major independent rating organizations as of February 28, 2002. - -------------------------------------------------------------------- A.M. STANDARD BEST FITCH & 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 quarterly income preferred securities [1] a- A BBB+ A3 Hartford Capital III trust originated preferred securities [1] a- A BBB+ A3 Hartford Life, Inc.: Senior debt a+ A+ A A2 Commercial paper -- F-1 A-1 P-1 Hartford Life, Inc.: Capital I and II trust preferred securities [1] a- A BBB+ A3 - -------------------------------------------------------------------- [1] In 2001, Moody's Investor Service recalibrated its rating scale for preferred stock and subordinated bonds to increase comparability of credit risk assessments across sectors of fixed income markets globally. The recalibration represents a change in Moody's overall rating system for preferred stocks and subordinated bonds but not a change in its risk assessment of an issuer's fundamental credit quality. The Company's preferred securities ratings were changed from A2 to A3 as a result of the recalibration. 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. As a result of September 11 and subsequent reviews by major independent rating agencies, all insurance financial strength and debt ratings of The Hartford were reaffirmed. However, negative outlooks were placed upon the debt ratings of the Company by Moody's and the property and casualty financial strength rating by Standard & Poor's. All other ratings were reaffirmed with stable outlooks. - 50 - 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 borrowings from 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 certain 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, 2001, the maximum amount of statutory dividends which may be paid to The Hartford Financial Services Group, Inc. from its insurance subsidiaries in 2002, without prior regulatory approval, is $577. 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.) FUTURE TERRORISM EXPOSURES The September 11 terrorist attack had a significant impact on The Hartford and the insurance industry as a whole. Since that time, The Hartford has taken steps to limit future exposure to terrorist acts. These steps include attaching terrorist exclusions to our policies wherever possible and identifying and managing concentrated exposures by location and dividing the exposures into terrorism risk classes. The Hartford and the industry continue to support the development of Federal legislation to provide a federal insurance program, which would help share in potential losses from terrorism. However, in the absence of a federally backed capital resource or availability of adequate reinsurance coverage and despite the steps already taken to limit exposure, The Hartford may not have the capacity to cover future large-scale terrorist acts such as nuclear, chemical or biological attacks. In addition, losses related to future terrorist attacks could negatively impact the Company's financial strength and debt ratings. As a result, any losses related to future terrorist attacks could have a material impact to the liquidity, financial condition and results of operation of The Hartford. CASH FLOW - -------------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------- Net cash provided by operating activities $ 2,303 $ 2,435 $ 954 Net cash provided by (used for) investing activities $ (5,536) $ (2,164) $ 2,216 Net cash provided by (used for) financing activities $ 3,365 $ (208) $ (3,104) Cash - end of year $ 353 $ 227 $ 182 ==================================================================== 2001 COMPARED TO 2000 -- The increase in cash from financing activities was the result of current year proceeds on investment type contracts versus the prior year disbursements for investment type contracts and financing activities related to Fortis and September 11. Cash provided by financing and operating activities accounted for the majority of the change in cash for investing activities. Cash flows from operating activities were comparable with prior year. 2000 COMPARED TO 1999 -- The increase in operating cash flow was primarily the result of growth in Life business, along with favorable underwriting cash flows in 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. Operating cash flows in each of the last three years have been more than adequate to meet liquidity requirements. 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, 2001, each of The Hartford's insurance subsidiaries within Life and Property & Casualty had more than sufficient capital to meet the NAIC's RBC requirements. - 51 - - -------------------------------------------------------------------------------- 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, either through the modification of rate and form filing requirements or Congressional adoption of optional federal charter legislation. Federal measures which have been previously considered or enacted by Congress and which, if revisited, 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. Legislation to restructure the social security system, expand private pension plans, and create new retirement savings incentives also may be considered. It is too early to determine the future disposition of any of these proposals. 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 considering terrorism insurance backstop legislation and proposals to moderate the business community's asbestos exposure. Both 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 $6 in 2001, $2 in 2000 and $4 in 1999. 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. As of December 31, 2001, the impact of applying the new guidance resulted in a benefit of approximately $400 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 allowed 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. 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. - 52 - ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information required by this item is set 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 2002 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 The information called for by Item 13 is set forth in the Proxy Statement under the caption "Certain Relationships and Related Transactions" and is incorporated herein by reference. 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 3 reports on Form 8-K during the quarter ended December 31, 2001. (c) See Item 14(a)(3). (d) See Item 14(a)(2). Shareholders may receive, without charge, a copy of the documents filed with the Securities and Exchange Commission as exhibits to this report by submitting a written request to the Investor Relations Department at the following address: The Hartford Financial Services Group, Inc. 690 Asylum Avenue, Hartford, CT 06115 or by calling (888) 322-8444. - 53 - 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, 2001 F-3 Consolidated Balance Sheets as of December 31, 2001 and 2000 F-4 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 2001 F-5-6 Consolidated Statements of Cash Flows for the three years ended December 31, 2001 F-7 Notes to Consolidated Financial Statements F-8-35 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-6 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 operations, 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, 2001 and 2000, 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, 2001. 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, 2001 and 2000, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2001 in conformity with accounting principles generally accepted in the United States. As explained in Note 1(b) to the financial statements, effective January 1, 2001, the Company changed its method of accounting for derivatives and hedging activities. Effective April 1, 2001, the Company changed its method of accounting for recognition of interest income and impairment on purchased and retained beneficial interests in securitized financial assets. 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 28, 2002 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) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- REVENUES Earned premiums $ 9,409 $ 8,941 $ 8,342 Fee income 2,633 2,484 2,105 Net investment income 2,850 2,674 2,627 Other revenue 491 459 420 Net realized capital gains (losses) (236) 145 34 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 15,147 14,703 13,528 ----------------------------------------------------------------------------------------------------------------------- BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 9,764 8,419 7,902 Amortization of deferred policy acquisition costs and present value of future profits 2,214 2,213 2,011 Insurance operating costs and expenses 2,037 1,958 1,779 Goodwill amortization 60 28 10 Other expenses 718 667 591 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 14,793 13,285 12,293 ----------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 354 1,418 1,235 Income tax expense (benefit) (195) 390 287 - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 549 1,028 948 Minority interest in consolidated subsidiary -- (54) (86) Extraordinary loss from early retirement of debt, net of tax (8) -- -- Cumulative effect of accounting changes, net of tax (34) -- -- - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 507 $ 974 $ 862 ======================================================================================================================= BASIC EARNINGS PER SHARE Income before extraordinary item and cumulative effect of accounting changes $ 2.31 $ 4.42 $ 3.83 Extraordinary loss from early retirement of debt, net of tax (0.04) -- -- Cumulative effect of accounting changes, net of tax (0.14) -- -- - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 2.13 $ 4.42 $ 3.83 DILUTED EARNINGS PER SHARE Income before extraordinary item and cumulative effect of accounting changes $ 2.27 $ 4.34 $ 3.79 Extraordinary loss from early retirement of debt, net of tax (0.03) -- -- Cumulative effect of accounting changes, net of tax (0.14) -- -- - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 2.10 $ 4.34 $ 3.79 - -------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 237.7 220.6 224.9 Weighted average common shares outstanding and dilutive potential common shares 241.4 224.4 227.5 - -------------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share $ 1.01 $ 0.97 $ 0.92 ================================================================================================================================
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) 2001 2000 - --------------------------------------------------------------------------------------------------------------------------- ASSETS Investments ----------- Fixed maturities, available for sale, at fair value (amortized cost of $39,154 and $33,856) $ 40,046 $ 34,492 Equity securities, available for sale, at fair value (cost of $1,289 and $921) 1,349 1,056 Policy loans, at outstanding balance 3,317 3,610 Other investments 1,977 1,511 - --------------------------------------------------------------------------------------------------------------------------- Total investments 46,689 40,669 Cash 353 227 Premiums receivable and agents' balances 2,432 2,295 Reinsurance recoverables 5,162 4,579 Deferred policy acquisition costs and present value of future profits 6,420 5,305 Deferred income tax 693 682 Goodwill 1,694 1,202 Other assets 3,075 2,519 Separate account assets 114,720 114,054 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 181,238 $ 171,532 =============================================================================================================== LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 16,678 $ 15,874 Life 8,819 7,105 Other policyholder funds and benefits payable 19,355 15,848 Unearned premiums 3,436 3,093 Short-term debt 599 235 Long-term debt 1,965 1,862 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,412 1,243 Other liabilities 5,241 4,754 Separate account liabilities 114,720 114,054 - --------------------------------------------------------------------------------------------------------------------------- 172,225 164,068 COMMITMENTS AND CONTINGENCIES, NOTE 15 STOCKHOLDERS' EQUITY Common stock - authorized 400,000,000, issued 248,477,367 and 238,645,675 shares, par value $0.01 2 2 Additional paid-in capital 2,362 1,686 Retained earnings 6,152 5,887 Treasury stock, at cost - 2,941,340 and 12,355,414 shares (37) (480) Accumulated other comprehensive income 534 369 - --------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 9,013 7,464 --------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 181,238 $ 171,532 ===============================================================================================================
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, 2001 Accumulated Other Comprehensive Income (Loss) --------------------------------------------- Common Unrealized Net Gain on Minimum Stock/ Gain Cash-Flow Pension Outstanding Additional Treasury (Loss) on Hedging Cumulative Liability Shares Paid-in Retained Stock Securities, Instruments Translation Adjustment, (In (In millions) Capital Earnings at Cost net of tax net of tax Adjustments net of tax Total thousands) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF YEAR $1,688 $5,887 $(480) $497 $-- $(113) $(15) $7,464 226,290 Comprehensive income Net income 507 507 Other comprehensive income (loss), net of tax [1] Cumulative effect of accounting change [2] (1) 24 23 Unrealized gain on securities [3] 110 110 Cumulative translation adjustments (3) (3) Net gain on cash-flow hedging instruments [4] 39 39 Minimum pension liability adjustment (4) (4) ----- Total other comprehensive income 165 ----- Total comprehensive income 672 ===== Issuance of shares under incentive and stock purchase plans 93 4 97 2,331 Issuance of common stock in underwritten offering 569 446 1,015 17,042 Tax benefit on employee stock options and awards 14 14 Treasury stock acquired (7) (7) (127) Dividends declared on common stock (242) (242) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF YEAR $2,364 $6,152 $(37) $606 $63 $(116) $(19) $9,013 245,536 ====================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 2000 Accumulated Other Comprehensive Income (Loss) ------------------------------------- Common Unrealized Minimum Stock/ Gain Pension Outstanding Additional Treasury (Loss) on Cumulative Liability Shares Paid-in Retained Stock Securities, Translation Adjustment, (In (In millions) Capital Earnings at Cost net of tax Adjustments net of tax Total 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 (loss), net of tax [1] Unrealized gain on securities [3] 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 ====================================================================================================================================
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, 1999 Accumulated Other Comprehensive Income (Loss) ------------------------------------- Common Unrealized Minimum Stock/ Gain Pension Outstanding Additional Treasury (Loss) on Cumulative Liability Shares Paid-in Retained Stock Securities, Translation Adjustment, (In (In millions) Capital Earnings at Cost net of tax Adjustments net of tax Total 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 [3] (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 ==================================================================================================================================== [1] Unrealized gain (loss) on securities is net of tax of $60, $370 and $(546) for the years ended December 31, 2001, 2000 and 1999, respectively. Net gain on cash-flow hedging instruments is net of tax of $21 for the year ended December 31, 2001. There is no tax effect on cumulative translation adjustments. Minimum pension liability adjustment is net of tax of $(2), $(2) and $(6) for the years ended December 31, 2001, 2000 and 1999, respectively. [2] Unrealized gain (loss) on securities, net of tax, includes cumulative effect of accounting change of $(23) to net income and $24 to net gain on cash-flow hedging instruments. [3] Net of reclassification adjustment for gains (losses) realized in net income of $(98), $(57) and $25 for the years ended December 31, 2001, 2000 and 1999, respectively. [4] Net of amortization adjustment of $6 to net investment income.
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) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 507 $ 974 $ 862 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Change in receivables, payables and accruals 197 126 132 Change in reinsurance recoverables (599) (85) 126 Amortization of deferred policy acquisition costs 2,214 2,213 2,011 Additions to deferred policy acquisition costs (2,739) (2,573) (2,498) Change in accrued and deferred income taxes (114) 398 166 Increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 2,737 1,130 454 Minority interest in consolidated subsidiary -- 54 86 Net realized capital (gains) losses 236 (145) (34) Depreciation and amortization 72 63 58 Cumulative effect of accounting changes, net of tax 34 -- -- Extraordinary item, net of tax 8 -- -- Other, net (250) 280 (409) - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 2,303 2,435 954 ==================================================================================================================== INVESTING ACTIVITIES Purchase of investments (16,871) (15,104) (13,172) Sale of investments 9,850 11,985 13,525 Maturity of investments 2,760 2,001 2,098 Purchase of business/affiliate (1,105) (1,391) (52) Sale of affiliates 39 545 -- Additions to property, plant and equipment (209) (200) (183) - -------------------------------------------------------------------------------------------------------------------- NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (5,536) (2,164) 2,216 ==================================================================================================================== FINANCING ACTIVITIES Short-term debt, net 264 4 -- Issuance of long-term debt 400 516 -- Issuance of trust preferred securities 684 -- -- Repayment of long-term debt (200) -- -- Repayment of trust preferred securities (500) -- -- Issuance of common stock 1,015 398 -- Net proceeds from (disbursements for) investment and universal life-type contracts charged against policyholder accounts 1,867 (947) (2,356) Dividends paid (235) (210) (207) Acquisition of treasury stock (7) (100) (596) Proceeds from issuances of shares under incentive and stock purchase plans 77 131 55 - -------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 3,365 (208) (3,104) ==================================================================================================================== Foreign exchange rate effect on cash (6) (18) (7) - -------------------------------------------------------------------------------------------------------------------- Net increase in cash 126 45 59 Cash - beginning of year 227 182 123 - -------------------------------------------------------------------------------------------------------------------- CASH - END OF YEAR $ 353 $ 227 $ 182 ==================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - ------------------------------------------------ NET CASH PAID (RECEIVED) DURING THE YEAR FOR: Income taxes $ (52) $ 95 $ 41 Interest $ 282 $ 248 $ 214
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 investment products, life and property and casualty insurance to both individual and commercial customers in the United States and internationally. On April 2, 2001, The Hartford acquired the U.S. individual life insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as "Fortis Financial Group", or "Fortis"). The acquisition was accounted for as a purchase transaction and, as such, the revenues and expenses generated by this business from April 2, 2001 forward are included in the Company's Consolidated Statements of Income. (For further discussion of the Fortis Acquisition, see Note 18(a).) 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 16.) 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, the liability for future policy benefits, unpaid claims and claim adjustment expenses and investment values. 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 Effective September 2001, the Company adopted Emerging Issues Task Force ("EITF") Issue 01-10, "Accounting for the Impact of the Terrorist Attacks of September 11, 2001". Under the consensus, costs related to the terrorist act should be reported as part of income from continuing operations and not as an extraordinary item. The Company has recognized and classified all direct and indirect costs associated with the attack of September 11 in accordance with the consensus. (For discussion of the impact of the September 11 terrorist attack ("September 11"), see Note 2.) Effective April 1, 2001, the Company adopted EITF Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets". Under the consensus, investors in certain asset-backed securities are required to record changes in their estimated yield on a prospective basis and to evaluate these securities for an other than temporary decline in value. If the fair value of the asset-backed security has declined below its carrying amount and the decline is determined to be other than temporary, the security is written down to fair value. Upon adoption of EITF Issue 99-20, the Company recorded an $11 charge in net income as a net of tax cumulative effect of accounting change. Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138. The standard requires, among other things, that all derivatives be carried on the balance sheet at fair value. The standard also specifies hedge accounting criteria under which a derivative can qualify for special accounting. In order to receive special accounting, the derivative instrument must qualify as a hedge of either the fair value or the variability of the cash flow of a qualified asset or liability, or forecasted transaction. Special accounting for qualifying hedges provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of the corresponding changes in value of the hedged item. The Company's policy prior to adopting SFAS No. 133 was to carry its derivative instruments on the balance sheet in a manner similar to the hedged item(s). Upon adoption of SFAS No. 133, the Company recorded a $23 charge in net income as a net of tax cumulative effect of accounting change. The transition adjustment was primarily comprised of gains and losses on derivatives that had been previously deferred and not adjusted to the carrying amount of the hedged item. Also included in the transition adjustment were gains and losses related to recognizing at fair value all derivatives that are designated as fair-value hedging instruments offset by the difference between the book values and fair values of related hedged items attributable to the hedged risks. The entire transition amount was previously recorded in Accumulated Other Comprehensive Income ("OCI") - Unrealized Gain/Loss on Securities in accordance with SFAS No. 115. Gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of hedged items were not affected by the implementation of SFAS No. 133. F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (B) ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED) Upon adoption, the Company also reclassified $24, net of tax, to Accumulated OCI - - Gain on Cash-Flow Hedging Instruments from Accumulated OCI - Unrealized Gain/Loss on Securities. This reclassification reflects the January 1, 2001 net unrealized gain for all derivatives that are designated as cash-flow hedging instruments. (For further discussion of the Company's derivative-related accounting policies, see Note 1(e).) In September 2000, the Financial Accounting Standards Board ("FASB") issued 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 accounting for securitizations, other financial asset transfers and collateral arrangements. SFAS No. 140 was effective for transfers and servicing of financial assets and extinguishments of liabilities occurring after March 31, 2001. For recognition and disclosure of collateral and for additional disclosures related to securitization transactions, SFAS No. 140 was effective for the Company's December 31, 2000 financial statements. Adoption of SFAS No. 140 did not have a material impact on the Company's financial condition or results of operations. In March 2000, the FASB issued Interpretation No. 44, "Accounting for Certain Transactions Involving Stock Compensation - an Interpretation of Accounting Principles Board ("APB") Opinion No. 25" ("FIN 44"). 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 ("SEC") 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. The Hartford's cash flows were not impacted by adopting these changes in accounting principles. (C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for long-lived assets to be disposed of by sale by requiring those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of Statement 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144 will not have a material impact on the Company's financial condition or results of operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations requiring all business combinations to be accounted for under the purchase method. Accordingly, net assets acquired are recorded at fair value with any excess of cost over net assets assigned to goodwill. SFAS No. 141 also requires that certain intangible assets acquired in a business combination be recognized apart from goodwill. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method of accounting for those transactions is prohibited. Adoption of SFAS No. 141 will not have a material impact on the Company's financial condition or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, amortization of goodwill is precluded; however, its fair value is periodically (at least annually) reviewed and tested for impairment. Goodwill must be tested for impairment in the year of adoption, including an initial test performed within six months of adoption. If the initial test indicates a potential impairment, then a more detailed analysis to determine the extent of impairment must be completed by the end of the year of adoption. F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED) SFAS No. 142 requires that useful lives for intangibles other than goodwill be reassessed and remaining amortization periods be adjusted accordingly. The reassessment must be completed prior to the end of the first quarter of 2002. All provisions of SFAS No. 142 will be applied beginning January 1, 2002 to goodwill and other intangible assets. Goodwill amortization totaled $52, after-tax, in 2001. Application of the non-amortization provisions of the statement is expected to result in an increase in net income of $56, after-tax, in 2002. The Company is in the process of assessing the impacts from the implementation of the other provisions of SFAS No. 142. (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 amortized 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 investments consist primarily of limited partnership investments which are accounted for by the equity method, except in instances in which the Company's interest is so minor that it exercises virtually no influence over operating and financial policies. In such instances, the Company applies the cost method of accounting. The Company's net income from partnerships is included in net investment income. Other investments also include mortgage loans at amortized cost and derivatives at fair value. Net realized capital gains and losses on security transactions associated with the Company's immediate participation guaranteed contracts are recorded and offset by amounts owed to policyholders and were $(1), $(9) and $2 for the years ended December 31, 2001, 2000 and 1999, respectively. Under the terms of the contracts, the net 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 requires other than temporary impairment charges to be recorded when it is determined that the Company is unable to recover its cost basis in an investment. Impairment charges on investments are included in net realized capital gains and losses. Factors considered in evaluating whether a decline in value is other than temporary include: (a) the length of time and the extent to which the fair value has been less than cost, (b) the financial conditions and near-term prospects of the issuer, and (c) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery. 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 Overview - -------- The Company utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options, 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 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. (For a description of derivative instruments utilized by the Company, see the Capital Markets Risk Management section of Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") under Derivative Instruments.) Accounting and Financial Statement Presentation of Derivative Instruments and - -------------------------------------------------------------------------------- Hedging Activities - ------------------ Effective January 1, 2001, and in accordance with SFAS No. 133, all derivatives are recognized on the balance sheet at their fair value. On the date the derivative contract is entered into, the Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability ("fair value" hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash flow" hedge), (3) a foreign-currency, fair value or cash-flow hedge ("foreign-currency" hedge), (4) a hedge of a net investment in a foreign operation, or (5) held for other risk management activities, which primarily involve managing asset or liability related risks which do not qualify for hedge accounting under SFAS No. 133. Changes in the fair value of a derivative that is designated and qualifies as a fair-value hedge, along with the gain or loss on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings as net realized capital gains and losses. Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge are recorded in OCI and are reclassified into earnings when earnings are impacted by the variability of the cash flow of the hedged item. Changes in the fair value of derivatives that are designated and qualify as foreign-currency hedges are recorded in either current period earnings or OCI, depending on whether the hedge transaction is a fair value hedge or a cash-flow hedge. If, however, a derivative is used as a hedge of a net investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded in the cumulative translation adjustments account within stockholders' equity. Changes in the fair value of derivative instruments held for other risk management purposes are reported in current period earnings as net realized capital gains and losses. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (E) DERIVATIVE INSTRUMENTS (CONTINUED) Accounting and Financial Statement Presentation of Derivative Instruments and - -------------------------------------------------------------------------------- Hedging Activities (continued) - ------------------------------ As of December 31, 2001, the Company carried $138 of derivative assets in other investments and $208 of derivative liabilities in other liabilities. Hedge Documentation and Effectiveness Testing - --------------------------------------------- At hedge inception, the Company formally documents all relationships between hedging instruments and hedged items, as well as its risk-management objective and strategy for undertaking each hedge transaction. In connection with the implementation of SFAS No. 133, the Company designated anew all existing hedge relationships. The documentation process includes linking all derivatives that are designated as fair value, cash flow or foreign-currency hedges to specific assets and liabilities on the balance sheet or to specific forecasted transactions. The Company also formally assesses, both at the hedge's inception and on an ongoing basis, whether the derivatives that are used in hedging transactions are highly effective in offsetting changes in fair values or cash flows of hedged items. At inception, and on a quarterly basis, the change in value of the hedging instrument and the change in value of the hedged item are measured to assess the validity of maintaining special hedge accounting. Hedging relationships are considered highly effective if the changes in the fair value or discounted cash flows of the hedging instrument are within a ratio of 80-120% of the inverse changes in the fair value or discounted cash flows of the hedged item. High effectiveness is calculated using a cumulative approach. If it is determined that a derivative is no longer highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below under discontinuance of hedge accounting. Credit Risk - ----------- 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. By using derivative instruments, the Company is exposed to credit risk which is measured as the amount owed to the Company based on current market conditions and potential payment obligations between the Company and its counterparties. When the fair value of a derivative contract is positive, this indicates that the counterparty owes the Company, and, therefore, exposes the Company to credit risk. 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 Company also minimizes the credit risk in derivative instruments by entering into transactions with high quality counterparties that are reviewed periodically by the Company's internal compliance unit, reviewed frequently by senior management and reported to the Company's Finance Committee. The Company also maintains a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association Master Agreement which is structured by legal entity and by counterparty and permits right of offset. Embedded Derivatives - -------------------- The Company occasionally purchases or issues financial instruments that contain a derivative instrument that is embedded in the financial instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a fair value, cash flow, or foreign-currency hedge, or as held for other risk management purposes. However, in cases where (1) the host contract is measured at fair value, with changes in fair value reported in current earnings or (2) the Company is unable to reliably identify and measure an embedded derivative for separation from its host contract, the contract is not designated as a hedging instrument. The entire contract is carried on the balance sheet at fair value with changes in fair value recorded as net realized capital gains and losses. Discontinuance of Hedge Accounting - ---------------------------------- The Company discontinues hedge accounting prospectively when (1) it is determined that the derivative is no longer highly effective in offsetting changes in the fair value or cash flows of a hedged item; (2) the derivative is dedesignated as a hedge instrument, because it is unlikely that a forecasted transaction will occur; or (3) the derivative expires or is sold, terminated, or exercised. When hedge accounting is discontinued because it is determined that the derivative no longer qualifies as an effective fair-value hedge, the derivative continues to be carried at fair value on the balance sheet with changes in its fair value recognized in current period earnings. The changes in the fair value of the hedged asset or liability are no longer recorded in earnings. When hedge accounting is discontinued because the Company becomes aware that it is probable that a forecasted transaction will not occur, the derivative continues to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in OCI are recognized immediately in earnings. In all other situations in which hedge accounting is discontinued on a cash-flow hedge, including those where the derivative is sold, terminated or exercised, amounts previously deferred in OCI are amortized into earnings when earnings are impacted by the variability of the cash flow of the hedged item. SFAS No. 133 Categorization of the Company's Hedging Activities - --------------------------------------------------------------- Cash-Flow Hedges General For the year ended December 31, 2001, the Company's gross gains and losses representing the total ineffectiveness of all cash-flow hedges essentially offset, with the net impact reported as net realized capital gains and losses. All components of each derivative's gain or loss are included in the assessment of hedge effectiveness. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (E) DERIVATIVE INSTRUMENTS (CONTINUED) SFAS No. 133 Categorization of the Company's Hedging Activities (continued) - --------------------------------------------------------------------------- Cash-Flow Hedges (continued) General (continued) Gains and losses on derivative contracts that are reclassified from OCI to current period earnings are included in the line item in the statement of income in which the hedged item is recorded. As of December 31, 2001, $2 of after-tax deferred net gains on derivative instruments accumulated in OCI are expected to be reclassified to earnings during the next twelve months. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains/losses as an adjustment to interest income over the term of the investment cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows (for all forecasted transactions, excluding interest payments on variable-rate debt) is twelve months. As of December 31, 2001, the Company held $2.6 billion in derivative notional value related to strategies categorized as cash- flow hedges. There were no reclassifications from OCI to earnings resulting from the discontinuance of cash-flow hedges during the year ended December 31, 2001. Specific Strategies The Company's primary use of cash-flow hedging is to use interest-rate swaps as an "asset hedging" strategy, in order to convert interest receipts on floating-rate fixed maturity investments to fixed rates. When multiple assets are designated in a hedging relationship under SFAS No. 133, a homogeneity test is performed to ensure that the assets react similarly to changes in market conditions. To satisfy this requirement, at inception of the hedge, fixed maturity investments with identical variable rates are grouped together (for example: 1-month LIBOR or 3-month LIBOR, not both). The Company enters into "receive fixed/pay variable" interest rate swaps to hedge the variability in the first LIBOR-based interest payments received on each pool of eligible variable rate fixed maturity investments. Effectiveness is measured by comparing the present value of the variable rate pay side of the swaps to the present value of the first anticipated variable rate interest receipts on the hedged fixed maturity investments. At December 31, 2001, the Company held $2.0 billion in derivative notional value related to this strategy. The Company also uses cash-flow hedges, in its anticipated purchase of fixed maturity investments. Fair-Value Hedges General For the year ended December 31, 2001, the Company's gross gains and losses representing the total ineffectiveness of all fair-value hedges essentially offset, with the net impact reported as net realized capital gains and losses. All components of each derivative's gain or loss are included in the assessment of hedge effectiveness. As of December 31, 2001, the Company held $899 in derivative notional value related to strategies categorized as fair-value hedges. Specific Strategies During 2001, the Company entered an interest rate swap as an economic hedge of a portion of its Trust Preferred Securities issued. The interest rate swap agreement was structured to exactly offset the terms and conditions of the hedged trust preferred securities (i.e. notional value, call provisions, maturity date, and payment dates) and has been designated as a hedge of the benchmark interest rate (i.e. LIBOR). The calculation of ineffectiveness involves a comparison of the present value of the cumulative change in the expected future cash flows on the interest rate swap and the present value of the cumulative change in the expected future cash flows on the hedged trust preferred securities. If hedge ineffectiveness exists, it is recorded as net realized capital gain or loss. At December 31, 2001, the Company held $500 in derivative notional value related to this strategy. The Company purchases interest rate caps and sells interest rate floor contracts in an "asset hedging" strategy utilized to offset corresponding interest rate caps and floors that exist in certain of its variable-rate fixed maturity investments. The standalone interest rate cap and floor contracts are structured to exactly offset those embedded in the hedged investment. The calculation of ineffectiveness involves a comparison of the present value of the cumulative change in the expected future cash flows on the interest rate cap/floor and the present value of the cumulative change in the expected future interest cash flows that are hedged on the fixed maturity investment. If hedge ineffectiveness exists, it is recorded as net realized capital gain or loss. All hedges involving variable rate bonds with embedded interest rate caps and floors are perfectly matched with respect to notional values, payment dates, maturity, index, and the hedge relationship does not contain any other basis differences. No component of the hedging instruments fair value is excluded from the determination of effectiveness. At December 31, 2001, the Company held $200 in derivative notional value related to this strategy. The Company enters into swaption arrangements in an "asset hedging" strategy utilized to offset the change in the fair value of call options embedded in certain of its investments in municipal fixed maturity investments. The swaptions give the Company the option to enter into a "receive fixed" swap. The swaption's exercise dates coincide with the municipal fixed maturity's call dates, and the receive side of the swaps closely matches the coupon rate on the original municipal fixed maturity investment. The purpose of the swaptions is to ensure a fixed return over the original term to maturity. Should the municipal fixed maturity investment be called, the swaptions would be either settled in cash or exercised. The proceeds from the call are used to purchase a variable rate fixed maturity investment. If the bonds are not called, the swaptions expire worthless. Each swaption contract hedges multiple fixed maturity investments containing embedded call options. These fixed maturity investments are subdivided into portfolio hedges. In accordance with SFAS No. 133, a stress test is performed at the inception of the hedge to prove the homogeneity of each portfolio (with regard to the risk being hedged) and thereby F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (E) DERIVATIVE INSTRUMENTS (CONTINUED) SFAS No. 133 Categorization of the Company's Hedging Activities (continued) - --------------------------------------------------------------------------- Fair-Value Hedges (continued) Specific Strategies (continued) qualify that hedge for special hedge accounting treatment. Correlation calculations are performed at various interest rate levels comparing the total change in the aggregate value of the embedded calls in the hedged portfolio to the change in value of the embedded call in each individual fixed maturity investment in the portfolio. The correlation statistic for homogeneity must be within a range of 0.85 to 1.00. The calculation of ineffectiveness involves a comparison of the cumulative change in fair value of the embedded call option with the cumulative change in fair value of the swaption. Ineffectiveness is reported as net realized capital gains and losses. No component of the hedging instruments' fair value is excluded from the determination of effectiveness. At December 31, 2001, the Company held $133 in derivative notional value related to this strategy. Other Risk Management Activities General The Company's other risk management activities relate to strategies used to meet the following Company-approved objectives; to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transaction costs. For the year ended December 31, 2001, the Company recognized an after-tax net loss of $23 (reported as net realized capital losses in the statement of income), which represented the total change in value for other derivative-based strategies which do not qualify for hedge accounting under SFAS No. 133. As of December 31, 2001, the Company held $4.6 billion in derivative notional value related to strategies categorized as Other Risk Management Activities. Specific Strategies The Company issues liability contracts in which policyholders have the option to surrender their policies at book value and that guarantee a minimum credited rate of interest. Typical products with these features include Whole Life, Universal Life and Repetitive Premium Variable Annuities. The Company uses interest rate cap and swaption contracts as an economic hedge, classified for internal purposes as a "liability hedge", thereby mitigating the Company's loss in a rising interest rate environment. The Company is exposed to the situation where interest rates rise and the Company is not able to raise its credited rates to competitive yields. The policyholder can then surrender at book value while the underlying bond portfolio may be at a loss. The increase in yield in a rising interest rate environment due to the interest rate cap and swaption contracts may be used to raise credited rates, increasing the Company's competitiveness and reducing the policyholder's incentive to surrender. In accordance with Company policy, the amount of notional value will not exceed the book value of the liabilities being hedged and the term of the derivative contract will not exceed the average maturity of the liabilities. As of December 31, 2001, the Company held $516 in derivative notional value related to this strategy. When terminating certain hedging relationships, the Company will enter a derivative contract with terms and conditions that directly offset the original contract, thereby offsetting its changes in value from that date forward. The Company de-designates the original contract and records the changes in value of both the original contract and the new offsetting contract through net realized capital gains and losses. At December 31, 2001, the Company held $2.0 billion in derivative notional value related to this strategy. Periodically, the Company enters into swap agreements that have cash flows based upon the results of a referenced index or asset pool. These arrangements are entered into to modify portfolio duration or to increase diversification while controlling transaction costs. At December 31, 2001, the Company held $687 in derivative notional value related to this strategy. The Company will issue an option in an "asset hedging" strategy utilized to monetize the option embedded in certain of its fixed maturity investments. The Company will receive a premium for issuing the freestanding option. The structure is designed such that the fixed maturity investment and freestanding option have identical expected lives, typically 3-5 years. At December 31, 2001, the Company held $1.2 billion in derivative notional value related to this strategy. (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 LIFE - Policy acquisition costs, which include commissions and certain other expenses that vary with and are primarily associated with acquiring business, are deferred and amortized over the estimated lives of the contracts, usually 20 years. Deferred policy acquisition costs related to investment contracts and universal life type contracts are deferred and amortized using the 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 re-estimated and adjusted by a cumulative charge or credit to income. The average rate of assumed future investment yield used in estimating expected gross profits related to variable annuity and F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (G) DEFERRED POLICY ACQUISITION COSTS (CONTINUED) variable life business was 9% at December 31, 2001 and for all other products including fixed annuities and other universal life type contracts the average assumed investment yield ranged from 5.0% - 8.5%. Deferred policy acquisition costs related to traditional policies are amortized over the premium paying period of the related policies in proportion to the ratio of the present value of annual expected premium income to the present value of total expected premium income. Adjustments are made each year to recognize actual experience as compared to assumed experience for the current period. PROPERTY & CASUALTY - Policy acquisition costs, representing commissions, premium taxes and certain other underwriting expenses, are deferred and amortized over policy terms. Estimates of the present value of future revenues, including net investment income and tax benefits, are compared to estimates of the present value of future costs, including amortization of policy acquisition costs, to determine if the deferred acquisition costs are recoverable and, if not, they are charged to expense. (H) FUTURE POLICY BENEFITS, UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES 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, ---------------------------------- 2001 2000 1999 - ------------------------------------------------------------------- BEGINNING CLAIM RESERVES-GROSS $2,384 $2,128 $1,938 Reinsurance recoverables 177 125 125 - ------------------------------------------------------------------- BEGINNING CLAIM RESERVES-NET 2,207 2,003 1,813 - ------------------------------------------------------------------- INCURRED EXPENSES RELATED TO Current year 1,272 1,093 1,013 Prior years (15) (11) (33) - ------------------------------------------------------------------- TOTAL INCURRED 1,257 1,082 980 - ------------------------------------------------------------------- PAID EXPENSES RELATED TO Current year 439 410 360 Prior years 525 468 430 - ------------------------------------------------------------------- TOTAL PAID 964 878 790 - ------------------------------------------------------------------- ENDING CLAIM RESERVES-NET 2,500 2,207 2,003 Reinsurance recoverables 264 177 125 - ------------------------------------------------------------------- ENDING CLAIM RESERVES-GROSS $2,764 $2,384 $2,128 =================================================================== 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 5.1% in 2001 and 5.7% in 2000. At December 31, 2001 and 2000, such discounted reserves totaled $719 and $716, respectively (net of discounts of $429 and $396, respectively). Amortization of the discount did not have a material effect on net income during 2001, 2000 and 1999, respectively. A reconciliation of liabilities for unpaid claims and claim adjustment expenses follows: For the years ended December 31, --------------------------------- 2001 2000 1999 - ------------------------------------------------------------------- BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $15,874 $16,014 $16,449 Reinsurance recoverables 3,452 3,271 3,286 - ------------------------------------------------------------------- BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 12,422 12,743 13,163 - ------------------------------------------------------------------- ADD PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Current year 5,992 5,170 4,953 Prior years [1] 143 27 (171) - ------------------------------------------------------------------- TOTAL PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES 6,135 5,197 4,782 - ------------------------------------------------------------------- LESS PAYMENTS Current year 2,349 2,265 2,137 Prior years 3,243 3,069 3,024 - ------------------------------------------------------------------- TOTAL PAYMENTS 5,592 5,334 5,161 - ------------------------------------------------------------------- Foreign currency translation (3) (26) (41) Reserves resulting from acquisitions -- -- -- Other [2] (102) (158) -- - ------------------------------------------------------------------- ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 12,860 12,422 12,743 Reinsurance recoverables 3,818 3,452 3,271 - ------------------------------------------------------------------- ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $16,678 $15,874 $16,014 =================================================================== [1] Excludes the effects of foreign exchange adjustments. [2] Includes $101 in 2001 and $161 in 2000 related to the sale of international subsidiaries. The Company has an exposure to catastrophic losses, both natural and man made, which can be caused by significant events including hurricanes, severe winter storms, earthquakes, windstorms, fires and terrorist acts. The frequency and severity of catastrophic losses 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 catastrophic losses through individual risk selection and the purchase of catastrophe reinsurance. (I) OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE Other policyholder funds and benefits payable include reserves for investment contracts without life contingencies, corporate F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (I) OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE (CONTINUED) owned life insurance and universal life insurance contracts. Of the amounts included in this item, $18.8 billion and $15.6 billion, as of December 31, 2001 and 2000, 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 LIFE - For investment and universal life-type contracts, the amounts collected from policyholders are considered deposits and are not included in revenue. 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. Traditional life and the majority of the Company's accident and health products are long duration contracts, and premiums are recognized as revenue 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. 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. LIFE - Participating life insurance in force accounted for 8%, 17% and 20% as of December 31, 2001, 2000 and 1999, respectively, of total life insurance in force. Dividends to policyholders were $68, $67 and $104 for the years ended December 31, 2001, 2000 and 1999, respectively. There were no additional amounts of income allocated to participating policyholders. PROPERTY & CASUALTY - Net written premiums for participating property and casualty insurance policies represented 9%, 9% and 11% of total net written premiums for the years ended December 31, 2001, 2000 and 1999, respectively. Dividends to policyholders were $38, $33 and $40 for the years ended December 31, 2001, 2000 and 1999, 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 21 mutual funds. The Company charges fees to the shareholders of the mutual funds, which are recorded as revenue by the Company. Investors can purchase "shares" in the mutual funds, all of which are registered with the Securities and Exchange Commission, in accordance with the Investment Company Act of 1940. The mutual funds are owned by the shareholders of those funds and not by the Company. As such, the mutual fund assets and liabilities 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. SEPTEMBER 11, 2001 As a result of the September 11 terrorist attack, the Company recorded in 2001 an estimated before-tax loss amounting to $678, net of reinsurance: $647 related to property and casualty operations and $31 related to life operations. The Property & Casualty loss included a $1.1 billion gross reserve addition and cessions under reinsurance contracts of $569. Also included in the Property & Casualty loss was $91 of reinstatement and other reinsurance premiums. The property-casualty portion of the estimate includes coverages related to property, business interruption, workers' compensation, and other liability exposures, including those underwritten by the Company's assumed reinsurance operation. The Company based the loss estimate upon a review of insured exposures using a variety of assumptions and actuarial techniques, including estimated amounts for unknown and unreported policyholder losses and costs incurred in settling claims. Also included was an estimate of amounts recoverable under the Company's ceded reinsurance programs, including the cost of additional reinsurance premiums. As a result of the uncertainties involved in the estimation process, final claims settlement may vary from present estimates. F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS For the years ended December 31, -------------------------------- (A) COMPONENTS OF NET INVESTMENT INCOME 2001 2000 1999 - ------------------------------------------------------------------------------------------------------- Interest income $ 2,669 $ 2,544 $ 2,530 Dividends 39 27 31 Other investment income 178 142 107 - ------------------------------------------------------------------------------------------------------- Gross investment income 2,886 2,713 2,668 Less: Investment expenses 36 39 41 - ------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 2,850 $ 2,674 $ 2,627 ======================================================================================================= (B) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES) - ------------------------------------------------------------------------------------------------------- Fixed maturities $ (50) $ (251) $ (64) Equity securities (34) 148 105 Sale of affiliates and other [1] (153) 239 (5) Change in liability to policyholders for net realized capital (gains) losses 1 9 (2) - ------------------------------------------------------------------------------------------------------- NET REALIZED CAPITAL GAINS (LOSSES) $ (236) $ 145 $ 34 ======================================================================================================= [1] 2001 primarily relates to before-tax losses on the sales of international subsidiaries and the change in value of certain derivative instruments. 2000 includes a $242, before-tax, gain on the sale of Zwolsche.
(C) UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES - ------------------------------------------------------------------------------------------------------- Gross unrealized gains $ 177 $ 230 $ 395 Gross unrealized losses (117) (95) (46) Minority interest in consolidated subsidiary -- -- (4) - ------------------------------------------------------------------------------------------------------- Net unrealized gains 60 135 345 Deferred income taxes 19 45 121 - ------------------------------------------------------------------------------------------------------- Net unrealized gains, net of tax 41 90 224 Balance - beginning of year 90 224 144 - ------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED GAINS/LOSSES ON EQUITY SECURITIES $ (49) $ (134) $ 80 ======================================================================================================= (D) UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES - ------------------------------------------------------------------------------------------------------- Gross unrealized gains $ 1,369 $ 1,042 $ 271 Gross unrealized losses (477) (406) (1,049) Minority interest in consolidated subsidiary -- -- 105 Net unrealized (gains) losses credited to policyholders (22) (10) 24 - ------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) 870 626 (649) Deferred income taxes 305 219 (227) - ------------------------------------------------------------------------------------------------------- Net unrealized gains (losses), net of tax 565 407 (422) Balance - beginning of year 407 (422) 667 - ------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED GAINS/LOSSES ON FIXED MATURITIES $ 158 $ 829 $(1,089) =======================================================================================================
(E) FIXED MATURITY INVESTMENTS As of December 31, 2001 ----------------------------------------------------------- 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) $ 559 $ 20 $ (4) $ 575 U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) - asset-backed 1,925 47 (4) 1,968 States, municipalities and political subdivisions 9,642 452 (34) 10,060 International governments 938 75 (10) 1,003 Public utilities 1,470 30 (31) 1,469 All other corporate including international 13,187 454 (213) 13,428 All other corporate - asset-backed 8,469 263 (152) 8,580 Short-term investments 2,104 3 -- 2,107 Certificates of deposit 708 20 (28) 700 Redeemable preferred stock 152 5 (1) 156 - ----------------------------------------------------------------------------------------------------------------- TOTAL FIXED MATURITIES $ 39,154 $ 1,369 $ (477) $ 40,046 =================================================================================================================
F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(E) FIXED MATURITY INVESTMENTS (CONTINUED) As of December 31, 2001 ----------------------------------------------------------- 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 =================================================================================================================
The amortized cost and estimated fair value of fixed maturity investments at December 31, 2001 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 $ 4,324 $ 4,352 Over one year through five years 10,980 11,218 Over five years through ten years 11,352 11,644 Over ten years 12,498 12,832 - ------------------------------------------------------------------ TOTAL $ 39,154 $ 40,046 ================================================================== (F) SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS For the years ended December 31, ----------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------- SALE OF FIXED MATURITIES Sale proceeds $ 8,714 $ 9,606 $ 9,761 Gross gains 202 187 245 Gross losses (82) (429) (311) SALE OF EQUITY SECURITIES Sale proceeds $ 803 $ 1,306 $ 1,317 Gross gains 135 258 124 Gross losses (139) (110) (19) ====================================================================== (G) CONCENTRATION OF CREDIT RISK The Hartford is not exposed to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity. (H) DERIVATIVE INSTRUMENTS 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 $8.0 billion at December 31, 2001 and $5.3 billion at December 31, 2000. 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. F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED) (H) DERIVATIVE INSTRUMENTS (CONTINUED) A reconciliation between notional amounts as of December 31, 2001 and 2000 by derivative type and strategy is as follows:
DERIVATIVE INSTRUMENTS December 31, 2000 Maturities/ December 31, 2001 Notional Amount Additions Terminations [1] Notional Amount - ------------------------------------------------------------------------------------- BY DERIVATIVE TYPE Caps $ 592 $ 11 $ -- $ 603 Floors 295 25 -- 320 Swaps/Forwards 3,919 3,190 1,509 5,600 Futures 144 153 220 77 Options 356 1,363 311 1,408 - ------------------------------------------------------------------------------------- TOTAL $ 5,306 $ 4,742 $ 2,040 $ 8,008 ===================================================================================== BY STRATEGY Liability $ 774 $ 582 $ 43 $ 1,313 Anticipatory 144 475 292 327 Asset 3,489 3,685 1,705 5,469 Portfolio 899 -- -- 899 - ------------------------------------------------------------------------------------- TOTAL $ 5,306 $ 4,742 $ 2,040 $ 8,008 ===================================================================================== [1] During 2001, 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, 2001 and 2000, collateral pledged has not been separately reported in the Consolidated Balance Sheet. The classification and carrying amounts of collateral pledged at December 31, 2001 and 2000 were as follows: ASSETS 2001 2000 - ------------------------------------------------------------------------------ U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) $ 1 $ 3 U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored - asset backed) 53 31 - ------------------------------------------------------------------------------ TOTAL $ 54 $ 34 - ------------------------------------------------------------------------------ At December 31, 2001 and 2000, The Hartford had accepted collateral consisting of cash and U.S. Government securities with a fair value of $161 and $252, respectively. At December 31, 2001 and 2000, only cash collateral of $108 and $31, respectively, was recorded on the balance sheet in fixed maturities and other liabilities. While The Hartford is permitted by contract to sell or repledge the noncash collateral, none of the collateral has been sold or repledged at December 31, 2001 and 2000. As of December 31, 2001 and 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 of limited partnerships and trusts is based on external market valuations from partnership and trust management. Derivative instruments are reported at fair value based on internally established valuations that are consistent with external valuation models. 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 trust preferred securities is based on external valuation using discounted future cash flows at current market interest rates. F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) The carrying amounts and fair values of The Hartford's financial instruments at December 31, 2001 and 2000 were as follows: 2001 2000 ------------------------------------------ Carrying Fair Carrying Fair Amount Value Amount Value - ---------------------------------------------------------------------- ASSETS Fixed maturities $40,046 $40,046 $34,492 $34,492 Equity securities 1,349 1,349 1,056 1,056 Policy loans 3,317 3,317 3,610 3,610 Limited partnerships [1] 1,372 1,372 1,138 1,138 Other investments [2] [3] 605 605 373 374 LIABILITIES Other policyholder funds and benefits payable [4] $16,077 $15,939 $11,985 $11,607 Short-term debt 599 607 235 238 Long-term debt 1,965 2,082 1,862 1,901 Trust preferred securities 1,412 1,429 1,243 1,233 Derivative related liabilities [3] [5] 208 208 -- -- ====================================================================== [1] Included in other investments on the balance sheet. [2] 2001 includes $138 of derivative related assets. [3] Prior year derivative related assets and liabilities were reported along with the items being hedged in accordance with then generally accepted accounting principles. [4] Excludes group accident and health and universal life insurance contracts, including corporate owned life insurance. [5] Included in other liabilities on the balance sheet. 5. SEPARATE ACCOUNTS The Hartford maintained separate account assets and liabilities totaling $114.7 billion and $114.1 billion at December 31, 2001 and 2000, 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 $104.6 billion and $104.3 billion at December 31, 2001 and 2000, respectively, wherein the policyholder assumes the investment risk, and guaranteed separate accounts totaling $10.1 billion and $9.8 billion at December 31, 2001 and 2000, 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 $575 and $697 at December 31, 2001 and 2000, 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 included in fee income were $1.3 billion, $1.4 billion and $1.1 billion in 2001, 2000 and 1999, respectively. The guaranteed separate accounts include fixed market value adjusted ("MVA") individual annuities and modified guaranteed life insurance. The average credited interest rate on these contracts was 6.4% and 6.6% at December 31, 2001 and 2000, respectively. The assets that support these liabilities were comprised of $9.8 billion and $9.6 billion in fixed maturities as of December 31, 2001 and 2000, respectively, and $243 and $127 of other investments as of December 31, 2001 and 2000, respectively. 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 $37 and $3 in net carrying value and $3.2 billion and $3.5 billion in notional amounts as of December 31, 2001 and 2000, respectively. 6. DEBT
2001 2000 ----------------------------------------------------------- Weighted Average Weighted Average Amount Interest Rate [1] Amount Interest Rate [1] - -------------------------------------------------------------------------------------------------------------- SHORT-TERM DEBT Commercial paper $ 299 2.0% $ 35 6.6% Current maturities of long-term debt 300 6.4% 200 8.3% - -------------------------------------------------------------------------------------------------------------- TOTAL SHORT-TERM DEBT $ 599 4.2% $ 235 8.1% ============================================================================================================== LONG-TERM DEBT 6.375% Notes, due 2002 -- -- 300 6.6% 6.9% Notes, due 2004 199 7.0% 199 7.0% 7.75% Notes, due 2005 246 8.2% 245 8.2% 7.1% Notes, due 2007 198 7.2% 198 7.2% 6.375% Notes, due 2008 200 6.5% 200 6.5% 7.9% Notes, due 2010 274 8.0% 274 8.0% 7.3% Notes, due 2015 200 7.4% 199 7.4% 7.65% Notes, due 2027 248 7.8% 247 7.8% 7.375% Notes, due 2031 400 7.5% -- -- - -------------------------------------------------------------------------------------------------------------- TOTAL LONG-TERM DEBT $ 1,965 7.4% $ 1,862 7.2% ============================================================================================================== [1] Represents the effective interest rate at the end of the year.
F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 6. DEBT (CONTINUED) (A) SHELF REGISTRATIONS On May 15, 2001, HLI filed with the SEC a shelf registration statement for the potential offering and sale of up to $1.0 billion in debt and preferred securities. The registration statement was declared effective on May 29, 2001. This registration statement includes an aggregate $150 of HLI securities remaining under the shelf registration filed by HLI with the SEC in June 1998. As of December 31, 2001, HLI had $1.0 billion remaining on its shelf. 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 registration statement was declared effective on February 12, 2001. As of December 31, 2001, The Hartford had $1.1 billion remaining on the shelf. (B) SHORT-TERM DEBT The Hartford has a commercial paper program which allows the Company to borrow up to a maximum amount of $2.0 billion in short-term commercial paper notes. The Hartford's commercial paper ranks equally with its other unsecured and unsubordinated indebtedness. As of December 31, 2001, the Company had $299 of outstanding borrowings under the program. Effective June 20, 2001, The Hartford entered into an amended and restated five-year revolving $1.0 billion credit facility with fourteen banks. This facility is available for general corporate purposes and to provide additional support to the Company's commercial paper program. As of December 31, 2001, there were no outstanding borrowings under the facility. HLI has a commercial paper program which allows it to borrow up to a maximum amount of $250 in short-term commercial paper notes. As of December 31, 2001, HLI had no outstanding borrowings under the program. As of December 31, 2001, 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, 2001, there were no outstanding borrowings under the facility or commercial paper program. 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 18(b)). (C) LONG-TERM DEBT The Hartford's long-term debt securities are issued by either The Hartford Financial Services Group, Inc. ("HFSG") or HLI and are unsecured obligations of HFSG or HLI and rank on a parity with all other unsecured and unsubordinated indebtedness of HFSG or HLI. On December 1, 2001, The Hartford's 8.3% medium term notes became due. The Company borrowed $200 under its commercial paper program to retire the debt. On March 1, 2001, HLI issued and sold $400 of senior debt securities from its existing shelf registration. The long-term debt was issued in the form of 7.375% thirty-year senior notes due March 1, 2031. Interest on the notes is payable semi-annually on March 1 and September 1, commencing on September 1, 2001. As previously discussed, HLI used the net proceeds from the issuance of the notes to partially fund the Fortis acquisition. (For further discussion of the Fortis Acquisition, see Note 18(a).) On June 16, 2000, The Hartford issued and sold $525 of unsecured redeemable long-term debt under its October 11, 1995 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 16). (D) INTEREST EXPENSE Interest expense incurred related to short-term and long-term debt totaled $179, $150 and $114 for 2001, 2000 and 1999, respectively. 7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST PREFERRED SECURITIES) (A) DESCRIPTION On October 26, 2001, Hartford Capital III, a Delaware statutory business trust formed by The Hartford, issued 20,000,000, 7.45% Trust Originated Preferred Securities, Series C. The proceeds from the sale of the Series C Preferred Securities were used to acquire $500 of Junior Subordinated Deferrable Interest Debentures Senior C issued by The Hartford. The Hartford used the proceeds from the sale of such debentures for the redemption of the 8.35% Cumulative Quarterly Income Preferred Securities, Series B of Hartford Capital II. The Series C Preferred Securities represent undivided beneficial interests in the assets of Hartford Capital III. The Hartford owns all of the common securities of Hartford Capital III. Holders of Series C Preferred Securities are entitled to receive cumulative cash distributions accruing from October 26, 2001, the date of issuance, and payable quarterly in arrears F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST PREFERRED SECURITIES) (CONTINUED) (A) DESCRIPTION (CONTINUED) commencing January 2, 2002 at the annual rate of 7.45% of the stated liquidation amount of $25.00 per Series C Preferred Security. The Series C Preferred Securities are subject to mandatory redemption upon repayment of the Series C Junior Subordinated Debentures at maturity or upon 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 present value, or (ii) on or after October 26, 2006, 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 principal amount, 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 7.45% of the principal amount, payable quarterly in arrears commencing January 2, 2002, and mature on October 26, 2050. 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 III obligations under the Hartford Series C 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 III has funds to make such payments. On March 6, 2001, Hartford Life Capital II, a Delaware statutory business trust formed by HLI, issued 8,000,000, 7.625% Trust Preferred Securities, Series B under its June 1998 shelf registration. The proceeds from the sale of the Series B Preferred Securities were used to acquire $200 of 7.625% Series B Junior Subordinated Debentures issued by HLI. HLI used the proceeds from the offering to partially fund the Fortis acquisition. The Series B Preferred Securities represent undivided beneficial interests in Hartford Life Capital II's assets, which consist solely of the Series B Junior Subordinated Debentures. HLI owns all of the common securities of Hartford Life Capital II. Holders of Series B Preferred Securities are entitled to receive cumulative cash distributions accruing from March 6, 2001, the date of issuance, and payable quarterly in arrears commencing April 15, 2001 at the annual rate of 7.625% of the stated liquidation amount of $25.00 per Series B Preferred Security. The Series B Preferred Securities are subject to mandatory redemption upon repayment of the Series B Junior Subordinated Debentures at maturity or upon earlier redemption. HLI has the right to redeem the Series B Junior Subordinated Debentures on or after March 6, 2006 or earlier upon the occurrence of certain events. Holders of Series B Preferred Securities generally have no voting rights. The Series B Junior Subordinated Debentures bear interest at the annual rate of 7.625% of the principal amount, payable quarterly in arrears commencing April 15, 2001, and mature on February 15, 2050. The Series B 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 obligations of HLI subsidiaries. HLI has the right at any time, and from time to time, to defer payments of interest on the Series B 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 equally with or junior to the Series B Junior Subordinated Debentures. HLI will have the right at any time to dissolve the Trust and cause the Series B Junior Subordinated Debentures to be distributed to the holders of the Series B Preferred Securities. HLI has guaranteed, on a subordinated basis, all of the Hartford Life Capital II obligations under the Series B Preferred Securities including payment of 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 Hartford Life Capital II has funds available to make such payments. 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. F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST PREFERRED SECURITIES) (CONTINUED) (A) DESCRIPTION (CONTINUED) 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 only, upon the occurrence of certain specified events. In either case, the redemption price equals the 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 to the extent of available funds and upon dissolution, winding up or liquidation but only to the extent that Hartford Life 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. The Series B Preferred Securities were redeemed on December 31, 2001, using the proceeds from the October 2001 Series C Preferred Securities. The Company incurred an $8, after-tax, extraordinary loss related to unamortized issue costs associated with the early extinguishment of the Series B Preferred Securities. 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 F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST PREFERRED SECURITIES) (CONTINUED) (A) DESCRIPTION (CONTINUED) 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 principal amount thereof, or (iii) at any time, in whole only, 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. (B) INTEREST EXPENSE Interest expense incurred with respect to the Series A Preferred Securities and Series B Preferred Securities totaled approximately $116, $100 and $100 in 2001, 2000 and 1999, respectively. 8. STOCKHOLDERS' EQUITY (A) COMMON STOCK On October 22, 2001, The Hartford issued 7.0 million shares of common stock under its current shelf registration to Salomon Smith Barney Inc. at a price of $56.82 per share and received proceeds of $400. The shares were then re-offered by Salomon Smith Barney Inc. to investors. The proceeds from this issuance were used for the replacement of a portion of the reduction in stockholders' equity from the September 11 loss. On February 16, 2001, The Hartford issued 10 million shares of common stock pursuant to an underwritten offering under its current shelf registration for net proceeds of $615. The proceeds were used to partially fund the Fortis acquisition. 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 16). In October 1999, The Hartford's Board of Directors authorized the repurchase of up to $1.0 billion of the Company's outstanding common stock. This repurchase authorization was effective in November 1999 and covers a three-year period. On the first two trading days following September 11, The Hartford repurchased 0.1 million shares of its common stock in the open market at a total cost of $7. This transaction represented the only repurchases made during 2001. Since the inception of the 1999 repurchase program, The Hartford has repurchased 6.1 million shares at a total cost of $250. Certain of these repurchased shares have been reissued pursuant to certain stock-based benefit plans. 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. (B) 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, 2001, 2000 or 1999. (C) STATUTORY RESULTS For the years ended December 31, -------------------------------- 2001 2000 1999 - --------------------------------------------------------------------- STATUTORY NET INCOME (LOSS) Life operations $ (364) $ 422 $ 245 Property & Casualty operations (223) 779 315 - --------------------------------------------------------------------- TOTAL $ (587) $ 1,201 $ 560 - --------------------------------------------------------------------- STATUTORY SURPLUS Life operations $ 2,991 $ 2,407 $ 2,356 Property & Casualty operations 3,178 3,495 4,678 - --------------------------------------------------------------------- TOTAL $ 6,169 $ 5,902 $ 7,034 ===================================================================== F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. STOCKHOLDERS' EQUITY (CONTINUED) (C) STATUTORY RESULTS (CONTINUED) 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, 2001, the maximum amount of statutory dividends which may be paid to HFSG from its insurance subsidiaries in 2002, without prior approval, is $577. 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. As of December 31, 2001, the impact of applying the new guidance resulted in a benefit of approximately $400 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.
2001 Income Shares Per Share Amount - ----------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common shareholders $507 237.7 $ 2.13 --------- DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 3.7 --------------- Income available to common shareholders plus assumed conversions $507 241.4 $ 2.10 ===================================================================================================== 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 =====================================================================================================
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, 2001, The Hartford had not issued any incentive stock options under the 2000 Plan. F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK COMPENSATION PLANS (CONTINUED) 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 288,118, 241,742 and 255,971 shares were sold in 2001, 2000 and 1999, respectively. The per share weighted average fair value of the discount under the ESPP was $10.11, $14.89 and $9.99 in 2001, 2000 and 1999, 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 APB 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, 2001, 2000 and 1999, compensation expense related to the Company's two stock-based compensation plans was $8, $23 and $16 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: 2001 2000 1999 - ------------------------------------------------------------------------------- Net income: As reported $ 507 $ 974 $ 862 Pro forma [1] [2] $ 454 $ 937 $ 834 Basic earnings per share: As reported $ 2.13 $ 4.42 $ 3.83 Pro forma [1] [2] $ 1.91 $ 4.25 $ 3.71 Diluted earnings per share: As reported $ 2.10 $ 4.34 $ 3.79 Pro forma [1] [2] $ 1.88 $ 4.18 $ 3.67 =============================================================================== [1] The pro forma disclosures are not representative of the effects on net income and earnings per share in future years. [2] For 2000 and 1999 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. 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 2001, 2000 and 1999: dividend yield of 1.6% for 2001, 1.5% for 2000 and 2.1% for 1999; expected price variability of 29.1% for 2001, 35.7% for 2000 and 29.0% for 1999; risk-free interest rates of 4.98% for 2001 grants, 6.41% for 2000 grants and 5.08% for 1999 grants; and expected lives of six years for 2001, four years for 2000 and seven years for 1999. A summary of the status of non-qualified options included in the Company's incentive stock plan as of December 31, 2001, 2000 and 1999 and changes during the years ended December 31, 2001, 2000 and 1999 is presented below:
2001 2000 1999 -------------------------------- ------------------------------- ----------------------------- Weighted Average Weighted Average Weighted Average (shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding at beg. of year 16,970 $39.96 12,103 $36.58 12,478 $33.89 Granted 4,237 62.10 5,374 37.62 1,131 51.86 HLI converted options -- -- 3,770 44.00 -- -- Exercised (1,789) 34.28 (3,894) 30.07 (1,387) 23.79 Canceled/Expired (481) 45.04 (383) 40.97 (119) 44.93 ------- ------- ------- Outstanding at end of year 18,937 45.29 16,970 39.96 12,103 36.58 - ------------------------------------------------------------------------------------------------------------------------------------ Exercisable at end of year 10,716 40.30 7,885 37.29 6,923 29.49 Weighted average fair value of options granted $24.86 $17.60 $15.83 ====================================================================================================================================
F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 10. STOCK COMPENSATION PLANS (CONTINUED) The following table summarizes information about stock options outstanding and exercisable (shares in thousands) at December 31, 2001:
Options Outstanding Options Exercisable ---------------------------------------------------------- -------------------------------------------- Number Weighted Average Weighted Number Weighted Range of Outstanding at Remaining Contractual Average Exercisable at Average Exercise Prices December 31, 2001 Life (Years) Exercise Price December 31, 2001 Exercise Price - --------------------------------------------------------------------------------------------------------------------------- $15.31 - $22.97 854 2.9 $19.84 854 $19.84 22.97 - 30.63 716 3.9 26.01 716 26.01 30.63 - 38.28 4,632 7.4 34.33 2,471 34.61 38.28 - 45.94 4,743 6.9 43.14 3,889 43.87 45.94 - 53.59 2,420 6.2 48.12 2,209 47.89 53.59 - 61.25 1,236 7.8 57.44 429 57.54 61.25 - 68.91 4,299 9.1 62.41 136 64.36 68.91 - 76.56 37 8.9 72.41 12 72.49 - --------------------------------------------------------------------------------------------------------------------------- $15.31 - $76.56 18,937 7.2 $45.29 10,716 $40.30 ===========================================================================================================================
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, 2001 and 2000. 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 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------- Benefit obligation - beginning of year $ 1,880 $ 1,684 $ 331 $ 278 Service cost (excludes expenses) 67 58 8 7 Interest cost 145 136 25 23 Plan participants' contributions -- -- 5 5 Actuarial loss 43 36 -- 11 Change in assumption: Discount rate 70 121 27 28 Salary scale -- 1 -- -- Demographic -- -- -- -- Benefits paid (96) (90) (23) (21) Sale of subsidiaries (1) (66) -- -- - ---------------------------------------------------------------------------------------------------------- BENEFIT OBLIGATION - END OF YEAR $ 2,108 $ 1,880 $ 373 $ 31 ========================================================================================================== Pension Benefits Other Benefits ----------------------- ------------------- CHANGE IN PLAN ASSETS 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------- Fair value of plan assets - beginning of year $ 1,839 $ 1,890 $ 100 $ 96 Actual return on plan assets (119) 96 3 7 Employer contribution 90 1 -- -- Benefits paid (93) (88) (6) (3) Expenses paid (6) (3) -- -- Sale of subsidiaries -- (57) -- -- - ---------------------------------------------------------------------------------------------------------- FAIR VALUE OF PLAN ASSETS - END OF YEAR $ 1,711 $ 1,839 $ 97 $ 100 - ---------------------------------------------------------------------------------------------------------- Funded status $ (397) $ (41) $ (276) $ (231) Unrecognized net actuarial (gain) loss 280 (119) 46 13 Unrecognized prior service cost 32 37 (127) (151) - ---------------------------------------------------------------------------------------------------------- ACCRUED BENEFIT COST $ (85) $ (123) $ (357) $ (369) - ----------------------------------------------------------------------------------------------------------
F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS (CONTINUED) Amounts recognized in the statement of financial position consist of:
Pension Benefits Other Benefits ----------------------- ------------------- 2001 2000 2001 2000 - ---------------------------------------------------------------------------------------------------------- Accrued benefit cost $ -- $ -- $ (357) $ (369) Accrued benefit liability [1] (83) (65) -- -- Accumulated other comprehensive income 30 24 -- -- - ---------------------------------------------------------------------------------------------------------- NET AMOUNT RECOGNIZED $ (53) $ (41) $ (357) $ (369) ========================================================================================================== [1] Represents amounts related to Excess Retirement Plan.
Weighted-average assumptions used in the accounting for the plans were:
December 31, ----------------------- 2001 2000 - -------------------------------------------------------------------------------------------------- Benefit discount rate 7.50% 7.75% 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, an 8% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2001. 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, 2001 by $8 $(8) 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, 2001, 2000 and 1999 include the following components:
Pension Benefits Other Benefits ------------------------- ------------------------- 2001 2000 1999 2001 2000 1999 - --------------------------------------------------------------------------------------------------------- Service cost $ 70 $ 62 $ 67 $ 8 $ 7 $ 8 Interest cost 145 135 131 25 23 21 Expected return on plan assets (168) (159) (149) (9) (9) (9) Amortization of prior service cost 6 6 6 (23) (23) (24) Amortization of unrecognized net losses 4 3 6 -- -- 1 Amortization of unrecognized net obligation arising from initial application of SFAS No. 87 -- 1 1 -- -- -- - --------------------------------------------------------------------------------------------------------- NET PENSION COST $ 57 $ 48 $ 62 $ 1 $ (2) $ (3) =========================================================================================================
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. Effective January 1, 2001, the Company amended the defined benefit pension plan to add a cash balance benefit formula to apply to all employees with an original hire date on or after January 1, 2001. 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. The cost to The Hartford for the above plan was approximately $30, $28 and $26 for 2001, 2000 and 1999, respectively. 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, 2001, The Hartford had no reinsurance-related concentrations of credit risk greater than 10% of the Company's stockholders' equity. Life insurance net retained premiums were comprised of the following: For the years ended December 31, ---------------------------------------- 2001 2000 1999 - --------------------------------------------------------------------- Gross premiums $ 5,070 $ 4,731 $ 4,165 Assumed 232 137 154 Ceded (398) (303) (250) - --------------------------------------------------------------------- NET RETAINED PREMIUMS $ 4,904 $ 4,565 $ 4,069 ===================================================================== F-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 13. REINSURANCE (CONTINUED) 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 $392, $225 and $168 for the years ended December 31, 2001, 2000 and 1999, respectively. The effect of reinsurance on property and casualty premiums written and earned was as follows: For the years ended December 31, -------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------- PREMIUMS WRITTEN Direct $ 7,625 $ 7,109 $ 6,464 Assumed 1,035 965 833 Ceded (1,075) (826) (585) - -------------------------------------------------------------------- NET $ 7,585 $ 7,248 $ 6,712 ==================================================================== PREMIUMS EARNED Direct $ 7,230 $ 6,770 $ 6,189 Assumed 1,016 1,001 827 Ceded (980) (795) (528) - -------------------------------------------------------------------- NET $ 7,266 $ 6,976 $ 6,488 ==================================================================== Reinsurance cessions, which reduce claims and claim expenses incurred, were $1.2 billion, $650 and $565 for the years ended December 31, 2001, 2000 and 1999, respectively. 14. INCOME TAX
For the years ended December 31, ----------------------------------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES U.S. Federal $ 354 $ 1,381 $ 1,188 International -- 37 47 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME BEFORE INCOME TAXES, MINORITY INTEREST, EXTRAORDINARY ITEM AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES $ 354 $ 1,418 $ 1,235 - -------------------------------------------------------------------------------------------------------------------------------- INCOME TAX EXPENSE (BENEFIT) Current - U.S. Federal $ (235) $ 58 $ (28) International (2) 31 28 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT (237) 89 -- - -------------------------------------------------------------------------------------------------------------------------------- Deferred - U.S. Federal 41 318 289 International 1 (17) (2) - -------------------------------------------------------------------------------------------------------------------------------- TOTAL DEFERRED 42 301 287 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME TAX EXPENSE (BENEFIT) $ (195) $ 390 $ 287 ================================================================================================================================
Deferred tax assets (liabilities) include the following as of December 31:
2001 2000 --------------------------------------------------------- U.S. Federal International U.S. Federal International - ---------------------------------------------------------------------------------------------- Discounted loss reserves $ 624 $ -- $ 627 $ -- Other insurance-related items 1 -- 533 -- Employee benefits 173 -- 214 -- Earnings from foreign subsidiaries (1) -- 22 -- Reserve for bad debts 26 -- 25 -- Accelerated depreciation 29 -- 25 -- Unrealized gains (327) 3 (262) (2) Other investment-related items (225) -- (454) -- NOL benefit carryover 410 -- 13 -- Other (17) (3) (61) (1) - ---------------------------------------------------------------------------------------------- TOTAL $ 693 $ -- $ 682 $ (3)* ============================================================================================== * 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, 2001. F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. INCOME TAX (CONTINUED) No additional provision or benefit has been recognized for U.S. taxes on international earnings, as amounts were insignificant at December 31, 2001. 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, ----------------------------------------------------- 2001 2000 1999 - ---------------------------------------------------------------------------------------------------------------------------- Tax provision at U.S. Federal statutory rate $ 124 $ 496 $ 432 Tax-exempt interest (217) (178) (146) Foreign tax rate differential -- 1 (1) Sale of International subsidiaries (see Note 18(b)) 9 88 -- Internal Revenue Service audit settlement (see Note 15(d)) -- (24) -- Tax adjustment - HLI (see Note 15(d)) (130) -- -- Other 19 7 2 - ---------------------------------------------------------------------------------------------------------------------------- PROVISION (BENEFIT) FOR INCOME TAX $ (195) $ 390 $ 287 ============================================================================================================================
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 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. The Hartford reported net environmental and asbestos reserves of $1,270 and $1,483 as of December 31, 2001 and 2000, respectively. The Hartford believes that the environmental and asbestos reserves reported at December 31, 2001 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 $181 in 2001, $179 in 2000 and $183 in 1999. Future minimum lease commitments are as follows: 2002 $ 131 2003 112 2004 98 2005 84 2006 69 Thereafter 194 - ---------------------------------------------------------------------- TOTAL $ 688 - ---------------------------------------------------------------------- (D) TAX MATTERS The Hartford's federal income tax returns are routinely audited by the Internal Revenue Service ("IRS"). In August 2001, the Company recorded a $130 benefit, primarily the result of the favorable treatment of certain tax matters related to separate account investment activity arising during the 1996-2000 tax years. During 2000, the Company recorded a $24 tax benefit as a result of a settlement with the IRS with respect to certain similar tax matters for the 1993-1995 tax years. F-29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. COMMITMENTS AND CONTINGENCIES (CONTINUED) (D) TAX MATTERS (CONTINUED) 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. (E) UNFUNDED COMMITMENTS At December 31, 2001, The Hartford has outstanding commitments to fund limited partnership investments totaling $375. These capital commitments can be called by the partnerships during the commitment period (on average, 3-6 years) 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 but may elect to do so. 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, 2001, accruals had been established for liabilities covered by this agreement. 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 was amortized on a straight-line basis until January 1, 2002. 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 years ended December 31, 2001 and 2000, amortization of PVP amounted to $79 and $47, respectively. Amortization of purchase adjustments will not have a significant impact on the Company's ongoing results of operations. 17. SEGMENT INFORMATION The Hartford is organized into two major operations: Life and Property & Casualty. Within these operations, The Hartford conducts business principally in ten operating segments. Additionally, all activities related to The HLI Repurchase and the minority interest in HLI for pre-acquisition periods are included in Corporate. Life is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI"). Investment Products offers individual variable and fixed annuities, mutual funds, retirement plan services and other investment products. Individual Life sells a variety of life insurance products, including variable life, universal life, interest sensitive whole life and term life insurance. Group Benefits sells group insurance products, including group life and group disability insurance as well as other products, including stop loss and supplementary medical coverages to employers and employer sponsored plans, accidental death and dismemberment, travel accident and other special risk coverages to employers and associations. COLI primarily offers variable products used by employers to fund non-qualified benefits or other postemployment benefit obligations as well as leveraged COLI. Life also includes in an Other category its international operations, which are primarily located in Latin America and Japan, as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. Property & Casualty was reorganized into six reportable operating segments and, effective January 1, 2001, is reported as the North American underwriting segments of Business Insurance, Affinity Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance; and the Other Operations segment, formerly International and Other Operations. Business Insurance provides standard commercial insurance coverage to small (Select Customer) and mid-sized (Key Accounts) insureds. This segment also provides commercial risk management products and services to small and mid-sized members of affinity groups in addition to marine coverage. Affinity Personal Lines provides customized products and services to the membership of AARP through a direct marketing operation; and to customers of Sears and Ford as well as customers of financial institutions through an affinity center. Personal Insurance provides automobile, homeowners and F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT INFORMATION (CONTINUED) home-based business coverages to individuals who prefer local agent involvement through a network of independent agents in the standard personal lines market and through Omni in the non-standard automobile market. Specialty Commercial provides property, bond and professional liability coverages as well as insurance through retailers and wholesalers to large commercial clients and insureds requiring a variety of specialized coverages. The Reinsurance segment assumes reinsurance worldwide and primarily writes treaty reinsurance through professional reinsurance brokers covering various property, casualty, specialty and marine classes of business. In October 2001, The Hartford's reinsurance segment announced a centralization of all underwriting and claims operations in Hartford, Connecticut. While exiting most international lines, HartRe will continue to write worldwide catastrophe, Alternative Risk Transfer ("ART") and marine from Hartford. For further discussion of this restructuring, see Note 18(c) of Notes to Consolidated Financial Statements. The Other Operations segment currently consists of certain property and casualty insurance operations of The Hartford which have discontinued writing new business. The Other Operations segment results also include activity for the Company's international property & casualty businesses up until their dates of sales. For further discussion regarding the sales of international subsidiaries, see Note 18(b). The measure of profit or loss used by The Hartford's management in evaluating performance is operating income (defined in previous years as "core earnings"), except for its North American underwriting segments, which are evaluated by The Hartford's management primarily based upon underwriting results. "Operating income" is defined as after-tax operational results excluding, as applicable, net realized capital gains and losses, the cumulative effect of accounting changes and certain other items. While not considered segments, the Company also reports and evaluates operating income results for Life, Property & Casualty and North American. North American includes the combined underwriting results of the North American underwriting segments along with income and expense items not directly allocable to these segments, such as net investment income. Property & Casualty includes operating income for North American and the 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 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 operating income (loss). Underwriting results are presented for the Business Insurance, Affinity Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance segments, while operating income is presented for all other segments, along with Life and Property & Casualty, including North American.
REPORTING SEGMENT INFORMATION For the years ended December 31, --------------------------------- REVENUES 2001 2000 1999 - ---------------------------------------------------------------------------------- Life Investment Products $ 2,506 $ 2,380 $ 2,041 Individual Life 890 640 584 Group Benefits 2,507 2,207 2,024 COLI 719 767 831 Other (73) (4) 56 - ---------------------------------------------------------------------------------- Total Life 6,549 5,990 5,536 - ---------------------------------------------------------------------------------- Property & Casualty North American Earned premiums and other revenue Business Insurance 2,645 2,298 2,202 Affinity Personal Lines 1,891 1,749 1,630 Personal Insurance 1,006 964 875 Specialty Commercial 1,242 1,202 1,069 Reinsurance 920 809 680 Ceded premiums related to September 11 (91) -- -- - ---------------------------------------------------------------------------------- Total earned premiums and other revenue 7,613 7,022 6,456 Net investment income 907 862 853 Net realized capital gains (losses) (108) 218 22 - ---------------------------------------------------------------------------------- Total North American 8,412 8,102 7,331 Other Operations 168 602 661 - ---------------------------------------------------------------------------------- Total Property & Casualty 8,580 8,704 7,992 - ---------------------------------------------------------------------------------- Corporate 18 9 -- - ---------------------------------------------------------------------------------- TOTAL REVENUES $ 15,147 $ 14,703 $ 13,528 ==================================================================================
F-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. SEGMENT INFORMATION (CONTINUED) For the years ended December 31, --------------------------------------- OPERATING INCOME (LOSS) 2001 2000 1999 - -------------------------------------------------------------------------------------------------------- Life Investment Products $ 463 $ 424 $ 330 Individual Life 121 79 71 Group Benefits 106 90 79 COLI 37 34 30 Other 73 5 (43) - -------------------------------------------------------------------------------------------------------- Total Life 800 632 467 - -------------------------------------------------------------------------------------------------------- Property & Casualty North American Underwriting results Business Insurance 3 (50) (123) Affinity Personal Lines (36) 17 19 Personal Insurance (42) (15) 15 Specialty Commercial (95) (103) (48) Reinsurance (149) (73) (48) - -------------------------------------------------------------------------------------------------------- Underwriting results excluding September 11 (319) (224) (185) September 11 (647) -- -- - -------------------------------------------------------------------------------------------------------- Total North American underwriting results (966) (224) (185) Net servicing and other income [1] 22 9 19 Net investment income 907 862 853 Other expenses [2] (189) (216) (212) Income tax (expense) benefit 206 (19) (41) - -------------------------------------------------------------------------------------------------------- Total North American (20) 412 434 Other Operations 6 17 22 - -------------------------------------------------------------------------------------------------------- Total Property & Casualty (14) 429 456 - -------------------------------------------------------------------------------------------------------- Corporate (62) (99) (86) - -------------------------------------------------------------------------------------------------------- TOTAL OPERATING INCOME 724 962 837 Restructuring charges, net of tax (11) -- -- Extraordinary loss from early retirement of debt, net of tax (8) -- -- Cumulative effect of accounting changes, net of tax (34) -- -- Net realized capital gains (losses), after-tax (164) 12 25 - -------------------------------------------------------------------------------------------------------- NET INCOME $ 507 $ 974 $ 862 ======================================================================================================== [1] Net of expenses related to service business. [2] 2001 excludes $15 related to restructuring charges.
As of December 31, --------------------------------------- ASSETS 2001 2000 1999 - -------------------------------------------------------------------------------------------------------- Life $ 151,612 $ 143,621 $ 139,033 Property & Casualty 28,829 27,094 28,018 Corporate 797 817 -- - -------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 181,238 $ 171,532 $ 167,051 ========================================================================================================
GEOGRAPHICAL SEGMENT INFORMATION For the years ended December 31, ---------------------------------------- REVENUES 2001 2000 1999 - -------------------------------------------------------------------------------------------------------- North America $ 15,003 $ 14,062 $ 12,826 Other 144 641 702 - -------------------------------------------------------------------------------------------------------- TOTAL REVENUES $ 15,147 $ 14,703 $ 13,528 ========================================================================================================
F-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT INFORMATION (CONTINUED)
REVENUES BY PRODUCT LINE For the years ended December 31, --------------------------------------------- REVENUES 2001 2000 1999 - ------------------------------------------------------------------------------------------------------------ Life Investment Products Individual annuity $ 1,492 $ 1,538 $ 1,354 Other 1,014 842 687 - ------------------------------------------------------------------------------------------------------------ Total Investment Products 2,506 2,380 2,041 Individual Life 890 640 584 Group Benefits 2,507 2,207 2,024 COLI 719 767 831 Other (73) (4) 56 - ------------------------------------------------------------------------------------------------------------ Total Life 6,549 5,990 5,536 - ------------------------------------------------------------------------------------------------------------ Property & Casualty North American Business Insurance Workers' Compensation 891 764 782 Property 770 646 570 Automobile 512 445 414 Liability 345 331 318 Other 127 112 118 - ------------------------------------------------------------------------------------------------------------ Total Business Insurance 2,645 2,298 2,202 Affinity Personal Automobile 1,350 1,239 1,151 Homeowners and other [1] 541 510 479 - ------------------------------------------------------------------------------------------------------------ Total Affinity Personal 1,891 1,749 1,630 Personal Insurance Automobile 747 717 645 Homeowners and other 259 247 230 - ------------------------------------------------------------------------------------------------------------ Total Personal Insurance 1,006 964 875 Specialty Commercial Workers' Compensation 126 118 118 Property 108 86 79 Automobile 20 19 25 Liability 151 72 20 Other [1] 837 907 827 - ------------------------------------------------------------------------------------------------------------ Total Specialty Commercial 1,242 1,202 1,069 Reinsurance 920 809 680 Ceded premiums related to September 11 (91) -- -- Net investment income 907 862 853 Net realized capital gains (losses) (108) 218 22 - ------------------------------------------------------------------------------------------------------------ Total North American 8,412 8,102 7,331 Other Operations 168 602 661 - ------------------------------------------------------------------------------------------------------------ Total Property & Casualty 8,580 8,704 7,992 - ------------------------------------------------------------------------------------------------------------ Corporate 18 9 -- - ------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 15,147 $ 14,703 $ 13,528 ============================================================================================================ [1] Includes servicing revenue.
F-33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING (A) ACQUISITIONS On April 2, 2001, The Hartford acquired Fortis Financial Group for $1.12 billion in cash. The Company effected the acquisition through several reinsurance agreements with subsidiaries of Fortis, Inc. and the purchase of 100% of the stock of Fortis Advisers, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis, Inc. The acquisition was accounted for as a purchase transaction and, as such, the revenues and expenses generated by this business from April 2, 2001 forward are included in the Company's Consolidated Statement of Income. Purchase consideration for the transaction was as follows: Issuance of: - ------------ Common stock issuance (10 million shares @ $64.00 per share), net of transaction costs $ 615 Long-term notes: $400 7.375% notes due March 1, 2031 400 Trust preferred securities: $200 7.625% Trust Preferred Securities (Series B) due February 15, 2050 200 - ----------------------------------------------------------------------- Consideration raised $ 1,215 ======================================================================= The assets and liabilities acquired in this transaction were recorded at values prescribed by applicable purchase accounting rules, which generally represent estimated fair value. In addition, an intangible asset representing the present value of future profits ("PVP") of the acquired business was established in the amount of $605. The PVP is amortized to expense in relation to the estimated gross profits of the underlying insurance contracts, and interest is accreted on the unamortized balance. For the year ended December 31, 2001, amortization of PVP amounted to $66. Goodwill of $553, representing the excess of the purchase price over the amount of net assets (including PVP) acquired, has also been recorded and was amortized on a straight-line basis until January 1, 2002. On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI that it did not already own. For additional discussion, see Note 16, Transactions with Affiliates. (B) DISPOSITIONS In September 2001, The Hartford entered an agreement to sell its Singapore-based Hartford Insurance Company (Singapore), Ltd. The Company recorded a net realized capital loss of $9 after-tax related to the sale, which was completed in January 2002. On September 7, 2001, HLI completed the sale of its ownership interest in an Argentine subsidiary, Sudamerica Holding S.A. The Company recorded an after-tax net realized capital loss of $21 related to the sale. On February 8, 2001, The Hartford completed the sale of its Spain-based subsidiary, Hartford Seguros. The Hartford received $29 before costs of sale and recorded an after-tax net realized capital loss of $16. On December 22, 2000, The Hartford completed the sale of its Netherlands-based Zwolsche subsidiary. 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 a portion of the proceeds from the sale to reduce outstanding commercial paper which was issued to partially fund The HLI Repurchase. (C) RESTRUCTURING During the fourth quarter of 2001, the Company approved and implemented plans for restructuring the operations of both HartRe and The Hartford Bank. In October 2001, HartRe announced a restructuring of its entire international and domestic operations, with the purpose of centralizing the underwriting organization in Hartford, Connecticut. Also during the fourth quarter, the Boards of Directors for both The Hartford Bank and The Hartford Financial Services Group, Inc., approved The Hartford Bank's dissolution plan. Both plans will be completed during 2002. Primarily as a result of these restructuring plans, the Company recorded a fourth quarter pretax charge of approximately $16, which is classified within "Other Expenses" on the 2001 Consolidated Statement of Income. This amount includes $8 in employee-related costs, $5 in occupancy-related costs and the remaining $3 in other restructuring related costs. The 79 employees terminated under these restructuring plans primarily relate to all levels of the underwriting and claims areas. As of December 31, 2001, the Company has not paid any severance costs. The occupancy-related costs represent the remaining lease liabilities for both the domestic and international offices of HartRe to be closed pursuant to the restructuring plan. F-34
19. QUARTERLY RESULTS FOR 2001 AND 2000 (UNAUDITED) Three Months Ended --------------------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, --------------------------------------------------------------------------------------------- 2001 2000 2001 2000 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues $ 3,722 $ 3,499 $ 3,847 $ 3,514 $ 3,722 $ 3,791 $ 3,856 $ 3,899 Benefits, claims and expenses $ 3,401 $ 3,155 $ 3,552 $ 3,256 $ 4,148 $ 3,472 $ 3,692 $ 3,402 Net income (loss) [1] $ 240 $ 238 $ 226 $ 213 $ (103) $ 250 $ 144 $ 273 Basic earnings (loss) per share [1] $ 1.04 $ 1.10 $ 0.95 $ 0.98 $ (0.43) $ 1.11 $ 0.59 $ 1.21 Diluted earnings (loss) per share [1] [2] $ 1.02 $ 1.10 $ 0.94 $ 0.97 $ (0.43) $ 1.09 $ 0.58 $ 1.18 Weighted average common shares outstanding 231.5 215.8 237.3 216.5 238.0 224.4 244.1 225.7 Weighted average common shares outstanding and dilutive potential common shares [2] 235.5 217.3 241.3 219.9 238.0 229.3 247.1 231.0 ==================================================================================================================================== [1] Included in the quarter ended September 30, 2001 are after-tax losses of $440 ($1.85 per basic and diluted share) related to September 11 and $130 of tax benefits ($0.55 per basic and diluted share) in Life primarily related to the expected favorable treatment of certain tax matters arising during the 1996-2000 tax years. [2] As a result of the net loss in the quarter ended September 30, 2001, SFAS 128, "Earnings Per Share", requires the Company to use basic weighted average shares outstanding in the calculation of third quarter 2001 diluted earnings per share, as the inclusion of options and contingently issuable shares of 3.7 would have been antidilutive to the earnings per share calculation. In the absence of the net loss, weighted average common shares outstanding and dilutive potential common shares would have totaled 241.7.
F-35
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE I SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES (In millions) As of December 31, 2001 ------------------------------------------- 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) $ 559 $ 575 $ 575 U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) - asset-backed 1,925 1,968 1,968 States, municipalities and political subdivisions 9,642 10,060 10,060 International governments 938 1,003 1,003 Public utilities 1,470 1,469 1,469 All other corporate including international 13,187 13,428 13,428 All other corporate - asset-backed 8,469 8,580 8,580 Short-term investments 2,104 2,107 2,107 Certificates of deposit 708 700 700 Redeemable preferred stock 152 156 156 - -------------------------------------------------------------------------------------------------------------------- TOTAL FIXED MATURITIES 39,154 40,046 40,046 - -------------------------------------------------------------------------------------------------------------------- EQUITY SECURITIES Common stocks Public utilities 19 15 15 Banks, trusts and insurance companies 87 94 94 Industrial and miscellaneous 757 815 815 Nonredeemable preferred stocks 426 425 425 - -------------------------------------------------------------------------------------------------------------------- TOTAL EQUITY SECURITIES 1,289 1,349 1,349 - -------------------------------------------------------------------------------------------------------------------- TOTAL FIXED MATURITIES AND EQUITY SECURITIES 40,443 41,395 41,395 - -------------------------------------------------------------------------------------------------------------------- REAL ESTATE 2 2 2 OTHER INVESTMENTS Mortgage loans on real estate 387 387 387 Policy loans 3,317 3,317 3,317 Investments in partnerships and trusts 1,312 1,372 1,372 Futures, options and miscellaneous 134 216 216 - -------------------------------------------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS 5,150 5,292 5,292 - -------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS $ 45,595 $ 46,689 $ 46,689 ====================================================================================================================
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 2001 2000 - -------------------------------------------------------------------------------------------------- ASSETS Receivables from affiliates $ 162 $ 212 Other assets 216 119 Investment in affiliates 11,254 9,680 - -------------------------------------------------------------------------------------------------- TOTAL ASSETS 11,632 10,011 - -------------------------------------------------------------------------------------------------- LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt 599 235 Long-term debt 919 1,218 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely parent junior subordinated debentures 968 1,000 Other liabilities 133 94 - -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 2,619 2,547 TOTAL STOCKHOLDERS' EQUITY 9,013 7,464 - -------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 11,632 $ 10,011 ==================================================================================================
(In millions) STATEMENTS OF INCOME For the years ended December 31, --------------------------------------- 2001 2000 1999 - ------------------------------------------------------------------------------------------------------ Earnings of subsidiaries $ 641 $ 1,096 $ 944 Interest expense (net of interest income) 190 186 150 Other expenses (income) 3 3 1 - ------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES AND EXTRAORDINARY ITEM 448 907 793 Income tax expense (benefit) (67) (67) (69) Extraordinary loss from early retirement of debt, net of tax (8) -- -- - ------------------------------------------------------------------------------------------------------ NET INCOME $ 507 $ 974 $ 862 ======================================================================================================
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, --------------------------------------- 2001 2000 1999 - -------------------------------------------------------------------------------------------------------------------- OPERATING ACTIVITIES Net income $ 507 $ 974 $ 862 Undistributed earnings of subsidiaries (555) (436) (86) Change in working capital 45 48 (28) - -------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (3) 586 748 - -------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Net purchase of short-term investments (41) -- -- Capital contribution to subsidiary (854) (1,325) -- - -------------------------------------------------------------------------------------------------------------------- CASH USED FOR INVESTING ACTIVITIES (895) (1,325) -- - -------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Net increase in debt 48 520 -- Issuance of common stock 1,015 398 -- Dividends paid (235) (210) (207) Acquisition of treasury stock (7) (100) (596) Proceeds from issuances of shares under incentive and stock purchase plans 77 131 55 - -------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 898 739 (748) - -------------------------------------------------------------------------------------------------------------------- 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 $ 192 $ 184 $ 148
S-3
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (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 - --------------------------------------------------------------------------------------------------------------------- 2001 Life $ 5,572 $ 8,842 $ 45 $ 19,357 $ 4,903 $ 1,779 P&C 847 16,678 3,399 -- 7,630 1,053 Corporate 1 (23) (8) (2) -- 18 - --------------------------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS $ 6,420 $ 25,497 $ 3,436 $ 19,355 $ 12,533 $ 2,850 ===================================================================================================================== 2000 Life $ 4,527 $ 7,074 $ 54 $ 15,849 $ 4,486 $ 1,592 P&C 777 15,934 3,048 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 Life $ 4,210 $ 6,236 $ 48 $ 16,873 $ 3,979 $ 1,562 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 ===================================================================================================================== [1] Also includes present value of future profits for 2001 and 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.
SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2001, 2000 AND 1999 (CONTINUED) (In millions) Benefits, Amortization Claims and of Deferred Net Realized Claim Policy Capital Adjustment Acquisition Other Net Written Gains(Losses) Expenses Costs[1] Expenses Premiums - ---------------------------------------------------------------------------------------------------- 2001 Life $ (133) $ 3,611 $ 642 $ 1,531 $ N/A P&C (103) 6,146 1,572 1,197 7,585 Corporate -- 7 -- 87 N/A - ---------------------------------------------------------------------------------------------------- CONSOLIDATED OPERATIONS $ (236) $ 9,764 $ 2,214 $ 2,815 $ 7,585 ==================================================================================================== 2000 Life $ (88) $ 3,162 $ 671 $ 1,369 $ N/A 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 Life $ (5) $ 3,054 $ 568 $ 1,228 $ N/A 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 ==================================================================================================== [1] Also includes present value of future profits for 2001 and 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 Percentage of Gross Other From Other Net Ammount (In millions) Amount Companies Companies Amount Assumed to Net - ------------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2001 Life insurance in force $ 534,489 $ 142,352 $ 50,828 $ 442,965 11% =============================================================================================================================== INSURANCE REVENUES Property and casualty insurance $ 7,625 $ 1,075 $ 1,035 $ 7,585 14% Life insurance 3,661 282 81 3,460 2% Accident and health insurance 1,408 116 151 1,443 10% - ------------------------------------------------------------------------------------------------------------------------------- TOTAL INSURANCE REVENUES $ 12,694 $ 1,473 $ 1,267 $ 12,488 10% =============================================================================================================================== 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% ===============================================================================================================================
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, - --------------------------------------------------------------------------------------------------------------------- 2001 ---- Allowance for doubtful accounts $ 127 $ 60 $ (1) $ (53) $ 133 Accumulated depreciation of plant, property and equipment 675 95 -- (49) 721 Reserve for restructuring charges -- 16 -- -- 16 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 - ---------------------------------------------------------------------------------------------------------------------
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE VI SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS Discount Claims and Claim Adjustment Paid Claims and Deducted From Expenses Incurred Related to: Claim Adjustment ---------------------------------- (In millions) Liabilities [1] Current Year Prior Years Expenses - ------------------------------------------------------------------------------------------------------------------------------------ Years ended December 31, 2001 $ 429 $ 5,992 $ 143 $ 5,592 2000 $ 396 $ 5,170 $ 27 $ 5,334 1999 $ 480 $ 4,953 $ (171) $ 5,161 ==================================================================================================================================== [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 5.1%, 5.7% and 6.3% for 2001, 2000 and 1999, 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 18, 2002 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 18, 2002 - ---------------------- Ramani Ayer Executive Officer and Director /S/ THOMAS A. MARRA Executive Vice President and Director March 18, 2002 - ---------------------- Thomas A. Marra /S/ DAVID K. ZWIENER Executive Vice President and Director March 18, 2002 - ---------------------- David K. Zwiener /S/ DAVID M. JOHNSON Executive Vice President March 18, 2002 - ---------------------- David M. Johnson and Chief Financial Officer /S/ JOHN N. GIAMALIS Senior Vice President March 18, 2002 - ---------------------- John N. Giamalis and Controller /S/ RAND V. ARASKOG Director March 18, 2002 - ---------------------- Rand V. Araskog /S/ DINA DUBLON Director March 18, 2002 - ---------------------- Dina Dublon /S/ DONALD R. FRAHM Director March 18, 2002 - ---------------------- Donald R. Frahm /S/ EDWARD J. KELLY Director March 18, 2002 - ---------------------- Edward J. Kelly /S/ PAUL G. KIRK, JR. Director March 18, 2002 - ---------------------- Paul G. Kirk, Jr. /S/ ROBERT W. SELANDER Director March 18, 2002 - ---------------------- Robert W. Selander /S/ CHARLES B. STRAUSS Director March 18, 2002 - ---------------------- Charles B. Strauss /S/ H. PATRICK SWYGERT Director March 18, 2002 - ---------------------- H. Patrick Swygert /S/ GORDON I. ULMER Director March 18, 2002 - ---------------------- Gordon I. Ulmer II-1 THE HARTFORD FINANCIAL SERVICES GROUP, INC. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001 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 NO. DESCRIPTION - ----------- ----------- 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 (incorporated herein by reference as indicated in Exhibits 3.01 and 3.02, respectively). 4.02 Rights Agreement dated as of November 1, 1995, (the "Rights Agreement"), 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). 4.07 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 (the "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. 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. II-2 EXHIBITS INDEX (CONTINUED) EXHIBIT NO. - ----------- 4.15 Preferred Security Certificate for Hartford Capital I (included as Exhibit E to 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 Company, 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. 4.19 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, (the "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 that is incorporated by reference as Exhibit 4.19 hereto). 4.21 Preferred Security Certificate for Hartford Capital II (included as Exhibit E to the Amended and Restated Trust Agreement that is incorporated by reference as Exhibit 4.19 hereto). 4.22 Guarantee Agreement, dated as of October 30, 1996, between The Hartford and Wilmington Trust Company, 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 was filed as Exhibit 4.24 to The Hartford's Form 10-K for the fiscal year ended December 31, 2000 and is incorporated herein by reference. 4.25 Form of The Hartford's 7.90% Senior Notes due June 15, 2010 was filed as Exhibit 4.25 to The Hartford's Form 10-K for the fiscal year ended December 31, 2000 and is incorporated herein by reference. 4.26 Junior Subordinated Indenture, dated October 30, 1996, between ITT Hartford Group, Inc. and Wilmington Trust Company, as trustee, was filed as Exhibit 4.16 to ITT Hartford Group, Inc.'s Form 10-K for the fiscal year ended December 31, 1996 and is incorporated herein by reference. 4.27 Supplemental Indenture, dated as of October 26, 2001, between The Hartford and Wilmington Trust Company, as trustee, to the Junior Subordinated Indenture between The Hartford and Wilmington Trust Company, as trustee. + 4.28 Amended and Restated Trust Agreement, dated as of October 26, 2001, of Hartford Capital III, relating to the 7.45% Trust Originated Preferred Securities, Series C, (the "Series C Preferred Securities"). + 4.29 Agreement as to Expenses and Liabilities, dated as of October 26, 2001, between The Hartford and Hartford Capital III. + 4.30 Preferred Security Certificate for Hartford Capital III. + 4.31 Guarantee Agreement, dated as of October 26, 2001, between The Hartford and Wilmington Trust Company, relating to The Hartford's guarantee of the Series C Preferred Securities. + 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 NO. - ----------- 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, as amended. + *10.18 The Hartford 1996 Deferred Restricted Stock Unit Plan, as amended. + *10.19 The Hartford 1996 Deferred Compensation Plan, as amended. + II-4 EXHIBITS INDEX (CONTINUED) EXHIBIT NO. - ----------- *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 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 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 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 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 for the quarterly period ended June 30, 1997 and is incorporated herein by reference. 10.27 Employment Agreement, dated as of March 20, 2001, between The Hartford and Neal Wolin as Executive Vice President and General Counsel was filed as Exhibit 10.1 to The Hartford's Form 10-Q for the quarterly period ended March 31, 2001 and is incorporated herein by reference. 10.28 Employment Agreement, dated as of April 26, 2001, between The Hartford and David M. Johnson as Executive Vice President and Chief Financial Officer was filed as Exhibit 10.2 to The Hartford's Form 10-Q for the quarterly period ended March 31, 2001 and is incorporated herein by reference. 10.29 Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement, dated as of June 20, 2001, among The Hartford Financial Services Group, Inc., the lenders named therein, and The Chase Manhattan Bank and Bank of America, N.A. as co-administrative agents was filed as Exhibit 10.1 to The Hartford's Form 10-Q for the quarterly period ended June 30, 2001 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. + Filed with the Securities and Exchange Commission as an exhibit to this report. II-5 EX-4 3 exh4_27.txt EXHIBIT 4.27 ================================================================================ EXHIBIT 4.27 THE HARTFORD FINANCIAL SERVICES GROUP, INC. to WILMINGTON TRUST COMPANY, as Trustee SUPPLEMENTAL INDENTURE Dated as of October 26, 2001 7.45% Junior Subordinated Deferrable Interest Debentures Series C, Due October 26, 2050 ================================================================================ THE HARTFORD FINANCIAL SERVICES GROUP, INC. SUPPLEMENTAL INDENTURE 7.45% Junior Subordinated Deferrable Interest Debentures Series C, Due October 26, 2050 SUPPLEMENTAL INDENTURE, dated as of October 26, 2001, between THE HARTFORD FINANCIAL SERVICES GROUP, INC., a Delaware corporation (the "Company"), and WILMINGTON TRUST COMPANY, a Delaware banking corporation, as Trustee (the "Trustee"). Recitals -------- The Company has heretofore executed and delivered to the Trustee a Junior Subordinated Indenture, dated as of October 30, 1996 (the "Indenture"), providing for the issuance from time to time of series of the Company's Securities. Section 301 of the Indenture provides for various matters with respect to any series of Securities issued under the Indenture to be established in an indenture supplemental to the Indenture. Section 901(3) of the Indenture provides for the Company and the Trustee to enter into an indenture supplemental to the Indenture to establish the form or terms of Securities of any series as provided by Sections 201 and 301 of the Indenture. For and in consideration of the premises and the issuance of the series of Securities provided for herein, it is mutually covenanted and agreed, for the equal and proportionate benefit of the Holders of the Securities of such series, as follows: ARTICLE 1 Relation to Indenture; Definitions Section 1.1. This Supplemental Indenture constitutes an integral part of the Indenture. Section 1.2. For all purposes of this Supplemental Indenture: (1) Capitalized terms used herein without definition shall have the meanings specified in the Indenture or in the Amended and Restated Trust Agreement, dated as of October 26, 2001, among the Company, as Depositor, Wilmington Trust Company, as Property Trustee and Delaware Trustee, and the Administrative Trustees named therein, as the case may be; (2) All references herein to Articles and Sections, unless otherwise specified, refer to the corresponding Articles and Sections of this Supplemental Indenture; and (3) The terms "herein", "hereof", "hereunder" and other words of similar import refer to this Supplemental Indenture. ARTICLE 2 The Series of Securities Section 2.1. Title of the Securities. There shall be a series of ------------------------ Securities designated the "7.45% Junior Subordinated Deferrable Interest Debentures, Series C, due October 26, 2050" (the "Securities"). Section 2.2. Limitation on Aggregate Principal Amount; Date of ------------------------------------------------------- Securities. The aggregate principal amount of the Securities shall be limited to - ---------- $515,463,925 (and up to an additional $77,319,600 if and to the extent the overallotment option granted by the Trust to the purchasers of the Preferred Securities is exercised); provided, however, that the authorized aggregate -------- ------- principal amount of the Securities may be increased above such amount by a Board Resolution to such effect. Each Security shall be dated the date of its authentication. Section 2.3. Principal Payment Date. The principal amount of the ------------------------ Securities Outstanding (together with any accrued and unpaid interest (including any Additional Interest) thereon) shall be payable in a single installment on October 26, 2050. Section 2.4. Interest and Interest Rates. The rate of interest on each --------------------------- Security shall be 7.45% per annum, accruing from October 26, 2001 and, subject to Section 2.5, interest shall be payable, quarterly in arrears, on January 2, April 1, July 1 and October 1 of each year (each such date, an "Interest Payment Date"), commencing January 2, 2002. The rate of any Additional Interest that shall accrue on each Security shall be at the same rate per annum. The amount of interest payable for any period shall be computed on the basis of a 360-day year of twelve 30-day months. The amount of interest payable for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on a Security is not a Business Day, then a payment of the interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding - 2 - Business Day, in each case with the same force and effect as if made on the date such payment was originally payable. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date shall be paid to the Person in whose name such Security (or one or more Predecessor Securities) is registered at the close of business on the Regular Record Date for such interest installment, which shall be the close of business on the Business Day next preceding such Interest Payment Date. The interest so payable on any Security which is not punctually paid or duly provided for on any Interest Payment Date shall forthwith cease to be payable to the Holder on such Regular Record Date and may either be paid to the Person in whose name such 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 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 may be listed, and upon such notice as may be required by such exchange, all as more fully provided in the Indenture. Section 2.5. Extension of Interest Payment Period. (a) The Company --------------------------------------- shall have the right, at any time during the term of the Securities, from time to time, to extend the interest payment period on the Securities for up to 20 consecutive quarters with respect to each deferred period (each, an "Extension Period") during which periods the Company shall have the right to make partial payments of interest on any Interest Payment Date, and at the end of such Extension Period the Company shall pay all interest then accrued and unpaid thereon (together with Additional Interest thereon, if any, at the annual rate of 7.45% to the extent permitted by applicable law), provided, however, that -------- ------- during any such Extension Period, the Company shall not, and shall cause any Subsidiary not to, (i) declare or pay any dividends or distributions on, or - redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company's capital stock, or (ii) make any payment of principal, interest or -- premium, if any, on or repay, repurchase or redeem any debt securities that rank pari passu with or junior in interest to the Securities or make any guarantee - ---- ----- payments with respect to the foregoing (other than (A) dividends or - distributions payable solely in common stock of the Company, (B) redemptions or - purchases of any rights pursuant to the Company's Rights Plan, or any successor to such Rights Plan, and the declaration of a dividend of such rights in the future, and (C) payments under any Hartford Guarantee). Prior to the termination - of any such Extension Period, the Company may further extend the interest payment period, provided that such Extension Period together with all such -------- previous and further extensions of such Extension Period shall not exceed 20 consecutive quarters or extend beyond the Maturity of the Securities. Upon termination of any such Extension Period and upon the payment of all accrued and unpaid interest and any Additional Interest then due, the Company may select a new Extension Period, subject to the above requirements. No interest shall be due and payable during an Extension Period, except at the end thereof. The Company shall give the Holders of the Securities and the Property Trustee, the - 3 - Administrative Trustees and the Trustee notice of its selection of such Extension Period at least one Business Day prior to the earlier of (i) the date - the Distributions on the Preferred Securities are payable or (ii) the date the -- Administrative Trustees are required to give notice to the New York Stock Exchange or other applicable self-regulatory organization or to holders of such Preferred Securities of the record date or the date such Distributions are payable, but in any event not less than one Business Day prior to such record date. The Trustee shall promptly give notice of the Company's selection of such Extension Period to the holders of the outstanding Preferred Securities. Section 2.6. Place of Payment. The Place of Payment where the ------------------ Securities may be presented or surrendered for payment, where the Securities may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Company in respect of the Securities and the Indenture may be served shall be the Corporate Trust Office of the Trustee. Section 2.7. Redemption. At any time on or after October 26, 2006, the ---------- Company may, at its option, subject to the terms and conditions of Article Eleven of the Indenture, redeem the Securities in whole at any time or in part from time to time, without premium or penalty, at a redemption price equal to the accrued and unpaid interest, including Additional Interest, if any, to the date fixed for redemption, plus 100% of the principal amount thereof. At any time prior to October 26, 2006, the Company may, at its option, subject to the terms and conditions of Article Eleven of the Indenture, redeem the Securities in whole at any time or in part from time to time, without premium or penalty, at a redemption price equal to the accrued and unpaid interest, including Additional Interest, if any, to the date fixed for redemption, plus the greater of (a) the principal amount thereof and (b) an - - amount equal to the Discounted Remaining Payments to Initial Optional Prepayment Date (as defined herein). "Discounted Remaining Payments to Initial Optional Prepayment Date" --------------------------------------------------------------------- means an amount equal to the sum of the Current Values of the amounts of interest and principal that would have been payable by the Company pursuant to the terms of the Securities on each Interest Payment Date after the redemption date through and including October 26, 2006, assuming redemption of the Securities on October 26, 2006, discounted to the redemption date at the Treasury Rate. The "Treasury Rate" is a per annum rate, expressed as a decimal and, in the case of United States Treasury bills, converted to a per annum yield, determined on the redemption date to be the per annum rate equal to the semiannual bond equivalent yield to maturity, adjusted to reflect quarterly compounding for United States Treasury securities maturing on October 26, 2006. The Company will determine this rate by reference to the weekly average yield to maturity for United States Treasury securities - 4 - maturing on October 26, 2006 if reported in the most recent Statistical Release H.15(519) of the Board of Governors of the Federal Reserve. If no such securities mature on that date, the Company will determine the rate by interpolation between the most recent weekly average yields to maturity for two series of United States Treasury securities, (1) one maturing as close as - possible to, but earlier than, October 26, 2006 and (2) the other maturing as - close as possible to, but later than, October 26, 2006, in each case as published in the most recent Statistical Release H.15(519) of the Board of Governors of the Federal Reserve. If a Special Event in respect of Hartford Capital III shall occur and be continuing, the Company may, at its option, redeem the Securities on any Interest Payment Date falling within 90 days of the occurrence of such Special Event, in whole but not in part, subject to the provisions of Article Eleven of the Indenture. The redemption price for any Security so redeemed shall be equal to 100% of the principal amount thereof plus accrued and unpaid interest, including Additional Interest, if any, to the date fixed for redemption. Section 2.8. Denomination. The Securities shall be in registered form ------------ without coupons and shall be issuable in denominations of $25 and integral multiples thereof. Section 2.9. Currency. Principal and interest on the Securities shall -------- be payable in Dollars. Section 2.10. Form of Securities. The Securities shall be substantially ------------------ in the form attached as Exhibit A hereto. Section 2.11. Securities Registrar and Paying Agent. The Trustee shall ------------------------------------- initially serve as Securities Registrar and Paying Agent. Section 2.12. Sinking Fund Obligations. The Company has no obligation ------------------------ to redeem or purchase any Securities pursuant to any sinking fund or analogous requirement or upon the happening of a specified event or at the option of a Holder thereof. ARTICLE 3 Miscellaneous Provisions Section 3.1. The Indenture, as supplemented and amended by this Supplemental Indenture, is in all respects hereby adopted, ratified and confirmed. Section 3.2. This Supplemental Indenture may be executed in any number of counterparts, each of which shall be an original, but such counterparts shall together constitute but one and the same instrument. - 5 - SECTION 3.3. THIS SUPPLEMENTAL INDENTURE AND EACH SECURITY SHALL BE DEEMED TO BE A CONTRACT MADE UNDER THE LAWS OF THE STATE OF NEW YORK AND SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. - 6 - IN WITNESS WHEREOF, the parties hereto have caused this Supplemental Indenture to be duly executed, as of the day and year first written above. THE HARTFORD FINANCIAL SERVICES GROUP, INC. By: /s/ DAVID M. JOHNSON ------------------------------------- Name: David M. Johnson Title: Executive Vice President and Chief Financial Officer By: /s/ J. RICHARD GARRETT ------------------------------------- Name: J. Richard Garrett Title: Senior Vice President, Treasurer [Seal] Attest: /s/ LINDA C. SAYLER -------------------------- Name: Linda C. Sayler Title: Counsel WILMINGTON TRUST COMPANY, as Trustee By: /s/ MARY C. ST. AMAND ------------------------------------- Name: Mary C. St. Amand Title: Assistant Vice President [Seal] Attest: /s/ MARY KAY PUPILLO -------------------------- Name: Mary Kay Pupillo Title: Senior Financial Services Officer - 7 - Exhibit A --------- [FORM OF FACE OF SECURITY] [Unless this Security is presented by an authorized representative of The Depository Trust Company (the "DTC"), a New York corporation, New York, New York to The Hartford Financial Services Group, Inc., or its agent for registration of transfer, exchange or payment, and any Security issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of the DTC and any payment hereon is made to Cede & Co.; or such other entity as is requested by an authorized representative of the DTC, any transfer, pledge or other use hereof for value or otherwise by a person is wrongful inasmuch as the registered owner hereof, Cede & Co., has an interest herein. This Security is a Global Security within the meaning of the Indenture hereinafter referred to and is registered in the name of the DTC or a nominee of the DTC. This Security is exchangeable for Securities registered in the name of a person other than the DTC or its nominee only in the limited circumstances described in the Indenture and no transfer of this Security (other than a transfer of this Security as a whole by the DTC to a nominee of the DTC or by a nominee of the DTC to the DTC or another nominee of the DTC) may be registered except in limited circumstances.] THE HARTFORD FINANCIAL SERVICES GROUP, INC. 7.45% Junior Subordinated Deferrable Interest Debentures Series C, Due October 26, 2050 No._______ $__________ THE HARTFORD FINANCIAL SERVICES 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 ________ , or registered assigns, the principal sum of _________ Dollars on October 26, 2050. The Company further promises to pay interest on said principal sum from October 26, 2002 or from the most recent interest payment date (each such date, an "Interest Payment ---------------- Date") on which interest has been paid or duly provided for, quarterly (subject - ---- to deferral as set forth herein) in arrears on January 2, April 1, July 1 and October 1 of each year, commencing January 2, 2002, at the rate of 7.45% per annum, until the principal hereof shall have become due and payable, plus Additional Interest, if any, until the principal hereof is paid or duly provided for or made available for payment and on any overdue principal and (without duplication and to the extent that payment of such interest is enforceable under applicable law) on any overdue installment of interest at the rate of 7.45% per annum, compounded quarterly. The amount of interest payable for any period will be computed on the basis of twelve 30-day months and a 360-day year. The amount of interest payable for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. In the event that any date on which interest is payable on this Security is not a Business Day, then a payment of the interest payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day is in the next succeeding calendar year, such payment shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on the date the payment was originally payable. A "Business Day" shall mean any day other than a day on which banking ------------- institutions in the City of New York are authorized or required by law or executive order to remain closed or a day on which the Corporate Trust Office of the Trustee or the principal office of the Property Trustee under the Trust Agreement hereinafter referred to for Hartford Capital III, is closed for business. The interest installment so payable, and punctually paid or duly provided for, on any Interest Payment Date will, as provided in the Indenture, be paid to the Person in whose name this Security (or one or more Predecessor Securities, as defined in the Indenture) is registered at the close of business on the Regular Record Date for such interest installment, which shall be the close of business on the Business Day next preceding such Interest Payment Date. Any such interest installment not so punctually paid or duly provided for shall 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. The Company shall have the right at any time during the term of this Security, from time to time, to extend the interest payment period of such Security for up to 20 consecutive quarters with respect to each deferral period (each an "Extension Period"), during which periods the Company shall have the ----------------- right to make partial payments of interest on any Interest Payment Date, and at the end of which the Company shall pay all interest then accrued and unpaid (together with Additional Interest thereon to the extent permitted by applicable law); provided that during any such Extension Period, the Company will not, and -------- will not permit any Subsidiary of the Company to (i) declare or pay any - dividends or distributions or redeem, purchase, acquire or make a liquidation payment with respect to, any of the Company's outstanding capital stock or (ii) -- make any payment of principal, interest or premium, if any, on or repay, repurchase or redeem any debt security that rank pari passu with or junior in ---- ----- interest to this Security or make any - 2 - guarantee payments with respect to the foregoing (other than (A) dividends or - distributions payable solely in common stock of the Company, (B) redemptions or - purchases of any rights pursuant to the Company's Rights Plan, or any successor to such Rights Plan, and the declaration of a dividend of such rights in the future, and (C) payments under any Hartford Guarantee (as defined in the - Indenture)). Prior to the termination of any such Extension Period, the Company may further extend the interest payment period, provided that such Extension -------- Period together with all such previous and further extensions of such Extension Period, shall not exceed 20 consecutive quarters or extend beyond the Maturity of this Security. Upon the termination of any such Extension Period and upon the payment of all accrued and unpaid interest and any Additional Interest then due, the Company may select a new Extension Period, subject to the above requirements. No interest shall be due and payable during an Extension Period except at the end thereof. The Company shall give the Holder of this Security and the Trustee notice of its selection of an Extension Period at least one Business Day prior to the earlier of (i) the date the Distributions on the - Preferred Securities are payable or (ii) the date the Administrative Trustees -- are required to give notice to the New York Stock Exchange or other applicable self-regulatory organization or to holders of such Preferred Securities of the record date or the date such Distributions are payable, but in any event not less than one Business Day prior to such record date. 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 United States, 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 (i) by check mailed to the address of the Person entitled - thereto as such address shall appear in the Securities Register or (ii) by wire -- transfer in immediately available funds at such place and to such account as may be designated by the Person entitled thereto as specified in the Securities Register. The indebtedness evidenced by this Security is, to the extent provided in the Indenture, subordinate and subject in right of payments to the prior payment in full of all Senior Debt, and this Security is issued subject to the provisions of the Indenture with respect thereto. Each Holder of this Security, by accepting the same, (a) agrees to and shall be bound by such provisions, (b) - - authorizes and directs the Trustee on his behalf to take such actions as may be necessary or appropriate to effectuate the subordination so provided and (c) - appoints the Trustee his attorney-in-fact for any and all such purposes. Each Holder hereof, by his acceptance hereof, waives all notice of the acceptance of the subordination provisions contained herein and in the Indenture by each holder of Senior Debt, whether now outstanding or hereafter incurred, and waives reliance by each such holder upon said provisions. - 3 - 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. - 4 - 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: ________________________________ [Chairman and Chief Executive Officer, President or Vice President] Attest: ________________________________ [Secretary; Corporate Secretary or Assistant Secretary] - 5 - [FORM OF 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 Junior Subordinated Indenture, dated as of October 30, 1996 (herein called the "Indenture"), between the Company and Wilmington Trust --------- Company, as Trustee (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 Trustee, the Company 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 $515,463,925 (and up to an additional $77,319,600 if and to the extent the overallotment option granted by the Trust to the purchasers of the Preferred Securities is exercised). All terms used in this Security that are defined in the Indenture or in the Amended and Restated Trust Agreement, dated as of October 26, 2001 (the "Trust Agreement"), among The Hartford Financial Services Group, Inc. as ---------------- Depositor, and the Trustees named therein, for Hartford Capital III, shall have the meanings assigned to them in the Indenture or the Trust Agreement, as the case may be. At any time on or after October 26, 2006, the Company may, at its option, subject to the terms and conditions of Article Eleven of the Indenture, redeem this Security in whole at any time or in part from time to time, without premium or penalty, at a redemption price equal to the accrued and unpaid interest, including Additional Interest, if any, to the date fixed for redemption, plus 100% of the principal amount thereof. At any time prior to October 26, 2006, the Company may, at its option, subject to the terms and conditions of Article Eleven of the Indenture, redeem this Security in whole at any time or in part from time to time, without premium or penalty, at a redemption price equal to the accrued and unpaid interest, including Additional Interest, if any, to the date fixed for redemption, plus the greater of (a) the principal amount thereof and (b) an amount equal to the Discounted Remaining Payments to Initial Optional Prepayment Date (as defined herein). "Discounted Remaining Payments to Initial Optional Prepayment Date" --------------------------------------------------------------------- means an amount equal to the sum of the Current Values of the amounts of interest and principal that would have been payable by the Company pursuant to the terms of the Securities on each Interest Payment Date after the redemption date through and including October 26, 2006, assuming redemption of the Securities on October 26, 2006, discounted to the redemption date at the Treasury Rate. The "Treasury Rate" is a per annum rate, expressed as a decimal and, in the case of United States Treasury bills, converted to a per annum yield, determined on the redemption date to be the per annum rate equal to the semiannual bond equivalent yield to maturity, adjusted to reflect quarterly compounding for United States Treasury securities maturing on October 26, 2006. The Company will determine this rate by reference to the weekly average yield to maturity for United States Treasury securities maturing on October 26, 2006 if reported in the most recent Statistical Release H.15(519) of the Board of Governors of the Federal Reserve. If no such securities mature on that date, the Company will determine the rate by interpolation between the most recent weekly average yields to maturity for two series of United States Treasury securities, (1) one maturing as close as - possible to, but earlier than, October 26, 2006 and (2) the other maturing as - close as possible to, but later than, October 26, 2006, in each case as published in the most recent Statistical Release H.15(519) of the Board of Governors of the Federal Reserve. If a Special Event in respect of Hartford Capital III shall occur and be continuing, the Company may, at its option, redeem this Security on any Interest Payment Date falling within 90 days of the occurrence of such Special Event, in whole but not in part, subject to the provisions of Section 1107 and the other provisions of Article Eleven of the Indenture. The redemption price for any Security so redeemed shall be equal to 100% of the principal amount thereof plus accrued and unpaid interest, including Additional Interest, if any, to the date fixed for redemption. 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. 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, with the effect and subject to the conditions provided in the Indenture. The Indenture contains provisions for satisfaction, discharge and defeasance at any time of the entire indebtedness of this Security upon compliance by the Company with certain conditions set forth 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 of each series at the time Outstanding of each series to be affected. The Indenture also contains provisions permitting 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 this Security and of any Security issued upon the registration of transfer - 2 - 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 maintained under Section 1002 of the Indenture 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. 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. The Securities of this series are issuable only in registered form without coupons in denominations of $25 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 such series of a different authorized denomination, as requested by the Holder surrendering the same. The Company and, by its acceptance of this Security or a beneficial interest therein, the Holder of, and any Person that acquires a beneficial interest in, this Security agree that for United States Federal, state and local tax purposes it is intended that this Security constitute indebtedness. THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF LAWS PRINCIPLES THEREOF. - 3 - EX-4 4 exh4_28.txt EXHIBIT 4.28 EXHIBIT 4.28 AMENDED AND RESTATED TRUST AGREEMENT Among THE HARTFORD FINANCIAL SERVICES GROUP, INC., as Depositor, Wilmington Trust Company, as Property Trustee and Delaware Trustee, And THE ADMINISTRATIVE TRUSTEES NAMED HEREIN Dated as of October 26, 2001 HARTFORD CAPITAL III Hartford Capital III Certain Sections of this Trust Agreement relating to Sections 310 through 318 of the Trust Indenture Act of 1939: Trust Indenture Trust Agreement Act Section Section (S) 310 (a)(1).......................................... 8.7 (a)(2).......................................... 8.7 (a)(3).......................................... 8.9 (a)(4).......................................... 2.7(a)(ii) (b)............................................. 8.8 (S) 311 (a)............................................. 8.13 (b)............................................. 8.13 (S) 312 (a)............................................. 5.7 (b)............................................. 5.7 (c)............................................. 5.7 (S) 313 (a)............................................. 8.14(a) (a)(4).......................................... 8.14(b) (b)............................................. 8.14(b) (c)............................................. 10.8 (d)............................................. 8.14(c) (S) 314 (a)............................................. 8.15 (b)............................................. Not Applicable (c)(1).......................................... 8.16 (c)(2).......................................... 8.16 (c)(3).......................................... Not Applicable (d)............................................. Not Applicable (e)............................................. 1.1, 8.16 (S) 315 (a)............................................. 8.1(a), 8.3(a) (b)............................................. 8.2, 10.8 (c)............................................. 8.1(a) (d)............................................. 8.1, 8.3 (e)............................................. Not Applicable (S) 316 (a)............................................. Not Applicable (a)(1)(A)....................................... Not Applicable (a)(1)(B)....................................... Not Applicable (a)(2).......................................... Not Applicable (b)............................................. Not Applicable (c)............................................. 6.7 (S) 317 (a)(1).......................................... Not Applicable (a)(2).......................................... Not Applicable (b)............................................. 5.9 (S) 318 (a)............................................. 10.10 _______________ Note: This reconciliation and tie sheet shall not, for any purpose, be deemed to be a part of the Trust Agreement. Table of Contents ----------------- Page ---- ARTICLE I Defined Terms Section 1.1 Definitions...............................................2 ARTICLE II Establishment of the Trust Section 2.1 Name.....................................................10 Section 2.2 Office of the Delaware Trustee; Principal Place of Business..............................................10 Section 2.3 Initial Contribution of Trust Property; Organizational Expenses..................................11 Section 2.4 Issuance of the Preferred Securities.....................11 Section 2.5 Subscription and Purchase of Debentures; Issuance of the Common Securities.................................11 Section 2.6 Declaration of Trust.....................................12 Section 2.7 Authorization to Enter into Certain Transactions.........13 Section 2.8 Assets of Trust..........................................17 Section 2.9 Title to Trust Property..................................17 ARTICLE III Payment Account Section 3.1 Payment Account..........................................17 ARTICLE IV Distributions; Redemption Section 4.1 Distributions............................................18 Section 4.2 Redemption...............................................19 Section 4.3 Subordination of Common Securities.......................21 Section 4.4 Payment Procedures.......................................22 Section 4.5 Tax Returns and Reports..................................22 Section 4.6 Payment of Taxes, Duties, Etc. of the Trust..............23 Section 4.7 Payments under Indenture.................................23 ARTICLE V Trust Securities Certificates Section 5.1 Initial Ownership........................................23 Section 5.2 The Trust Securities Certificates........................23 Section 5.3 Delivery of Trust Securities Certificates................24 Section 5.4 Registration of Transfer and Exchange of Preferred Securities Certificates..................................24 Section 5.5 Mutilated, Destroyed, Lost or Stolen Trust Securities Certificates..................................25 Section 5.6 Persons Deemed Securityholders...........................25 Section 5.7 Access to List of Securityholders' Names and Addresses...25 Section 5.8 Maintenance of Office or Agency..........................26 Section 5.9 Appointment of Paying Agent..............................26 Section 5.10 Ownership of Common Securities by Depositor..............27 Section 5.11 Book-Entry Preferred Securities Certificates; Common Securities Certificate............................27 i Table of Contents ----------------- (continued) Page ---- Section 5.12 Notices to Clearing Agency...............................28 Section 5.13 Definitive Preferred Securities Certificates.............29 Section 5.14 Rights of Securityholders................................29 ARTICLE VI Acts of Securityholders; Meetings; Voting Section 6.1 Limitations on Voting Rights.............................30 Section 6.2 Notice of Meetings.......................................31 Section 6.3 Meetings of Preferred Securityholders....................31 Section 6.4 Voting Rights............................................32 Section 6.5 Proxies, etc.............................................32 Section 6.6 Securityholder Action by Written Consent.................32 Section 6.7 Record Date for Voting and Other Purposes................32 Section 6.8 Acts of Securityholders..................................33 Section 6.9 Inspection of Records....................................34 ARTICLE VII Representations and Warranties Section 7.1 Representations and Warranties of the Bank...............34 Section 7.2 Representations and Warranties of Depositor..............35 ARTICLE VIII The Trustees Section 8.1 Certain Duties and Responsibilities......................36 Section 8.2 Notice of Defaults.......................................38 Section 8.3 Certain Rights of Property Trustee.......................38 Section 8.4 Not Responsible for Recitals or Issuance of Securities...41 Section 8.5 May Hold Securities......................................41 Section 8.6 Compensation; Indemnity; Fees............................41 Section 8.7 Corporate Property Trustee Required; Eligibility of Trustees..................................42 Section 8.8 Conflicting Interests....................................43 Section 8.9 Co-Trustees and Separate Trustee.........................43 Section 8.10 Resignation and Removal; Appointment of Successor........46 Section 8.11 Acceptance of Appointment by Successor...................46 Section 8.12 Merger, Conversion, Consolidation or Succession to Business...................................47 Section 8.13 Preferential Collection of Claims Against Depositor or Trust.......................................47 Section 8.14 Reports by Property Trustee..............................48 Section 8.15 Reports to the Property Trustee..........................48 Section 8.16 Evidence of Compliance with Conditions Precedent.........49 Section 8.17 Number of Trustees.......................................49 Section 8.18 Delegation of Power......................................49 ARTICLE IX Termination, Liquidation and Merger Section 9.1 Termination Upon Expiration Date.........................50 Section 9.2 Early Termination........................................50 Section 9.3 Termination..............................................50 ii Table of Contents ----------------- (continued) Page ---- Section 9.4 Liquidation..............................................51 Section 9.5 Mergers, Consolidations, Amalgamations or Replacements of the Trust................................52 ARTICLE X Miscellaneous Provisions Section 10.1 Limitation of Rights of Securityholders..................54 Section 10.2 Amendment................................................54 Section 10.3 Separability.............................................55 Section 10.4 Governing Law............................................55 Section 10.5 Payments Due on Non-Business Day.........................56 Section 10.6 Successors...............................................56 Section 10.7 Headings.................................................56 Section 10.8 Reports, Notices and Demands.............................56 Section 10.9 Agreement Not to Petition................................57 Section 10.10 Trust Indenture Act; Conflict with Trust Indenture Act...57 Section 10.11 Acceptance of Terms of Trust Agreement, Guarantee and Indenture..................................58 Exhibit A Certificate of Trust Exhibit B Form of Certificate Depository Agreement Exhibit C Form of Common Securities Certificate Exhibit D Form of Expense Agreement Exhibit E Form of Preferred Securities iii AMENDED AND RESTATED TRUST AGREEMENT, dated as of October 26, 2001, among (i) The Hartford Financial Services Group, Inc., a Delaware corporation - (including any successors or assigns, the "Depositor"), (ii) Wilmington Trust -- Company, a Delaware banking corporation duly organized and existing under the laws of the State of Delaware, as property trustee and Delaware trustee (in each such capacity, the "Property Trustee" and "Delaware Trustee," respectively, and, in its separate corporate capacity and not in its capacity as Property Trustee or Delaware Trustee, the "Bank"), (iii) J. Richard Garrett, an individual, and --- David M. Johnson, an individual, each of whose address is c/o The Hartford Financial Services Group, Inc., Hartford Plaza, Hartford, Connecticut 06115 (each an "Administrative Trustee" and collectively the "Administrative Trustees") (the Property Trustee, the Delaware Trustee and the Administrative Trustees referred to collectively as the "Trustees") and (iv) the several -- Holders, as hereinafter defined. W I T N E S S E T H: - - - - - - - - - - WHEREAS, the Depositor and the Delaware Trustee have heretofore duly declared and established a business trust pursuant to the Delaware Business Trust Act by the entering into of that certain Trust Agreement, dated as of October 25, 1995 (the "Original Trust Agreement"), and by the execution and filing by the Delaware Trustee with the Secretary of State of the State of Delaware of the Certificate of Trust, filed on October 25, 1995, attached as Exhibit A; and WHEREAS, the Depositor and the Delaware Trustee desire to amend and restate the Original Trust Agreement in its entirety as set forth herein to provide for, among other things, (i) the issuance of the Common Securities by - the Trust to the Depositor, (ii) the issuance and sale of the Preferred -- Securities by the Trust pursuant to the Underwriting Agreement, (iii) the --- acquisition by the Trust from the Depositor of all of the right, title and interest in the Debentures and (iv) the appointment of the Administrative -- Trustees; NOW THEREFORE, in consideration of the agreements and obligations set forth herein and for other good and valuable consideration, the sufficiency of which is hereby acknowledged, each party, for the benefit of the other party and for the benefit of the Securityholders, hereby amends and restates the Original Trust Agreement in its entirety and agrees as follows: ARTICLE I DEFINED TERMS ------------- Section 1.1 Definitions. ----------- For all purposes of this Trust Agreement, except as otherwise expressly provided or unless the context otherwise requires: (a) the terms defined in this Article have the meanings assigned to them in this Article and include the plural as well as the singular; (b) all other terms used herein that are defined in the Trust Indenture Act, either directly or by reference therein, have the meanings assigned to them therein; (c) unless the context otherwise requires, any reference to an "Article" or a "Section" refers to an Article or a Section, as the case may be, of this Trust Agreement; and (d) the words "herein", "hereof" and "hereunder" and other words of similar import refer to this Trust Agreement as a whole and not to any particular Article, Section or other subdivision. "Act" has the meaning specified in Section 6.8. --- "Additional Amount" means, with respect to Trust Securities of a given ------------------ Liquidation Amount and/or a given period, the amount of Additional Interest (as defined in the Indenture) paid by the Depositor on a Like Amount of Debentures for such period. "Administrative Trustee" means each of J. Richard Garrett and David M. ----------------------- Johnson, solely in his capacity as Administrative Trustee of the Trust and not in his individual capacity, or such Administrative Trustee's successor in interest in such capacity, or any successor trustee appointed as herein provided. "Affiliate" of any specified Person means any other Person directly or --------- indirectly controlling or controlled by or under direct or indirect common control with such specified Person. For the purposes of this definition, "control" when used with respect to any specified Person means the power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings correlative to the foregoing. - 2 - "Bank" has the meaning specified in the preamble to this Trust ---- Agreement. "Bankruptcy Event" means, with respect to any Person: ---------------- (a) the entry of a decree or order by a court having jurisdiction in the premises judging such Person a bankrupt or insolvent, or approving as properly filed a petition seeking reorganization, arrangement, adjudication or composition of or in respect of such Person under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law, or appointing a receiver, liquidator, assignee, trustee, sequestrator (or other similar official) of such Person or of any substantial part of its property or ordering the winding up or liquidation of its affairs, and the continuance of any such decree or order unstayed and in effect for a period of 60 consecutive days; or (b) the institution by such Person of proceedings to be adjudicated a bankrupt or insolvent, or the consent by it to the institution of bankruptcy or insolvency proceedings against it, or the filing by it of a petition or answer or consent seeking reorganization or relief under any applicable Federal or State bankruptcy, insolvency, reorganization or other similar law, or the consent by it to the filing of any such petition or to the appointment of a receiver, liquidator, assignee, trustee, sequestrator (or similar official) of such Person or of any substantial part of its property, or the making by it of an assignment for the benefit of creditors, or the admission by it in writing of its inability to pay its debts generally as they become due and its willingness to be adjudicated a bankrupt, or the taking of corporate action by such Person in furtherance of any such action. "Bankruptcy Laws" has the meaning specified in Section 10.9. --------------- "Board Resolution" means a copy of a resolution certified by the ----------------- Secretary, the Corporate Secretary or an Assistant Secretary of the Depositor to have been duly adopted by the Depositor's Board of Directors, or such committee of the Board of Directors or officers of the Company to which authority to act on behalf of the Board of Directors has been delegated, and to be in full force and effect on the date of such certification, and delivered to the Trustees. "Book Entry Preferred Securities Certificates" means a beneficial ------------------------------------------------ interest in the Preferred Securities Certificates, ownership and transfers of which shall be made through book entries by a Clearing Agency as described in Section 5.11. "Business Day" means a day other than (a) a Saturday or Sunday, (b) a ------------- - - day on which banking institutions in The City of New York are authorized or required by law or executive order to remain closed, or (c) a day on which the - Property Trustee's Corporate - 3 - Trust Office or the Corporate Trust Office of the Debenture Trustee is closed for business. "Certificate Depository Agreement" means the agreement among the Trust, -------------------------------- the Depositor and The Depository Trust Company, as the initial Clearing Agency, dated as of the Closing Date, relating to the Trust Securities Certificates, substantially in the form attached as Exhibit B, as the same may be amended and supplemented from time to time. "Clearing Agency" means an organization registered as a "clearing ---------------- agency" pursuant to Section 17A of the Securities Exchange Act of 1934, as amended. The Depository Trust Company will be the initial Clearing Agency. "Clearing Agency Participant" means a broker, dealer, bank, other ----------------------------- financial institution or other Person for whom from time to time a Clearing Agency effects book-entry transfers and pledges of securities deposited with the Clearing Agency. "Closing Date" means the First Time of Delivery as defined in the ------------- Underwriting Agreement, which date is also the date of execution and delivery of this Trust Agreement. "Code" means the Internal Revenue Code of 1986, as amended. ---- "Commission" means the Securities and Exchange Commission, as from time ---------- to time constituted, created under the Securities Exchange Act of 1934, as amended, or, if at any time after the execution of this instrument such Commission is not existing and performing the duties now assigned to it under the Trust Indenture Act, then the body performing such duties at such time. "Common Security" means an undivided beneficial interest in the assets --------------- of the Trust, having a Liquidation Amount of $25 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "Common Securities Certificate" means a certificate evidencing -------------------------------- ownership of Common Securities, substantially in the form attached as Exhibit C. "Corporate Trust Office" means the principal office of the Property ----------------------- Trustee located in Wilmington, Delaware. "Debenture Event of Default" means an "Event of Default" as defined in --------------------------- the Indenture. "Debenture Redemption Date" means, with respect to any Debentures to be ------------------------- redeemed under the Indenture, the date fixed for redemption under the Indenture. - 4 - "Debenture Trustee" means Wilmington Trust Company, a Delaware banking ------------------ corporation organized under the laws of the State of Delaware and any successor thereto acting in its capacity as trustee under the Indenture. "Debentures" means the $515,463,925 aggregate principal amount (and up ---------- to an additional $77,319,600 if and to the extent the overallotment option granted by the Trust to the purchasers of the Preferred Securities is exercised) of the Depositor's 7.45% Junior Subordinated Deferrable Interest Debentures due October 26, 2050, Series C, issued pursuant to the Indenture. "Definitive Preferred Securities Certificates" means either or both (as -------------------------------------------- the context requires) of (a) Preferred Securities Certificates issued in - certificated, fully registered form as provided in Section 5.11(a) and (b) - Preferred Securities Certificates issued in certificated, fully registered form as provided in Section 5.13. "Delaware Business Trust Act" means Chapter 38 of Title 12 of the ------------------------------ Delaware Code, 12 Del. C. (S) 3801, et seq., as it may be amended from time to -- --- time. "Delaware Trustee" means the commercial bank or trust company ------------------ identified as the "Delaware Trustee" in the preamble to this Trust Agreement solely in its capacity as Delaware Trustee of the Trust and not in its individual capacity, or its successor in interest in such capacity, or any successor Delaware Trustee appointed as herein provided. "Depositor" has the meaning specified in the preamble to this Trust --------- Agreement. "Distribution Date" has the meaning specified in Section 4.1(a). ----------------- "Distributions" means amounts payable in respect of the Trust ------------- Securities as provided in Section 4.1. "Event of Default" means any one of the following events (whatever the ---------------- reason for such Event of Default and whether it shall be voluntary or involuntary or be effected by operation of law or pursuant to any judgment, decree or order of any court or any order, rule or regulation of any administrative or governmental body): (a) the occurrence of a Debenture Event of Default; or (b) default by the Trust in the payment of any Distribution when it becomes due and payable, and continuation of such default for a period of 30 days; or (c) default by the Trust in the payment of any Redemption Price of any Trust Security when it becomes due and payable; or - 5 - (d) default in the performance, or breach, in any material respect, of any covenant or warranty of the Trustees in this Trust Agreement (other than a covenant or warranty a default in whose performance or breach is dealt with in clause (b) or (c), above) and continuation of such default or breach for a period of 60 days after there has been given, by registered or certified mail, to the defaulting Trustee or Trustees by the Holders of at least 10% in Liquidation Amount of the Outstanding Preferred Securities a written notice specifying such default or breach and requiring it to be remedied and stating that such notice is a "Notice of Default" hereunder; or (e) the occurrence of a Bankruptcy Event with respect to the Property Trustee and the failure by the Depositor to appoint a successor Property Trustee within 60 days thereof. "Expense Agreement" means the Agreement as to Expenses and Liabilities ------------------ between the Depositor and the Trust, substantially in the form attached as Exhibit D, as amended from time to time. "Expiration Date" has the meaning specified in Section 9.1. --------------- "Guarantee" means the Guarantee Agreement executed and delivered by the --------- Depositor and Wilmington Trust Company, as trustee thereunder, contemporaneously with the execution and delivery of this Trust Agreement, for the benefit of the holders of the Preferred Securities, as amended from time to time. "Indenture" means the Junior Subordinated Indenture, dated as of --------- October 30, 1996, as supplemented by a Supplemental Indenture, dated as of October 26, 2001 between the Depositor and the Debenture Trustee, as trustee, as amended or supplemented from time to time. "Lien" means any lien, pledge, charge, encumbrance, mortgage, deed of ---- trust, adverse ownership interest, hypothecation, assignment, security interest or preference, priority or other security agreement or preferential arrangement of any kind or nature whatsoever. "Like Amount" means (a) with respect to a redemption of Trust ------------ - Securities, Trust Securities having a Liquidation Amount equal to the principal amount of Debentures to be contemporaneously redeemed in accordance with the Indenture the proceeds of which will be used to pay the Redemption Price of such Trust Securities, and (b) with respect to a distribution of Debentures to - Holders of Trust Securities in connection with a dissolution or liquidation of the Trust, Debentures having a principal amount equal to the Liquidation Amount of the Trust Securities of the Holder to whom such Debentures are distributed. - 6 - "Liquidation Amount" means the stated amount of $25 per Trust Security. ------------------ "Liquidation Date" means each Date on which Debentures are to be ----------------- distributed to Holders of Trust Securities in connection with a dissolution and liquidation of the Trust pursuant to Section 9.4(a). "Liquidation Distribution" has the meaning specified in Section 9.4(d). ------------------------ "1940 Act" means the Investment Company Act of 1940, as amended. -------- "Officers' Certificate" means a certificate signed by the Chairman and ---------------------- Chief Executive Officer, President or a Vice President, and by the Treasurer, an Associate Treasurer, an Assistant Treasurer, the Controller, the Secretary, the Corporate Secretary or an Assistant Secretary, of the Depositor, and delivered to the appropriate Trustee. One of the officers signing an Officers' Certificate given pursuant to Section 8.6 shall be the principal executive, financial or accounting officer of the Depositor. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Trust Agreement shall include: (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Opinion of Counsel" means a written opinion of counsel, who may be ------------------- counsel for the Trust, the Property Trustee or the Depositor, but not an employee of any thereof, and who shall be acceptable to the Property Trustee. "Original Trust Agreement" has the meaning specified in the recitals to ------------------------ this Trust Agreement. "Outstanding", when used with respect to Preferred Securities, means, ----------- as of the date of determination, all Preferred Securities theretofore executed and delivered under this Trust Agreement, except: ------ - 7 - (a) Preferred Securities theretofore cancelled by the Administrative Trustees or delivered to the Administrative Trustees for cancellation; (b) Preferred Securities for whose payment or redemption money in the necessary amount has been theretofore deposited with the Property Trustee or any Paying Agent for the Holders of such Preferred Securities; provided that, if such Preferred Securities are to be -------- redeemed, notice of such redemption has been duly given pursuant to this Trust Agreement; and (c) Preferred Securities which have been paid or in exchange for or in lieu of which other Preferred Securities have been executed and delivered pursuant to Sections 5.4, 5.5, 5.11 and 5.13; provided, however, that in determining whether the Holders of the requisite - -------- ------- Liquidation Amount of the Outstanding Preferred Securities have given any request, demand, authorization, direction, notice, consent or waiver hereunder, Preferred Securities owned by the Depositor, any Trustee or any Affiliate of the Depositor or any Trustee shall be disregarded and deemed not to be Outstanding, except that (a) in determining whether any Trustee shall be protected in relying - upon any such request, demand, authorization, direction, notice, consent or waiver, only Preferred Securities that such Trustee knows to be so owned shall be so disregarded and (b) the foregoing shall not apply at any time when all of - the outstanding Preferred Securities are owned by the Depositor, one or more of the Trustees and/or any such Affiliate. Preferred Securities so owned which have been pledged in good faith may be regarded as Outstanding if the pledgee establishes to the satisfaction of the Administrative Trustees the pledgee's right so to act with respect to such Preferred Securities and that the pledgee is not the Depositor or any Affiliate of the Depositor. "Owner" means each Person who is the beneficial owner of a Book Entry ----- Preferred Securities Certificate as reflected in the records of the Clearing Agency or, if a Clearing Agency Participant is not the Owner, then as reflected in the records of a Person maintaining an account with such Clearing Agency (directly or indirectly, in accordance with the rules of such Clearing Agency). "Paying Agent" means any paying agent or co-paying agent appointed ------------- pursuant to Section 5.9 and shall initially be the Property Trustee. "Payment Account" means a segregated non-interest-bearing corporate ---------------- trust account maintained by the Property Trustee with the Bank in its trust department for the benefit of the Securityholders in which all amounts paid in respect of the Debentures will be held and from which the Property Trustee shall make payments to the Securityholders in accordance with Section 4.1 and 4.2. - 8 - "Person" means any individual, corporation, partnership, joint venture, ------ trust, limited liability company or corporation, unincorporated organization or government or any agency or political subdivision thereof. "Preferred Security" means an undivided beneficial interest in the ------------------- assets of the Trust, having a Liquidation Amount of $25 and having the rights provided therefor in this Trust Agreement, including the right to receive Distributions and a Liquidation Distribution as provided herein. "Preferred Securities Certificate" means a certificate evidencing ---------------------------------- ownership of Preferred Securities, substantially in the form attached as Exhibit E. "Property Trustee" means the commercial bank or trust company ------------------ identified as the "Property Trustee" in the preamble to this Trust Agreement solely in its capacity as Property Trustee of the Trust and not in its individual capacity, or its successor in interest in such capacity, or any successor property trustee appointed as herein provided. "Redemption Date" means, with respect to any Trust Security to be ---------------- redeemed, the date fixed for such redemption by or pursuant to this Trust Agreement; provided that each Debenture Redemption Date and the stated maturity -------- of the Debentures shall be a Redemption Date for a Like Amount of Trust Securities. "Redemption Price" means, with respect to any Trust Security, the' ----------------- Liquidation Amount of such Trust Security, plus accumulated and unpaid Distributions to the date of redemption, plus the related amount of the premium, if any, paid by the Depositor upon the concurrent redemption of a Like Amount of Debentures, allocated on a pro rata basis (based on Liquidation Amounts) among the Trust Securities. "Relevant Trustee" shall have the meaning specified in Section 8.10. ---------------- "Securities Register" and "Securities Registrar and Transfer Agent" -------------------- ----------------------------------------- have the respective meanings specified in Section 5.4. "Securityholder" or "Holder" means a Person in whose name a Trust -------------- ------ Security or Securities is registered in the Securities Register; any such Person shall be a beneficial owner within the meaning of the Delaware Business Trust Act. "Trust" means the Delaware business trust created and continued hereby ----- and identified on the cover page to this Trust Agreement. "Trust Agreement" means this Amended and Restated Trust Agreement, as ---------------- the same may be modified, amended or supplemented in accordance with the applicable provisions hereof, including all exhibits hereto, including, for all purposes of this Trust Agreement and any such modification, amendment or supplement, the provisions of the - 9 - Trust Indenture Act that are deemed to be a part of and govern this Trust Agreement and any such modification, amendment or supplement, respectively. "Trustees" has the meaning specified in the preamble to this Trust -------- Agreement. "Trust Indenture Act" means the Trust Indenture Act of 1939 as in force ------------------- at the date as of which this instrument was executed; provided, however, that in -------- ------- the event the Trust Indenture Act of 1939 is amended after such date, "Trust Indenture Act" means, to the extent required by any such amendment, the Trust Indenture Act of 1939 as so amended. "Trust Property" means (a) the Debentures, (b) any cash on deposit in, -------------- - - or owing to, the Payment Account and (c) all proceeds and rights in respect of - the foregoing and any other property and assets for the time being held or deemed to be held by the Property Trustee pursuant to the trusts of this Trust Agreement. "Trust Security" means any one of the Common Securities or the --------------- Preferred Securities. "Trust Securities Certificate" means any one of the Common Securities ----------------------------- Certificates or the Preferred Securities Certificates. "Underwriting Agreement" means the Pricing Agreement, dated as of ----------------------- October 19, 2001, among the Trust, the Depositor and the Underwriters named therein incorporating the Underwriting Agreement, dated as of October 19, 2001, also among the Trust, the Depositor and the Underwriters named therein. ARTICLE II ESTABLISHMENT OF THE TRUST -------------------------- Section 2.1 Name. ---- The Trust created pursuant to the Original Trust Agreement and continued hereby shall be known as "Hartford Capital III," as such name may be modified from time to time by the Administrative Trustees following written notice to the Holders of Trust Securities and the other Trustees, in which name the Trust may conduct its business, make and execute contracts and other instruments and sue and be sued. Section 2.2 Office of the Delaware Trustee; Principal Place of Business. ----------------------------------------------------------- The address of the Delaware Trustee in the State of Delaware is c/o Wilmington Trust Company, 1100 N. Market Street, Wilmington, Delaware, Attention: Corporate - 10 - Trust Administration, or such other address in the State of Delaware as the Delaware Trustee may designate by written notice to the Securityholders and the Depositor. The principal executive office of the Trust is c/o The Hartford Financial Services Group, Inc., Hartford Plaza, Hartford, Connecticut 06115. Section 2.3 Initial Contribution of Trust Property; Organizational Expenses. --------------------------------------------------------------- The Property Trustee acknowledges receipt in trust from the Depositor in connection with the Original Trust Agreement of the sum of $10, which constituted the initial Trust Property. The Depositor shall pay organizational expenses of the Trust as they arise or shall, upon request of any Trustee, promptly reimburse such Trustee for any such expenses paid by such Trustee. The Depositor shall make no claim upon the Trust Property for the payment of such expenses. Section 2.4 Issuance of the Preferred Securities. ------------------------------------ On October 19, 2001 the Depositor, on behalf of the Trust and pursuant to the Original Trust Agreement, executed and delivered the Underwriting Agreement. Contemporaneously with the execution and delivery of this Trust Agreement, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 5.2 and deliver to the Underwriters named therein Preferred Securities Certificates, registered in the name of the nominee of the initial Clearing Agency, in an aggregate amount of 20,000,000 Preferred Securities having an aggregate Liquidation Amount of $500,000,000, against receipt of the aggregate purchase price of such Preferred Securities of $500,000,000, which amount the Administrative Trustees shall promptly deliver to the Property Trustee. In the event and to the extent the overallotment option granted by the Trust pursuant to the Underwriting Agreement is exercised by such Underwriters, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 5.2 and deliver to such Underwriters Preferred Securities Certificates, registered in the name of the nominee of the initial Clearing Agency, in an aggregate amount of up to an additional 3,000,000 Preferred Securities having an aggregate Liquidation Amount of up to $75,000,000, against receipt of the aggregate purchase price of such Preferred Securities of up to $75,000,000, which amount the Administrative Trustees shall promptly deliver to the Property Trustee, on the date specified pursuant to the Underwriting Agreement. Section 2.5 Subscription and Purchase of Debentures; Issuance of the Common --------------------------------------------------------------- Securities. ---------- Contemporaneously with the execution and delivery of this Trust Agreement, the Administrative Trustees, on behalf of the Trust, shall subscribe to and purchase from the - 11 - Depositor Debentures, registered in the name of the Trust and having an aggregate principal amount equal to $515,463,925, and, in satisfaction of the purchase price for such Debentures, the Property Trustee, on behalf of the Trust, shall deliver to the Depositor the sum of $515,463,925. Contemporaneously therewith, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 5.2 and deliver to the Depositor Common Securities Certificates, registered in the name of the Depositor, in an aggregate amount of 618,557 Common Securities having an aggregate Liquidation Amount of $15,463,925 against payment by the Depositor of the sum of $15,463,925. In the event the overallotment option granted by the Trust with respect to the Preferred Securities pursuant to the Underwriting Agreement is exercised by the Underwriters named therein, the Administrative Trustees, on behalf of the Trust and contemporaneously with the delivery to the Underwriters of such Preferred Securities, shall subscribe to and purchase from the Depositor, Debentures registered in the name of the Trust and having an aggregate principal amount up to $77,319,600 and, in satisfaction of the purchase price for such Debentures, the Trust shall, and the Property Trustee is hereby authorized to cause the Trust to, deliver to the Depositor an amount equal to the aggregate principal amount of Debentures being purchased. Contemporaneously therewith, an Administrative Trustee, on behalf of the Trust, shall execute in accordance with Section 5.3 and deliver to the Depositor Common Securities Certificates, registered in the name of the Depositor, in an aggregate amount (determined on a pro rata basis to the extent the overallotment option is exercised) of up to an additional 92,784 Common Securities having an aggregate Liquidation Amount of up to $2,319,600 against payment by the Depositor of an amount equal to the aggregate Liquidation Amount of the Common Securities Certificates so delivered. Section 2.6 Declaration of Trust. -------------------- The exclusive purposes and functions of the Trust are (a) to issue and sell Trust Securities and use the proceeds from such sale to acquire the Debentures, and (b) to engage in those activities necessary, convenient or incidental thereto. The Depositor hereby appoints the Trustees as trustees of the Trust, to have all the rights, powers and duties to the extent set forth herein, and the Trustees hereby accept such appointment. The Trust hereby declares that it will hold the Trust Property in trust upon and subject to the conditions set forth herein for the benefit of the Securityholders. The Administrative Trustees shall have all rights, powers and duties set forth herein and in accordance with applicable law with respect to accomplishing the purposes of the Trust. The Delaware Trustee shall not be entitled to exercise any powers, nor shall the Delaware Trustee have any of the duties and responsibilities, of the Property Trustee or the Administrative Trustees set forth herein. Notwithstanding anything to the contrary herein, the Delaware Trustee shall be one of the Trustees of the Trust for the sole and limited purpose of fulfilling the requirements of Section 3807 of the Delaware Business Trust Act. - 12 - Section 2.7 Authorization to Enter into Certain Transactions. ------------------------------------------------ (a) The Trustees shall conduct the affairs of the Trust in accordance with the terms of this Trust Agreement. Subject to the limitations set forth in paragraph (b) of this Section, and in accordance with the following provisions (i) and (ii), the Trustees shall have the authority to enter into all transactions and agreements determined by the Trustees to be appropriate in exercising the authority, express or implied, otherwise granted to the Trustees under this Trust Agreement, and to perform all acts in furtherance thereof, including without limitation, the following: (i) As among the Trustees, each Administrative Trustee shall have the power, duty and authority to act on behalf of the Trust with respect to the following matters: (A) the issuance and sale of the Trust Securities; (B) to cause the Trust to enter into, and to execute, deliver and perform on behalf of the Trust, the Expense Agreement and the Certificate Depository Agreement and such other agreements as may be necessary or desirable in connection with the purposes and function of the Trust; (C) assisting in the registration of the Preferred Securities under the Securities Act of 1933, as amended, and under state securities or blue sky laws, and the qualification of this Trust Agreement as a trust indenture under the Trust Indenture Act; (D) assisting in the listing of the Preferred Securities upon such securities exchange or exchanges as shall be determined by the Depositor and the registration of the Preferred Securities under the Securities Exchange Act of 1934, as amended, and the preparation and filing of all periodic and other reports and other documents pursuant to the foregoing; (E) the sending of notices (other than notices of default) and other information regarding the Trust Securities and the Debentures to the Securityholders in accordance with this Trust Agreement; - 13 - (F) the appointment of a Paying Agent, authenticating agent and Securities Registrar and Transfer Agent in accordance with this Trust Agreement; (G) registering transfer of the Trust Securities in accordance with this Trust Agreement; (H) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (I) unless otherwise determined by the Depositor, the Property Trustee or the Administrative Trustees, or as otherwise required by the Delaware Business Trust Act or the Trust Indenture Act, to execute on behalf of the Trust (either acting alone or together with any or all of the Administrative Trustees) any documents that the Administrative Trustees have the power to execute pursuant to this Trust Agreement; and (J) the taking of any action incidental to the foregoing as the Trustees may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement for the benefit of the Securityholders (without consideration of the effect of any such action on any particular Securityholder). (ii) As among the Trustees, the Property Trustee shall have the power, duty and authority to act on behalf of the Trust with respect to the following matters: (A) the establishment of the Payment Account; (B) the receipt of the Debentures; (C) the collection of interest, principal and any other payments made in respect of the Debentures in the Payment Account; (D) the distribution of amounts owed to the Securityholders in respect of the Trust Securities; - 14 - (E) the exercise of all of the rights, powers and privileges of a holder of the Debentures; (F) the sending of notices of default and other information regarding the Trust Securities and the Debentures to the Securityholders in accordance with this Trust Agreement; (G) the distribution of the Trust Property in accordance with the terms of this Trust Agreement; (H) to the extent provided in this Trust Agreement, the winding up of the affairs of and liquidation of the Trust and the preparation, execution and filing of the certificate of cancellation with the Secretary of State of the State of Delaware; (I) after an Event of Default the taking of any action incidental to the foregoing as the Property Trustee may from time to time determine is necessary or advisable to give effect to the terms of this Trust Agreement and protect and conserve the Trust Property for the benefit of the Securityholders (without consideration of the effect of any such action on any particular Securityholder); (J) registering transfers of the Trust Securities in accordance with this Trust Agreement; and (K) subject to this Section 2.7(a)(ii), the Property Trustee shall have none of the duties, liabilities, powers or the authority of the Administrative Trustees set forth in Section 2.7(a)(i). (b) So long as this Trust Agreement remains in effect, the Trust (or the Trustees acting on behalf of the Trust) shall not undertake any business, activities or transaction except as expressly provided herein or contemplated hereby. In particular, the Trustees shall not (i) acquire any investments or - engage in any activities not authorized by this Trust Agreement, (ii) sell, -- assign, transfer, exchange, mortgage, pledge, set-off or otherwise dispose of any of the Trust Property or interests therein, including to Securityholders, except as expressly provided herein, (iii) take any action that would cause the --- Trust to fail or cease to qualify as a "grantor trust" for federal income tax purposes, (iv) incur any indebtedness for borrowed money or issue any other debt -- or (v) take or consent to any action that would result in the placement of a - Lien on any of the Trust - 15 - Property. The Administrative Trustees shall defend all claims and demands of all Persons at any time claiming any Lien on any of the Trust Property adverse to the interest of the Trust or the Securityholders in their capacity as Securityholders. (c) In connection with the issue and sale of the Preferred Securities, the Depositor shall have the right and responsibility to assist the Trust with respect to, or effect on behalf of the Trust, the following (and any actions taken by the Depositor in furtherance of the following prior to the date of this Trust Agreement are hereby ratified and confirmed in all respects): (i) to prepare for filing by the Trust with the Commission and to execute on behalf of the Trust a registration statement on Form S-3 or S-4 in relation to the Preferred Securities, including any amendments thereto; (ii) to determine the States in which to take appropriate action to qualify or register for sale all or part of the Preferred Securities and to do any and all such acts, other than actions which must be taken by or on behalf of the Trust, and advise the Trustees of actions they must take on behalf of the Trust, and prepare for execution and filing any documents to be executed and filed by the Trust or on behalf of the Trust, as the Depositor deems necessary or advisable in order to comply with the applicable laws of any such States; (iii) to prepare for filing by the Trust and to execute on behalf of the Trust an application to the New York Stock Exchange or any other national stock exchange or the Nasdaq National Market for listing upon notice of issuance of any Preferred Securities; (iv) to prepare for filing by the Trust with the Commission and to execute on behalf of the Trust a registration statement on Form 8-A relating to the registration of the Preferred Securities under Section 12(b) or 12(g) of the Exchange Act, including any amendments thereto; (v) to negotiate the terms of, and execute and deliver, the Underwriting Agreement providing for the sale of the Preferred Securities; and (vi) any other actions necessary or desirable to carry out any of the foregoing activities. - 16 - (d) Notwithstanding anything herein to the contrary, the Administrative Trustees are authorized and directed to conduct the affairs of the Trust and to operate the Trust so that the Trust will not be deemed to be an "investment company" required to be registered under the Investment Company Act of 1940, as amended, or taxed as a corporation for United States federal income tax purposes so that the Debentures will be treated as indebtedness of the Depositor for United States federal income tax purposes. In this connection, the Depositor and the Administrative Trustees are authorized to take any action, not inconsistent with applicable law, the Certificate of Trust or this Trust Agreement, that each of the Depositor and the Administrative Trustees determines in their discretion to be necessary or desirable for such purposes, as long as such action does not adversely affect in any material respect the interests of the holders of the Preferred Securities. Section 2.8 Assets of Trust. --------------- The assets of the Trust shall consist of the Trust Property. Section 2.9 Title to Trust Property. ----------------------- Legal title to all Trust Property shall be vested at all times in the Property Trustee (in its capacity as such) and shall be held and administered by the Property Trustee for the benefit of the Securityholders in accordance with this Trust Agreement. ARTICLE III PAYMENT ACCOUNT --------------- Section 3.1 Payment Account. --------------- (a) On or prior to the Closing Date, the Property Trustee shall establish the Payment Account. The Property Trustee and any agent of the Property Trustee shall have exclusive control and sole right of withdrawal with respect to the Payment Account for the purpose of making deposits in and withdrawals from the Payment Account in accordance with this Trust Agreement. All monies and other property deposited or held from time to time in the Payment Account shall be held by the Property Trustee in the Payment Account for the exclusive benefit of the Securityholders and for distribution as herein provided, including (and subject to) any priority of payments provided for herein. - 17 - (b) The Property Trustee shall deposit in the Payment Account, promptly upon receipt, all payments of principal or interest on, and any other payments or proceeds with respect to, the Debentures. Amounts held in the Payment Account shall not be invested by the Property Trustee pending distribution thereof. ARTICLE IV DISTRIBUTIONS; REDEMPTION ------------------------- Section 4.1 Distributions. (a) Distributions on the Trust Securities shall be cumulative, and will accumulate whether or not there are funds of the Trust available for the payment of Distributions. Distributions shall accrue from October 26, 2001, and, except in the event that the Depositor exercises its right to extend the interest payment period for the Debentures pursuant to the Indenture, shall be payable quarterly in arrears on January 2, April 1, July 1 and October 1 of each year, commencing on January 2, 2002. If any date on which Distributions are otherwise payable on the Trust Securities is not a Business Day, then the payment of such Distribution shall be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay) except that, if such Business Day is in the next succeeding calendar year, payment of such Distribution shall be made on the immediately preceding Business Day, in each case with the same force and effect as if made on such date (each date on which Distributions are payable in accordance with this Section 4.1(a) a "Distribution Date"). (b) The Trust Securities represent undivided beneficial interests in the Trust Property, and the Distributions on the Trust Securities shall be payable at a rate of 7.45% per annum of the Liquidation Amount of the Trust Securities. The amount of Distributions payable for any full quarterly period shall be computed on the basis of a 360-day year of twelve 30-day months. If the interest payment for the Debentures is extended pursuant to Section 311 of the Indenture or the Debentures, then the rate per annum at which Distributions on the Trust Securities accumulate shall be increased by an amount such that the aggregate amount of Distributions that accumulate on all Trust Securities during any such extended interest payment period is equal to the aggregate amount of interest (including interest payable on unpaid interest at the rate of 7.45% of the Liquidation Amount of the Trust Securities per annum, compounded quarterly) that accrues during any such extended interest payment period on the Debentures. The amount of Distributions for any partial period shall be computed on the basis of the number of days elapsed in a 360-day year of twelve 30-day months. The amount of Distributions payable for any period shall include the Additional Amounts, if any. - 18 - (c) Distributions on the Trust Securities shall be made by the Property Trustee from the Payment Account and shall be payable on each Distribution Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Distributions. (d) Distributions on the Trust Securities with respect to a Distribution Date shall be payable to the Holders thereof as they appear on the Securities Register for the Trust Securities on the relevant record date, which shall be one Business Day prior to such Distribution Date; provided, however, -------- ------- that in the event that the Preferred Securities do not remain in book-entry-only form, the relevant record date shall be the date 15 days prior to the relevant Distribution Date. Section 4.2 Redemption. ---------- (a) On each Debenture Redemption Date and on the stated maturity of the Debentures, the Trust will be required to redeem a Like Amount of Trust Securities at the Redemption Price. (b) Notice of redemption shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not less than 30 nor more than 60 days prior to the Redemption Date to each Holder of Trust Securities to be redeemed, at such Holder's address appearing in the Security Register. All notices of redemption shall state: (i) the Redemption Date; (ii) the Redemption Price; (iii) the CUSIP number; (iv) if less than all the Outstanding Trust Securities are to be redeemed, the identification and the total Liquidation Amount of the particular Trust Securities to be redeemed; and (v) that on the Redemption Date the Redemption Price will become due and payable upon each such Trust Security to be redeemed and that distributions thereon will cease to accrue on and after said date. (c) The Trust Securities redeemed on each Redemption Date shall be redeemed at the Redemption Price with the proceeds from the contemporaneous redemption of Debentures. Redemptions of the Trust Securities shall be made - 19 - and the Redemption Price shall be payable on each Redemption Date only to the extent that the Trust has funds then on hand and available in the Payment Account for the payment of such Redemption Price. (d) If the Property Trustee gives a notice of redemption in respect of any Preferred Securities, then, by 12:00 noon, New York time, on the Redemption Date, subject to Section 4.2(c), the Property Trustee will, so long as the Preferred Securities are in book-entry-only form, irrevocably deposit with the Clearing Agency for the Preferred Securities funds sufficient to pay the applicable Redemption Price and will give such Clearing Agency irrevocable instructions and authority to pay the Redemption Price to the holders thereof. If the Preferred Securities are no longer in book-entry-only form, the Property Trustee, subject to Section 4.2(c), will irrevocably deposit with the Paying Agent funds sufficient to pay the applicable Redemption Price and will give the Paying Agent irrevocable instructions and authority to pay the Redemption Price to the holders thereof upon surrender of their Preferred Securities Certificates. Notwithstanding the foregoing, Distributions payable on or prior to the Redemption Date for any Trust Securities called for redemption shall be payable to the Holders of such Trust Securities as they appear on the Register for the Trust Securities on the relevant record dates for the related Distribution Dates. If notice of redemption shall have been given and funds deposited as required, then upon the date of such deposit, all rights of Securityholders holding Trust Securities so called for redemption will cease, except the right of such Securityholders to receive the Redemption Price and any Distribution payable on or prior to the Redemption Date, but without interest, and such Securities will cease to be outstanding. In the event that any date on which any Redemption Price is payable is not a Business Day, then payment of the Redemption Price payable on such date will be made on the next succeeding day which is a Business Day (and without any interest or other payment in respect of any such delay), except that, if such Business Day falls in the next calendar year, such payment will be made on the immediately preceding Business Day, in each case, with the same force and effect as if made on such date. In the event that payment of the Redemption Price in respect of any Trust Securities called for redemption is improperly withheld or refused and not paid either by the Trust or by the Depositor pursuant to the Guarantee, Distributions on such Trust Securities will continue to accrue, at the then applicable rate, from the Redemption Date originally established by the Trust for such Trust Securities to the date such Redemption Price is actually paid, in which case the actual payment date will be the date fixed for redemption for purposes of calculating the Redemption Price. (e) Payment of the Redemption Price on the Trust Securities shall be made to the recordholders thereof as they appear on the Securities Register for the - 20 - Trust Securities on the relevant record date, which shall be one Business Day prior to the relevant Redemption Date; provided, however, that in the event that -------- ------- the Preferred Securities do not remain in book-entry-only form, the relevant record date shall be the fifteenth day prior to the Redemption Date. (f) Subject to Section 4.3(a), if less than all the Outstanding Trust Securities are to be redeemed on a Redemption Date, then the aggregate Liquidation Amount of Trust Securities to be redeemed shall be allocated on a pro rata basis (based on Liquidation Amounts) among the Common Securities and the Preferred Securities. The particular Preferred Securities to be redeemed shall be selected on a pro rata basis (based upon Liquidation Amounts) not more than 60 days prior to the Redemption Date by the Property Trustee from the Outstanding Preferred Securities not previously called for redemption, by such method as the Property Trustee shall deem fair and appropriate and which may provide for the selection for redemption of portions (equal to $25 or an integral multiple of $25 in excess thereof) of the Liquidation Amount of Preferred Securities of a denomination larger than $25. The Property Trustee shall promptly notify the Security Registrar in writing of the Preferred Securities selected for redemption and, in the case of any Preferred Securities selected for partial redemption, the Liquidation Amount thereof to be redeemed. For all purposes of this Trust Agreement, unless the context otherwise requires, all provisions relating to the redemption of Preferred Securities shall relate, in the case of any Preferred Securities redeemed or to be redeemed only in part, to the portion of the Liquidation Amount of Preferred Securities which has been or is to be redeemed. Section 4.3 Subordination of Common Securities. ---------------------------------- (a) Payment of Distributions (including Additional Amounts, if applicable) on, and the Redemption Price of, the Trust Securities, as applicable, shall be made subject to Section 4.2(f) pro rata among the Common Securities and the Preferred Securities based on the Liquidation Amount of the Trust Securities; provided, however, that if on any Distribution Date or -------- ------- Redemption Date a Debenture Event of Default shall have occurred and be continuing, no payment of any Distribution (including Additional Amounts, if applicable) on, or Redemption Price of, any Common Security, and no other payment on account of the redemption, liquidation or other acquisition of Common Securities, shall be made unless payment in full in cash of all accumulated and unpaid Distributions (including Additional Amounts, if applicable) on all Outstanding Preferred Securities for all Distribution periods terminating on or prior thereto, or in the case of payment of the Redemption Price the full amount of such Redemption Price on all Outstanding Preferred Securities, shall have been made or provided for, and all funds immediately available to the Property Trustee shall first be applied to the - 21 - payment in full in cash of all Distributions (including Additional Amounts, if applicable) on, or Redemption Price of, Preferred Securities then due and payable. (b) In the case of the occurrence of any Debenture Event of Default, the Holder of Common Securities will be deemed to have waived any right to act with respect to any such Event of Default under this Trust Agreement until the effect of all such Events of Default with respect to the Preferred Securities have been cured, waived or otherwise eliminated. Until any such Event of Default under this Trust Agreement with respect to the Preferred Securities has been so cured, waived or otherwise eliminated, the Property Trustee shall act solely on behalf of the Holders of the Preferred Securities and not the Holder of the Common Securities, and only the Holders of the Preferred Securities will have the right to direct the Property Trustee to act on their behalf. Section 4.4 Payment Procedures. ------------------ Payments in respect of the Preferred Securities shall be made by check mailed to the address of the Person entitled thereto as such address shall appear on the Securities Register or, if the Preferred Securities are held by a Clearing Agency, such Distributions shall be made to the Clearing Agency in immediately available funds, which shall credit the relevant Persons' accounts at such Clearing Agency on the applicable Distribution Dates. Payments in respect of the Common Securities shall be made in such manner as shall be mutually agreed between the Property Trustee and the Common Securityholder. Section 4.5 Tax Returns and Reports. ----------------------- The Administrative Trustees shall prepare (or cause to be prepared), at the Depositor's expense, and file all Federal, state and local tax and information returns and reports required to be filed by or in respect of the Trust. In this regard, the Administrative Trustees shall (a) prepare and file - (or cause to be prepared and filed) the appropriate Internal Revenue Service Form required to be filed in respect of the Trust in each taxable year of the Trust and (b) prepare and furnish (or cause to be prepared and furnished) to - each Securityholder the appropriate Internal Revenue Service form required to be furnished to such Securityholder or the information required to be provided on such form. The Administrative Trustees shall provide the Depositor and the Property Trustee with a copy of all such returns, reports and schedules promptly after such filing or furnishing. The Trustees shall comply with United States federal withholding and backup withholding tax laws and information reporting requirements with respect to any payments to Securityholders under the Trust Securities. - 22 - Section 4.6 Payment of Taxes, Duties, Etc. of the Trust. ------------------------------------------- Upon receipt under the Debentures of Additional Sums (as defined in the Indenture), the Property Trustee shall promptly pay any taxes, duties or governmental charges of whatsoever nature (other than withholding taxes) imposed on the Trust by the United States or any other taxing authority. Section 4.7 Payments under Indenture. ------------------------ Any amount payable hereunder to any Holder of Preferred Securities (and any Owner with respect thereto) shall be reduced by the amount of any corresponding payment such Holder (and Owner) has directly received pursuant to Section 508 of the Indenture. ARTICLE V TRUST SECURITIES CERTIFICATES ----------------------------- Section 5.1 Initial Ownership. ----------------- Upon the formation of the Trust and the contribution by the Depositor pursuant to Section 2.3 and until the issuance of the Trust Securities, and at any time during which no Trust Securities are outstanding, the Depositor shall be the sole beneficial owner of the Trust. Section 5.2 The Trust Securities Certificates. --------------------------------- The Preferred Securities Certificates shall be issued in minimum denominations of $25 Liquidation Amount and integral multiples of $25 in excess thereof, and the Common Securities Certificates shall be issued in denominations of $25 Liquidation Amount and integral multiples thereof. The Trust Securities Certificates shall be executed on behalf of the Trust by manual signature of at least one Administrative Trustee. Trust Securities Certificates bearing the manual signatures of individuals who were, at the time when such signatures shall have been affixed, authorized to sign on behalf of the Trust, shall be validly issued and entitled to the benefits of this Trust Agreement, notwithstanding that such individuals or any of them shall have ceased to be so authorized prior to the delivery of such Trust Securities Certificates or did not hold such offices at the date of delivery of such Trust Securities Certificates. A transferee of a Trust Securities Certificate shall become a Securityholder, and shall be entitled to the rights and subject to the obligations of a Securityholder hereunder, upon due registration of such Trust Securities Certificate in such transferee's name pursuant to Sections 5.4, 5.11 and 5.13. - 23 - Section 5.3 Delivery of Trust Securities Certificates. ----------------------------------------- On the Closing Date, and on any date on which Preferred Securities are required to be delivered pursuant to the exercise of the overallotment option provided for in the Underwriting Agreement, the Administrative Trustees shall cause Trust Securities Certificates, in an aggregate Liquidation Amount as provided in Sections 2.4 and 2.5, to be executed on behalf of the Trust and delivered to or upon the written order of the Depositor, signed by its chairman of the board, its president, any senior vice president or any vice president, treasurer or assistant treasurer or controller without further corporate action by the Depositor, in authorized denominations. Section 5.4 Registration of Transfer and Exchange of Preferred Securities ------------------------------------------------------------- Certificates. ------------ The Securities Registrar and Transfer Agent shall keep or cause to be kept, at the office or agency maintained pursuant to Section 5.8, a Securities Register in which, subject to such reasonable regulations as it may prescribe, the Securities Registrar and Transfer Agent shall provide for the registration of Preferred Securities Certificates and Common Securities Certificates (subject to Section 5.10 in the case of the Common Securities Certificates) and registration of transfers and exchanges of Preferred Securities Certificates as herein provided. The Property Trustee shall be the initial Securities Registrar and Transfer Agent. Upon surrender for registration of transfer of any Preferred Securities Certificate at the office or agency maintained pursuant to Section 5.8, the Administrative Trustees or any one of them shall execute and deliver, in the name of the designated transferee or transferees, one or more new Preferred Securities Certificates in authorized denominations of a like aggregate Liquidation Amount dated the date of execution by such Administrative Trustee or Trustees. The Securities Registrar and Transfer Agent shall not be required to register the transfer of any Preferred Securities that have been called for redemption. At the option of a Holder, Preferred Securities Certificates may be exchanged for other Preferred Securities Certificates in authorized denominations of the same class and of a like aggregate Liquidation Amount upon surrender of the Preferred Securities Certificates to be exchanged at the office or agency maintained pursuant to Section 5.8. Every Preferred Securities Certificate presented or surrendered for registration of transfer or exchange shall be accompanied by a written instrument of transfer in form satisfactory to the Administrative Trustees and the Securities Registrar and Transfer Agent duly executed by the Holder or his attorney duly authorized in writing. Each Preferred Securities Certificate surrendered for registration of transfer or exchange shall - 24 - be cancelled and subsequently disposed of by the Administrative Trustees in accordance with their customary practice. No service charge shall be made for any registration of transfer or exchange of Preferred Securities Certificates, but the Securities Registrar and Transfer Agent may require payment of a sum sufficient to cover any tax or governmental charge that may be imposed in connection with any transfer or exchange of Preferred Securities Certificates. Section 5.5 Mutilated, Destroyed, Lost or Stolen Trust Securities ----------------------------------------------------- Certificates. ------------ If (a) any mutilated Trust Securities Certificate shall be surrendered - to the Securities Registrar and Transfer Agent, or if the Securities Registrar and Transfer Agent shall receive evidence to its satisfaction of the destruction, loss or theft of any Trust Securities Certificate and (b) there - shall be delivered to the Securities Registrar and Transfer Agent and the Administrative Trustees such security or indemnity as may be required by them to save each of them harmless, then in the absence of notice that such Trust Securities Certificate shall have been acquired by a bona fide purchaser, the Administrative Trustees, or any one of them, on behalf of the Trust shall execute and make available for delivery, in exchange for or in lieu of any such mutilated, destroyed, lost or stolen Trust Securities Certificate, a new Trust Securities Certificate of like class, tenor and denomination. In connection with the issuance of any new Trust Securities Certificate under this Section, the Administrative Trustees or the Securities Registrar and Transfer Agent may require the payment of a sum sufficient to cover any tax or other governmental charge that may be imposed in connection therewith. Any duplicate Trust Securities Certificate issued pursuant to this Section shall constitute conclusive evidence of an undivided beneficial interest in the assets of the Trust, as if originally issued, whether or not the lost, stolen or destroyed Trust Securities Certificate shall be found at any time. Section 5.6 Persons Deemed Securityholders. ------------------------------ The Administrative Trustees or the Securities Registrar and Transfer Agent shall treat the Person in whose name any Trust Securities Certificate shall be registered in the Securities Register as the owner of such Trust Securities Certificate for the purpose of receiving distributions and for all other purposes whatsoever, and neither the Trustees nor the Securities Registrar and Transfer Agent shall be bound by any notice to the contrary. Section 5.7 Access to List of Securityholders' Names and Addresses. ------------------------------------------------------ The Administrative Trustees or the Depositor shall furnish or cause to be furnished (a) to the Property Trustee, semi-annually on or before January 15 - and July 15 - 25 - in each year, a list, in such form as the Property Trustee may reasonably require, of the names and addresses of the Securityholders as of the most recent Record Date and (b) to the Property Trustee, promptly after receipt by any - Administrative Trustee or the Depositor of a request therefor from the Property Trustee in order to enable the Property Trustee to discharge its obligations under this Trust Agreement, in each case to the extent such information is in the possession or control of the Administrative Trustees or the Depositor and is not identical to a previously supplied list or has not otherwise been received by the Property Trustee in its capacity as Securities Registrar and Transfer Agent. The rights of Securityholders to communicate with other Securityholders with respect to their rights under this Trust Agreement or under the Trust Securities, and the corresponding rights of the Trustee shall be as provided in the Trust Indenture Act. Each Holder, by receiving and holding a Trust Securities Certificate, and each Owner shall be deemed to have agreed not to hold the Depositor, the Property Trustee, the Delaware Trustee or the Administrative Trustees accountable by reason of the disclosure of its name and address, regardless of the source from which such information was derived. Section 5.8 Maintenance of Office or Agency. ------------------------------- The Administrative Trustees shall maintain in Hartford, Connecticut, an office or offices or agency or agencies where Preferred Securities Certificates may be surrendered for registration of transfer or exchange and where notices and demands to or upon the Trustees in respect of the Trust Securities Certificates may be served. The Administrative Trustees initially designate c/o The Hartford Financial Services Group, Inc., Hartford Plaza, Hartford, Connecticut 06115, as their principal corporate trust office for such purposes. The Property Trustee shall give prompt written notice to the Depositor and to the Securityholders of any change in the location of the Securities Register or any such office or agency. Section 5.9 Appointment of Paying Agent. --------------------------- The Paying Agent shall make distributions to Securityholders from the Payment Account and shall report the amounts of such distributions to the Property Trustee and the Administrative Trustees. Any Paying Agent shall have the revocable power to withdraw funds from the Payment Account for the purpose of making the distributions referred to above. The Administrative Trustees may revoke such power and remove the Paying Agent if such Trustees determine in their sole discretion that the Paying Agent shall have failed to perform its obligations under this Trust Agreement in any material respect. The Paying Agent shall initially be the Property Trustee, and any co-paying agent chosen by the Bank, and acceptable to the Administrative Trustees and the Depositor. Any Person acting as Paying Agent shall be permitted to resign as Paying Agent upon 30 days' written notice to the Administrative Trustees, the Property Trustee and the Depositor. In - 26 - the event that the Property Trustee shall no longer be the Paying Agent or a successor Paying Agent shall resign or its authority to act be revoked, the Administrative Trustees shall appoint a successor that is acceptable to the Property Trustee and the Depositor to act as Paying Agent (which shall be a bank or trust company). The Administrative Trustees shall cause such successor Paying Agent or any additional Paying Agent appointed by the Administrative Trustees to execute and deliver to the Trustees an instrument in which such successor Paying Agent or additional Paying Agent shall agree with the Trustees that as Paying Agent, such successor Paying Agent or additional Paying Agent will hold all sums, if any, held by it for payment to the Securityholders in trust for the benefit of the Securityholders entitled thereto until such sums shall be paid to such Securityholders. The Paying Agent shall return all unclaimed funds to the Property Trustee and upon removal of a Paying Agent such Paying Agent shall also return all funds in its possession to the Property Trustee. The provisions of Sections 8.1, 8.3 and 8.6 shall apply to the Property Trustee also in its role as Paying Agent, for so long as the Property Trustee shall act as Paying Agent and, to the extent applicable, to any other paying agent appointed hereunder. Any reference in this Agreement to the Paying Agent shall include any co-paying agent unless the context requires otherwise. Section 5.10 Ownership of Common Securities by Depositor. ------------------------------------------- On the Closing Date and on each other date provided for in Section 2.5, the Depositor shall acquire and retain beneficial and record ownership of the Common Securities. To the fullest extent permitted by law, other than a transfer in connection with a consolidation or merger of the Depositor into another corporation, or any conveyance, transfer or lease by the Depositor of its properties and assets substantially as an entirety to any Person, pursuant to Section 801 of the Indenture, any attempted transfer of the Common Securities shall be void. The Administrative Trustees shall cause each Common Securities Certificate issued to the Depositor to contain a legend stating "THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT AS PROVIDED IN THE TRUST AGREEMENT (AS DEFINED BELOW)". Section 5.11 Book-Entry Preferred Securities Certificates; Common ---------------------------------------------------- Securities Certificate. ---------------------- (a) The Preferred Securities Certificates, upon original issuance, will be issued in the form of a typewritten Preferred Securities Certificate or Certificates representing Book-Entry Preferred Securities Certificates, to be delivered to The Depository Trust Company, the initial Clearing Agency, by, or on behalf of, the Trust. Such Preferred Securities Certificate or Certificates shall initially be registered on the Securities Register in the name of Cede & Co., the nominee of - 27 - the initial Clearing Agency, and no beneficial owner will receive a Definitive Preferred Securities Certificate representing such beneficial owner's interest in such Preferred Securities, except as provided in Section 5.13. Unless and until Definitive Preferred Securities Certificates have been issued to beneficial owners pursuant to Section 5.13: (i) the provisions of this Section 5.11(a) shall be in full force and effect; (ii) the Securities Registrar and Transfer Agent and the Trustees shall be entitled to deal with the Clearing Agency for all purposes of this Trust Agreement relating to the Book-Entry Preferred Securities Certificates (including the payment of principal of and interest on the Book-Entry Preferred Securities and the giving of instructions or directions to Owners of Book-Entry Preferred Securities) as the sole Holder of Book-Entry Preferred Securities and shall have no obligations to the Owners thereof; (iii) to the extent that the provisions of this Section 5.11 conflict with any other provisions of this Trust Agreement, the provisions of this Section 5.11 shall control; and (iv) the rights of the Owners of the Book-Entry Preferred Securities Certificates shall be exercised only through the Clearing Agency and shall be limited to those established by law and agreements between such Owners and the Clearing Agency and/or the Clearing Agency Participants. Pursuant to the Certificate Depository Agreement, unless and until Definitive Preferred Securities Certificates are issued pursuant to Section 5.13, the initial Clearing Agency will make book-entry transfers among the Clearing Agency Participants and receive and transmit payments on the Preferred Securities to such Clearing Agency Participants. (b) A single Common Securities Certificate representing the Common Securities shall be issued to the Depositor in the form of a definitive Common Securities Certificate. Section 5.12 Notices to Clearing Agency. -------------------------- To the extent that a notice or other communication to the Owners is required under this Trust Agreement, unless and until Definitive Preferred Securities Certificates shall have been issued to Owners pursuant to Section 5.13, the Trustees shall give all - 28 - such notices and communications specified herein to be given to Owners to the Clearing Agency, and shall have no obligations to the Owners. Section 5.13 Definitive Preferred Securities Certificates. -------------------------------------------- If (a) the Depositor advises the Trustees in writing that the Clearing - Agency is no longer willing or able to properly discharge its responsibilities with respect to the Preferred Securities Certificates, and the Depositor is unable to locate a qualified successor, (b) the Depositor at its option advises - the Trustees in writing that it elects to terminate the book-entry system through the Clearing Agency or (c) after the occurrence of a Debenture Event of - Default, Owners of Preferred Securities Certificates representing beneficial interests aggregating at least a majority of the Liquidation Amount advise the Administrative Trustees in writing that the continuation of a book-entry system through the Clearing Agency is no longer in the best interest of the Owners of Preferred Securities Certificates, then the Administrative Trustees shall notify the Clearing Agency and the Clearing Agency shall notify all Owners of Preferred Securities Certificates and the other Trustees of the occurrence of any such event and of the availability of the Definitive Preferred Securities Certificates to Owners of such class or classes, as applicable, requesting the same. Upon surrender to the Administrative Trustees of the typewritten Preferred Securities Certificate or Certificates representing the Book Entry Preferred Securities Certificates by the Clearing Agency, accompanied by registration instructions, the Administrative Trustees, or any one of them, shall execute the Definitive Preferred Securities Certificates in accordance with the instructions of the Clearing Agency. Neither the Securities Registrar and Transfer Agent nor the Trustees shall be liable for any delay in delivery of such instructions and may conclusively rely on, and shall be protected in relying on, such instructions. Upon the issuance of Definitive Preferred Securities Certificates, the Trustees shall recognize the Holders of the Definitive Preferred Securities Certificates as Securityholders. The Definitive Preferred Securities Certificates shall be printed, lithographed or engraved or may be produced in any other manner as is reasonably acceptable to the Administrative Trustees, as evidenced by the execution thereof by the Administrative Trustees or any one of them. Section 5.14 Rights of Securityholders. ------------------------- The legal title to the Trust Property is vested exclusively in the Property Trustee (in its capacity as such) in accordance with Section 2.9, and the Securityholders shall not have any right or title therein other than the undivided beneficial interest in the assets of the Trust conferred by their Trust Securities and they shall have no right to call for any partition or division of property, profits or rights of the Trust except as described below. The Trust Securities shall be personal property giving only the rights specifically set forth therein and in this Trust Agreement. The Trust Securities shall have no preemptive or - 29 - similar rights and when issued and delivered to Securityholders against payment of the purchase price therefor will be fully paid and nonassessable by the Trust. The Holders of the Trust Securities, in their capacities as such, shall be entitled to the same limitation of personal liability extended to stockholders of private corporations for profit organized under the General Corporation Law of the State of Delaware. ARTICLE VI ACTS OF SECURITYHOLDERS; MEETINGS; VOTING ----------------------------------------- Section 6.1 Limitations on Voting Rights. ---------------------------- (a) Except as provided in this Section, in Sections 8.10 and 10.2 and in the Indenture and as otherwise required by law, no Holder of Preferred Securities shall have any right to vote or in any manner otherwise control the administration, operation and management of the Trust or the obligations of the parties hereto, nor shall anything herein set forth, or contained in the terms of the Trust Securities Certificates, be construed so as to constitute the Securityholders from time to time as partners or members of an association. (b) So long as any Debentures are held by the Property Trustee, the Trustees shall not (i) direct the time, method and place of conducting any - proceeding for any remedy available to the Debenture Trustee, or executing any trust or power conferred on the Debenture Trustee with respect to such Debentures, (ii) waive any past default which is waivable under Section 5.13 of -- the Indenture, (iii) exercise any right to rescind or annul a declaration that --- the principal of all the Debentures shall be due and payable or (iv) consent to -- any amendment, modification or termination of the Indenture or the Debentures, where such consent shall be required, without, in each case, obtaining the prior approval of the Holders of at least a majority in Liquidation Amount of all outstanding Preferred Securities; provided, however, that where a consent under -------- ------- the Indenture would require the consent of each holder of Debentures affected thereby, no such consent shall be given by the Property Trustee without the prior written consent of each holder of Preferred Securities. The Trustees shall not revoke any action previously authorized or approved by a vote of the Preferred Securities, except by a subsequent vote of the Preferred Securities. The Property Trustee shall notify all Holders of the Preferred Securities of any notice of default received from the Debenture Trustee with respect to the Debentures. In addition to obtaining the foregoing approvals of the Holders of the Preferred Securities, prior to taking any of the foregoing actions, the Trustees shall, at the expense of the Depositor, obtain an Opinion of Counsel experienced in such matters to the effect that the Trust will not be classified as an association taxable as a corporation - 30 - or partnership for United States federal income tax purposes on account of such action. (c) If any proposed amendment to the Trust Agreement provides for, or the Trustees otherwise propose to effect, (i) any action that would adversely - affect in any material respect the powers, preferences or special rights of the Preferred Securities, whether by way of amendment to the Trust Agreement or otherwise, or (ii) the dissolution, winding-up or termination of the Trust, -- other than pursuant to the terms of this Trust Agreement, then the Holders of Outstanding Preferred Securities as a class will be entitled to vote on such amendment or proposal and such amendment or proposal shall not be effective except with the approval of the Holders of at least a majority in Liquidation Amount of the Outstanding Preferred Securities. Section 6.2 Notice of Meetings. ------------------ Notice of all meetings of the Preferred Securityholders, stating the time, place and purpose of the meeting, shall be given by the Property Trustee pursuant to Section 10.8 to each Preferred Securityholder of record, at his registered address, at least 15 days and not more than 90 days before the meeting. At any such meeting, any business properly before the meeting may be so considered whether or not stated in the notice of the meeting. Any adjourned meeting may be held as adjourned without further notice. Section 6.3 Meetings of Preferred Securityholders. ------------------------------------- No annual meeting of Securityholders is required to be held. The Administrative Trustees, however, shall call a meeting of Securityholders to vote on any matter upon the written request of the Preferred Securityholders of record of 25% of the Preferred Securities (based upon their Liquidation Amount) and the Administrative Trustees or the Property Trustee may, at any time in their discretion, call a meeting of Preferred Securityholders to vote on any matters as to which the Preferred Securityholders are entitled to vote. Preferred Securityholders of record of 50% of the Preferred Securities (based upon their Liquidation Amount), present in person or by proxy, shall constitute a quorum at any meeting of Securityholders. If a quorum is present at a meeting, an affirmative vote by the Preferred Securityholders of record present, in person or by proxy, holding a majority of the Preferred Securities (based upon their Liquidation Amount) held by the Preferred Securityholders of record present, either in person or by proxy, at such meeting shall - 31 - constitute the action of the Securityholders, unless this Trust Agreement requires a greater number of affirmative votes. Section 6.4 Voting Rights. ------------- Securityholders shall be entitled to one vote for each $25 of Liquidation Amount represented by their Trust Securities in respect of any matter as to which such Securityholders are entitled to vote. Section 6.5 Proxies, etc. ------------ At any meeting of Securityholders, any Securityholder entitled to vote thereat may vote by proxy, provided that no proxy shall be voted at any meeting unless it shall have been placed on file with the Administrative Trustees, or with such other officer or agent of the Trust as the Administrative Trustees may direct, for verification prior to the time at which such vote shall be taken. Pursuant to a resolution of the Property Trustee, proxies may be solicited in the name of the Property Trustee or one or more officers of the Property Trustee. Only Securityholders of record shall be entitled to vote. When Trust Securities are held jointly by several persons, any one of them may vote at any meeting in person or by proxy in respect of such Trust Securities, but if more than one of them shall be present at such meeting in person or by proxy, and such joint owners or their proxies so present disagree as to any vote to be cast, such vote shall not be received in respect of such Trust Securities. A proxy purporting to be executed by or on behalf of a Securityholder shall be deemed valid unless challenged at or prior to its exercise, and the burden of proving invalidity shall rest on the challenger. No proxy shall be valid for more than three years after its date of execution. Section 6.6 Securityholder Action by Written Consent. ---------------------------------------- Any action which may be taken by Securityholders at a meeting may be taken without a meeting and without prior notice if Securityholders holding a majority of all Outstanding Trust Securities (based upon their Liquidation Amount) entitled to vote in respect of such action (or such larger proportion thereof as shall be required by any express provision of this Trust Agreement) shall consent to the action in writing. Section 6.7 Record Date for Voting and Other Purposes. ----------------------------------------- For the purposes of determining the Securityholders who are entitled to notice of and to vote at any meeting or by written consent, or to participate in any distribution on the Trust Securities in respect of which a record date is not otherwise provided for in this - 32 - Trust Agreement, or for the purpose of any other action, Administrative Trustees may from time to time fix a date, not more than 90 days prior to the date of any meeting of Securityholders or the payment of distribution or other action, as the case may be, as a record date for the determination of the identity of the Securityholders of record for such purposes. Section 6.8 Acts of Securityholders. ----------------------- Any request, demand, authorization, direction, notice, consent, waiver or other action provided or permitted by this Trust Agreement to be given, made or taken by Securityholders or Owners may be embodied in and evidenced by one or more instruments of substantially similar tenor signed by such Securityholders or Owners in person or by an agent duly appointed in writing; and, except as otherwise expressly provided herein, such action shall become effective when such instrument or instruments are delivered to an Administrative Trustee. Such instrument or instruments (and the action embodied therein and evidenced thereby) are herein sometimes referred to as the "Act" of the Securityholders or Owners signing such instrument or instruments. Proof of execution of any such instrument or of a writing appointing any such agent shall be sufficient for any purpose of this Trust Agreement and (subject to Section 8.1) conclusive in favor of the Trustees, if made in the manner provided in this Section. The fact and date of the execution by any Person of any such instrument or writing may be proved by the affidavit of a witness of such execution or by a certificate of a notary public or other officer authorized by law to take acknowledgments of deeds, certifying that the individual signing such instrument or writing acknowledged to him the execution thereof. Where such execution is by a signer acting in a capacity other than his individual capacity, such certificate or affidavit shall also constitute sufficient proof of his authority. The fact and date of the execution of any such instrument or writing, or the authority of the Person executing the same, may also be proved in any other manner which any Trustee receiving the same deems sufficient. The ownership of Preferred Securities shall be proved by the Securities Register. Any request, demand, authorization, direction, notice, consent, waiver or other Act of the Securityholder of any Trust Security shall bind every future Securityholder of the same Trust Security and the Securityholder of every Trust Security issued upon the registration of transfer thereof or in exchange therefor or in lieu thereof in respect of anything done, omitted or suffered to be done by the Trustees or the Trust in reliance thereon, whether or not notation of such action is made upon such Trust Security. Without limiting the foregoing, a Securityholder entitled hereunder to take any action hereunder with regard to any particular Trust Security may do so with regard to all - 33 - or any part of the Liquidation Amount of such Trust Security or by one or more duly appointed agents each of which may do so pursuant to such appointment with regard to all or any part of such Liquidation Amount. If any dispute shall arise between the Securityholders and the Administrative Trustees or among such Securityholders or Trustees with respect to the authenticity, validity or binding nature of any request, demand, authorization, direction, consent, waiver or other Act of such Securityholder or Trustee under this Article VI, then the determination of such matter by the Property Trustee shall be conclusive with respect to such matter. Section 6.9 Inspection of Records. --------------------- Upon reasonable notice to the Administrative Trustees and the Property Trustee, the records of the Trust shall be open to inspection by Securityholders during normal business hours for any purpose reasonably related to such Securityholder's interest as a Securityholder. ARTICLE VII REPRESENTATIONS AND WARRANTIES ------------------------------ Section 7.1 Representations and Warranties of the Bank. ------------------------------------------ The Bank hereby represents and warrants for the benefit of the Depositor and the Securityholders that: (a) the Bank is a Delaware banking corporation duly organized, validly existing and in good standing under the laws of the State of Delaware; (b) the Bank has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; (c) this Trust Agreement has been duly authorized, executed and delivered by the Bank and constitutes the valid and legally binding agreement of the Bank enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; - 34 - (d) the execution, delivery and performance by the Bank of this Trust Agreement has been duly authorized by all necessary corporate or other action on the part of the Bank, and does not require any approval of stockholders of the Bank and such execution, delivery and performance will not (i) violate the - Bank's Charter or By-laws, (ii) violate any provision of, or constitute, with or -- without notice or lapse of time, a default under, or result in the creation or imposition of, any Lien on any properties included in the Trust Property pursuant to the provisions of, any indenture, mortgage, credit agreement, license or other agreement or instrument to which the Bank is a party or by which it is bound, or (iii) violate any law, governmental rule or regulation of --- the United States or the State of Delaware, as the case may be, governing the banking or trust powers of the Bank, or any order, judgment or decree applicable to the Property Trustee or the Bank; (e) neither the authorization, execution or delivery by the Bank of this Trust Agreement nor the consummation of any of the transactions by the Bank, the Property Trustee, or the Delaware Trustee (as appropriate in context) contemplated herein requires the consent or approval of, the giving of notice to, the registration with or the taking of any other action with respect to any governmental authority or agency under any existing federal law governing the banking or trust powers of the Bank under the laws of the United States or the State of Delaware; (f) there are no proceedings pending or, to the best of the Bank's knowledge, threatened against or affecting the Bank, the Property Trustee or the Delaware Trustee in any court or before any governmental authority, agency or arbitration board or tribunal which, individually or in the aggregate, would materially and adversely affect the Trust or would question the right, power and authority of the Bank to enter into or perform its obligations as one of the Trustees under this Trust Agreement. Section 7.2 Representations and Warranties of Depositor. ------------------------------------------- The Depositor hereby represents and warrants for the benefit of the Securityholders and the Bank that: (a) the Depositor has been duly incorporated and is validly existing as a corporation in good standing under the laws of the State of Delaware; (b) the Depositor has full corporate power, authority and legal right to execute, deliver and perform its obligations under this Trust Agreement and has - 35 - taken all necessary action to authorize the execution, delivery and performance by it of this Trust Agreement; (c) this Trust Agreement has been duly authorized, executed and delivered by the Depositor and constitutes the valid and legally binding agreement of the Depositor enforceable against it in accordance with its terms, subject to bankruptcy, insolvency, fraudulent transfer, reorganization, moratorium and similar laws of general applicability relating to or affecting creditors' rights and to general equity principles; (d) the Trust Securities Certificates issued on the Closing Date on behalf of the Trust have been, and any Trust Securities Certificates to be issued at the time of exercise, if any, of the overallotment option under the Underwriting Agreement will be, duly authorized and, as of each such date, upon their execution, issuance and delivery, will have been, duly and validly executed, issued and delivered by the Trustees pursuant to the terms and provisions of, and in accordance with the requirements of, this Trust Agreement and the Securityholders will be, entitled to the benefits of this Trust Agreement; and (e) there are no taxes, fees or other governmental charges payable by the Trust (or the Trustees on behalf of the Trust) under the laws of the State of Delaware or any political subdivision thereof in connection with the execution, delivery and performance by the Bank, the Property Trustee or the Delaware Trustee, as the case may be, of this Trust Agreement. ARTICLE VIII THE TRUSTEES ------------ Section 8.1 Certain Duties and Responsibilities. ----------------------------------- (a) The duties and responsibilities of the Trustees shall be as provided by this Trust Agreement and, in the case of the Property Trustee, by the Trust Indenture Act. Notwithstanding the foregoing, no provision of this Trust Agreement shall require the Trustees to expend or risk their own funds or otherwise incur any financial liability in the performance of any of their duties hereunder, or in the exercise of any of their rights or powers, if they shall have reasonable grounds for believing that repayment of such funds or adequate indemnity against such risk or liability is not reasonably assured to it. Whether or not therein expressly so provided, every provision of this Trust Agreement relating to the conduct or affecting the liability of or affording protection to the Trustees shall be subject to the provisions of this Section. Nothing in this Trust - 36 - Agreement shall be construed to release the Property Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct. To the extent that, at law or in equity, a Trustee has duties (including fiduciary duties) and liabilities relating thereto to the Trust or to the Securityholders, such Trustee shall not be liable to the Trust or to any Securityholder for such Trustee's good faith reliance on the provisions of this Trust Agreement. The provisions of this Trust Agreement, to the extent that they restrict the duties and liabilities of the Trustees otherwise existing at law or in equity, are agreed by the Depositor and the Securityholders to replace such other duties and liabilities of the Trustees. (b) All payments made by the Property Trustee or a Paying Agent in respect of the Trust Securities shall be made only from the revenue and proceeds from the Trust Property and only to the extent that there shall be sufficient revenue or proceeds from the Trust Property to enable the Property Trustee or a Paying Agent to make payments in accordance with the terms hereof. Each Securityholder, by its acceptance of a Trust Security, agrees that it will look solely to the revenue and proceeds from the Trust Property to the extent legally available for distribution to it as herein provided and that the Trustees are not personally liable to it for any amount distributable in respect of any Trust Security or for any other liability in respect of any Trust Security. This Section 8.1(b) does not limit the liability of the Trustees expressly set forth elsewhere in this Trust Agreement or, in the case of the Property Trustee, in the Trust Indenture Act. (c) No provision of this Trust Agreement shall be construed to relieve the Property Trustee from liability for its own negligent action, its own negligent failure to act, or its own willful misconduct, except that: (i) the Property Trustee shall not be liable for any error of judgment made in good faith by an authorized officer of the Property Trustee, unless it shall be proved that the Property Trustee was negligent in ascertaining the pertinent facts; (ii) the Property Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the holders of not less than a majority in Liquidation Amount of the Trust Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Property Trustee, or exercising any trust or power conferred upon the Property Trustee under this Trust Agreement; - 37 - (iii) the Property Trustee's sole duty with respect to the custody, safe keeping and physical preservation of the Debentures and the Payment Account shall be to deal with such Property in a similar manner as the Property Trustee deals with similar property for its own account, subject to the protections and limitations on liability afforded to the Property Trustee under this Trust Agreement and the Trust Indenture Act; (iv) the Property Trustee shall not be liable for any interest on any money received by it except as it may otherwise agree to in writing with the Depositor. Money held by the Property Trustee need not be segregated from other funds held by it except in relation to the Payment Account maintained by the Property Trustee pursuant to Section 3.1 and except to the extent otherwise required by law; and (v) the Property Trustee shall not be responsible for monitoring the compliance by the Administrative Trustees, the Depositor or the Depositor's agent with their respective duties under this Trust Agreement, nor shall the Property Trustee be liable for the default or misconduct of the Administrative Trustees, the Depositor or the Depositor's agent. Section 8.2 Notice of Defaults. ------------------ Within five Business Days after the occurrence of any Event of Default actually known to an officer of the Property Trustee with responsibility for administration of the Trust, the Property Trustee shall transmit, in the manner and to the extent provided in Section 10.8, notice of such Event of Default to the Securityholders, the Administrative Trustees and the Depositor, unless such Event of Default shall have been cured or waived. Within five Business Days after the receipt of notice of the Depositor's exercise of its right to extend the interest payment period for the Debentures pursuant to the Indenture, the Administrative Trustee shall transmit, in the manner and to the extent provided in Section 10.8, notice of such exercise to the Securityholders and the Property Trustee, unless such exercise shall have been revoked. Section 8.3 Certain Rights of Property Trustee. ---------------------------------- Subject to the provisions of Section 8.1: (a) the Property Trustee may rely and shall be protected in acting or refraining from acting in good faith upon any resolution, Opinion of Counsel, - 38 - certificate, written representation of a Holder or transferee, certificate of auditors or any other certificate, statement, instrument, opinion, report, notice, request, consent, order, appraisal, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed or presented by the proper party or parties; (b) if, (i) in performing its duties under this Trust Agreement the - Property Trustee is required to decide between alternative courses of action or (ii) in construing any of the provisions in this Trust Agreement the Property -- Trustee finds the same ambiguous or inconsistent with any other provisions contained herein or (iii) the Property Trustee is unsure of the application of --- any provision of this Trust Agreement, then, except as to any matter as to which the Preferred Securityholders are entitled to vote under the terms of this Trust Agreement, the Property Trustee shall deliver a notice to the Depositor requesting written instructions of the Depositor as to the course of action to be taken. The Property Trustee shall take such action, or refrain from taking such action, as the Property Trustee shall be instructed in writing to take, or to refrain from taking, by the Depositor; provided, however, that if the Property Trustee does not receive such instructions of the Depositor within ten Business Days after it has delivered such notice, or such reasonably shorter period of time set forth in such notice (which to the extent practicable shall not be less than two Business Days), it may, but shall be under no duty to, take or refrain from taking such action not inconsistent with this Trust Agreement as it shall deem advisable and in the best interests of the Securityholders, in which event the Property Trustee shall have no liability except for its own bad faith, negligence or willful misconduct; (c) any direction or act of the Depositor or the Administrative Trustees contemplated by this Trust Agreement shall be sufficiently evidenced by an Officer's Certificate; (d) whenever in the administration of this Trust Agreement, the Property Trustee shall deem it desirable that a matter be established before undertaking, suffering or omitting any action hereunder, the Property Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and rely upon an Officer's Certificate which, upon receipt of such request, shall be promptly delivered by the Depositor or the Administrative Trustees; (e) the Property Trustee shall have no duty to see to any recording, filing or registration of any instrument (including any financing or continuation statement or any filing under tax or securities laws) or any rerecording, refiling or reregistration thereof; - 39 - (f) the Property Trustee may consult with counsel and the advice of such counsel shall be full and complete authorization and protection in respect of any action taken, suffered or omitted by it hereunder in good faith and in reliance thereon and in accordance with such advice, such counsel may be counsel to the Depositor or any of its Affiliates, and may include any of its employees. The Property Trustee shall have the right at any time to seek instructions concerning the administration of this Trust Agreement from any court of competent jurisdiction; (g) the Property Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Trust Agreement at the request or direction of any of the Securityholders pursuant to this Trust Agreement, unless such Securityholders shall have offered to the Property Trustee reasonable security or indemnity against the costs, expenses and liabilities which might be incurred by it in compliance with such request or direction; (h) the Property Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, opinion, report, notice, request, consent, order, approval, bond, debenture, note or other evidence of indebtedness or other paper or document, unless requested in writing to do so by one or more Securityholders, but the Property Trustee may make such further inquiry or investigation into such facts or matters as it may see fit; (i) the Property Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys, and it shall have no liability in respect of the actions of such agents or attorneys, provided that the Property Trustee shall be -------- responsible for its own negligence or recklessness with respect to selection of any agent or attorney appointed by it hereunder, provided, further, that the -------- ------- Property Trustee hereby grants to the Trust its rights to enforce any duties or obligations of its agents or attorneys; (j) whenever in the administration of this Trust Agreement the Property Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder the Property Trustee (i) may request instructions from the Holders of the Trust Securities - which instructions may only be given by the Holders of the same proportion in Liquidation Amount of the Trust Securities as would be entitled to direct the Property Trustee under the terms of the Trust Securities in respect of such remedy, right or action, (ii) may refrain from enforcing such remedy or right or -- - 40 - taking such other action until such instructions are received, and (iii) shall --- be protected in acting in accordance with such instructions; and (k) except as otherwise expressly provided by this Trust Agreement, the Property Trustee shall not be under any obligation to take any action that is discretionary under the provisions of this Trust Agreement. No provision of this Trust Agreement shall be deemed to impose any duty or obligation on the Property Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it, in any jurisdiction in which it shall be illegal, or in which the Property Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts, or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Property Trustee shall be construed to be a duty. Section 8.4 Not Responsible for Recitals or Issuance of Securities. ------------------------------------------------------ The recitals contained herein and in the Trust Securities Certificates shall be taken as the statements of the Trust, and the Trustees do not assume any responsibility for their correctness or for the sufficiency of this Trust Agreement. The Trustees shall not be accountable for the use or application by the Depositor of the proceeds of the Debentures. Section 8.5 May Hold Securities. ------------------- Any Trustee or any other agent of any Trustee or the Trust, in its individual or any other capacity, may become the owner or pledgee of Trust Securities and, except as provided in the definition of the term "Outstanding" in Article I and subject to Sections 8.8 and 8.13, may otherwise deal with the Trust with the same rights it would have if it were not a Trustee or such other agent. Section 8.6 Compensation; Indemnity; Fees. ----------------------------- The Depositor agrees: (a) to pay to the Trustees from time to time reasonable compensation for all services rendered by them hereunder (which compensation shall not be limited by any provision of law in regard to the compensation of a trustee of an express trust); - 41 - (b) except as otherwise expressly provided herein, to reimburse the Trustees upon request for all reasonable expenses, disbursements and advances incurred or made by the Trustees in accordance with any provision of this Trust Agreement (including the reasonable compensation and the expenses and disbursements of its agents and counsel), except any such expense, disbursement or advance as may be attributable to its negligence or bad faith; and (c) to indemnify each of the Trustees or any predecessor Trustee for, and to hold the Trustees harmless against, any loss, damage, claims, liability, penalty or expense incurred without negligence or bad faith on its part, arising out of or in connection with the acceptance or administration of this Trust Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. No Trustee may claim any lien or charge on any Trust Property as a result of any amount due pursuant to this Section 8.6. Section 8.7 Corporate Property Trustee Required; Eligibility of Trustees. ------------------------------------------------------------ (a) There shall at all times be a Property Trustee hereunder with respect to the Trust Securities. The Property Trustee shall be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least $50,000,000. If any such Person publishes reports of condition at least annually, pursuant to law or to the requirements of its supervising or examining authority, then for the purposes of this Section, the combined capital and surplus of such Person shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. If at any time the Property Trustee with respect to the Trust Securities shall cease to be eligible in accordance with the provisions of this Section, it shall resign immediately in the manner and with the effect hereinafter specified in this Article VIII. (b) There shall at all times be one or more Administrative Trustees hereunder with respect to the Trust Securities. Each Administrative Trustee shall be either a natural person who is at least 21 years of age or a legal entity that shall act through one or more persons authorized to bind that entity. (c) There shall at all times be a Delaware Trustee with respect to the Trust Securities. The Delaware Trustee shall either be (i) a natural person who - is at least 21 years of age and a resident of the State of Delaware or (ii) a -- legal entity with its principal place of business in the State of Delaware and that otherwise - 42 - meets the requirements of applicable Delaware law that shall act through one or more persons authorized to bind such entity. Section 8.8 Conflicting Interests. --------------------- If the Property Trustee has or shall acquire a conflicting interest within the meaning of the Trust Indenture Act, the Property Trustee shall either eliminate such interest or resign, to the extent and in the manner provided by, and subject to the provisions of, the Trust Indenture Act and this Trust Agreement. Section 8.9 Co-Trustees and Separate Trustee. -------------------------------- Unless an Event of Default shall have occurred and be continuing, at any time or times, for the purpose of meeting the legal requirements of the Trust Indenture Act or of any jurisdiction in which any part of the Trust Property may at the time be located, the Depositor and the Administrative Trustees, by agreed action of the majority of such Trustees, shall have power to appoint, and upon the written request of the Administrative Trustees, the Depositor shall for such purpose join with the Administrative Trustees in the execution, delivery, and performance of all instruments and agreements necessary or proper to appoint, one or more Persons approved by the Property Trustee either to act as co-trustee, jointly with the Property Trustee, of all or any part of such Trust Property, or to the extent required by law to act as separate trustee of any such property, in either case with such powers as may be provided in the instrument of appointment, and to vest in such Person or Persons in the capacity aforesaid, any property, title, right or power deemed necessary or desirable, subject to the other provisions of this Section. If the Depositor does not join in such appointment within 15 days after the receipt by it of a request so to do, or in case a Debenture Event of Default has occurred and is continuing, the Property Trustee alone shall have power to make such appointment. Any co-trustee or separate trustee appointed pursuant to this Section 8.9 shall either be (i) a natural person who is at least 21 years of age and a resident of the United States or (ii) a legal entity with its principal place of business in the United States that shall act through one or more persons authorized to bind such entity. Should any written instrument from the Depositor be required by any co-trustee or separate trustee so appointed for more fully confirming to such co-trustee or separate trustee such property, title, right, or power, any and all such instruments shall, on request, be executed, acknowledged, and delivered by the Depositor. Every co-trustee or separate trustee shall, to the extent permitted by law, but to such extent only, be appointed subject to the following terms, namely: - 43 - (a) The Trust Securities shall be executed and delivered and all rights, powers, duties, and obligations hereunder in respect of the custody of securities, cash and other personal property held by, or required to be deposited or pledged with, the Trustees specified hereunder, shall be exercised, solely by such Trustees and not by such co-trustee or separate trustee. (b) The rights, powers, duties, and obligations hereby conferred or imposed upon the Property Trustee in respect of any property covered by such appointment shall be conferred or imposed upon and exercised or performed by the Property Trustee or by the Property Trustee and such co-trustee or separate trustee jointly, as shall be provided in the instrument appointing such co-trustee or separate trustee, except to the extent that under any law of any jurisdiction in which any particular act is to be performed, the Property Trustee shall be incompetent or unqualified to perform such act, in which event such rights, powers, duties, and obligations shall be exercised and performed by such co-trustee or separate trustee. (c) The Property Trustee at any time, by an instrument in writing executed by it, with the written concurrence of the Depositor, may accept the resignation of or remove any co-trustee or separate trustee appointed under this Section, and, in case an Event of Default under the Indenture has occurred and is continuing, the Property Trustee shall have power to accept the resignation of, or remove, any such co-trustee or separate trustee without the concurrence of the Depositor. Upon the written request of the Property Trustee, the Depositor shall join with the Property Trustee in the execution, delivery, and performance of all instruments and agreements necessary or proper to effectuate such resignation or removal. A successor to any co-trustee or separate trustee so resigned or removed may be appointed in the manner provided in this Section. (d) No co-trustee or separate trustee hereunder shall be personally liable by reason of any act or omission of the Property Trustee, or any other trustee hereunder. (e) The Property Trustee shall not be liable by reason of any act of a co-trustee or separate trustee. (f) Any Act of Holders delivered to the Property Trustee shall be deemed to have been delivered to each such co-trustee and separate trustee. - 44 - Section 8.10 Resignation and Removal; Appointment of Successor. ------------------------------------------------- No resignation or removal of any Trustee (the "Relevant Trustee") and no appointment of a successor Trustee pursuant to this Article shall become effective until the acceptance of appointment by the successor Trustee in accordance with the applicable requirements of Section 8.11. Any Trustee may resign at any time with respect to the Trust Securities by giving written notice thereof to the Securityholders. If the instrument of acceptance by the successor Trustee required by Section 8.11 shall not have been delivered to the Relevant Trustee within 30 days after the giving of such notice of resignation, the Relevant Trustee may petition, at the expense of the Company, any court of competent jurisdiction for the appointment of a successor Relevant Trustee with respect to the Trust Securities. Unless a Debenture Event of Default shall have occurred and be continuing, any Trustee may be removed at any time by Act of the Common Securityholder. If a Debenture Event of Default shall have occurred and be continuing, the Property Trustee or the Delaware Trustee, or both of them, may be removed at such time by Act of the Holders of a majority in Liquidation Amount of the Preferred Securities, delivered to the Relevant Trustee (in its individual capacity and on behalf of the Trust). An Administrative Trustee may be removed by the Common Securityholder at any time. If any Trustee shall resign, be removed or become incapable of acting as Trustee, or if a vacancy shall occur in the office of any Trustee for any cause, at a time when no Debenture Event of Default shall have occurred and be continuing, the Common Securityholder, by Act of the Common Securityholder delivered to the retiring Trustee, shall promptly appoint a successor Trustee or Trustees with respect to the Trust Securities and the Trust, and the retiring Trustee shall comply with the applicable requirements of Section 8.11. If the Property Trustee or the Delaware Trustee shall resign, be removed or become incapable of continuing to act as the Property Trustee or the Delaware Trustee, as the case may be, at a time when a Debenture Event of Default is continuing, the Preferred Securityholders, by Act of the Securityholders of a majority in Liquidation Amount of the Preferred Securities then Outstanding delivered to the retiring Relevant Trustee, shall promptly appoint a successor Relevant Trustee or Trustees with respect to the Trust Securities and the Trust, and such successor Trustee shall comply with the applicable requirements of Section 8.11. If an Administrative Trustee shall resign, be removed or become incapable of acting as Administrative Trustee, at a time when a Debenture Event of Default shall have occurred and be continuing, the Common Securityholder shall appoint a successor or Administrative Trustees. If no successor Relevant Trustee with respect to the Trust Securities shall have been so appointed by the Common Securityholder or the Preferred Securityholders and accepted appointment in the manner required by Section 8.11, any Securityholder who has been a Securityholder of Trust Securities for at least six months may, on behalf of himself and all others similarly - 45 - situated, petition any court of competent jurisdiction for the appointment of a successor Relevant Trustee with respect to the Trust Securities. The Property Trustee shall give notice of each resignation and each removal of the Property Trustee or the Debenture Trustee and each appointment of a successor to such Trustees to all Securityholders in the manner provided in Section 10.8 and shall give notice to the Depositor. Each notice shall include the name of the successor Relevant Trustee and the address of its Corporate Trust Office if it is the Property Trustee. Notwithstanding the foregoing or any other provision of this Trust Agreement, in the event any Administrative Trustee or a Delaware Trustee who is a natural person dies or becomes, in the opinion of the Depositor, incompetent or incapacitated, the vacancy created by such death, incompetence or incapacity may be filled by (a) the unanimous act of remaining Administrative Trustees if - there are at least two of them or (b) otherwise by the Depositor (with the - successor in each case being a Person who satisfies the eligibility requirement for Administrative Trustees set forth in Section 8.7). Section 8.11 Acceptance of Appointment by Successor. -------------------------------------- In case of the appointment hereunder of a successor Trustee such successor Trustee so appointed shall execute, acknowledge and deliver to the Trust and to the retiring Trustee an instrument accepting such appointment, and thereupon the resignation or removal of the retiring Trustee shall become effective and such successor Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Trustee; but, on the request of the Depositor or the successor Trustee, such retiring Trustee shall, upon payment of its charges, execute and deliver an instrument transferring to such successor Trustee all the rights, powers and trusts of the retiring Trustee and if the Property Trustee is the resigning Trustee shall duly assign, transfer and deliver to the successor Trustee all property and money held by such retiring Property Trustee hereunder. In case of the appointment hereunder of a successor Relevant Trustee with respect to the Trust Securities and the Trust, the retiring Relevant Trustee (if requested by the Depositor) and each successor Relevant Trustee with respect to the Trust Securities shall execute and deliver an amendment hereto wherein each successor Relevant Trustee shall accept such appointment and which (a) shall contain such provisions as shall be necessary or desirable to transfer - and confirm to, and to vest in, each successor Relevant Trustee all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust and (b) shall add to or change any of the - provisions of this Trust Agreement as shall be necessary to provide for or facilitate the administration of the trusts hereunder by more than one Relevant Trustee, it being understood that nothing herein or in such amendment shall constitute such Relevant - 46 - Trustees co-trustees of the same trust and that each such Relevant Trustee shall be trustee of a trust or trusts hereunder separate and apart from any trust or trusts hereunder administered by any other such Relevant Trustee and upon the execution and delivery of such amendment the resignation or removal of the retiring Relevant Trustee shall become effective to the extent provided therein and each such successor Relevant Trustee, without any further act, deed or conveyance, shall become vested with all the rights, powers, trusts and duties of the retiring Relevant Trustee with respect to the Trust Securities and the Trust; but, on request of the Trust or any successor Relevant Trustee such retiring Relevant Trustee shall duly assign, transfer and deliver to such successor Relevant Trustee all Trust Property, all proceeds thereof and money held by such retiring Relevant Trustee hereunder with respect to the Trust Securities and the Trust. Upon request of any such successor Relevant Trustee, the Trust shall execute any and all instruments for more fully and certainly vesting in and confirming to such successor Relevant Trustee all such rights, powers and trusts referred to in the first or second preceding paragraph, as the case may be. No successor Relevant Trustee shall accept its appointment unless at the time of such acceptance such successor Relevant Trustee shall be qualified and eligible under this Article. Section 8.12 Merger, Conversion, Consolidation or Succession to Business. ----------------------------------------------------------- Any corporation into which the Property Trustee, the Delaware Trustee or any Administrative Trustee may be merged or converted or with which it may be consolidated, or any corporation resulting from any merger, conversion or consolidation to which such Relevant Trustee shall be a party, or any corporation succeeding to all or substantially all the corporate trust business of such Relevant Trustee, shall be the successor of such Relevant Trustee hereunder, provided such corporation shall be otherwise qualified and eligible under this Article, without the execution or filing of any paper or any further act on the part of any of the parties hereto. Section 8.13 Preferential Collection of Claims Against Depositor or Trust. ------------------------------------------------------------ If and when the Property Trustee shall be or become a creditor of the Depositor or the Trust (or any other obligor upon the Debentures or the Trust Securities), the Property Trustee shall be subject to and shall take all actions necessary in order to comply with the provisions of the Trust Indenture Act regarding the collection of claims against the Depositor or Trust (or any such other obligor). - 47 - Section 8.14 Reports by Property Trustee. --------------------------- (a) Within 60 days after December 31 of each year commencing with December 31, 2001 the Property Trustee shall transmit to all Securityholders in accordance with Section 10.8, and to the Depositor, a brief report dated as of such December 31 with respect to: (i) its eligibility under Section 8.7 or, in lieu thereof, if to the best of its knowledge it has continued to be eligible under said Section, a written statement to such effect; (ii) a statement that the Property Trustee has complied with all of its obligations under this Trust Agreement during the twelve-month period (or, in the case of the initial report, the period since the Closing Date) ending with such December 31 or, if the Property Trustee has not complied in any material respect with such obligations, a description of such noncompliance; and (iii) any change in the property and funds in its possession as Property Trustee since the date of its last report and any action taken by the Property Trustee in the performance of its duties hereunder which it has not previously reported and which in its opinion materially affects the Trust Securities. (b) In addition the Property Trustee shall transmit to Securityholders such reports concerning the Property Trustee and its actions under this Trust Agreement as may be required pursuant to the Trust Indenture Act at the times and in the manner provided pursuant thereto. (c) A copy of each such report shall, at the time of such transmission to Holders, be filed by the Property Trustee with each stock exchange upon which the Trust Securities are listed, with the Commission and with the Depositor. Section 8.15 Reports to the Property Trustee. ------------------------------- The Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such documents, reports and information as required by Section 314 of the Trust Indenture Act (if any) and the compliance certificate required by Section 314(a) of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. - 48 - Section 8.16 Evidence of Compliance with Conditions Precedent. ------------------------------------------------ Each of the Depositor and the Administrative Trustees on behalf of the Trust shall provide to the Property Trustee such evidence of compliance with any conditions precedent, if any, provided for in this Trust Agreement that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) of the Trust Indenture Act shall be given in the form of an Officers' Certificate. Section 8.17 Number of Trustees. ------------------ (a) The number of Trustees shall be four, provided that the Holder of all of the Common Securities by written instrument may increase or decrease the number of Administrative Trustees. (b) If a Trustee ceases to hold office for any reason and the number of Administrative Trustees is not reduced pursuant to Section 8.17(a), or if the number of Trustees is increased pursuant to Section 8.17(a), a vacancy shall occur. The vacancy shall be filled with a Trustee appointed in accordance with Section 8.10. (c) The death, resignation, retirement, removal, bankruptcy, incompetence or incapacity to perform the duties of a Trustee shall not operate to dissolve, terminate or annul the Trust. Whenever a vacancy in the number of Administrative Trustees shall occur, until such vacancy is filled by the appointment of an Administrative Trustee in accordance with Section 8.10, the Administrative Trustees in office, regardless of their number (and notwithstanding any other provision of this Agreement), shall have all the powers granted to the Administrative Trustees and shall discharge all the duties imposed upon the Administrative Trustees by this Trust Agreement. Section 8.18 Delegation of Power. ------------------- (a) Any Administrative Trustee may, by power of attorney consistent with applicable law, delegate to any other natural person over the age of 21 his or her power for the purpose of executing any documents contemplated in Section 2.7(a), including any registration statement or amendment thereto filed with the Commission, or making any other governmental filing; and - 49 - (b) The Administrative Trustees shall have power to delegate from time to time to such of their number or to the Depositor the doing of such things and the execution of such instruments either in the name of the Trust or the names of the Administrative Trustees or otherwise as the Administrative Trustees may deem expedient, to the extent such delegation is not prohibited by applicable law or contrary to the provisions of the Trust, as set forth herein. ARTICLE IX TERMINATION, LIQUIDATION AND MERGER ----------------------------------- Section 9.1 Termination Upon Expiration Date. -------------------------------- Unless earlier dissolved, the Trust shall automatically dissolve on October 26, 2055 (the "Expiration Date"). Immediately following the Expiration Date, the Trust Property shall be distributed in accordance with Section 9.4. Section 9.2 Early Termination. ----------------- The first to occur of any of the following events is an "Early Termination Event", the occurrence of which will cause the Trust to dissolve: (a) the occurrence of a Bankruptcy Event in respect of, or the dissolution or liquidation of, the Depositor; (b) written direction given to the Property Trustee from the Depositor at any time (which direction is optional and wholly within the discretion of the Depositor) to dissolve the Trust and distribute Debentures to Securityholders in exchange for the Preferred Securities; (c) the redemption of all of the Preferred Securities; and (d) an order for dissolution of the Trust shall have been entered by a court of competent jurisdiction. Section 9.3 Termination. ----------- The respective obligations and responsibilities of the Trustees and the Trust created and continued hereby shall terminate upon the latest to occur of the following: (a) the distribution by the Property Trustee to Securityholders - upon the liquidation of the Trust pursuant to Section 9.4, or upon the redemption of all of the Trust Securities pursuant to Section 4.2, of all amounts required to be distributed hereunder upon the final - 50 - payment of the Trust Securities; (b) the payment of any expenses owed by the - Trust; and (c) the discharge of all administrative duties of the Administrative - Trustees, including the performance of any tax reporting obligations with respect to the Trust or the Securityholders. Section 9.4 Liquidation. ----------- (a) If an Early Termination Event specified in clause (a), (b) or (d) of Section 9.2 occurs or upon the Expiration Date, the Trust shall be liquidated by the Trustees as expeditiously as the Trustees determine to be possible by distributing, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, to each Securityholder a Like Amount of Debentures, subject to Section 9.4(d). Notice of liquidation shall be given by the Property Trustee by first-class mail, postage prepaid, mailed not later than 30 nor more than 60 days prior to the Liquidation Date to each Holder of Trust Securities at such Holder's address appearing in the Securities Register. All notices of liquidation shall: (i) state the Liquidation Date; (ii) state that from and after the Liquidation Date, the Trust Securities will no longer be deemed to be outstanding and any Trust Securities Certificates not surrendered for exchange will be deemed to represent a Like Amount of Debentures; and (iii) provide such information with respect to the mechanics by which Holders may exchange Trust Securities Certificates for Debentures, or if Section 9.4(d) applies receive a Liquidation Distribution, as the Administrative Trustees or the Property Trustee shall deem appropriate. (b) Except where Section 9.2(c) or 9.4(d) applies, in order to effect the liquidation of the Trust and distribution of the Debentures to Securityholders, the Property Trustee shall establish a record date for such distribution (which shall be not more than 45 days prior to the Liquidation Date) and, either itself acting as exchange agent or through the appointment of a separate exchange agent, shall establish such procedures as it shall deem appropriate to effect the distribution of Debentures in exchange for the Outstanding Trust Securities Certificates. (c) Except where Section 9.2(c) or 9.4(d) applies, after the Liquidation Date, (i) the Trust Securities will no longer be deemed to be - outstanding, (ii) certificates representing a Like Amount of Debentures will be -- issued to holders of Trust Securities Certificates, upon surrender of such certificates to the - 51 - Administrative Trustees or their agent for exchange, (iii) the Depositor shall --- use its reasonable efforts to have the Debentures listed on the New York Stock Exchange or on such other exchange as the Preferred Securities are then listed, (iv) any Trust Securities Certificates not so surrendered for exchange will be -- deemed to represent a Like Amount of Debentures, accruing interest at the rate provided for in the Debentures from the last Distribution Date on which a Distribution was made on such Trust Certificates until such certificates are so surrendered (and until such certificates are so surrendered, no payments of interest or principal will be made to holders of Trust Securities Certificates with respect to such Debentures) and (v) all rights of Securityholders holding - Trust Securities will cease, except the right of such Securityholders to receive Debentures upon surrender of Trust Securities Certificates. (d) In the event that, notwithstanding the other provisions of this Section 9.4, whether because of an order for dissolution entered by a court of competent jurisdiction or otherwise, distribution of the Debentures in the manner provided herein is determined by the Property Trustee not to be practical, the Trust Property shall be liquidated, and the Trust shall be wound-up by the Property Trustee in such manner as the Property Trustee determines. In such event, Securityholders will be entitled to receive out of the assets of the Trust available for distribution to Securityholders, after satisfaction of liabilities to creditors of the Trust as provided by applicable law, an amount equal to the Liquidation Amount per Trust Security plus accrued and unpaid Distributions thereon to the date of payment (such amount being the "Liquidation Distribution"). If the Liquidation Distribution can be paid only in part because the Trust has insufficient assets available to pay in full the aggregate Liquidation Distribution, then, subject to the next succeeding sentence, the amounts payable by the Trust on the Trust Securities shall be paid on a pro rata basis (based upon Liquidation Amounts). The Holder of the Common Securities will be entitled to receive Liquidation Distributions upon any such dissolution, winding-up or termination pro rata (determined as aforesaid) with Holders of Preferred Securities, except that, if a Debenture Event of Default has occurred and is continuing, the Preferred Securities shall have a priority over the Common Securities. Section 9.5 Mergers, Consolidations, Amalgamations or Replacements of the ------------------------------------------------------------- Trust. ----- The Trust may not merge with or into, consolidate, amalgamate, or be replaced by, or convey, transfer or lease its properties and assets substantially as an entirety to any Person, except pursuant to Section 9.4 or this Section 9.5. At the request of the Depositor, with the consent of the Administrative Trustees and without the consent of the Holders of the Preferred Securities, the Trust may merge with or into, consolidate, - 52 - amalgamate, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to a trust organized as such under the laws of any State; provided, that (i) such successor entity either (a) expressly -------- - - assumes all of the obligations of the Trust with respect to the Preferred Securities or (b) substitutes for the Preferred Securities other securities - having substantially the same terms as the Preferred Securities (the "Successor Securities") so long as the Successor Securities rank the same as the Preferred Securities rank in priority with respect to distributions and payments upon liquidation, redemption and otherwise, (ii) the Depositor expressly appoints a -- trustee of such successor entity possessing the same powers and duties as the Property Trustee as the holder of the Debentures, (iii) the Successor Securities --- are listed, or any Successor Securities will be listed upon notification of issuance, on any national securities exchange or other organization on which the Preferred Securities are then listed, if any, (iv) such merger, consolidation, -- amalgamation, replacement, conveyance, transfer or lease does not cause the Preferred Securities (including any Successor Securities) to be downgraded by any nationally recognized statistical rating organization, (v) such merger, - consolidation, amalgamation, replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the holders of the Preferred Securities (including any Successor Securities) in any material respect, (vi) such successor entity has a purpose substantially identical to -- that of the Trust, (vii) prior to such merger, consolidation, amalgamation, --- replacement, conveyance, transfer or lease the Depositor has received an Opinion of Counsel to the effect that (a) such merger, consolidation, amalgamation, - replacement, conveyance, transfer or lease does not adversely affect the rights, preferences and privileges of the Holders of the Preferred Securities (including any Successor Securities) in any material respect, and (b) following such - merger, consolidation, amalgamation, replacement, conveyance, transfer or lease, neither the Trust nor such successor entity will be required to register as an investment company under the 1940 Act and (viii) the Depositor owns all of the ---- common securities of such successor entity and guarantees the obligations of such successor entity under the Successor Securities at least to the extent provided by the Guarantee. Notwithstanding the foregoing, the Trust shall not, except with the consent of holders of 100% in Liquidation Amount of the Preferred Securities, consolidate, amalgamate, merge with or into, or be replaced by or convey, transfer or lease its properties and assets substantially as an entirety to any other entity or permit any other entity to consolidate, amalgamate, merge with or into, or replace it if such consolidation, amalgamation, merger, replacement, conveyance, transfer or lease would cause the Trust or the successor entity to be classified as other than a grantor trust for federal income tax purposes. - 53 - ARTICLE X MISCELLANEOUS PROVISIONS ------------------------ Section 10.1 Limitation of Rights of Securityholders. ---------------------------------------- The death, termination, dissolution, bankruptcy or incapacity of any Person having an interest, beneficial or otherwise, in Trust Securities shall not operate to terminate this Trust Agreement, nor dissolve, terminate or annul the Trust, nor entitle the legal representatives or heirs of such Person or any Securityholder for such Person, to claim an accounting, take any action or bring any proceeding in any court for a partition or winding up of the arrangements contemplated hereby, nor otherwise affect the rights, obligations and liabilities of the parties hereto or any of them. Section 10.2 Amendment. --------- (a) This Trust Agreement may be amended from time to time by the Trustees and the Depositor, without the consent of any Securityholders, (i) to - cure any ambiguity, correct or supplement any provision herein or therein which may be inconsistent with any other provision herein or therein, or to make any other provisions with respect to matters or questions arising under this Trust Agreement, which shall not be inconsistent with the other provisions of this Trust Agreement, or (ii) to modify, eliminate or add to any provisions of this -- Trust Agreement to such extent as shall be necessary to ensure that the Trust will be classified for Federal income tax purposes as a grantor trust at all times that any Trust Securities are outstanding or to ensure that the Trust will not be required to register as an "investment company" under the 1940 Act; provided, however, that in the case of clause (i), such action shall not - -------- ------- adversely affect in any material respect the interests of any Securityholder, and any such amendments of this Trust Agreement shall become effective when notice thereof is given to the Securityholders. (b) Except as provided in Section 10.2(c) hereof, any provision of this Trust Agreement may be amended by the Trustees and the Depositor with (i) the - consent of Trust Securityholders representing not less than a majority (based upon Liquidation Amounts) of the Trust Securities then Outstanding and (ii) -- receipt by the Trustees of an Opinion of Counsel to the effect that such amendment or the exercise of any power granted to the Trustees in accordance with such amendment will not affect the Trust's status as a grantor trust for federal income tax purposes or the Trust's exemption from status of an "investment company" under the 1940 Act. - 54 - (c) In addition to and notwithstanding any other provision in this Trust Agreement, without the consent of each affected Securityholder, this Trust Agreement may not be amended to (i) change the amount or timing of any - Distribution on the Trust Securities or otherwise adversely affect the amount of any Distribution required to be made in respect of the Trust Securities as of a specified date or (ii) restrict the right of a Securityholder to institute suit -- for the enforcement of any such payment on or after such date; notwithstanding any other provision herein without the unanimous consent of the Securityholders, this paragraph (c) of this Section 10.2 may not be amended. (d) Notwithstanding any other provisions of this Trust Agreement, no Trustee shall enter into or consent to any amendment to this Trust Agreement which would cause the Trust to fail or cease to qualify for the exemption from status of an "investment company" under the 1940 Act. (e) Notwithstanding anything in this Trust Agreement to the contrary, without the consent of the Depositor, this Trust Agreement may not be amended in a manner which imposes any additional obligation on the Depositor. (f) In the event that any amendment to this Trust Agreement is made, the Administrative Trustees shall promptly provide to the Depositor a copy of such amendment. (g) Neither the Property Trustee nor the Delaware Trustee shall be required to enter into any amendment to this Trust Agreement which affects its own rights, duties or immunities under this Trust Agreement. The Property Trustee shall be entitled to receive an Opinion of Counsel and an Officer's Certificate stating that any amendment to this Trust Agreement is in compliance with this Trust Agreement. Section 10.3 Separability. ------------ In case any provision in this Trust Agreement or in the Trust Securities Certificates shall be invalid, illegal or unenforceable, the validity, legality and enforceability of the remaining provisions shall not in any way be affected or impaired thereby. Section 10.4 Governing Law. ------------- This Trust Agreement and the rights and obligations of each of the Securityholders, the Trust and the Trustees with respect to this Trust Agreement and the Trust Securities shall be construed in accordance with and governed by the laws of the State of Delaware. - 55 - Section 10.5 Payments Due on Non-Business Day. -------------------------------- If the date fixed for any payment on any Trust Security shall be a day which is not a Business Day, then such payment need not be made on such date but may be made on the next succeeding day which is a Business Day (except as otherwise provided in Section 4.1(a)), with the same force and effect as though made on the date fixed for such payment, and no interest shall accrue thereon for the period after such date. Section 10.6 Successors. ---------- This Trust Agreement shall be binding upon and shall inure to the benefit of any successor to the Depositor, the Trust or the Relevant Trustee, including any successor by operation of law. Except in connection with a consolidation, merger or sale involving the Depositor that is permitted under Article Eight of the Indenture and pursuant to which the assignee agrees in writing to perform the Depositor's obligations hereunder, the Depositor shall not assign its obligations hereunder. Section 10.7 Headings. -------- The Article and Section headings are for convenience only and shall not affect the construction of this Trust Agreement. Section 10.8 Reports, Notices and Demands. ---------------------------- Any report, notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon any Securityholder or the Depositor may be given or served in writing by deposit thereof, first-class postage prepaid, in the United States mail, hand delivery or facsimile transmission, in each case, addressed, (a) in the case of a Preferred Securityholder, to such Preferred Securityholder as such Securityholder's name and address may appear on the Securities Register; and (b) in the case of the Common Securityholder or the Depositor, to The Hartford Financial Services Group, Inc., Hartford Plaza, Hartford, Connecticut 06115, Attention: Treasurer, facsimile no.: (860) 547-5966. Any notice to Preferred Securityholders shall also be given to such owners as have, within two years preceding the giving of such notice, filed their names and addresses with the Property Trustee for that purpose. Such notice, demand or other communication to or upon a Securityholder shall be deemed to have been sufficiently given or made, for all purposes, upon hand delivery, mailing or transmission. Any notice, demand or other communication which by any provision of this Trust Agreement is required or permitted to be given or served to or upon the Trust, the - 56 - Property Trustee or the Administrative Trustees shall be given in writing addressed (until another address is published by the Trust) as follows: (a) with - respect to the Property Trustee to Wilmington Trust Company, 1100 N. Market Street, Wilmington, Delaware, Attention: Corporate Trust Administration; (b) - with respect to the Delaware Trustee, to Wilmington Trust Company, 1100 N. Market Street, Wilmington, Delaware, Attention: Corporate Trust Administration; and (c) with respect to the Administrative Trustees, to them at the address - above for notices to the Depositor, marked "Attention: Administrative Trustees of Hartford Capital III." Such notice, demand or other communication to or upon the Trust or the Property Trustee shall be deemed to have been sufficiently given or made only upon actual receipt of the writing by the Trust or the Property Trustee. Section 10.9 Agreement Not to Petition. ------------------------- Each of the Trustees and the Depositor agree for the benefit of the Securityholders that, until at least one year and one day after the Trust has been terminated in accordance with Article IX, they shall not file, or join in the filing of, a petition against the Trust under any bankruptcy, insolvency, reorganization or other similar law (including, without limitation, the United States Bankruptcy Code) (collectively, "Bankruptcy Laws") or otherwise join in the commencement of any proceeding against the Trust under any Bankruptcy Law. In the event the Depositor takes action in violation of this Section 10.9, the Property Trustee agrees, for the benefit of Securityholders, that at the expense of the Depositor, it shall file an answer with the bankruptcy court or otherwise properly contest the filing of such petition by the Depositor against the Trust or the commencement of such action and raise the defense that the Depositor has agreed in writing not to take such action and should be stopped and precluded therefrom and such other defenses, if any, as counsel for the Trustee or the Trust may assert. The provisions of this Section 10.9 shall survive the termination of this Trust Agreement. Section 10.10 Trust Indenture Act; Conflict with Trust Indenture Act. ------------------------------------------------------ (a) This Trust Agreement is subject to the provisions of the Trust Indenture Act that are required to be part of this Trust Agreement and shall, to the extent applicable, be governed by such provisions. (b) The Property Trustee shall be the only Trustee which is a trustee for the purposes of the Trust Indenture Act. (c) If any provision hereof limits, qualifies or conflicts with another provision hereof which is required to be included in this Trust Agreement by any - 57 - of the provisions of the Trust Indenture Act, such required provision shall control. If any provision of this Trust Agreement modifies or excludes any provision of the Trust Indenture Act which may be so modified or excluded, the latter provision shall be deemed to apply to this Trust Agreement as so modified or to be excluded, as the case may be. (d) The application of the Trust Indenture Act to this Trust Agreement shall not affect the nature of the Securities as equity securities representing undivided beneficial interests in the assets of the Trust. Section 10.11 Acceptance of Terms of Trust Agreement, Guarantee and ----------------------------------------------------- Indenture. --------- THE RECEIPT AND ACCEPTANCE OF A TRUST SECURITY OR ANY INTEREST THEREIN BY OR ON BEHALF OF A SECURITYHOLDER OR ANY BENEFICIAL OWNER, WITHOUT ANY SIGNATURE OR FURTHER MANIFESTATION OF ASSENT, SHALL CONSTITUTE THE UNCONDITIONAL ACCEPTANCE BY THE SECURITYHOLDER AND ALL OTHERS HAVING A BENEFICIAL INTEREST IN SUCH TRUST SECURITY OF ALL THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT AND AGREEMENT TO THE SUBORDINATION PROVISIONS AND OTHER TERMS OF THE GUARANTEE AND THE INDENTURE, AND SHALL CONSTITUTE THE AGREEMENT OF THE TRUST, SUCH SECURITYHOLDER AND SUCH OTHERS THAT THE TERMS AND PROVISIONS OF THIS TRUST AGREEMENT SHALL BE BINDING, OPERATIVE AND EFFECTIVE AS BETWEEN THE TRUST AND SUCH SECURITYHOLDER AND SUCH OTHERS. - 58 - THE HARTFORD FINANCIAL SERVICES GROUP, INC. By: /s/ J. RICHARD GARRETT --------------------------------------------- Name: J. Richard Garrett Title: Senior Vice President and Treasurer WILMINGTON TRUST COMPANY, as Property Trustee and Delaware Trustee By: /s/ MARY C. ST. AMAND --------------------------------------------- Name: Mary C. St. Amand Title: Assistant Vice President By: /s/ DAVID M. JOHNSON --------------------------------------------- David M. Johnson as Administrative Trustee By: /s/ J. RICHARD GARRETT --------------------------------------------- J. Richard Garrett as Administrative Trustee - 59 - EXHIBIT A CERTIFICATE OF TRUST OF HARTFORD CAPITAL III THIS CERTIFICATE OF TRUST of Hartford Capital III (the "Trust"), dated October 25, 1995, is being duly executed and filed by the undersigned, as trustees, to form a business trust under the Delaware Business Trust Act (12 Del. C. (S) 3801 et seq.). 1. Name. The name of the business trust being formed hereby is Hartford Capital III. 2. Delaware Trustee. The name and business address of the trustee of the Trust with a principal place of business in the State of Delaware are Wilmington Trust Company, 1100 N. Market Street, Wilmington, Delaware, Attention: Corporate Trust Department. 3. Effective Date. This Certificate of Trust shall be effective as of its filing. IN WITNESS WHEREOF, the undersigned, being the sole trustee of the Trust, have executed this Certificate of Trust as of the date first above written. WILMINGTON TRUST COMPANY, as Trustee By ------------------------------------ Name: Title: A-1 EXHIBIT B October __, 2001 #21223901 v6 - Amended and Restated Trust Agreement.doc The Depository Trust Company, 55 Water Street, 49th Floor, New York, New York 10041-0099 Attention:___________________________ General Counsel's Office Re: Hartford Capital III Trust Originated Preferred Securities ---------------------------------------------------------- Ladies and Gentlemen: The purpose of this letter is to set forth certain matters relating to the issuance and deposit with The Depository Trust Company ("DTC") of the Hartford Capital III 7.45% Trust Originated Preferred Securities (the "Preferred Securities"), of Hartford Capital III, a Delaware statutory business trust (the "Issuer"), formed pursuant to an Amended and Restated Trust Agreement between The Hartford Financial Services Group, Inc. ("Hartford") and Wilmington Trust Company, as Trustee. The payment of distributions on the Preferred Securities to the extent the Issuer has funds available for the payment thereof, and payments due upon liquidation of Issuer or redemption of the Preferred Securities are guaranteed by Hartford to the extent set forth in a Guarantee Agreement, dated October 26, 2001, by Hartford with respect to the Preferred Securities. Hartford and the Issuer propose to sell the Preferred Securities to certain Underwriters (the "Underwriters") pursuant to an Underwriting Agreement, dated October 19, 2001, by and among the Underwriters, the Issuer and Hartford, and the Underwriters wish to take delivery of the Preferred Securities through DTC. Wilmington Trust Company in its capacity as Property Trustee and Delaware Trustee under the Amended and Restated Trust Agreement, is acting as transfer agent and registrar with respect to the Preferred Securities (the "Transfer Agent and Registrar"). To induce DTC to accept the Preferred Securities as eligible for deposit at DTC, and to act in accordance with DTC's rules with respect to the Preferred Securities, the Issuer, the Transfer Agent and Registrar and DTC agree among each other as follows: 1. Prior to the closing of the sale of the Preferred Securities to the Underwriters, which is expected to occur on or about October 26, 2001, there shall be deposited with DTC one or more global certificates (individually and collectively, the "Global Certificate") registered in the name of DTC's Preferred Securities nominee, Cede & Co., representing an aggregate of _______ Preferred Securities and bearing the following legend: Unless this certificate is presented by an authorized representative of The Depository Trust Company, a New York corporation ("DTC"), to Issuer or its agent for registration of transfer, exchange, or payment, and any B-1 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. 2. The Amended and Restated Trust Agreement of the Issuer provides for the voting by holders of the Preferred Securities under certain limited circumstances. The Issuer shall establish a record date for such purposes and shall, to the extent possible, give DTC notice of such record date not less than 15 calendar days in advance of such record date. 3. In the event of a stock split, conversion, recapitalization, reorganization or any other similar transaction resulting in the cancellation of all or any part of the Preferred Securities outstanding, the Issuer or the Transfer Agent and Registrar shall send DTC a notice of such event at least 5 business days prior to the effective date of such event. 4. In the event of distribution on, or an offering or issuance of rights with respect to, the Preferred Securities outstanding, the Issuer or the Transfer Agent and Registrar shall send DTC a notice specifying: (a) the amount of and conditions, if any, applicable to the payment of any such distribution or any such offering or issuance of rights; (b) any applicable expiration or deadline date, or any date by which any action on the part of the holders of Preferred Securities is required; and (c) the date any required notice is to be mailed by or on behalf of the Issuer to holders of Preferred Securities or published by or on behalf of the Issuer (whether by mail or publication, the "Publication Date"). Such notice shall be sent to DTC by a secure means (e.g., legible telecopy, registered or certified mail, overnight delivery) in a timely manner designed to assure that such notice is in DTC's possession no later than the close of business on the business day before the Publication Date. The Issuer or the Transfer Agent and Registrar will forward such notice either in a separate secure transmission for each CUSIP number or in a secure transmission of multiple CUSIP numbers (if applicable) that includes a manifest or list of each CUSIP number submitted in that transmission. (The party sending such notice shall have a method to verify subsequently the use of such means and the timeliness of such notice.) The Publication Date shall be not less than 30 calendar days nor more than 60 calendar days prior to the payment of any such distribution or any such offering or issuance of rights with respect to the Preferred Securities. After establishing the amount of payment to be made on the Preferred Securities, the Issuer or the Transfer Agent and Registrar will notify DTC's Dividend Department of such payment 5 business days prior to payment date. Notices to DTC's Dividend Department by telecopy shall be sent to (212) 709-1723. Such notices by mail or by any other means shall be sent to: B-2 Manager, Announcements Dividend Department The Depository Trust Company 7 Hanover Square, 23rd Floor New York, New York 10004-2695 The Issuer or the Transfer Agent and Registrar shall confirm DTC's receipt of such telecopy by telephoning the Dividend Department at (212) 709-1270. 5. In the event of a redemption by the Issuer of the Preferred Securities, notice specifying the terms of the redemption and the Publication Date of such notice shall be sent by the Issuer or the Transfer Agent and Registrar to DTC not less than 30 calendar days prior to such event by a secure means in the manner set forth in paragraph 4. Such redemption notice shall be sent to DTC's Call Notification Department at (516) 227-4164 or (516) 227-4190, and receipt of such notice shall be confirmed by telephoning (516) 227-4070. Notice by mail or by any other means shall be sent to: Call Notification Department The Depository Trust Company 711 Stewart Avenue Garden City, New York 11530-4719 6. In the event of any invitation to tender the Preferred Securities, notice specifying the terms of the tender and the Publication Date of such notice shall be sent by the Issuer or the Transfer Agent and Registrar to DTC by a secure means and in a timely manner as described in paragraph 4. Notices to DTC pursuant to this paragraph and notices of other corporate actions (including mandatory tenders, exchanges and capital changes), shall be sent, unless notification to another department is expressly provided for herein, by telecopy to DTC's Reorganization Department at (212) 709-1093 or (212) 709-1094 and receipt of such notice shall be confirmed by telephoning (212) 709-6884, or by mail or any other means to: Manager, Reorganization Department Reorganization Window The Depository Trust Company 7 Hanover Square, 23rd Floor New York, New York 10004-2695 7. All notices and payment advices sent to DTC shall contain the CUSIP number or numbers of the Preferred Securities and the accompanying designation of the Preferred Securities, which, as of the date of this letter is "Hartford Capital III 7.45% Trust Originated Preferred Securities ." B-3 8. Distribution payments or other cash payments with respect to the Preferred Securities evidenced by the Global Certificate shall be received by Cede & Co., as nominee of DTC, or its registered assigns in next day funds on each payment date (or in accordance with existing arrangements between the Issuer or the Transfer Agent and Registrar and DTC). Such payments shall be made payable to the order of Cede & Co., and shall be addressed as follows: NDFS Redemption Department The Depository Trust Company 7 Hanover Square, 23rd Floor New York, New York 10004-2695 9. DTC may by prior written notice direct the Issuer and the Transfer Agent and Registrar to use any other telecopy number or address of DTC as the number or address to which notices or payments may be sent. 10. In the event of a conversion, redemption, or any other similar transaction (e.g., tender made and accepted in response to the Issuer's or the - - Transfer Agent and Registrar's invitation) necessitating a reduction in the aggregate number of Preferred Securities outstanding evidenced by the Global Certificate, DTC, in its discretion: (a) may request the Issuer or the Transfer Agent and Registrar to issue and countersign a new Global Certificate; or (b) may make an appropriate notation on the Global Certificate indicating the date and amount of such reduction. 11. DTC may discontinue its services as a securities depositary with respect to the Preferred Securities at any time by giving at least 90 days' prior written notice to the Issuer and the Transfer Agent and Registrar (at which time DTC will confirm with the Issuer or the Transfer Agent and Registrar the aggregate number of Preferred Securities deposited with it) and discharging its responsibilities with respect thereto under applicable law. Under such circumstances, the Issuer may determine to make alternative arrangements for book-entry settlement for the Preferred Securities, make available one or more separate global certificates evidencing Preferred Securities to any Participant having Preferred Securities credited to its DTC account, or issue definitive Preferred Securities to the beneficial holders thereof, and in any such case, DTC agrees to cooperate fully with the Issuer and the Transfer Agent and Registrar and to return the Global Certificate, duly endorsed for transfer as directed by the Issuer or the Transfer Agent and Registrar, together with any other documents of transfer reasonably requested by the Issuer or the Transfer Agent and Registrar. 12. In the event that the Issuer determines that beneficial owners of Preferred Securities shall be able to obtain definitive Preferred Securities, the Issuer or the Transfer Agent and Registrar shall notify DTC of the availability of certificates. In such event, the Issuer or the Transfer Agent and Registrar shall issue, transfer and exchange certificates B-4 in appropriate amounts, as required by DTC and others, and DTC agrees to cooperate fully with the Issuer and the Transfer Agent and Registrar and to return the Global Certificate, duly endorsed for transfer as directed by the Issuer or the Transfer Agent and Registrar, together with any other documents of transfer reasonably requested by the Issuer or the Transfer Agent and Registrar. 13. This letter may be executed in any number of counterparts, each of which when so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. Nothing herein shall be deemed to require the Transfer Agent and Registrar to advance funds on behalf of Hartford Capital III. Very truly yours, HARTFORD CAPITAL III (As Issuer) By:[Name of Trustee] Administrative Trustee By _____________________________________ Name: Title: WILMINGTON TRUST COMPANY (Not in its individual capacity but solely as Property Trustee under the Amended and Restated Trust Agreement, as Transfer Agent and Registrar) By _____________________________________ Name: Title: RECEIVED AND ACCEPTED: THE DEPOSITORY TRUST COMPANY By _____________________________ Authorized Officer B-5 EXHIBIT C THIS CERTIFICATE IS NOT TRANSFERABLE EXCEPT AS PROVIDED IN THE TRUST AGREEMENT (AS DEFINED BELOW). Certificate Number Number of Common Securities C-__________ Certificate Evidencing Common Securities of Hartford Capital III 7.45% Common Securities (liquidation amount $25 per Common Security) Hartford Capital III, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that The Hartford Financial Services Group, Inc. (the "Holder") is the registered owner of ________ common securities of the Trust representing undivided beneficial interests in the assets of the Trust and designated the 7.45% Common Securities (liquidation amount $25 per Common Security) (the "Common Securities"). Except as provided in Section 5.10 of the Trust Agreement (as defined below) the Common Securities are not transferable and to the fullest extent permitted by law, any attempted transfer hereof shall be void. The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Common Securities are set forth in, and this certificate and the Common Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust dated as of October 26, 2001, as the same may be amended from time to time (the "Trust Agreement") including the designation of the terms of the Common Securities as set forth therein. The Trust will furnish a copy of the Trust Agreement to the Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. C-1 IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has executed this certificate this ______ day of ________ ____. HARTFORD CAPITAL III By _____________________________ Name: Administrative Trustee C-2 EXHIBIT D AGREEMENT AS TO EXPENSES AND LIABILITIES AGREEMENT, dated as of October, 2001, between The Hartford Financial Services Group, Inc., a Delaware corporation ("Hartford"), and Hartford Capital III, a Delaware business trust (the "Trust"). WHEREAS, the Trust intends to issue its Common Securities (the "Common Securities") to and receive Debentures from Hartford and to issue and sell 7.45% Trust Originated Preferred Securities (the "Preferred Securities") with such powers, preferences and special rights and restrictions as are set forth in the Amended and Restated Trust Agreement of the Trust dated as of October 26, 2001 as the same may be amended from time to time (the "Trust Agreement"); WHEREAS, Hartford will directly or indirectly own all of the Common Securities of Trust and will issue the Debentures; NOW, THEREFORE, in consideration of the purchase by each holder of the Preferred Securities, which purchase Hartford hereby agrees shall benefit Hartford and which purchase Hartford acknowledges will be made in reliance upon the execution and delivery of this Agreement, Hartford and Trust hereby agree as follows: ARTICLE I Section 1.1 Guarantee by Hartford. --------------------- Subject to the terms and conditions hereof, Hartford hereby irrevocably and unconditionally guarantees to each person or entity to whom the Trust is now or hereafter becomes indebted or liable (the "Beneficiaries") the full payment, when and as due, of any and all Obligations (as hereinafter defined) to such Beneficiaries. As used herein, "Obligations" means any costs, expenses or liabilities of the Trust, other than obligations of the Trust to pay to holders of any Preferred Securities or other similar interests in the Trust the amounts due such holders pursuant to the terms of the Preferred Securities or such other similar interests, as the case may be. This Agreement is intended to be for the benefit of, and to be enforceable by, all such Beneficiaries, whether or not such Beneficiaries have received notice hereof. Section 1.2. Term of Agreement. ----------------- This Agreement shall terminate and be of no further force and effect upon the later of (a) the date on which full payment has been made of all - amounts payable to all holders of all the Preferred Securities (whether upon redemption, liquidation, exchange or otherwise) and (b) the date on which there - are no Beneficiaries remaining; provided, however, that this Agreement shall -------- continue to be effective or shall be reinstated, as the case may be, if at any time any holder of Preferred Securities or any Beneficiary must D-1 restore payment of any sums paid under the Preferred Securities, under any Obligation, under the Guarantee Agreement dated the date hereof by Hartford and Wilmington Trust Company as guarantee trustee or under this Agreement for any reason whatsoever. This Agreement is continuing, irrevocable, unconditional and absolute. Section 1.3. Waiver of Notice. ---------------- Hartford hereby waives notice of acceptance of this Agreement and of any Obligation to which it applies or may apply, and Hartford hereby waives presentment, demand for payment, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. Section 1.4. No Impairment. ------------- The obligations, covenants, agreements and duties of Hartford under this Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the extension of time for the payment by the Trust of all or any portion of the Obligations or for the performance of any other obligation under, arising out of, or in connection with, the obligations; (b) any failure, omission, delay or lack of diligence on the part of the Beneficiaries to enforce, assert or exercise any right, privilege, power or remedy conferred on the Beneficiaries with respect to the Obligations or any action on the part of the Trust granting indulgence or extension of any kind; or (c) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Trust or any of the assets of the Trust. There shall be no obligation of the Beneficiaries to give notice to, or obtain the consent of, Hartford with respect to the happening of any of the foregoing. Section 1.5. Enforcement. ----------- A Beneficiary may enforce this Agreement directly against Hartford and Hartford waives any right or remedy to require that any action be brought against the Trust or any other person or entity before proceeding against Hartford. D-2 ARTICLE II Section 2.1. Binding Effect. -------------- All guarantees and agreements contained in this Agreement shall bind the successors, assigns, receivers, trustees and representatives of Hartford and shall inure to the benefit of the Beneficiaries. Section 2.2. Amendment. --------- So long as there remains any Beneficiary or any Preferred Securities of any series are outstanding, this Agreement shall not be modified or amended in any manner adverse to such Beneficiary or to the holders of the Preferred Securities. Section 2.3. Notices. ------- Any notice, request or other communication required or permitted to be given hereunder shall be given in writing by delivering the same against receipt therefor by facsimile transmission (confirmed by mail), telex or by registered or certified mail, addressed as follows (and if so given, shall be deemed given when mailed or upon receipt of an answer-back, if sent by telex): Hartford Capital III c/o Wilmington Trust Company 1100 N. Market Street Wilmington, Delaware 19890 Facsimile No.: (302) 651-8882 Attention: Corporate Trust Department The Hartford Financial Services Group, Inc. Hartford Plaza Hartford, Connecticut 06115 Facsimile No.: (860) 547-5966 Attention: Treasurer Section 2.4. This agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York. D-3 THIS AGREEMENT is executed as of the day and year first above written. THE HARTFORD FINANCIAL SERVICES GROUP, INC. By: __________________________ Name: Title: HARTFORD CAPITAL III By: __________________________ Name: Administrative Trustee D-4 EXHIBIT D IF THE PREFERRED SECURITY IS TO BE A GLOBAL CERTIFICATE INSERT - This Preferred Security is a Global Certificate within the meaning of the Trust Agreement hereinafter referred to and is registered in the name of The Depository Trust Company (the "Depository") or a nominee of the Depository. This Preferred Security is exchangeable for Preferred Securities registered in the name of a person other than the Depository or its nominee only in the limited circumstances described in the Trust Agreement and no transfer of this Preferred Security (other than a transfer of this Preferred Security as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository) may be registered except in limited circumstances. Unless this Preferred Security is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York) to Hartford Capital III or its agent for registration of transfer, exchange or payment, and any Preferred Security issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & Co., any transfer, pledge or other use hereof for value or otherwise by a person is wrongful inasmuch as the registered owner hereof, Cede & Co., has an interest herein. Certificate Number Number of Preferred Securities P-___________ CUSIP NO. Certificate Evidencing Preferred Securities of Hartford Capital III 7.45% Trust Originated Preferred Securities, Series C (liquidation amount $25 per Preferred Security) Hartford Capital III, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that _______________ (the "Holder") is the registered owner of ____________ (__________) preferred securities of the Trust representing an undivided beneficial interest in the assets of the Trust and designated the Hartford Capital III 7.45% Trust Originated Preferred Securities, Series A (liquidation amount $25 per Preferred Security) (the "Preferred Securities"). The Preferred Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer E-1 as provided in Section 5.4 of the Trust Agreement (as defined below). The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities are set forth in, and this certificate and the Preferred Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust dated as of October 26, 2001, as the same may be amended from time to time (the "Trust Agreement") including the designation of the terms of Preferred Securities as set forth therein. The Holder is entitled to the benefits of the Guarantee Agreement entered into by The Hartford Financial Services Group, Inc., a Delaware corporation, and Wilmington Trust Company, as guarantee trustee, dated as of October 26, 2001, as the same may be amended from time to time (the "Guarantee"), to the extent provided therein. The Trust will furnish a copy of the Trust Agreement and the Guarantee to the Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. E-2 IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has executed this certificate this ___________ day of ____. HARTFORD CAPITAL III By: ______________________________ Name: Administrative Trustee E-3 ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Preferred Security to: (Insert assignee's social security or tax identification number) (Insert address and zip code of assignee) and irrevocably appoints agent to transfer this Preferred Securities Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date:_____________ Signature:___________________________ (Sign exactly as your name appears on the other side of this Preferred Securities Certificate) E-4 EX-4 5 exh4_29.txt EXHIBIT 4.29 EXHIBIT 4.29 AGREEMENT AS TO EXPENSES AND LIABILITIES AGREEMENT dated as of October 26, 2001, between The Hartford Financial Services Group, Inc., a Delaware corporation ("Hartford"), and Hartford Capital III, a Delaware business trust (the "Trust"). WHEREAS, the Trust intends to issue its Common Securities (the "Common Securities") to and receive Debentures from Hartford and to issue and sell 7.45% Trust Originated Preferred Securities (the "Preferred Securities") with such powers, preferences and special rights and restrictions as are set forth in the Amended and Restated Trust Agreement of the Trust dated as of October 26, 2001 as the same may be amended from time to time (the "Trust Agreement"); WHEREAS, Hartford will directly or indirectly own all of the Common Securities of Trust and will issue the Debentures; NOW, THEREFORE, in consideration of the purchase by each holder of the Preferred Securities, which purchase Hartford hereby agrees shall benefit Hartford and which purchase Hartford acknowledges will be made in reliance upon the execution and delivery of this Agreement, Hartford and Trust hereby agree as follows: ARTICLE I Section 1.1 Guarantee by Hartford. --------------------- Subject to the terms and conditions hereof, Hartford hereby irrevocably and unconditionally guarantees to each person or entity to whom the Trust is now or hereafter becomes indebted or liable (the "Beneficiaries") the full payment, when and as due, of any and all Obligations (as hereinafter defined) to such Beneficiaries. As used herein, "Obligations" means any costs, expenses or liabilities of the Trust, other than obligations of the Trust to pay to holders of any Preferred Securities or other similar interests in the Trust the amounts due such holders pursuant to the terms of the Preferred Securities or such other similar interests, as the case may be. This Agreement is intended to be for the benefit of, and to be enforceable by, all such Beneficiaries, whether or not such Beneficiaries have received notice hereof. Section 1.2. Term of Agreement. ----------------- This Agreement shall terminate and be of no further force and effect upon the later of (a) the date on which full payment has been made of all - amounts payable to all holders of all the Preferred Securities (whether upon redemption, liquidation, exchange or otherwise) and (b) the date on which there - are no Beneficiaries remaining; provided, however, that this Agreement shall -------- continue to be effective or shall be reinstated, as the case may be, if at any time any holder of Preferred Securities or any Beneficiary must restore payment of any sums paid under the Preferred Securities, under any Obligation, under the Guarantee Agreement dated the date hereof by Hartford and Wilmington Trust Company as guarantee trustee or under this Agreement for any reason whatsoever. This Agreement is continuing, irrevocable, unconditional and absolute. Section 1.3. Waiver of Notice. ---------------- Hartford hereby waives notice of acceptance of this Agreement and of any Obligation to which it applies or may apply, and Hartford hereby waives presentment, demand for payment, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. Section 1.4. No Impairment. ------------- The obligations, covenants, agreements and duties of Hartford under this Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the extension of time for the payment by the Trust of all or any portion of the Obligations or for the performance of any other obligation under, arising out of, or in connection with, the obligations; (b) any failure, omission, delay or lack of diligence on the part of the Beneficiaries to enforce, assert or exercise any right, privilege, power or remedy conferred on the Beneficiaries with respect to the Obligations or any action on the part of the Trust granting indulgence or extension of any kind; or (c) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt, or other similar proceedings affecting the Trust or any of the assets of the Trust. There shall be no obligation of the Beneficiaries to give notice to, or obtain the consent of, Hartford with respect to the happening of any of the foregoing. Section 1.5. Enforcement. ----------- A Beneficiary may enforce this Agreement directly against Hartford and Hartford waives any right or remedy to require that any action be brought against the Trust or any other person or entity before proceeding against Hartford. - 2 - ARTICLE II Section 2.1. Binding Effect. -------------- All guarantees and agreements contained in this Agreement shall bind the successors, assigns, receivers, trustees and representatives of Hartford and shall inure to the benefit of the Beneficiaries. Section 2.2. Amendment. --------- So long as there remains any Beneficiary or any Preferred Securities of any series are outstanding, this Agreement shall not be modified or amended in any manner adverse to such Beneficiary or to the holders of the Preferred Securities. Section 2.3. Notices. ------- Any notice, request or other communication required or permitted to be given hereunder shall be given in writing by delivering the same against receipt therefor by facsimile transmission (confirmed by mail), telex or by registered or certified mail, addressed as follows (and if so given, shall be deemed given when mailed or upon receipt of an answer-back, if sent by telex): Hartford Capital III c/o Wilmington Trust Company 1100 N. Market Street Wilmington, Delaware 19890 Facsimile No.: (302) 651-8882 Attention: Corporate Trust Department The Hartford Financial Services Group, Inc. Hartford Plaza Hartford, Connecticut Facsimile No.: (860) 547-5462 Attention: Treasurer Section 2.4. This agreement shall be governed by and construed and interpreted in accordance with the laws of the State of New York. - 3 - THIS AGREEMENT is executed as of the day and year first above written. THE HARTFORD FINANCIAL SERVICES GROUP, INC. By:/s/ DAVID M. JOHNSON ------------------------------------ Name: David M. Johnson Title: Executive Vice President and Chief Financial Officer HARTFORD CAPITAL III By:/s/ J. RICHARD GARRETT ------------------------------------ Name: J. Richard Garrett Administrative Trustee - 4 - EX-4 6 exh4_30.txt EXHIBIT 4.30 EXHIBIT 4.30 This Preferred Security is a Global Certificate within the meaning of the Trust Agreement hereinafter referred to and is registered in the name of The Depository Trust Company (the "Depository") or a nominee of the Depository. This Preferred Security is exchangeable for Preferred Securities registered in the name of a person other than the Depository or its nominee only in the limited circumstances described in the Trust Agreement and no transfer of this Preferred Security (other than a transfer of this Preferred Security as a whole by the Depository to a nominee of the Depository or by a nominee of the Depository to the Depository or another nominee of the Depository) may be registered except in limited circumstances. Unless this Preferred Security is presented by an authorized representative of The Depository Trust Company (55 Water Street, New York) to Hartford Capital III or its agent for registration of transfer, exchange or payment, and any Preferred Security issued is registered in the name of Cede & Co. or such other name as requested by an authorized representative of The Depository Trust Company and any payment hereon is made to Cede & Co., any transfer, pledge or other use hereof for value or otherwise by a person is wrongful inasmuch as the registered owner hereof, Cede & Co., has an interest herein. Certificate Number Number of Preferred Securities P-1 16,000,000 CUSIP NO. 41631P 20 4 Certificate Evidencing Preferred Securities of Hartford Capital III 7.45% Trust Originated Preferred Securities, Series C (liquidation amount $25 per Preferred Security) Hartford Capital III, a statutory business trust formed under the laws of the State of Delaware (the "Trust"), hereby certifies that Cede & Co. (the "Holder") is the registered owner of SIXTEEN MILLION (16,000,000) preferred securities of the Trust representing an undivided beneficial interest in the assets of the Trust and designated the Hartford Capital III 7.45% Trust Originated Preferred Securities, Series C (liquidation amount $25 per Preferred Security) (the "Preferred Securities"). The Preferred Securities are transferable on the books and records of the Trust, in person or by a duly authorized attorney, upon surrender of this certificate duly endorsed and in proper form for transfer as provided in Section 5.4 of the Trust Agreement (as defined below). The designations, rights, privileges, restrictions, preferences and other terms and provisions of the Preferred Securities are set forth in, and this certificate and the Preferred Securities represented hereby are issued and shall in all respects be subject to the terms and provisions of, the Amended and Restated Trust Agreement of the Trust dated as of October 26, 2001, as the same may be amended from time to time (the "Trust Agreement") including the designation of the terms of Preferred Securities as set forth therein. The Holder is entitled to the benefits of the Guarantee Agreement entered into by The Hartford Financial Services Group, Inc., a Delaware corporation, and Wilmington Trust Company, as guarantee trustee, dated as of October 26, 2001, as the same may be amended from time to time (the "Guarantee"), to the extent provided therein. The Trust will furnish a copy of the Trust Agreement and the Guarantee to the Holder without charge upon written request to the Trust at its principal place of business. Upon receipt of this certificate, the Holder is bound by the Trust Agreement and is entitled to the benefits thereunder. IN WITNESS WHEREOF, one of the Administrative Trustees of the Trust has executed this certificate this ___________ day of October 2001. ------------ HARTFORD CAPITAL III By: /s/ DAVID M. JOHNSON ---------------------- Name: David M. Johnson Administrative Trustee ASSIGNMENT FOR VALUE RECEIVED, the undersigned assigns and transfers this Preferred Security to: (Insert assignee's social security or tax identification number) (Insert address and zip code of assignee) and irrevocably appoints agent to transfer this Preferred Securities Certificate on the books of the Trust. The agent may substitute another to act for him or her. Date:_____________ Signature:___________________________ (Sign exactly as your name appears on the other side of this Preferred Securities Certificate) EX-4 7 exh4_31.txt EXHIBIT 4.31 ================================================================================ EXHIBIT 4.31 GUARANTEE AGREEMENT Between The Hartford Financial Services Group, Inc. (as Guarantor) and Wilmington Trust Company (as Guarantee Trustee) dated as of October 26, 2001 ================================================================================ TABLE OF CONTENTS ----------------- Page ---- ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions....................................................1 ARTICLE 2 TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application...............................5 SECTION 2.2 List of Holders................................................5 SECTION 2.3 Reports by the Guarantee Trustee...............................5 SECTION 2.4 Periodic Reports to Guarantee Trustee..........................5 SECTION 2.5 Evidence of Compliance with Conditions Precedent...............6 SECTION 2.6 Events of Default; Waiver......................................6 SECTION 2.7 Event of Default; Notice.......................................6 SECTION 2.8 Conflicting Interests..........................................6 ARTICLE 3 POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of the Guarantee Trustee.....................7 SECTION 3.2 Certain Rights of Guarantee Trustee............................8 SECTION 3.3 Indemnity.....................................................10 ARTICLE 4 GUARANTEE TRUSTEE SECTION 4.1 Guarantee Trustee; Eligibility................................10 SECTION 4.2 Appointment, Removal and Resignation of the Guarantee Trustee.11 ARTICLE 5 GUARANTEE SECTION 5.1 Guarantee.....................................................12 SECTION 5.2 Waiver of Notice and Demand...................................12 SECTION 5.3 Obligations Not Affected......................................12 SECTION 5.4 Rights of Holders.............................................13 SECTION 5.5 Guarantee of Payment..........................................13 i TABLE OF CONTENTS ----------------- (continued) SECTION 5.6 Subrogation...................................................13 SECTION 5.7 Independent Obligations.......................................14 ARTICLE 6 COVENANTS AND SUBORDINATION SECTION 6.1 Subordination.................................................14 SECTION 6.2 Pari Passu Guarantees.........................................14 ARTICLE 7 TERMINATION SECTION 7.1 Termination...................................................14 ARTICLE 8 MISCELLANEOUS SECTION 8.1 Successors and Assigns........................................15 SECTION 8.2 Amendments....................................................15 SECTION 8.3 Notices.......................................................15 SECTION 8.4 Benefit.......................................................16 SECTION 8.5 Interpretation................................................16 SECTION 8.6 GOVERNING LAW.................................................17 ii GUARANTEE AGREEMENT ------------------- This GUARANTEE AGREEMENT, dated as of October 26, 2001, is executed and delivered by The Hartford Financial Services Group, Inc., a Delaware corporation (the "Guarantor"), and Wilmington Trust Company, a Delaware banking corporation organized under the laws of the State of Delaware, as trustee (the "Guarantee Trustee"), for the benefit of the Holders (as defined herein) from time to time of the Preferred Securities (as defined herein) of Hartford Capital III, a Delaware statutory business trust (the "Issuer"). WHEREAS, pursuant to an Amended and Restated Trust Agreement (the "Trust Agreement"), dated as of October 26, 2001 among the Issuer's Trustees named therein, the Guarantor, as Depositor, and the Holders from time to time of undivided beneficial interests in the assets of the Issuer, the Issuer is issuing up to $575,000,000 aggregate liquidation preference amount of its 7.45% Preferred Securities, Series A (liquidation preference $25 per preferred security) (the "Preferred Securities") representing preferred undivided beneficial interests in the assets of the Issuer and having the terms set forth in the Trust Agreement; WHEREAS, the Preferred Securities will be issued by the Issuer and the proceeds thereof, together with the proceeds from the issuance of the Issuer's Common Securities (as defined below), will be used to purchase the Debentures (as defined in the Trust Agreement) of the Guarantor which will be deposited with Wilmington Trust Company, as Property Trustee under the Trust Agreement, as trust assets; and WHEREAS, as incentive for the Holders to purchase Preferred Securities the Guarantor desires irrevocably and unconditionally to agree, to the extent set forth herein, to pay to the Holders of the Preferred Securities the Guarantee Payments (as defined herein) and to make certain other payments on the terms and conditions set forth herein. NOW, THEREFORE, in consideration of the purchase by each Holder of Preferred Securities, which purchase the Guarantor hereby agrees shall benefit the Guarantor, the Guarantor executes and delivers this Guarantee Agreement for the benefit of the Holders from time to time of the Preferred Securities. ARTICLE 1 DEFINITIONS SECTION 1.1 Definitions. ----------- As used in this Guarantee Agreement, the terms set forth below shall, unless the context otherwise requires, have the following meanings. Capitalized or otherwise defined terms used but not otherwise defined herein shall have the meanings assigned to such terms in the Trust Agreement as in effect on the date hereof. "Affiliate" of any specified Person means any other Person directly or --------- indirectly controlling or controlled by or under direct or indirect common control with such specified Person, provided, however, that an Affiliate of the -------- ------- Guarantor shall not be deemed to include the Issuer. For the purposes of this definition, "control" when used with respect to any specified Person means the ------- power to direct the management and policies of such Person, directly or indirectly, whether through the ownership of voting securities, by contract or otherwise; and the terms "controlling" and "controlled" have meanings ----------- ---------- correlative to the foregoing. "Common Securities" means the securities representing common beneficial ----------------- interests in the assets of the Issuer. "Debt" means, with respect to any Person, whether recourse is to all or ---- a portion of the assets of such Person and whether or not contingent, (i) every - obligation of such Person for money borrowed; (ii) every obligation of such -- Person evidenced by bonds, debentures, notes or other similar instruments, including obligations incurred in connection with the acquisition of property, assets or businesses; (iii) every reimbursement obligation of such Person with --- respect to letters of credit, bankers' acceptances or similar facilities issued for the account of such Person; (iv) every obligation of such Person issued or -- assumed as the deferred purchase price of property or services (but excluding trade accounts payable or accrued liabilities arising in the ordinary course of business); (v) every capital lease obligation of such Person; and (vi) every - -- obligation of the type referred to in clauses (i) through (v) of another Person and all dividends of another Person the payment of which, in either case, such Person has guaranteed or is responsible or liable, directly or indirectly, as obligor or otherwise. "Event of Default" means a default by the Guarantor on any of its ----------------- payment or other obligations under this Guarantee Agreement; provided, however, -------- ------- that, except with respect to a default in payment of any Guarantee Payments, the Guarantor shall have received notice of default and shall not have cured such default within 60 days after receipt of such notice. - 2 - "Guarantee Payments" means the following payments or distributions, ------------------- without duplication, with respect to the Preferred Securities, to the extent not paid or made by or on behalf of the Issuer: (i) any accrued and unpaid - Distributions (as defined in the Trust Agreement) required to be paid on the Preferred Securities, to the extent the Issuer shall have funds on hand available therefor, (ii) the redemption price, including all accrued and unpaid -- Distributions to the date of redemption (the "Redemption Price"), with respect to the Preferred Securities called for redemption by the Issuer to the extent the Issuer shall have funds on hand available therefor, and (iii) upon a --- voluntary or involuntary termination, winding-up or liquidation of the Issuer, unless Debentures are distributed to the Holders, the lesser of (a) the - aggregate of the liquidation preference of $25 per Preferred Security plus accrued and unpaid Distributions on the Preferred Securities to the date of payment and (b) the amount of assets of the Issuer remaining available for - distribution to Holders in liquidation of the Issuer (in either case, the "Liquidation Distribution"). "Guarantee Trustee" means Wilmington Trust Company, acting in its ------------------ capacity as the trustee hereunder until a Successor Guarantee Trustee has been appointed and has accepted such appointment pursuant to the terms of this Guarantee Agreement and thereafter means each such Successor Guarantee Trustee. "Holder" means any holder, as registered on the books and records of ------ the Issuer, of any Preferred Securities; provided, however, that in determining -------- ------- whether the holders of the requisite percentage of Preferred Securities have given any request, notice, consent or waiver hereunder, "Holder" shall not include the Guarantor, the Guarantee Trustee or any Affiliate of the Guarantor or the Guarantee Trustee. "Indenture" means the Junior Subordinated Indenture dated as of October --------- 30, 1996, between the Guarantor and Wilmington Trust Company, as Trustee, as supplemented or amended from time to time. "List of Holders" has the meaning specified in Section 2.2(a). --------------- "Majority in liquidation preference of the Securities" means, except as ---------------------------------------------------- provided by the Trust Indenture Act, a vote by the Holder(s), voting separately as a class, of more than 50% of the liquidation preference of all then outstanding Preferred Securities issued by the Issuer. "Officers' Certificate" means, with respect to any Person, a ----------------------- certificate signed by the Chairman and Chief Executive Officer, President or a Vice President, and by the Treasurer, an Associate Treasurer, an Assistant Treasurer, the Controller, the Secretary or an Assistant Secretary of such Person, and delivered to the Guarantee Trustee. Any Officers' Certificate delivered with respect to compliance with a condition or covenant provided for in this Guarantee Agreement shall include: - 3 - (a) a statement that each officer signing the Officers' Certificate has read the covenant or condition and the definitions relating thereto; (b) a brief statement of the nature and scope of the examination or investigation undertaken by each officer in rendering the Officers' Certificate; (c) a statement that each such officer has made such examination or investigation as, in such officer's opinion, is necessary to enable such officer to express an informed opinion as to whether or not such covenant or condition has been complied with; and (d) a statement as to whether, in the opinion of each such officer, such condition or covenant has been complied with. "Person" means a legal person, including any individual, corporation, ------ estate, partnership, joint venture, association, joint stock company, limited liability company, trust, unincorporated association, or government or any agency or political subdivision thereof, or any other entity of whatever nature. "Responsible Officer" means, with respect to the Guarantee Trustee, any ------------------- Senior Vice President, any Vice President, any Assistant Vice President, the Secretary, any Assistant Secretary, the Treasurer, any Assistant Treasurer, any Trust Officer or Assistant Trust Officer or any other officer of the Corporate Trust Department of the Guarantee Trustee customarily performing functions similar to those performed by any of the above designated officers with responsibility over the administration of the Trust. "Senior Debt" means the principal of (and premium, if any) and ------------ interest, if any (including interest accruing on or after the filing of any petition in bankruptcy or for reorganization relating to the Guarantor whether or not such claim for post-petition interest is allowed in such proceeding), on Debt, whether incurred on or prior to the date of this Guarantee or thereafter incurred, unless, in the instrument creating or evidencing the same or pursuant to which the same is outstanding, it is provided that such obligations are not superior in right of payment to the Guarantee or to other Debt which is pari passu with, or subordinated to, the Guarantee; provided, however, that Senior -------- ------- Debt shall not be deemed to include, without limitation, (a) the 7.70% Junior - Subordinated Deferrable Interest Debentures, Series A, Due February 28, 2015, of the Guarantor, (b) any Debt of the Guarantor which when incurred and without - respect to any election under Section 1111(b) of the Bankruptcy Reform Act of 1978, was without recourse to the Guarantor, (c) any Debt of the Guarantor to - any of its Subsidiaries, (d) Debt to any employee of the Guarantor, (e) any - - liability for taxes, (f) Debt or other monetary obligations to trade creditors - created or assumed by the Guarantor or any of its Subsidiaries in the ordinary course of business in connection with the obtaining of goods, materials or services, (g) Debt issued under the Indenture and (h) the Guarantee. - - - 4 - "Successor Guarantee Trustee" means a successor Guarantee Trustee ----------------------------- possessing the qualifications to act as Guarantee Trustee under Section 4.1. "Trust Indenture Act" means the Trust Indenture Act of 1939, as --------------------- amended. ARTICLE 2 TRUST INDENTURE ACT SECTION 2.1 Trust Indenture Act; Application. -------------------------------- (a) This Guarantee Agreement is subject to the provisions of the Trust Indenture Act that are required to be part of this Guarantee Agreement and shall, to the extent applicable, be governed by such provisions. (b) If and to the extent that any provision of this Guarantee Agreement limits, qualifies or conflicts with the duties imposed by Sections 310 to 317, inclusive, of the Trust Indenture Act, such imposed duties shall control. SECTION 2.2 List of Holders. --------------- (a) The Guarantor shall furnish or cause to be furnished to the Guarantee Trustee (i) semiannually, on or before February 15 and August 15 of - each year, a list, in such form as the Guarantee Trustee may reasonably require, of the names and addresses of the Holders ("List of Holders") as of a date not more than 15 days prior to the delivery thereof, and (ii) at such other times as -- the Guarantee Trustee may request in writing, within 30 days after the receipt by the Guarantor of any such request, a List of Holders as of a date not more than 15 days prior to the time such list is furnished, in each case to the extent such information is in the possession or control of the Guarantor and is not identical to a previously supplied list of Holders or has not otherwise been received by the Guarantee Trustee in its capacity as such. The Guarantee Trustee may destroy any List of Holders previously given to it on receipt of a new List of Holders. (b) The Guarantee Trustee shall comply with its obligations under Section 311(a), Section 311(b) and Section 312(b) of the Trust Indenture Act, as applicable. SECTION 2.3 Reports by the Guarantee Trustee. --------------------------------- Within 60 days after July 1 of each year, the Guarantee Trustee shall provide to the Holders such reports as are required by Section 313 of the Trust Indenture Act, if any, in the form and in the manner provided by Section 313 of the Trust Indenture Act. The Guarantee Trustee shall also comply with the requirements of Section 313(d) of the Trust Indenture Act. - 5 - SECTION 2.4 Periodic Reports to Guarantee Trustee. ------------------------------------- The Guarantor shall provide to the Guarantee Trustee, the Securities and Exchange Commission and the Holders such documents, reports and information, if any, as required by Section 314 of the Trust Indenture Act and the compliance certificate required by Section 314 of the Trust Indenture Act in the form, in the manner and at the times required by Section 314 of the Trust Indenture Act. SECTION 2.5 Evidence of Compliance with Conditions Precedent. ------------------------------------------------ The Guarantor shall provide to the Guarantee Trustee such evidence of compliance with such conditions precedent, if any, provided for in this Guarantee Agreement that relate to any of the matters set forth in Section 314(c) of the Trust Indenture Act. Any certificate or opinion required to be given by an officer pursuant to Section 314(c)(1) may be given in the form of an Officers' Certificate. SECTION 2.6 Events of Default; Waiver. ------------------------- The Holders of a Majority in liquidation preference of the Preferred Securities may, by vote, on behalf of the Holders, waive any past Event of Default and its consequences. Upon such waiver, any such Event of Default shall cease to exist, and any Event of Default arising therefrom shall be deemed to have been cured, for every purpose of this Guarantee Agreement, but no such waiver shall extend to any subsequent or other default or Event of Default or impair any right consequent therefrom. SECTION 2.7 Event of Default; Notice. ------------------------ (a) The Guarantee Trustee shall, within 90 days after the occurrence of an Event of Default, transmit by mail, first class postage prepaid, to the Holders, notices of all Events of Default known to the Guarantee Trustee, unless such defaults have been cured before the giving of such notice, provided, that, except in the case of a default in the payment of a Guarantee Payment, the Guarantee Trustee shall be protected in withholding such notice if and so long as the Board of Directors, the executive committee or a trust committee of directors and/or Responsible Officers of the Guarantee Trustee in good faith determines that the withholding of such notice is in the interests of the Holders. (b) The Guarantee Trustee shall not be deemed to have knowledge of any Event of Default unless the Guarantee Trustee shall have received written notice, or a Responsible Officer charged with the administration of the Trust Agreement shall have obtained written notice, of such Event of Default. - 6 - SECTION 2.8 Conflicting Interests. --------------------- The Trust Agreement shall be deemed to be specifically described in this Guarantee Agreement for the purposes of clause (i) of the first proviso contained in Section 310(b) of the Trust Indenture Act. ARTICLE 3 POWERS, DUTIES AND RIGHTS OF THE GUARANTEE TRUSTEE SECTION 3.1 Powers and Duties of the Guarantee Trustee. ------------------------------------------ (a) This Guarantee Agreement shall be held by the Guarantee Trustee for the benefit of the Holders, and the Guarantee Trustee shall not transfer this Guarantee Agreement to any Person except a Holder exercising his or her rights pursuant to Section 5.04(iv) or to a Successor Guarantee Trustee on acceptance by such Successor Guarantee Trustee of its appointment to act as Successor Guarantee Trustee. The right, title and interest of the Guarantee Trustee shall automatically vest in any Successor Guarantee Trustee, upon acceptance by such Successor Guarantee Trustee of its appointment hereunder, and such vesting and cessation of title shall be effective whether or not conveyancing documents have been executed and delivered pursuant to the appointment of such Successor Guarantee Trustee. (b) If an Event of Default has occurred and is continuing, the Guarantee Trustee shall enforce this Guarantee Agreement for the benefit of the Holders. (c) The Guarantee Trustee, before the occurrence of any Event of Default and after the curing of all Events of Default that may have occurred, shall undertake to perform only such duties as are specifically set forth in this Guarantee Agreement, and no implied covenants shall be read into this Guarantee Agreement against the Guarantee Trustee. In case an Event of Default has occurred (that has not been cured or waived pursuant to Section 2.6), the Guarantee Trustee shall exercise such of the rights and powers vested in it by this Guarantee Agreement, and use the same degree of care and skill in its exercise thereof, as a prudent person would exercise or use under the circumstances in the conduct of his or her own affairs. (d) No provision of this Guarantee Agreement shall be construed to relieve the Guarantee Trustee from liability for its own negligent action, its own negligent failure to act or its own willful misconduct, except that: (i) prior to the occurrence of any Event of Default and after the curing or waiving of all such Events of Default that may have occurred: - 7 - (A) the duties and obligations of the Guarantee Trustee shall be determined solely by the express provisions of this Guarantee Agreement, and the Guarantee Trustee shall not be liable except for the performance of such duties and obligations as are specifically set forth in this Guarantee Agreement; and (B) in the absence of bad faith on the part of the Guarantee Trustee, the Guarantee Trustee may conclusively rely, as to the truth of the statements and the correctness of the opinions expressed therein, upon any certificates or opinions furnished to the Guarantee Trustee and conforming to the requirements of this Guarantee Agreement; but in the case of any such certificates or opinions that by any provision hereof or of the Trust Indenture Act are specifically required to be furnished to the Guarantee Trustee, the Guarantee Trustee shall be under a duty to examine the same to determine whether or not they conform to the requirements of this Guarantee Agreement; (ii) the Guarantee Trustee shall not be liable for any error of judgment made in good faith by a Responsible Officer of the Guarantee Trustee, unless it shall be proved that the Guarantee Trustee was negligent in ascertaining the pertinent facts upon which such judgment was made; (iii) the Guarantee Trustee shall not be liable with respect to any action taken or omitted to be taken by it in good faith in accordance with the direction of the Holders of not less than a Majority in liquidation preference of the Preferred Securities relating to the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee, or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement; and (iv) no provision of this Guarantee Agreement shall require the Guarantee Trustee to expend or risk its own funds or otherwise incur personal financial liability in the performance of any of its duties or in the exercise of any of its rights or powers, if the Guarantee Trustee shall have reasonable grounds for believing that the repayment of such funds or liability is not reasonably assured to it under the terms of this Guarantee Agreement or adequate indemnity against such risk or liability is not reasonably assured to it. - 8 - SECTION 3.2 Certain Rights of Guarantee Trustee. ----------------------------------- (a) Subject to the provisions of Section 3.01: (i) The Guarantee Trustee may rely and shall be fully protected in acting or refraining from acting upon any resolution, certificate, statement, instrument, opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document believed by it to be genuine and to have been signed, sent or presented by the proper party or parties. (ii) Any direction or act of the Guarantor contemplated by this Guarantee Agreement shall be sufficiently evidenced by an Officers' Certificate unless otherwise prescribed herein. (iii) Whenever, in the administration of this Guarantee Agreement, the Guarantee Trustee shall deem it desirable that a matter be proved or established before taking, suffering or omitting to take any action hereunder, the Guarantee Trustee (unless other evidence is herein specifically prescribed) may, in the absence of bad faith on its part, request and rely upon an Officers' Certificate which, upon receipt of such request from the Guarantee Trustee, shall be promptly delivered by the Guarantor. (iv) The Guarantee Trustee may consult with legal counsel, and the written advice or opinion of such legal counsel with respect to legal matters shall be full and complete authorization and protection in respect of any action taken, suffered or omitted to be taken by it hereunder in good faith and in accordance with such advice or opinion. Such legal counsel may be legal counsel to the Guarantor or any of its Affiliates and may be one of its employees. The Guarantee Trustee shall have the right at any time to seek instructions concerning the administration of this Guarantee Agreement from any court of competent jurisdiction. (v) The Guarantee Trustee shall be under no obligation to exercise any of the rights or powers vested in it by this Guarantee Agreement at the request or direction of any Holder, unless such Holder shall have provided to the Guarantee Trustee such adequate security and indemnity as would satisfy a reasonable person in the position of the Guarantee Trustee, against the costs, expenses (including attorneys' fees and expenses) and liabilities that might be incurred by it in complying with such request or direction, including such reasonable advances as may be requested by the Guarantee Trustee; provided that, nothing contained in this Section 3.2(a)(v) shall be taken to relieve the Guarantee Trustee, upon the occurrence of an Event of Default, of its obligation to exercise the rights and powers vested in it by this Guarantee Agreement. (vi) The Guarantee Trustee shall not be bound to make any investigation into the facts or matters stated in any resolution, certificate, statement, instrument, - 9 - opinion, report, notice, request, direction, consent, order, bond, debenture, note, other evidence of indebtedness or other paper or document, but the Guarantee Trustee, in its discretion, may make such further inquiry or investigation into such facts or matters as it may see fit. (vii) The Guarantee Trustee may execute any of the trusts or powers hereunder or perform any duties hereunder either directly or by or through its agents or attorneys, and the Guarantee Trustee shall not be responsible for any misconduct or negligence on the part of any such agent or attorney appointed with due care by it hereunder. (viii) Whenever in the administration of this Guarantee Agreement the Guarantee Trustee shall deem it desirable to receive instructions with respect to enforcing any remedy or right or taking any other action hereunder, the Guarantee Trustee (A) may request instructions from the Holders, - (B) may refrain from enforcing such remedy or right or taking such other action - until such instructions are received, and (C) shall be protected in acting in - accordance with such instructions. (b) No provision of this Guarantee Agreement shall be deemed to impose any duty or obligation on the Guarantee Trustee to perform any act or acts or exercise any right, power, duty or obligation conferred or imposed on it in any jurisdiction in which it shall be illegal, or in which the Guarantee Trustee shall be unqualified or incompetent in accordance with applicable law, to perform any such act or acts or to exercise any such right, power, duty or obligation. No permissive power or authority available to the Guarantee Trustee shall be construed to be a duty to act in accordance with such power and authority. SECTION 3.3 Indemnity. --------- The Guarantor agrees to indemnify the Guarantee Trustee for, and to hold it harmless against, any loss, liability or expense incurred without negligence or bad faith on the part of the Guarantee Trustee, arising out of or in connection with the acceptance or administration of this Guarantee Agreement, including the costs and expenses of defending itself against any claim or liability in connection with the exercise or performance of any of its powers or duties hereunder. The Guarantee Trustee will not claim or exact any lien or charge on any Guarantee Payments as a result of any amount due to it under this Guarantee Agreement. - 10 - ARTICLE 4 GUARANTEE TRUSTEE SECTION 4.1 Guarantee Trustee; Eligibility. ------------------------------ (a) There shall at all times be a Guarantee Trustee which shall: (i) not be an Affiliate of the Guarantor; and (ii) be a Person that is eligible pursuant to the Trust Indenture Act to act as such and has a combined capital and surplus of at least 50 million U.S. dollars ($50,000,000), and shall be a corporation meeting the requirements of Section 310(c) of the Trust Indenture Act. If such corporation publishes reports of condition at least annually, pursuant to law or to the requirements of the supervising or examining authority, then, for the purposes of this Section and to the extent permitted by the Trust Indenture Act, the combined capital and surplus of such corporation shall be deemed to be its combined capital and surplus as set forth in its most recent report of condition so published. (b) If at any time the Guarantee Trustee shall cease to be eligible to so act under Section 4.1(a), the Guarantee Trustee shall immediately resign in the manner and with the effect set out in Section 4.2(c). (c) If the Guarantee Trustee has or shall acquire any "conflicting interest" within the meaning of Section 310(b) of the Trust Indenture Act, the Guarantee Trustee and Guarantor shall in all respects comply with the provisions of Section 310(b) of the Trust Indenture Act. SECTION 4.2 Appointment, Removal and Resignation of the Guarantee Trustee. ------------------------------------------------------------- (a) Subject to Section 4.2(b), the Guarantee Trustee may be appointed or removed without cause at any time by the Guarantor. (b) The Guarantee Trustee shall not be removed until a Successor Guarantee Trustee has been appointed and has accepted such appointment by written instrument executed by such Successor Guarantee Trustee and delivered to the Guarantor. (c) The Guarantee Trustee appointed hereunder shall hold office until a Successor Guarantee Trustee shall have been appointed or until its removal or resignation. The Guarantee Trustee may resign from office (without need for prior or subsequent accounting) by an instrument in writing executed by the Guarantee Trustee and delivered to the Guarantor, which resignation shall not take effect until a Successor Guarantee Trustee has been appointed and has accepted such appointment by instrument - 11 - in writing executed by such Successor Guarantee Trustee and delivered to the Guarantor and the resigning Guarantee Trustee. (d) If no Successor Guarantee Trustee shall have been appointed and accepted appointment as provided in this Section 4.2 within 60 days after delivery to the Guarantor of an instrument of resignation, the resigning Guarantee Trustee may petition, at the expense of the Guarantor, any court of competent jurisdiction for appointment of a Successor Guarantee Trustee. Such court may thereupon, after prescribing such notice, if any, as it may deem proper, appoint a Successor Guarantee Trustee. ARTICLE 5 GUARANTEE SECTION 5.1 Guarantee. --------- The Guarantor irrevocably and unconditionally agrees to pay in full to the Holders the Guarantee Payments (without duplication of amounts theretofore paid by or on behalf of the Issuer), as and when due, regardless of any defense, right of set-off or counterclaim which the Issuer may have or assert. The Guarantor's obligation to make a Guarantee Payment may be satisfied by direct payment of the required amounts by the Guarantor to the Holders or by causing the Issuer to pay such amounts to the Holders. SECTION 5.2 Waiver of Notice and Demand. --------------------------- The Guarantor hereby waives notice of acceptance of the Guarantee Agreement and of any liability to which it applies or may apply, presentment, demand for payment, any right to require a proceeding first against the Guarantee Trustee, Issuer or any other Person before proceeding against the Guarantor, protest, notice of nonpayment, notice of dishonor, notice of redemption and all other notices and demands. SECTION 5.3 Obligations Not Affected. ------------------------ The obligations, covenants, agreements and duties of the Guarantor under this Guarantee Agreement shall in no way be affected or impaired by reason of the happening from time to time of any of the following: (a) the release or waiver, by operation of law or otherwise, of the performance or observance by the Issuer of any express or implied agreement, covenant, term or condition relating to the Preferred Securities to be performed or observed by the Issuer; (b) the extension of time for the payment by the Issuer of all or any portion of the Distributions (other than an extension of time for payment of - 12 - Distributions that results from the extension of any interest payment period on the Debentures as so provided in the Indenture), Redemption Price, Liquidation Distribution or any other sums payable under the terms of the Preferred Securities or the extension of time for the performance of any other obligation under, arising out of, or in connection with, the Preferred Securities; (c) any failure, omission, delay or lack of diligence on the part of the Holders to enforce, assert or exercise any right, privilege, power or remedy conferred on the Holders pursuant to the terms of the Preferred Securities, or any action on the part of the Issuer granting indulgence or extension of any kind; (d) the voluntary or involuntary liquidation, dissolution, sale of any collateral, receivership, insolvency, bankruptcy, assignment for the benefit of creditors, reorganization, arrangement, composition or readjustment of debt of, or other similar proceedings affecting, the Issuer or any of the assets of the Issuer; (e) any invalidity of, or defect or deficiency in, the Preferred Securities; (f) the settlement or compromise of any obligation guaranteed hereby or hereby incurred; or (g) any other circumstance whatsoever that might otherwise constitute a legal or equitable discharge or defense of a guarantor, it being the intent of this Section 5.3 that the obligations of the Guarantor hereunder shall be absolute and unconditional under any and all circumstances. There shall be no obligation of the Holders to give notice to, or obtain the consent of, the Guarantor with respect to the happening of any of the foregoing. SECTION 5.4 Rights of Holders. ----------------- The Guarantor expressly acknowledges that: (i) this Guarantee Agreement - will be deposited with the Guarantee Trustee to be held for the benefit of the Holders; (ii) the Guarantee Trustee has the right to enforce this Guarantee -- Agreement on behalf of the Holders; (iii) the Holders of a Majority in --- liquidation preference of the Preferred Securities have the right to direct the time, method and place of conducting any proceeding for any remedy available to the Guarantee Trustee in respect of this Guarantee Agreement or exercising any trust or power conferred upon the Guarantee Trustee under this Guarantee Agreement; and (iv) any Holder may institute a legal proceeding directly against -- the Guarantor to enforce its rights under this Guarantee Agreement, without first instituting a legal proceeding against the Guarantee Trustee, the Issuer or any other Person. - 13 - SECTION 5.5 Guarantee of Payment. -------------------- This Guarantee Agreement creates a guarantee of payment and not of collection. This Guarantee Agreement will not be discharged except by payment of the Guarantee Payments in full (without duplication of amounts theretofore paid by the Issuer) or upon distribution of Debentures to Holders as provided in the Trust Agreement. SECTION 5.6 Subrogation. ----------- The Guarantor shall be subrogated to all (if any) rights of the Holders against the Issuer in respect of any amounts paid to the Holders by the Guarantor under this Guarantee Agreement and shall have the right to waive payment by the Issuer pursuant to Section 5.1; provided, however, that the -------- ------- Guarantor shall not (except to the extent required by mandatory provisions of law) be entitled to enforce or exercise any rights which it may acquire by way of subrogation or any indemnity, reimbursement or other agreement, in all cases as a result of payment under this Guarantee Agreement, if, at the time of any such payment, any amounts are due and unpaid under this Guarantee Agreement. If any amount shall be paid to the Guarantor in violation of the preceding sentence, the Guarantor agrees to hold such amount in trust for the Holders and to pay over such amount to the Holders. SECTION 5.7 Independent Obligations. ----------------------- The Guarantor acknowledges that its obligations hereunder are independent of the obligations of the Issuer with respect to the Preferred Securities and that the Guarantor shall be liable as principal and as debtor hereunder to make Guarantee Payments pursuant to the terms of this Guarantee Agreement notwithstanding the occurrence of any event referred to in subsections (a) through (g), inclusive, of Section 5.3 hereof. ARTICLE 6 COVENANTS AND SUBORDINATION SECTION 6.1 Subordination. ------------- This Guarantee Agreement will constitute an unsecured obligation of the Guarantor and will rank subordinate and junior in right of payment to all Senior Debt of the Guarantor. SECTION 6.2 Pari Passu Guarantees. --------------------- This Guarantee Agreement shall rank pari passu with any similar Guarantee Agreements issued by the Guarantor on behalf of the holders of Preferred Securities - 14 - issued by Hartford Capital I, Hartford Capital II, Hartford Capital IV and Hartford Capital V. ARTICLE 7 TERMINATION SECTION 7.1 Termination. ----------- This Guarantee Agreement shall terminate and be of no further force and effect upon (i) full payment of the Redemption Price of all Preferred Securities, (ii) the distribution of Debentures to the Holders in exchange for all of the Preferred Securities or (iii) full payment of the amounts payable in accordance with the Trust Agreement upon liquidation of the Issuer. Notwithstanding the foregoing, this Guarantee Agreement will continue to be effective or will be reinstated, as the case may be, if at any time any Holder must restore payment of any sums paid with respect to Preferred Securities or this Guarantee Agreement. ARTICLE 8 MISCELLANEOUS SECTION 8.1 Successors and Assigns. ---------------------- All guarantees and agreements contained in this Guarantee Agreement shall bind the successors, assigns, receivers, trustees and representatives of the Guarantor and shall inure to the benefit of the Holders of the Preferred Securities then outstanding. Except in connection with a consolidation, merger or sale involving the Guarantor that is permitted under Article Eight of the Indenture and pursuant to which the assignee agrees in writing to perform the Guarantor's obligations hereunder, the Guarantor shall not assign its obligations hereunder. SECTION 8.2 Amendments. ---------- Except with respect to any changes which do not adversely affect the rights of the Holders in any material respect (in which case no consent of the Holders will be required), this Guarantee Agreement may only be amended with the prior approval of the Holders of not less than a Majority in liquidation preference of all the outstanding Preferred Securities. The provisions of Article VI of the Trust Agreement concerning meetings of the Holders shall apply to the giving of such approval. - 15 - SECTION 8.3 Notices. ------- Any notice, request or other communication required or permitted to be given hereunder shall be in writing, duly signed by the party giving such notice, and delivered, telecopied or mailed by first class mail as follows: (a) if given to the Guarantor, to the address set forth below or such other address as the Guarantor may give notice of to the Holders: The Hartford Financial Services Group, Inc. Hartford Plaza Hartford, Connecticut 06115 Facsimile No.: (860) 547-5966 Attention: Treasurer (b) if given to the Issuer, in care of the Guarantee Trustee, at the Issuer's (and the Guarantee Trustee's) address set forth below or such other address as the Guarantee Trustee on behalf of the Issuer may give notice to the Holders: Hartford Capital III c/o The Hartford Financial Services Group, Inc. Hartford Plaza Hartford, Connecticut 06115 Facsimile No: (860) 547-5966 Attention: Treasurer with a copy to: Wilmington Trust Company 1100 N. Market Street Wilmington, Delaware Facsimile No.: (302) 651-8882 Attention: Corporate Trust Department (c) if given to any Holder, at the address set forth on the books and records of the Issuer. All notices hereunder shall be deemed to have been given when received in person, telecopied with receipt confirmed, or mailed by first class mail, postage prepaid, except that if a notice or other document is refused delivery or cannot be delivered because of a changed address of which no notice was given, such notice or other document shall be deemed to have been delivered on the date of such refusal or inability to deliver. - 16 - SECTION 8.4 Benefit. ------- This Guarantee Agreement is solely for the benefit of the Holders and is not separately transferable from the Preferred Securities. SECTION 8.5 Interpretation. -------------- In this Guarantee Agreement, unless the context otherwise requires: (a) capitalized terms used in this Guarantee Agreement but not defined in the preamble hereto have the respective meanings assigned to them in Section 1.1; (b) a term defined anywhere in this Guarantee Agreement has the same meaning throughout; (c) all references to "the Guarantee Agreement" or "this Guarantee Agreement" are to this Guarantee Agreement as modified, supplemented or amended from time to time; (d) all references in this Guarantee Agreement to Articles and Sections are to Articles and Sections of this Guarantee Agreement unless otherwise specified; (e) a term defined in the Trust Indenture Act has the same meaning when used in this Guarantee Agreement unless otherwise defined in this Guarantee Agreement or unless the context otherwise requires; (f) a reference to the singular includes the plural and vice versa; and (g) the masculine, feminine or neuter genders used herein shall include the masculine, feminine and neuter genders. SECTION 8.6 GOVERNING LAW. ------------- THIS GUARANTEE AGREEMENT SHALL BE GOVERNED BY AND CONSTRUED AND INTERPRETED IN ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO THE CONFLICT OF LAW PRINCIPLES THEREOF. This instrument may be executed in any number of counterparts, each of which so executed shall be deemed to be an original, but all such counterparts shall together constitute but one and the same instrument. - 17 - THIS GUARANTEE AGREEMENT is executed as of the day and year first above written. THE HARTFORD FINANCIAL SERVICES GROUP, INC. By: /s/ J. RICHARD GARRETT ---------------------------- Name: J. Richard Garrett Title: Senior Vice President and Treasurer WILMINGTON TRUST COMPANY, as Guarantee Trustee By: /s/ MARY C. ST. AMAND --------------------------- Name: Mary C. St. Amand Title: Assistant Vice President CROSS-REFERENCE TABLE* Section of Section of Trust Indenture Act Guarantee of 1939, as amended Agreement - ------------------- --------- 310(a)..................................................... 4.1(a) 310(b)..................................................... 4.1(c), 208 310(c)..................................................... Inapplicable 311(a)..................................................... 2.2(b) 311(b)..................................................... 2.2(b) 311(c)..................................................... Inapplicable 312(a)..................................................... 2.2(a) 312(b)..................................................... 2.2(b) 313........................................................ 2.3 314(a)..................................................... 2.4 314(b)..................................................... Inapplicable 314(c)..................................................... 2.5 314(d)..................................................... Inapplicable 314(e)..................................................... 1.1, 2.5, 3.2 314(f)..................................................... 2.1, 3.2 315(a)..................................................... 3.1(d) 315(b)..................................................... 2.7 315(c)..................................................... 3.1 315(d)..................................................... 3.1(d) 316(a)..................................................... 1.1, 2.6, 5.4 316(b)..................................................... 5.3 316(c)..................................................... 8.2 317(a)..................................................... Inapplicable 317(b)..................................................... Inapplicable 318(a)..................................................... 2.1(b) 318(b)..................................................... 2.1 318(c)..................................................... 2.1(a) - -------- * This Cross-Reference Table does not constitute part of the Guarantee Agreement and shall not affect the interpretation of any of its terms or provisions. i EX-10 8 exh10_17.txt EXHIBIT 10.17 EXHIBIT 10.17 THE HARTFORD FINANCIAL SERVICES GROUP, INC. 17,211,837 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE ________________________________________________________________________________ THE HARTFORD INCENTIVE STOCK PLAN ________________________________________________________________________________ PLAN INFORMATION ________________________________________________________________________________ THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933. THE PROSPECTUS COVERS SUCH ADDITIONAL SECURITIES AS MAY BE ISSUABLE AS A RESULT OF ANTI-DILUTION PROVISIONS CONTAINED IN THE INSTRUMENTS PURSUANT TO WHICH SECURITIES COVERED BY THE PROSPECTUS ARE ISSUED. ________________________________________________________________________________ THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION PASSED UPON THE ACCURACY OR ADEQUACY OF THE PROSPECTUS. ANY REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE. FOR NORTH CAROLINA RESIDENTS: THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY OF THIS DOCUMENT. ________________________________________________________________________________ JANUARY, 2002 Additional information about The Hartford Incentive Stock Plan (the "Plan") and its administration may be obtained without charge by written or oral request to the Manager of Stock Option Plan Administration, The Hartford Financial Services Group, Inc. ("The Hartford"), Hartford Plaza, Hartford, CT 06115, telephone number (860) 547-5000. AVAILABLE INFORMATION The Hartford will provide, without charge, upon the written or oral request of any person to whom this Prospectus is delivered, a copy of any of the following documents, all of which are incorporated by reference in this Prospectus: (a) The Hartford's latest Annual Report on Form 10-K filed with the Securities and Exchange Commission (the "Commission") pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) All other reports filed pursuant to Section 13(a) or 15(d) of the Exchange Act since the end of the fiscal year covered by the Form 10-K referred to in (a) above; and (c) The description of the Common Stock contained in a registration statement filed under the Exchange Act, including any amendment or report filed for the purpose of updating such description. All documents subsequently filed with the Commission by The Hartford pursuant to Sections 13(a), 13(c), 14 and 15(d) of the Exchange Act, after the date hereof and prior to the filing of a post-effective amendment which indicates that all securities offered have been sold or which deregisters all securities then remaining unsold shall be deemed to be incorporated by reference in the Prospectus and to be a part thereof from the date of filing such documents. In addition, The Hartford will provide, without charge, upon the written or oral request of any person to whom this Prospectus is delivered, the following documents: (a) When updating information is furnished, a copy of all documents previously delivered containing Plan information that then constitute part of this Prospectus; and (b) A copy of whichever of the following was previously distributed pursuant to Rule 428(b)(2) under the Securities Act of 1933, as amended (the "Securities Act"): (i) The Hartford's annual report to stockholders containing the information required by Rule 14a-3(b) under the Exchange Act for its latest fiscal year; (ii) The Hartford's annual report on Form 10-K for its latest fiscal year; or - 2 - (iii) The latest prospectus filed pursuant to Rule 424(b) under the Securities Act that contains audited financial statements for The Hartford's latest fiscal year. Any statement contained in a document incorporated or deemed to be incorporated by reference in the Prospectus shall be deemed to be modified or superseded for purposes of the Prospectus to the extent that a statement contained in the Prospectus or in any other subsequently filed document which also is or is deemed to be incorporated by reference in the Prospectus modifies or supersedes such statement. Any such statement so modified or superseded shall not be deemed, except as so modified or superseded, to constitute a part of the Prospectus. Any such document, as well as The Hartford's most recent annual report to shareholders and any other report or communication distributed to The Hartford shareholders generally, may be obtained without charge by written or oral request to the Manager of Stock Option Plan Administration, The Hartford, Hartford Plaza, Hartford, CT 06115, telephone number: (860) 547-5000. - 3 - TABLE OF CONTENTS General Information............................................................4 The Hartford Incentive Stock Plan..............................................5 Administration................................................................23 Federal Tax Treatment.........................................................23 GENERAL INFORMATION The Plan contains a limit on the aggregate number of shares which may be awarded for the duration of the Plan. The maximum limit applicable to all share awards for the duration of the Plan (the "Maximum Limit") is eight percent (8%) of the total outstanding shares of The Hartford Common Stock as of the date of shareholder approval of the Plan. In addition, no more than 20% of the total may be available for awards of restricted stock or performance shares under the Plan. The Plan limits the award of stock options to any one person in any year to no more than 1,000,000 shares. The Plan permits the committee administering the Plan to award performance shares and restricted stock, as well as non-qualified stock options and incentive stock options, with or without stock appreciation rights. Reference is made to the text of the Plan herein for a complete description of awards permitted under the Plan and the relevant provisions and conditions applicable thereto. The prospectus does not cover resales of The Hartford Common Stock acquired pursuant to the provisions of the Plan. Resales may be subject to restrictions or limitations imposed by the Securities Act of 1933 and the Securities Exchange Act of 1934. The Plan is not subject to any of the provisions of the Employee Retirement Income Security Act of 1974. Furthermore, Section 401 of the Internal Revenue Code relating to certain qualified pension, profit-sharing and stock bonus plans does not apply to the Plan. Plan participants receive information with respect to their participation, including the date of grant, the exercise price, the amount exercisable and the expiration date, as well as applicable information concerning whatever performance shares or restricted stock may be relevant to them. Set forth below is the text of the Plan. - 4 - THE HARTFORD INCENTIVE STOCK PLAN 1. PURPOSE The purpose of The Hartford Incentive Stock Plan is to motivate and reward superior performance on the part of Key Employees of The Hartford Financial Services Group, Inc. and its subsidiaries ("The Hartford") and to thereby attract and retain Key Employees of superior ability. In addition, the Plan is intended to further opportunities for stock ownership by such Key Employees and Directors (as defined below) in order to increase their proprietary interest in The Hartford and, as a result, their interest in the success of the Company. Awards will be made, in the discretion of the Committee, to Key Employees (including officers and directors who are also Key Employees) whose responsibilities and decisions directly affect the performance of any Participating Company and its subsidiaries, and also to Directors. Such incentive awards may consist of stock options and stock appreciation rights payable in stock or cash for Key Employees or Directors, and performance shares, restricted stock or any combination of the foregoing for Key Employees, as the Committee may determine. 2. DEFINITIONS When used herein, the following terms shall have the following meanings: "Act" means the Securities Exchange Act of 1934, as amended. "Award" means an award granted to any Key Employee or Director in accordance with the provisions of the Plan in the form of Options, Rights, Performance Shares or Restricted Stock, or any combination of the foregoing, as applicable. "Award Agreement" means the written agreement evidencing each Award granted under the Plan. "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: (i) 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 (A) 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 (B) 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 (A) or (B) above, whether or not such agreement, arrangement or understanding is also then reportable - 5 - by such Person on Schedule 13D under the Act (or any comparable or successor report); and (ii) 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. "Beneficiary" means the beneficiary or beneficiaries designated pursuant to Section 10 to receive the amount, if any, payable under the Plan upon the death of an Award Recipient. "Board" means the Board of Directors of the Company. "Change of Control" means the occurrence of an event defined in Section 9 of the Plan. "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. (All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.) "Committee" means the Compensation and Personnel Committee of the Board or such other committee as may be designated by the Board to administer the Plan. "Company" means The Hartford and its successors and assigns. "Director" means a member of the Board of The Hartford Financial Services Group, Inc. who is not an employee of any Participating Company. "Eligible Employee" means an Employee employed by a Participating Company; provided, however, that except as the Board of Directors or the Committee, pursuant to authority delegated by the Board of Directors, may otherwise provide on a basis uniformly applicable to all persons similarly situated, "Eligible Employee" shall not include any "Ineligible Person," which includes (i) a person who (A) holds a position with the Company's "HARTEMP" Program, (B) is hired to work for a Participating Company through a temporary employment agency, or (C) is hired to a position with a Participating Company with notice on his or her date of hire that the position will terminate on a certain date; (ii) a person who is a leased employee (within the meaning of Code Section 414(n)(2)) of a Participating Company or is otherwise employed by or through a temporary help firm, technical help firm, staffing firm, employee leasing firm, or professional employer organization, regardless of whether such person is an Employee of a Participating Company, and (iii) a person who performs services for a Participating Company as an independent contractor or under any other non-employee classification, or who is classified by a Participating Company as, or determined by a Participating Company to be, an independent contractor, regardless of whether such person is characterized or ultimately determined by the Internal Revenue Service or any other Federal, State or local governmental authority or regulatory body to be an employee of a Participating Company or its affiliates for income or - 6 - wage tax purposes or for any other purpose. Notwithstanding any provision in the Plan to the contrary, if any person is an Ineligible Person, or otherwise does not qualify as an Eligible Employee, or otherwise is ineligible to participate in the Plan, and such person is later required by a court or governmental authority or regulatory body to be classified as a person who is eligible to participate in the Plan, such person shall not be eligible to participate in the Plan, notwithstanding such classification, unless and until designated as an Eligible Employee by the Committee, and if so designated, the participation of such person in the Plan shall be prospective only. "Employee" means any person regularly employed by a Participating Company, but shall not include any person who performs services for a Participating Company as an independent contractor or under any other non-employee classification, or who is classified by a Participating Company as, or determined by a Participating Company to be, an independent contractor. "Fair Market Value", unless otherwise indicated in the provisions of this Plan, means, as of any date, the composite closing price for one share of Stock on the New York Stock Exchange or, if no sales of Stock have taken place on such date, the composite closing price on the most recent date on which selling prices were quoted, the determination to be made in the discretion of the Committee. "Incentive Stock Option" means a stock option qualified under Section 422 of the Code. "Key Employee" means an Employee (including any officer or director who is also an Employee) of any Participating Company who is an Eligible Employee and whose responsibilities and decisions, in the judgment of the Committee, directly affect the performance of the Company and its subsidiaries. "Option" means an option awarded under Section 5 of the Plan to purchase Stock of the Company, which option may be an Incentive Stock Option or a non-qualified stock option. "Participating Company" means the Company or any subsidiary or other affiliate of the Company; provided, however, for Incentive Stock Options only, "Participating Company" means the Company or any corporation which at the time such Option is granted qualifies as a "subsidiary" of the Company under Section 424(f) of the Code. "Performance Share" means a performance share awarded under Section 6 of the 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 - 7 - include (i) the Company, any subsidiary of the Company or any other Person controlled by the Company, (ii) any trustee or other fiduciary holding securities under any employee benefit plan of the Company or of any subsidiary of the Company, or (iii) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of securities of the Company. "Plan" means The Hartford 2000 Incentive Stock Plan, as the same may be amended, administered or interpreted from time to time. "Plan Year" means the calendar year. "Retirement" means eligibility to receive immediate retirement benefits under a Participating Company pension plan. "Retirement" means, solely with respect to a Key Employee with an original hire date with a Participating Company before January 1, 2002, eligibility to receive immediate retirement benefits under a Participating Company pension plan. "Restricted Stock" means Stock awarded under Section 7 of the Plan subject to such restrictions as the Committee deems appropriate or desirable. "Right" means a stock appreciation right awarded in connection with an Option under Section 5 of the Plan. "Stock" means the common stock ($.01 par value) of The Hartford. "Total Disability" means the complete and permanent inability of a Key Employee to perform all of his or her duties under the terms of his or her employment with any Participating Company, as determined by the Committee upon the basis of such evidence, including independent medical reports and data, as the Committee deems appropriate or necessary. "Transferee" means any person or entity to whom or to which a non-qualified stock option has been transferred and assigned in accordance with Section 5(h) of the Plan. 3. SHARES SUBJECT TO THE PLAN The aggregate number of shares of Stock which may be awarded under the Plan shall be subject to a maximum limit applicable to all Awards for the duration of the Plan (the "Maximum Limit"). The Maximum Limit shall be eight percent (8%) of the total of the outstanding shares of Stock as of the date of shareholder approval of the Plan. In addition to the foregoing, in no event shall more than twenty percent (20%) of the total number of shares on a cumulative basis be available for Restricted Stock and Performance Share Awards. For any Plan Year, no individual employee may receive an - 8 - Award of Options for more than 1,000,000 shares. Subject to the above limitations, shares of Stock to be issued under the Plan may be made available from the authorized but unissued shares, or shares held by the Company in treasury or from shares purchased in the open market. For the purpose of computing the total number of shares of Stock available for Awards under the Plan, there shall be counted against the foregoing limitations the number of shares of Stock subject to issuance upon exercise or settlement of Awards and the number of shares of Stock which equal the value of performance share Awards, in each case determined as at the dates on which such Awards are granted. If any Awards under the Plan are forfeited, terminated, expire unexercised, are settled in cash in lieu of Stock or are exchanged for other Awards, the shares of Stock which were theretofore subject to such Awards shall again be available for Awards under the Plan to the extent of such forfeiture, termination, expiration, cash settlement or exchange of such Awards. Further, any shares that are exchanged (either actually or constructively) by optionees as full or partial payment to the Company of the purchase price of shares being acquired through the exercise of a stock option granted under the Plan may be available for subsequent Awards. 4. GRANT OF AWARDS AND AWARD AGREEMENTS (a) Subject to the provisions of the Plan, the Committee shall (i) determine and designate from time to time those Key Employees or groups of Key Employees to whom Awards are to be granted, and those Directors to whom Options and Rights may be granted; (ii) determine the form or forms of Award to be granted to any Key Employee and any Director; (iii) determine the amount or number of shares of Stock subject to each Award; and (iv) determine the terms and conditions of each Award. (b) Each Award granted under the Plan shall be evidenced by a written Award Agreement. Such Award Agreement shall be subject to and incorporate the express terms and conditions, if any, required under the Plan or required by the Committee. 5. STOCK OPTIONS AND RIGHTS (a) With respect to Options and Rights, the Committee shall (i) authorize the granting of Incentive Stock Options, non-qualified stock options, or a combination of Incentive Stock Options and non-qualified stock options; (ii) authorize the granting of Rights which may be granted in connection with all or part of any Option granted under this Plan, either concurrently with the grant of the Option or at any time thereafter during the term of the Option; (iii) determine the number of shares of Stock subject to each Option or the number of shares of Stock that shall be used to determine the value of a Right; and (iv) determine the time or times when and the manner in which each Option or Right shall be exercisable and the duration of the exercise period. - 9 - (b) Any option issued hereunder which is intended to qualify as an Incentive Stock Option shall be subject to such limitations or requirements as may be necessary for the purposes of Section 422 of the Code or any regulations and rulings thereunder to the extent and in such form as determined by the Committee in its discretion. (c) The exercise period for a non-qualified stock option and any related Right shall not exceed ten years and two days from the date of grant, and the exercise period for an Incentive Stock Option and any related Right shall not exceed ten years from the date of grant. (d) The Option price per share shall be determined by the Committee at the time any Option is granted and shall be not less than the Fair Market Value of one share of Stock on the date the Option is granted. (e) No part of any Option or Right may be exercised until the Key Employee who has been granted the Award shall have remained in the employ of a Participating Company for such period after the date of grant as the Committee may specify, if any, and the Committee may further require exercisability in installments. (f) Except as provided in Section 9, the purchase price of the shares as to which an Option shall be exercised shall be paid to the Company at the time of exercise either in cash or Stock already owned by the optionee having a total Fair Market Value equal to the purchase price, or a combination of cash and Stock having a total fair market value, as so determined, equal to the purchase price. The Committee shall determine acceptable methods for tendering Stock as payment upon exercise of an Option and may impose such limitations and prohibitions on the use of Stock to exercise an Option as it deems appropriate. (g) In case of a Key Employee's termination of employment, the following provisions shall apply: (A) If a Key Employee who has been granted an Option shall die before such Option has expired, his or her Option may be exercised in full by (i) the person or persons to whom the Key Employee's rights under the Option pass by will, or if no such person has such right, by his or her executors or administrators; (ii) his or her Transferee(s) (with respect to non-qualified stock options); or (iii) his or her Beneficiary designated pursuant to Section 10, at any time, or from time to time, within five years after the date of the Key Employee's death or within such other period, and subject to such terms and conditions as the Committee may specify, but not later than the expiration date specified in Section 5(c) above. (B) If the Key Employee's employment by any Participating Company terminates (i) because of his or her Total Disability, or (ii) solely in the case of a Key Employee with an original hire date with a Participating Company before January 1, 2002, because of his or her voluntary termination of employment due to Retirement; he or she may exercise his or her Options in full at any time, or from time to time, within five years after - 10 - the date of the termination of his or her employment, or within such other period, and subject to such terms and conditions as the Committee may specify, but not later than the expiration date specified in Section 5(c) above. Any such Options not fully exercisable immediately prior to such optionee's Retirement shall become fully exercisable upon such Retirement unless the Committee, in its sole discretion, shall otherwise determine. (C) Except as provided in Section 5(g)(B) and Section 9, if the Key Employee shall voluntarily resign from employment or he or she is terminated for cause as determined by the Committee, the Options or Rights shall be canceled coincident with the effective date of the termination of employment. (D) Except as provided in Section 9, if a Key Employee's employment terminates for any other reason, he or she may exercise his or her Options, to the extent that he or she shall have been entitled to do so at the date of the termination of his or her employment at any time, or from time to time, within three months after the date of the termination of his or her employment, or within such other period, and subject to such terms and conditions as the Committee may specify, but not later than the expiration date specified in Section 5(c) above. (h) Except as provided in this Section 5(h), no Option or Right granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the optionee, an Option or Right shall be exercisable only by the Key Employee or Director, to whom the Option or Right is granted (or his or her estate or designated Beneficiary). Notwithstanding the foregoing, all or a portion of a non-qualified stock option may be transferred and assigned by such persons designated by the Committee, to such persons designated by the Committee, and upon such terms and conditions as the Committee may from time to time authorize and determine in its sole discretion. (i) Except as provided in Section 9, if a Director's service on the Board terminates for any reason, including without limitation, termination due to death, disability or retirement, such Director may exercise any Option or Right granted to him or her only to the extent determined by the Committee as set forth in such Director's Award Agreement and/or any administrative rules or other terms and conditions adopted by the Committee from time to time applicable to such Option or Right granted to such Director. (j) With respect to an Incentive Stock Option, the Committee shall specify such terms and provisions as the Committee may determine to be necessary or desirable in order to qualify such Option as an "incentive stock option" within the meaning of Section 422 of the Code. (k) With respect to the exercisability and settlement of Rights: (i) Upon exercise of a Right, a Key Employee or Director shall be entitled, subject to such terms and conditions the Committee may specify, to receive upon exercise thereof all or a portion of the excess of (A) the Fair Market Value of a specified - 11 - number of shares of Stock at the time of exercise, as determined by the Committee, over (B) a specified amount which shall not, subject to Section 5(d), be less than the Fair Market Value of such specified number of shares of Stock at the time the Right is granted. Upon exercise of a Right, payment of such excess shall be made as the Committee shall specify in cash, the issuance or transfer to the Key Employee or Director of whole shares of Stock with a Fair Market Value at such time equal to any excess, or a combination of cash and shares of Stock with a combined Fair Market Value at such time equal to any such excess, all as determined by the Committee. The Company will not issue a fractional share of Stock and, if a fractional share would otherwise be issuable, the Company shall pay cash equal to the Fair Market Value of the fractional share of Stock at such time. (ii) In the event of the exercise of such Right, the Company's obligation in respect of any related Option or such portion thereof will be discharged by payment of the Right so exercised. 6. PERFORMANCE SHARES (a) Subject to the provisions of the Plan, the Committee shall (i) determine and designate from time to time those Key Employees or groups of Key Employees to whom Awards of Performance Shares are to be made, (ii) determine the Performance Period (the "Performance Period") and Performance Objectives (the "Performance Objectives") applicable to such Awards, (iii) determine the form of settlement of a Performance Share and (iv) generally determine the terms and conditions of each such Award. At any date, each Performance Share shall have a value equal to the Fair Market Value of a share of Stock at such date; provided that the Committee may limit the aggregate amount payable upon the settlement of any Award. The maximum award for any individual employee in any given year shall be 200,000 Performance Shares. (b) The Committee shall determine a Performance Period of not less than two nor more than five years. Performance Periods may overlap and Key Employees may participate simultaneously with respect to Performance Shares for which different Performance Periods are prescribed. (c) The Committee shall determine the Performance Objectives of Awards of Performance Shares. Performance Objectives may vary from Key Employee to Key Employee and between groups of Key Employees and shall be based upon one or more of the following objective criteria, as the Committee deems appropriate, which may be (i) determined solely by reference to the performance of the Company, any subsidiary or affiliate of the Company or any division or unit of any of the foregoing, or (ii) based on comparative performance of any one or more of the following relative to other entities: (A) earnings per share, (B) return on equity, (C) cash flow, (D) return on total capital, (E) return on assets, (F) economic value added, (G) increase in surplus, (H) reductions in operating expenses, (I) increases in operating margins, (J) earnings before income taxes and depreciation, (K) total shareholder return, (L) return on invested capital, (M) cost reductions and savings, (N) earnings before interest, taxes, depreciation and amortization ("EDITDA"), (O) pre-tax - 12 - operating income, (P) productivity improvements, or (Q) a Key Employee's attainment of personal objectives with respect to any of the foregoing criteria or other criteria such as growth and profitability, customer satisfaction, leadership effectiveness, business development, negotiating transactions and sales or developing long term business goals. If during the course of a Performance Period there shall occur significant events which the Committee expects to have a substantial effect on the applicable Performance Objectives during such period, the Committee may revise such Performance Objectives. (d) At the beginning of a Performance Period, the Committee shall determine for each Key Employee or group of Key Employees the number of Performance Shares or the percentage of Performance Shares which shall be paid to the Key Employee or member of the group of Key Employees if the applicable Performance Objectives are met in whole or in part. (e) If a Key Employee terminates service with all Participating Companies during a Performance Period: (i) because of death, (ii) because of Total Disability, (iii) solely in the case of a Key Employee with an original hire date with a Participating Company before January 1, 2002, because of his or her voluntary termination of employment due to Retirement, or (iv) under other circumstances where the Committee in its sole discretion finds that a waiver would be in the best interests of the Company; that Key Employee may, as determined by the Committee, be entitled to payment in settlement of such Performance Shares at the end of the Performance Period based upon the extent to which the Performance Objectives were satisfied at the end of such period and prorated for the portion of the Performance Period during which the Key Employee was employed by any Participating Company; provided, however, the Committee may provide for an earlier payment in settlement of such Performance Shares in such amount and under such terms and conditions as the Committee deems appropriate or desirable. If a Key Employee terminates service with all Participating Companies during a Performance Period for any other reason, then such Key Employee shall not be entitled to any Award with respect to that Performance Period unless the Committee shall otherwise determine. (f) Each Award of a Performance Share shall be paid in whole shares of Stock, or cash, or a combination of Stock and cash either as a lump sum payment or in annual installments, all as the Committee shall determine, with payment to commence as soon as practicable after the end of the relevant Performance Period. - 13 - 7. RESTRICTED STOCK (a) Except as provided in Section 9, Restricted Stock shall be subject to a restriction period (after which restrictions will lapse) which shall mean a period commencing on the date the Award is granted and ending on such date as the Committee shall determine (the "Restriction Period"). The Committee may provide for the lapse of restrictions in installments where deemed appropriate and it may also require the achievement of predetermined performance objectives in order for such shares to vest. Except as otherwise provided in the Plan, certificates for shares of Restricted Stock shall be delivered to a Key Employee as soon as administratively practicable following the end of the applicable Restriction Period. (b) Except when the Committee determines otherwise pursuant to Section 7(d), if a Key Employee terminates employment with all Participating Companies for any reason before the expiration of the Restriction Period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Key Employee and shall be reacquired by the Company. (c) Except as otherwise provided in this Section 7, no shares of Restricted Stock received by a Key Employee shall be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of during the Restriction Period. (d) In cases of: (i) death, (ii) Total Disability, (iii) solely in the case of a Key Employee with an original hire date with a Participating Company before January 1, 2002, a voluntary termination of employment due to Retirement, or (iv) in cases of special circumstances, the Committee may, in its sole discretion when it finds that a waiver would be in the best interests of the Company, elect to waive any or all remaining restrictions with respect to such Key Employee's Restricted Stock. (e) The Committee may require, under such terms and conditions as it deems appropriate or desirable, that the certificates for Stock delivered under the Plan may be held in custody by a bank or other institution, or that the Company may itself hold such shares in custody until the Restriction Period expires or until restrictions thereon otherwise lapse, or later as provided in Section 14 hereof. The Committee may require, as a condition of any Award of Restricted Stock that the Key Employee shall have delivered a stock power endorsed in blank relating to the Restricted Stock, and shall require, as a condition of settlement of any Award of Stock, that the Key Employee satisfy applicable tax withholding obligations as provided in Section 14 hereof. (f) Nothing in this Section 7 shall preclude a Key Employee from exchanging any shares of Restricted Stock subject to the restrictions contained herein for any other shares of Stock that are similarly restricted. - 14 - (g) Subject to Section 7(e) and Section 8, each Key Employee entitled to receive Restricted Stock under the Plan shall be issued a certificate for the shares of Stock. Such certificate shall be registered in the name of the Key Employee, and shall bear an appropriate legend reciting the terms, conditions and restrictions, if any, applicable to such Award and shall be subject to appropriate stop-transfer orders. 8. CERTIFICATES FOR AWARDS OF STOCK (a) The Company shall not be required to issue or deliver any certificates for shares of Stock prior to (i) the listing of such shares on any stock exchange on which the Stock may then be listed, (ii) the completion of any registration or qualification of such shares under any federal or state law, or any ruling or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable, and (iii) the satisfaction of any tax withholding obligations as provided in Section 14 hereof. (b) All certificates for shares of Stock delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. In making such determination, the Committee may rely upon an opinion of counsel for the Company. (c) Except for the restrictions on Restricted Stock under Section 7, each Key Employee who receives Stock in settlement of an Award of Stock, shall have all of the rights of a shareholder with respect to such shares, including the right to vote the shares and receive dividends and other distributions. No Key Employee awarded an Option, a Right or Performance Share, and no Director awarded an Option or Right, shall have any right as a shareholder with respect to any shares covered by his or her Option, Right or Performance Share prior to the date of issuance to him or her of a certificate or certificates for such shares. 9. CHANGE OF CONTROL (a) For purposes of this Plan, a Change of Control shall occur if: (i) 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 Company or a subsidiary of the Company or any employee benefit plan sponsored by the Company or a subsidiary of the Company is the Beneficial Owner of twenty percent or more of the outstanding stock of the Company entitled to vote in the election of directors of the Company; - 15 - (ii) any Person other than the Company or a subsidiary of the Company or any employee benefit plan sponsored by the Company or a subsidiary of the Company shall purchase shares pursuant to a tender offer or exchange offer to acquire any stock of the Company (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 Company entitled to vote in the election of directors of the Company (calculated as provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights to acquire stock); (iii) the stockholders of the Company shall approve (A) any consolidation or merger in which the Company is not the continuing or surviving corporation or pursuant to which shares of stock of the Company entitled to vote in the election of directors of the Company would be converted into cash, securities or other property, other than a consolidation or merger of the Company in which holders of such stock of the Company immediately prior to the consolidation or merger have the same proportionate ownership of common stock of the surviving corporation entitled to vote in the election of directors immediately after the consolidation or merger as immediately before, or (B) 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 Company; or (iv) within any 12 month period, the persons who were directors of the Company immediately before the beginning of such period (the "Incumbent Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director (A) was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this clause (iv), and (B) was not designated by a Person who has entered into an agreement with the Company to effect a transaction described in the immediately preceding paragraph (iii). (b) Notwithstanding any provisions in this Plan to the contrary, upon the occurrence of a Change of Control: (i) Each Option and related Right outstanding on the date such Change of Control occurs, and which is not then fully vested and exercisable, shall immediately vest and become exercisable to the full extent of the original grant for the remainder of its term. (ii) The surviving or resulting corporation may, in its discretion, provide for the assumption or replacement of each outstanding Option and related Right granted under the Plan on terms which are no less favorable to the optionee than those applicable to the Options and Rights immediately prior to the Change of Control. If the surviving or resulting corporation offers to assume or replace the Options and Rights, the optionee may elect to have his or her Options and Rights assumed or replaced, in whole or in part, or to - 16 - surrender on the date the Change of Control occurs his or her Options and Rights, in whole or in part, for cash equal to the excess of the Formula Price as defined in Section 9(b)(v) hereof over the exercise price. (iii) In the event the successor corporation does not offer to assume or replace the outstanding Options and Rights as described in Section 9(b)(ii) hereof, each Option and Right will be exercised on the date such Change of Control occurs for cash equal to the excess of the Formula Price as defined in Section 9(b)(v) hereof over the exercise price. (iv) If an employee elects to have his or her Options and Rights assumed or replaced in accordance with clause (ii) above, and within the three (3) year period following the date of the Change of Control either of the following occurs: (A) the employment of such employee is involuntarily terminated other than in a Termination For Just Cause (as defined below), or (B) such employee voluntarily terminates employment in a Termination For Good Reason (as defined below); then such employee's assumed or replaced Options and Rights shall remain exercisable in whole or in part for seven (7) months after the date of such termination (or until the expiration date for such Options and Rights, if earlier). Such assumed or replaced Options and Rights may be exercised for cash equal to the higher of (1) the excess of the Fair Market Value of the ------ successor corporation's common stock on the date of such termination over the exercise price for such Options and Rights, or (2) the excess of the Formula Price (as defined below) of the Company's Stock on the date the Change of Control occurred over the exercise price for such Options and Rights. (v) The following definitions shall apply for purposes of this Section 9 only: ---- "Base Salary" means the amount an employee is entitled to receive as wages or salary on an annualized basis, excluding all bonus, overtime, and incentive compensation, payable by the Company or the successor corporation, as the case may be, as consideration for the employee's services, and including earned but deferred wages or salary. "Formula Price" means the highest of (A) the highest composite daily ------- closing price of the Stock during the period beginning on the 60th calendar day prior to the Change of Control and ending on the date of such Change of Control, (B) the highest gross price paid for the Stock during the same period of time, as reported in a report on Schedule 13D filed with the Securities and Exchange Commission, or (C) the highest gross price paid or to be paid for a share of Stock (whether by way of exchange, conversion, distribution upon merger, liquidation or otherwise) in any of the transactions set forth in this Section as constituting a Change of Control; provided that in the case of the exercise of any such Right related to an Incentive Stock Option, "Formula Price" shall mean the Fair Market Value of the Stock at the time of such exercise. - 17 - "Required Base Salary" means with respect to any employee the higher of (a) the employee's Base Salary as in effect immediately prior to the Change of Control, or (b) the employee's highest Base Salary in effect at any time thereafter. "Target Bonus" means the annual bonus of an employee determined as a percentage of annual Base Salary based on the annual target bonus percentage established for the employee under the Executive Bonus Program or the Performance Share Program (or any other similar or successor plan, policy or program) for a calendar year, or if no annual target bonus percentage has been established under the applicable bonus plan, policy or program, based on the highest actual bonus percentage awarded to the employee under the applicable bonus plan, policy or program during the three preceding full calendar years. "Termination For Good Reason" means a voluntary termination of employment by an employee because of the occurrence of any of the following (A) a reduction in the employee's Base Salary below the Required Base Salary; (B) a greater than 10% reduction in the level of the Total Compensation offered to the employee in comparison to the Total Compensation enjoyed by the employee immediately prior to the Change of Control; or (C) the successor corporation requiring the employee to be based at any office or location more than 50 miles from the location at which he or she performed services immediately prior to the Change of Control, except for travel reasonably required in the performance of the employee's job responsibilities. "Termination For Just Cause" means a termination of employment based on fraud, misappropriation or embezzlement on the part of the employee which results in a final conviction of a felony. "Total Compensation" means the aggregate of an employee's Base Salary, Target Bonus, and the value of any long-term incentive compensation award (including any option award) made to the employee under this Plan or the 1997 Hartford Life, Inc. Incentive Stock Plan (or any successor plan, policy or program), such value to be determined as of the date such award was made. (vi) The restrictions applicable to shares of Restricted Stock held by Key Employees pursuant to Section 7 shall lapse upon the occurrence of a Change of Control, and such Key Employees shall be entitled to elect, at any time during the 60 calendar days following such Change of Control, to receive immediately after the date the Key Employee makes such election either of the following: (A) unrestricted certificates for all of such shares, or (B) a lump sum cash amount equal to the number of such shares multiplied by the Formula Price. If a Key Employee does not make any election during the foregoing 60 day period, such Key Employee shall be deemed to have made the election described in Section 9(b)(vi)(A) as of the 60th day of such period, and unrestricted certificates shall be issued to such Key Employee immediately following such day as described in Section 9(b)(vi)(A) hereof. - 18 - (vii) If a Change of Control occurs during the course of a Performance Period applicable to an Award of Performance Shares pursuant to Section 6, then a Key Employee shall be deemed to have satisfied the Performance Objectives effective on the date of such occurrence. Such Key Employee shall be paid, immediately following the occurrence of such Change of Control, a lump sum cash amount equal to the number of outstanding Performance Shares awarded to such Key Employee multiplied by the Formula Price. (c) In the event of a Change of Control, no amendment, suspension or termination of the Plan thereafter shall impair or reduce the rights of any person with respect to any Award made under the Plan. 10. BENEFICIARY (a) Each Key Employee, Director and/or his or her Transferee may file with the Company a written designation of one or more persons as the Beneficiary who shall be entitled to receive the Award, if any, payable under the Plan upon his or her death. A Key Employee, Director or Transferee may from time to time revoke or change his or her Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Company. The last such designation received by the Company shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Company prior to the Key Employee's, Director's or Transferee's death, as the case may be, and in no event shall it be effective as of a date prior to such receipt. (b) If no such Beneficiary designation is in effect at the time of a Key Employee's, Director's or Transferee's death, as the case may be, or if no designated Beneficiary survives the Key Employee, Director or Transferee or if such designation conflicts with law, the Key Employee's, Director's or Transferee's estate, as the case may be, shall be entitled to receive the Award, if any, payable under the Plan upon his or her death. If the Committee is in doubt as to the right of any person to receive such Award, the Company may retain such Award, without liability for any interest thereon, until the Committee determines the rights thereto, or the Company may pay such Award into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Company therefor. 11. ADMINISTRATION OF THE PLAN (a) Each member of the Committee shall be both a member of the Board and both a "non-employee director" within the meaning of Rule 16b-3 under the Act or successor rule or regulation and an "outside director" for purposes of Section 162(m) of the Internal Revenue Code. (b) All decisions, determinations or actions of the Committee made or taken pursuant to grants of authority under the Plan shall be made or taken in the sole discretion - 19 - of the Committee and shall be final, conclusive and binding on all persons for all purposes. (c) The Committee shall have full power, discretion and authority to interpret, construe and administer the Plan and any part thereof, and its interpretations and constructions thereof and actions taken thereunder shall be, except as otherwise determined by the Board, final, conclusive and binding on all persons for all purposes. (d) The Committee's decisions and determinations under the Plan need not be uniform and may be made selectively among Key Employees, whether or not such Key Employees are similarly situated. (e) The Committee may, in its sole discretion, delegate such of its powers as it deems appropriate to the chief executive officer or other members of senior management, except that Awards to executive officers shall be made solely by the Committee or the Board of Directors. (f) If a Change of Control has not occurred and if the Committee determines that a Key Employee has taken action inimical to the best interests of any Participating Company, the Committee may, in its sole discretion, terminate in whole or in part such portion of any Option (including any related Right) as has not yet become exercisable at the time of termination, terminate any Performance Share Award for which the Performance Period has not been completed or terminate any Award of Restricted Stock for which the Restriction Period has not lapsed. 12. AMENDMENT, EXTENSION OR TERMINATION The Board may, at any time, amend or terminate the Plan and, specifically, may make such modifications to the Plan as it deems necessary to avoid the application of Section 162(m) of the Code and the Treasury regulations issued thereunder. However, (1) with respect only to Incentive Stock Options, no amendment shall, without approval by a majority of the Company's stockholders, (a) alter the group of persons eligible to participate in the Plan, or (b) except as provided in Section 13 increase the maximum number of shares of Stock which are available for Awards under the Plan; or, (2) with respect to all Options, allow the Committee to reprice the Options. If a Change of Control has occurred, no amendment or termination shall impair the rights of any person with respect to a prior Award. 13. ADJUSTMENTS IN EVENT OF CHANGE IN COMMON STOCK In the event of any reorganization, merger, recapitalization, consolidation, liquidation, stock dividend, stock split, reclassification, combination of shares, rights offering, split-up or extraordinary dividend (including a spin-off) or divestiture, or any other change in the corporate structure or shares, the Committee may make such adjustment in the Stock subject to Awards, including Stock subject to purchase by an Option, or the terms, conditions or restrictions on Stock or Awards, including the price payable upon the exercise - 20 - of such Option and the number of shares subject to restricted stock awards, as the Committee deems equitable. 14. MISCELLANEOUS (a) Except as provided in Section 9, nothing in this Plan or any Award granted hereunder shall confer upon any employee any right to continue in the employ of any Participating Company or interfere in any way with the right of any Participating Company to terminate his or her employment at any time. No Award payable under the Plan shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of any Participating Company for the benefit of its employees unless the Company shall determine otherwise. No Key Employee shall have any claim to an Award until it is actually granted under the Plan. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as provided in Section 7(e) with respect to Restricted Stock. (b) The Committee or the Group Senior Vice President, Human Resources (or other person holding a similar position) shall have the right to make such provisions as deemed appropriate in its sole discretion to satisfy any obligation of the Company to withhold federal, state or local income or other taxes incurred by reason of the operation of the Plan or an Award under the Plan, including but not limited to at any time (i) requiring a Key Employee to submit payment to the Company for such taxes before making settlement of any Award of Stock or other amount due under the Plan, (ii) withholding such taxes from wages or other amounts due to the Key Employee before making settlement of any Award of Stock or other amount due under the Plan, (iii) making settlement of any Award of Stock or other amount due under the Plan part in Stock and part in cash to facilitate satisfaction of such withholding obligations, or (iv) receiving Stock already owned by the Key Employee or withholding Stock otherwise due to the Key Employee in an amount determined necessary to satisfy such withholding obligations. (c) The Plan and the grant of Awards shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. (d) The terms of the Plan shall be binding upon the Company and its successors and assigns. (e) Captions preceding the sections hereof are inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provision hereof. - 21 - 15. EFFECTIVE DATE, TERM OF PLAN AND SHAREHOLDER APPROVAL The effective date of the Plan shall be May 18, 2000. No Award shall be granted under this Plan after the Plan's termination date. The Plan's termination date shall be the earlier of: (a) May 18, 2010, or (b) the date on which the Maximum Limit is reached; provided, however, that the Plan will continue in effect for existing Awards as long as any such Award is outstanding. - 22 - ADMINISTRATION The Plan is administered by a Committee of the Board of Directors of The Hartford, presently designated as the Compensation and Personnel Committee, the members of which serve at the pleasure of the Board. The Committee is composed of directors none of whom is an officer or employee of The Hartford. FEDERAL TAX TREATMENT The following is a brief summary of the current Federal income tax rules generally applicable to options, SARs, performance shares and restricted stock. Awardees should consult their own tax advisors as to the specific Federal, state and local tax consequences applicable to them. A. OPTIONS AND STOCK APPRECIATION RIGHTS Options granted under the Plan may be either non-qualified options or "incentive stock options" qualifying under Section 422A of the Internal Revenue Code. Non-qualified Options An optionee is not subject to Federal income tax upon grant of a non-qualified option. At the time of exercise, the optionee will realize compensation income (subject to withholding) to the extent that the then fair market value of the stock exceeds the option price. The amount of such income will constitute an addition to the optionee's tax basis in the optioned stock. Sale of the shares will result in capital gain or loss (long-term or short-term depending on the optionee's holding period). The Hartford is entitled to a Federal tax deduction at the same time and to the same extent that the optionee realizes compensation income. - 23 - Incentive Stock Options ("ISOs") Options under the Plan denominated as ISOs are intended to constitute incentive stock options under Section 422A of the Internal Revenue Code of 1986, as amended. An optionee is not subject to Federal income tax upon either the grant or exercise of an ISO. If the optionee holds the shares acquired upon exercise for at least one year after issuance of the optioned shares and until at least two years after grant of the option, then the difference between the amount realized on a subsequent sale or other taxable disposition of the shares and the option price will constitute long-term capital gain or loss. To obtain favorable tax treatment, an ISO must be exercised within three months after termination of employment (other than by retirement, disability, or death) with The Hartford or a 50% subsidiary. To obtain favorable tax treatment, an ISO must be exercised within three months of retirement or within one year of cessation of employment for disability (with no limitation in the case of death), notwithstanding any longer exercise period permitted under the terms of the Plan. The Hartford will not be entitled to a Federal tax deduction with respect to the grant or exercise of the ISO. If the optionee sells the shares acquired under an ISO before the requisite holding period, he or she will be deemed to have made a "disqualifying disposition" of the shares and will realize compensation income in the year of disposition equal to the lesser of the fair market value of the shares at exercise or the amount realized on their disposition over the option price of the shares. (However, if the disposition is by gift or by sale to a related party, the compensation income must be measured by the value of the shares at exercise over the option price.) Any gain recognized upon a disqualifying disposition in excess of the ordinary income portion will constitute either short-term or long-term capital gain. In the event of a disqualifying disposition, The Hartford will be entitled to a Federal tax deduction in the amount of the compensation income realized by the optionee. The option spread on the exercise of an ISO is an adjustment in computing alternative minimum taxable income. No adjustment is required, however, if the optionee made a disqualifying disposition of the shares in the same year as he or she is taxed on the exercise. Stock Appreciation Rights ("SARs") SARs may have been awarded to officers and directors of The Hartford subject to Section 16(b) of the Act with respect to both ISOs and non-qualified options granted under the Plan. An optionee is not taxed upon the grant of SARs. An optionee exercising SARs for cash will realize compensation income (subject to withholding) in the amount of the cash received. The Hartford is entitled to a tax deduction at the same time and to the same extent that the optionee realizes compensation income. - 24 - B. PERFORMANCE SHARES An awardee of Performance Shares will generally realize compensation income (subject to withholding) when and to the extent that payment is made, whether in the form of cash or shares of The Hartford Stock. To the extent that payment is made in the form of Stock, income shall be measured by the then fair market value of the shares, which shall constitute an addition to the awardee's tax basis in such shares. The Hartford will be entitled to a Federal tax deduction for the value of payment at the time of payment. C. RESTRICTED STOCK An awardee of Restricted Stock will generally realize compensation income (subject to withholding) when and to the extent that the restrictions on the shares lapse, as measured by the value of the shares at the time of lapse. The awardee's holding period for the shares will not commence until the date of lapse, and dividends paid during the restriction period will be treated as compensation. The income realized on lapse of the restrictions will constitute an addition to the awardee's tax basis in the shares. In lieu of deferred recognition of income, the awardee may formally elect, within 30 days of award, to realize compensation income at the time of award, as measured by the fair market value of the stock on the date of award determined without regard to the restrictions. The income realized will constitute an addition to the tax basis of the shares. In the case of such election, any appreciation (or depreciation) on the shares during the restriction period will give rise to capital gain (or capital loss). In the event that the awardee terminates employment during the restriction period and forfeits his or her shares, no deduction may be claimed and the taxes paid on award of the shares shall be forfeited. The Hartford will be entitled to a Federal tax deduction at the same time and to the same extent that the awardee realizes compensation income. However, if an awardee makes an election to realize compensation income at the time of the award and subsequently forfeits the shares of Restricted Stock, The Hartford must include as ordinary income the amount it previously deducted in the year of grant with respect to such shares. D. GOLDEN PARACHUTE TAX PENALTIES Options, SARs, Performance Shares or Restricted Stock which are granted, accelerated or enhanced upon the occurrence of a takeover (i.e., a Change of Control as defined in Section 9 of the Plan) may give rise, in whole or in part, to "excess parachute payments" within the meaning of Section 280G of the Internal Revenue Code and, to such extent, will be nondeductible by The Hartford and subject to a 20% excise tax to the awardee. - 25 - EX-10 9 exh10_18.txt EXHIBIT 10.18 EXHIBIT 10.18 THE HARTFORD DEFERRED RESTRICTED STOCK UNIT PLAN THIS DOCUMENT CONSTITUTES PART OF A PROSPECTUS COVERING SECURITIES THAT HAVE BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933 FOR NORTH CAROLINA RESIDENTS: THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE COMMISSIONER OF INSURANCE FOR THE STATE OF NORTH CAROLINA, NOR HAS THE COMMISSIONER OF INSURANCE RULED UPON THE ACCURACY OR THE ADEQUACY OF THIS DOCUMENT. JANUARY, 2002 TABLE OF CONTENTS General Information....................................................................1 The Hartford Deferred Restricted Stock Unit Plan............................................2 Federal Tax Treatment.........................................................10 Participant Status............................................................10 Resale Restrictions...........................................................12 GENERAL INFORMATION Under The Hartford Deferred Restricted Stock Unit Plan (the "Plan"), certain employees of The Hartford Financial Services Group, Inc. and its subsidiaries (the "Company") may elect to forego receipt of (i) cash compensation, including cash bonuses, and/or (ii) shares of Company common stock ("Common Stock") or other stock-based awards granted pursuant to any Company plan or arrangement, in each case as determined and approved from time to time by the Compensation and Personnel Committee of the Board of Directors of the Company (the "Committee"), in exchange for restricted contractual rights ("Units") to receive Common Stock. As more fully set forth in the Plan, the Committee has the discretion to award, or not to award, Units to employee participants who have previously made a proper election to receive Units. The Committee may award Units pursuant to the restricted stock provisions of the The Hartford Incentive Stock Plan ("Incentive Stock Plan"), under which the Plan is implemented. AN EMPLOYEE'S ELECTION TO RECEIVE UNITS IS IRREVOCABLE UNLESS OTHERWISE DETERMINED BY THE COMMITTEE IN ITS SOLE DISCRETION. PARTICIPANTS RECEIVING UNITS WILL GENERALLY NOT HAVE THE RIGHT TO RECEIVE COMMON STOCK UNTIL THE END OF A THREE YEAR RESTRICTION PERIOD OR OTHER RESTRICTION PERIOD PERMITTED BY THE COMMITTEE, EXCEPT IN CERTAIN CASES AS SET FORTH IN THE PLAN. THE MARKET PRICE OF THE COMMON STOCK WILL FLUCTUATE AND ON THE DATE THAT A PARTICIPANT RECEIVES COMMON STOCK, THE MARKET PRICE MAY BE MORE OR LESS THAN THE MARKET PRICE ON THE DATE THAT AWARDS OF UNITS WAS MADE. This prospectus supplements the Incentive Stock Plan prospectus dated October 14, 1998, as may be amended from time to time, which should be read in conjunction with this prospectus. To the extent of any inconsistency between this prospectus and the Incentive Stock Plan prospectus, this prospectus shall control. The text of the Plan is set forth below. - 1 - THE HARTFORD DEFERRED RESTRICTED STOCK UNIT PLAN ------------------------------------------------ ARTICLE I CREATION AND PURPOSE 1.1 CREATION OF THE PLAN. The Hartford Deferred Restricted Stock Unit Plan (the -------------------- "Plan") is created pursuant to the terms of The Hartford Incentive Stock Plan (the "Incentive Stock Plan") relating to restricted stock, which terms are incorporated herein by reference. Capitalized terms used in this Plan and not defined herein shall have the meanings assigned to such terms by the Incentive Stock Plan. 1.2 PURPOSE OF THE PLAN. The purpose of the Plan is to motivate and reward -------------------- superior performance on the part of employees of the Company and thereby to attract and retain employees of superior ability. In addition, the Plan is intended to further the opportunities for stock ownership by such employees in order to increase their proprietary interest in the Company, and as a result, their interest in the success of the Company. Awards consisting of contractual rights to receive shares of the Company's Stock ("Units") may be made under the Plan, in the discretion of the Committee, to Key Employees of the Company who properly elect to participate in the Plan. Participation in the Plan shall require a Key Employee's irrevocable election to receive Units in exchange for all or a portion of certain Compensation that may become payable to such Key Employee, such Units entitling the Key Employee to receive Company Stock at the end of a three year restriction period or other restriction period permitted by the Committee, to the extent provided herein. ARTICLE II DEFINITIONS 2.1 "ACCOUNT" means an account maintained on behalf of a Participant on the ------- books of the Company in accordance with the terms hereof. 2.2 "AWARD DATE" means the date designated by the Committee for the award of ---------- Units pursuant to the Plan. 2.3 "BOARD OF DIRECTORS" means the Board of Directors of The Hartford Financial ------------------ Services Group, Inc. 2.4 "BENEFICIARY" shall have the meaning assigned by the Incentive Stock Plan. ----------- - 2 - 2.5 "CHANGE OF CONTROL" shall have the meaning assigned by the Incentive Stock ----------------- Plan. 2.6 "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 VIII. 2.7 "COMPANY" means The Hartford Financial Services Group, Inc. and its ------- subsidiaries, and their successors and assigns. 2.8 "COMPENSATION" means compensation payable to a Key Employee in the form of ------------ (i) cash, including cash bonuses, and (ii) Stock and other stock-based awards granted pursuant to any plan or other arrangement of the Company, which compensation the Committee determines from time to time as eligible for the election to receive Units under the Plan. 2.9 "DIVIDEND AMOUNT" means the per share cash dividend amount paid on the ---------------- Company's Stock on a particular dividend payment date. 2.10 "DIVIDEND CONVERSION PRICE" means the Fair Market Value of one share of the ------------------------- Company's Stock on the Dividend Record Date. 2.11 "DIVIDEND RECORD DATE" means the date fixed by the Board of Directors as ---------------------- the date for determining those holders of Stock who are entitled to receive payment of any dividend declared by the Board of Directors. 2.12 "ELECTIVE UNITS" shall have the meaning assigned by Article III of the --------------- Plan. 2.13 "FAIR MARKET VALUE" shall have the meaning assigned by the Incentive Stock ----------------- Plan. 2.14 "INCENTIVE STOCK PLAN" means The Hartford 2000 Incentive Stock Plan, as --------------------- amended from time to time. 2.15 "KEY EMPLOYEE" shall have the meaning assigned by the Incentive Stock Plan. ------------ 2.16 "NORMAL VESTING DATE" means the third anniversary of the Award Date, or --------------------- such other date that the Committee may permit with respect to any particular award of Units. 2.17 "PARTICIPANT" means a Key Employee who properly elects to participate in ----------- the Plan pursuant to Article V of the Plan. 2.18 "PARTICIPATING COMPANY" shall have the meaning assigned by the Incentive ---------------------- Stock Plan. 2.19 "PLAN" means this The Hartford 1996 Deferred Restricted Stock Unit Plan. ---- - 3 - 2.20 "PREMIUM UNITS" shall have the meaning assigned by Article IV of the Plan. ------------- 2.21 "PLAN ADMINISTRATOR" shall have the meaning assigned by Article VIII of the ------------------ Plan. 2.22 "RETIREMENT" shall have the meaning assigned by the Incentive Stock Plan. ---------- 2.23 "STOCK" shall have the meaning assigned by the Incentive Stock Plan. ----- 2.24 "TOTAL DISABILITY" shall have the meaning assigned by the Incentive Stock ----------------- Plan. 2.25 "UNITS" shall have the meaning assigned by Article I of the Plan. ----- ARTICLE III ELECTIVE UNITS 3.1 AWARD OF ELECTIVE UNITS. On the Award Date, the Committee may, in its ------------------------- discretion, award to each Participant a number of whole and/or fractional contractual rights to receive in accordance with the Plan shares of the Company's Stock (the "Elective Units") equal to (a) the portion of Compensation elected by the Participant in accordance with Article V, divided by (b) the Fair Market Value of the Company's Stock on the Award Date. If all or a portion of the Compensation is in the form of Company Stock, such Stock shall be valued based on the Fair Market Value of the Company's Stock on the Award Date. If the Committee does not make an award to a Participant pursuant to this Section, any election made by the Participant pursuant to Article V shall be null and void. 3.2 CREDITING OF ELECTIVE UNITS TO ACCOUNT. The number of whole and/or ------------------------------------------ fractional Elective Units awarded to a Participant pursuant to this Article III shall be credited, as of the Award Date, to the Participant's Account. 3.3 VESTING OF ELECTIVE UNITS. The rights of a Participant with respect to --------------------------- Elective Units awarded hereunder shall be fully vested and nonforfeitable at all times. To the extent provided in Article VII, the Participant shall become entitled to receive certificates for shares of Stock corresponding to such Elective Units credited to the Participant's Account on the applicable date identified in Article VII. - 4 - ARTICLE IV PREMIUM UNITS 4.1 AWARD OF PREMIUM UNITS. Except as provided below, on the Award Date, the ----------------------- Committee shall award to each Participant a number of additional whole and/or fractional contractual rights to receive in accordance with the Plan shares of the Company's Stock (the "Premium Units") equal to 10% of the Elective Units awarded to the Participant pursuant to Article III. Notwithstanding the foregoing, the Committee may decide that no Premium Units shall be awarded with respect to any particular award of Elective Units, in which case all of the provisions of the Plan relating to Premium Units shall be null and void and without effect with respect to such Elective Units. 4.2 CREDITING OF PREMIUM UNITS TO ACCOUNT. The number of whole and/or fractional ------------------------------------- Premium Units awarded to a Participant pursuant to this Article IV shall be credited, as of the Award Date, to the Participant's Account. 4.3 VESTING OF PREMIUM UNITS. Except as otherwise provided herein, a --------------------------- Participant's rights with respect to Premium Units shall vest on the Normal Vesting Date. To the extent provided in Article VII, the Participant shall become entitled to receive certificates for shares of Stock corresponding to vested Premium Units credited to the Participant's Account on the applicable date identified in Article VII. A. TERMINATION OF EMPLOYMENT. In the event of a Participant's --------------------------- termination of employment with all Participating Companies prior to the Normal Vesting Date (i) due to death, (ii) due to Total Disability, or (iii) solely in the case of a Participant with an original hire date with a Participating Company on or before January 1, 2002, due to Retirement, the Premium Units credited to the Participant's Account as of the date of such termination shall become immediately vested and nonforfeitable. In the event of a Participant's termination of employment with all Participating Companies for any other reason, any Premium Units credited to the Participant's Account that have not become vested on or before the date of such termination shall be forfeited, unless the Committee determines otherwise in its sole discretion in accordance with the Incentive Stock Plan. Premium Units forfeited by a Participant pursuant to this Section shall immediately be deducted from the Participant's Account. ARTICLE V PARTICIPATION 5.1 ELECTION TO PARTICIPATE. A Key Employee may participate in the Plan by ------------------------ filing a properly completed election agreement, 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 hereunder shall only apply to the Compensation as to which the election is made, and - 5 - shall be irrevocable, unless otherwise determined by the Committee in its sole discretion. The election of a Key Employee shall be deemed null and void if no award pursuant to Article III hereof is made to the Key Employee with respect to such election. 5.2 ELECTION FORM. The election agreement completed by a Participant pursuant to ------------- this Article V shall (a) identify a portion of the Participant's Compensation that may become payable with respect to the Participant's services, (b) contain the Participant's election to receive such portion (which would otherwise become payable in cash, Stock or otherwise) in the form of Elective Units in accordance with the Plan, and (c) contain such other information as the Plan Administrator may require. 5.3 MAXIMUM AND MINIMUM AMOUNTS REQUIRED FOR PARTICIPATION. The Committee may -------------------------------------------------------- designate a maximum and a minimum portion of a Key Employee's Compensation, in terms of a percentage or other amount, as to which an election may be made hereunder. ARTICLE VI DIVIDEND EQUIVALENTS 6.1 DIVIDEND EQUIVALENTS ON ELECTIVE UNITS. As soon as practicable after any ---------------------------------------- dividend is paid on the Company's Stock, a Participant's Account shall be credited with additional Elective Units, such crediting to be effective retroactive to the Dividend Record Date. The amount of such additional Elective Units shall be equal to (a) the product of (I) the Dividend Amount, and (ii) the number of whole and fractional Elective Units credited to the Participant's Account as of the Dividend Record Date, divided by (b) the Dividend Conversion Price. 6.2 DIVIDEND EQUIVALENTS ON PREMIUM UNITS. As soon as practicable after any --------------------------------------- dividend is paid on the Company's Stock, a Participant's Account shall be credited with additional Premium Units such crediting to be effective retroactive to the Dividend Record Date. The amount of such additional Premium Units shall be equal to (a) the product of (I) the Dividend Amount, and (ii) the number of whole and fractional Premium Units credited to the Participant's Account as of the Dividend Record Date, divided by (b) the Dividend Conversion Price. 6.3 TREATMENT OF UNITS CREDITED IN RESPECT OF DIVIDEND EQUIVALENTS. Any --------------------------------------------------------------------- additional Units credited to the Account of a Participant pursuant to this Article VI shall, as of the date so credited, be treated for all purposes of this Plan (including, without limitation, the provisions hereof pertaining to the crediting of future dividend equivalents and the vesting of Premium Units) as though part of the Elective Units and Premium Units in relation to which such additional Units were credited, respectively. - 6 - 6.4 NON-CASH DIVIDENDS. In the event that a stock dividend is paid on the ------------------- Company's Stock, the appropriate Dividend Amount for purposes of this Article VI shall be determined in accordance with Section 9.3 hereof. ARTICLE VII RECEIPT OF SHARES IN RESPECT OF UNITS 7.1 GENERAL RULE. Except as otherwise provided herein, as soon as practicable ------------ after the earlier to occur of (a) the Normal Vesting Date, or (b) the date a Participant's employment with all Participating Companies terminates, the Company shall issue to such Participant certificates for shares of Stock corresponding to the number of whole Elective Units and whole vested Premium Units credited to the Participant's Account as of the earlier of such dates. 7.2 FRACTIONAL UNITS. Notwithstanding anything herein to the contrary, if any ---------------- vested fractional Units are credited to a Participant's Account (after adding together all fractional Elective and vested Premium Units then credited to the Participant's Account) on the earlier of the dates identified in Section 7.1, such fractional Units shall be paid to the Participant in cash, based on the Fair Market Value of the Company's Stock on such date. 7.3 VOLUNTARY DEFERRAL. Upon such terms and conditions as the Committee may ------------------- determine, a Participant may be permitted to elect, by written notice to the Plan Administrator filed by the date and on such form or other authorization as the Plan Administrator may require, to defer the issuance hereunder of certificates for shares of Stock pursuant to the Plan, or such other arrangement maintained by the Company, if any, in which the Participant is eligible to participate as of such date. Such election shall have the effect of deferring such issuance until the date permitted by the Plan Administrator, and/or such other effect as permitted by the Committee. 7.4 CHANGE OF CONTROL. Notwithstanding anything herein to the contrary, upon the ----------------- occurrence of a Change of Control, any Premium Units then credited to each Participant's Account shall immediately become fully vested, and each Participant shall be paid immediately following such Change of Control, a lump sum cash amount equal to the number of whole and fractional Elective Units credited to the Participant's Account plus the Participant's vested whole and fractional Premium Units, multiplied by the "Formula Price", as such term is defined in the Incentive Stock Plan. - 7 - ARTICLE VIII ADMINISTRATION 8.1 ADMINISTRATION BY COMMITTEE. Except as otherwise delegated by the Committee --------------------------- pursuant to this Plan or the Incentive Stock Plan, (a) this 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. 8.2 DELEGATION OF CERTAIN AUTHORITY TO PLAN ADMINISTRATOR. Except as otherwise ------------------------------------------------------ provided by the Committee in accordance with this Plan or the Incentive Stock Plan, the Plan Administrator shall be the Company's Senior Vice President, Human Resources. Except as otherwise provided in this Plan or the Incentive Stock Plan, 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 this Plan or the Incentive Stock 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. 8.3 APPLICABILITY OF INCENTIVE STOCK PLAN. In the event of a conflict between -------------------------------------- the terms of this Plan and the terms of the Incentive Stock Plan, the terms of the Incentive Stock Plan shall control. ARTICLE IX MISCELLANEOUS 9.1 TAX WITHHOLDING. The Committee or the Group Senior Vice President, Human ---------------- Resources (or other person holding a similar position) shall have the right to make such provisions as deemed appropriate in its sole discretion to satisfy any obligation of a Participating Company to withhold federal, state or local income or other taxes incurred by reason of the operation of the Plan or an Award under the Plan, including but not limited to at any time (i) requiring a Key Employee to submit payment to a Participating Company for such taxes before making settlement of any Award of Units or Stock or other amount due under the Plan, (ii) withholding such taxes from wages or other amounts due to the Key Employee before making settlement of any Award of Units or Stock or other amount due under the Plan, (iii) making settlement of any Award of Units or Stock or other amount due under the Plan part in Units or Stock and part in cash to facilitate satisfaction of such withholding obligations, or (iv) receiving Units or Stock already owned by the Key Employee or withholding Units or Stock otherwise due to the Key Employee in an amount determined necessary to satisfy such withholding obligations. - 8 - 9.2 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 bonus. 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 bonus policies at any time. 9.3 CAPITAL ADJUSTMENTS FOR CORPORATE TRANSACTIONS. Upon the occurrence of an ------------------------------------------------ event described in Section 13 of the Incentive Stock Plan, the Committee may adjust the number of Units credited to the Account of a Participant in accordance with the terms of that Section. 9.4 DELIVERY OF SHARES OF STOCK IN THE EVENT OF DEATH. In the event of the death ------------------------------------------------- of a Participant, certificates for shares of Stock and/or cash corresponding to the Elective Units and vested Premium Units then credited to the Account of the Participant shall be transferred (in the same form as would have been transferred to the Participant pursuant to Article VII) as soon as practicable thereafter to such Beneficiary or Beneficiaries as properly designated by the Participant in accordance with Section 10 of the Incentive Stock Plan. If no such designation is in effect at the time of the Participant's death, or if no designated Beneficiary survives the Participant or if any Beneficiary designation conflicts with applicable law, such certificates and/or cash shall be transferred to the Participant's estate as provided in Section 10 of the Incentive Stock Plan. 9.5 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 Units awarded under the Plan. 9.6 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. 9.7 USE OF FUNDS AND ASSETS. All funds and assets received or held by the ------------------------- Company pursuant to or in connection with the Plan may be used by the Company for any corporate purpose, and the Company shall not be obligated to segregate such amounts from its general assets. The Company may establish a trust or other entity to aid in meeting its obligations under the Plan. 9.8 SOURCE OF SHARES FOR THE PLAN. Except as otherwise provided in the Incentive ----------------------------- Stock Plan, shares of Company Stock to be issued hereunder may be made available from authorized but unissued stock, shares held by the Company in treasury or shares purchased on the open market. - 9 - 9.9 AMENDMENT AND TERMINATION OF THE PLAN. Subject to the provisions of the --------------------------------------- Incentive Stock Plan, the Board of Directors may amend or terminate this Plan at any time; provided that, in the event of a Change of Control, no amendment or termination thereafter shall impair or reduce the rights of any person with respect to any award made under the Plan. Amendments to the Plan may be made by the Plan Administrator to the extent (a) required by applicable law, or (b) required to maintain a favorable tax status for the Plan. 9.10 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. 9.11 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. FEDERAL TAX TREATMENT The following is a brief summary of the U. S. Federal income tax consequences of the award of Units and the subsequent receipt of Common Stock under the Plan based upon the Federal tax laws and rules in effect on the date hereof. This summary is not exhaustive and does not describe state, local or foreign tax consequences. Each Plan participant should consult his or her tax advisor for precise advice on his or her particular circumstances. A participant will not recognize income on that portion of compensation that is exchanged for Units, and the Company, therefore, will not be entitled to a deduction. However, after the restriction period on the Units ends and Common Stock is issued to a participant (unless a participant further defers receipt of Common Stock, if eligible to do so), the participant will be subject to tax at ordinary income rates on the fair market value of the Common Stock on the date that the stock is distributed and the capital gain or loss holding period for such stock will also commence on that date. The Company will be entitled to a deduction in the amount that is taxable as ordinary income to the participant. PARTICIPANT STATUS CREDITOR OF THE COMPANY - ----------------------- Upon the award of Units, the Company will place into a trust (the "Trust") the shares of Common Stock that may be issued to a participant after the restriction period on Units ends. However, participants will not be named beneficiaries under the Trust and will not have any specific rights under the Trust. Until shares of Common Stock are issued to a participant, he or she will be a general creditor of the Company as to his or her contractual right to receive Common Stock, as represented by Units. - 10 - STOCKHOLDER STATUS - ------------------ The trustee ("Trustee") of the Trust will be the legal owner and holder of record of the shares of Common Stock underlying Units. Therefore, except as described below or as otherwise provided under the Plan, participants will neither be stockholders of the Company nor have any stockholder rights by virtue of being awarded Units. After the Unit restriction period ends, and unless a participant further defers receipt of Common Stock (if eligible to do so), a participant will receive shares of Common Stock represented by Units and will thereby become a stockholder of the Company and have all stockholder rights. VOTING RIGHTS - ------------- Notwithstanding the above, each participant may direct the Trustee as to the manner in which Common Stock underlying Units credited to his or her Plan account shall be voted on all matters as to which the holders of Common Stock are entitled to vote. Each participant will be furnished with a proxy statement or other solicitation document prior to any stockholder meeting of the Company, along with a form (which may be a Company proxy card) to allow the participant to instruct the Trustee on voting the Common Stock underlying Units credited to a participant's Plan account as of the meeting record date. The Trustee will vote the shares of Common Stock as instructed by participants. In lieu of voting fractional shares, the Trustee may vote the combined fractional shares to the extent possible to reflect participants' instructions. The Trustee will vote shares of Common Stock as to which no valid instructions were given in the same manner and proportion as the shares as to which the Trustee has received valid instructions DIVIDENDS - --------- The Company may, from time to time, declare and pay a cash dividend ("Dividend") to the holders of shares of Common Stock. As more fully set forth in the Plan, Dividends payable upon shares underlying Units will not be credited to participants' Plan accounts in the form of cash, but instead will be credited as reinvested in additional full and/or fractional Units ("Reinvested Units"). The effect on Units of any stock dividend or stock split distributed by the Company on shares of Common Stock, or other corporate actions affecting the Common Stock, will be determined by the Committee. To the extent that any such corporate action results in additional Units being credited to a participant's account, subsequent Dividends relating to these Units will also be in Reinvested Units. - 11 - RESALE RESTRICTIONS As set forth in the Plan, participants have no right to receive shares of Common Stock until the restriction period on Units ends. The Plan contains no restrictions on the resale of Common Stock issued to participants after such restriction period ends. However, affiliates of the Company, which may include directors and certain officers of the Company, may not reoffer or resell shares of Common Stock in a transaction which is not registered under the Securities Act except pursuant to Rule 144 under such Act or another exemption thereunder. Rule 144 requires, among other things, that (1) any sales of Common Stock by an affiliate must be through a broker, and (2) SEC Form 144 must be mailed to the SEC prior to or concurrently with the placing of a sell order with the broker if the amount sold during any three month period exceeds 500 shares or has an aggregate sale price of more than $10,000. - 12 - EX-10 10 exh10_19.txt EXHIBIT 10.19 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. REV. JANUARY, 2002 "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 Page 2 (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. "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 Page 3 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. ------------------ "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 Page 4 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 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 Page 5 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 Page 6 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. 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 Page 7 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 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 Page 8 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. 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 the employment of a Participant with all Participating Companies, other than a Participant who has reached age 55, terminates for any reason, 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. Page 9 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 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 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 receive 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). Page 10 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. 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 Page 11 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 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 TAX WITHHOLDING. The Plan Administrator or the Group Senior Vice President, --------------- Human Resources (or other person holding a similar position) shall have the right to make such provisions as deemed appropriate in its sole discretion to satisfy any obligation of a Participating Company to withhold federal, state or local income or other taxes incurred by reason of the operation of the Plan or an Award under the Plan, including but not limited to at any time (i) requiring a Key Employee to submit payment to a Participating Company for such taxes before making settlement of any amount due under the Plan, (ii) withholding such taxes from wages or other amounts due to the Key Employee before making settlement of any amount due under the Plan, (iii) making settlement of any amount due under the Plan part in shares of common stock of The Hartford and part in cash to facilitate satisfaction of such withholding obligations, OR (IV) receiving shares of common stock of The Hartford already owned by the Key Employee or withholding such shares otherwise due to the Key Employee in an amount determined necessary to satisfy such withholding obligations. 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. Page 12 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. 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 13 EX-12 11 exh12_01.txt EXHIBIT 12.01
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) 2001 2000 1999 1998 1997 - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS $ 354 $ 1,418 $ 1,235 $ 1,475 $ 1,703 ADD: FIXED CHARGES Interest expense 295 250 219 216 213 Interest factor attributable to rentals 72 67 61 54 48 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED CHARGES 367 317 280 270 261 - ----------------------------------------------------------------------------------------------------------------------------------- Interest credited to contractholders 1,260 1,124 1,197 1,475 1,180 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED CHARGES INCLUDING INTEREST CREDITED TO CONTRACTHOLDERS 1,627 1,441 1,477 1,745 1,441 - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS, AS DEFINED 721 1,735 1,515 1,745 1,964 - ----------------------------------------------------------------------------------------------------------------------------------- EARNINGS, AS DEFINED INCLUDING INTEREST CREDITED TO CONTRACTHOLDERS $ 1,981 $ 2,859 $ 2,712 $ 3,220 $ 3,144 =================================================================================================================================== RATIOS Earnings, as defined, to total fixed charges [2] 2.0 5.5 5.4 6.5 7.5 - ----------------------------------------------------------------------------------------------------------------------------------- Earnings, as defined, including interest credited to contractholders, to total fixed charges including interest credited to contractholders [3] 1.2 2.0 1.8 1.8 2.2 =================================================================================================================================== [1] The Company had no dividends on preferred stock for the years 1997 to 2001. [2] Excluding the impact of September 11 of $678, the 2001 ratio of earnings to fixed charges was 3.8. Excluding the equity gain on HLI initial public offering of $368, the 1997 ratio of earnings to fixed charges was 6.1. [3] Excluding the impact of September 11 of $678, the 2001 ratio of earnings to fixed charges including interest credited to contractholders was 1.6. 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.
EX-21 12 exh21_01.txt EXHIBIT 21.01
EXHIBIT 21.01 SUBSIDIARIES OF THE HARTFORD FINANCIAL SERVICES GROUP, INC. JURISDICTION OF COMPANY NAME INCORPORATION - ------------ ------------- 1st AgChoice, Inc. South Dakota 1810 Corporation Delaware Access Coverage Corp., Inc. North Carolina American Maturity Life Insurance Company Connecticut AML Financial Inc. Connecticut BMG Capital Advisors, L.L.C Connecticut Brazilcap Capitalizacao S.A Brazil Business Management Group, Inc. Connecticut CCS Commercial, L.L.C Delaware CLA Corporation Connecticut Cuore, S.A Mexico Ersatz Corporation Delaware Excess Insurance Company Limited U.K. Fedcap Capitalizacao S.A Brazil 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 Fortis Series Fund, Inc. Maryland Four Thirty Seven Land Company Inc. Delaware HARCO Property Services, Inc. Connecticut Hart Life Insurance Company Connecticut Hart Re Group, L.L.C Connecticut Hartford Accident and Indemnity Company Connecticut Hartford Administrative Services Company Minnesota Hartford Advisers HLS Fund, Inc. Maryland Hartford Bond HLS Fund, Inc. Maryland Hartford Capital Appreciation HLS Fund, Inc. Maryland Hartford Casualty Insurance Company Indiana Hartford Dividend and Growth HLS Fund, Inc. Maryland Hartford Equity Sales Company, Inc. Connecticut Hartford Fianzas S.A. de C.V Mexico Hartford Financial Services Life Insurance Company Connecticut Hartford Financial Services, LLC Delaware Hartford Fire Insurance Company Connecticut Hartford Fire International (Germany) GMBH Germany Hartford Fire International, Ltd. Connecticut Hartford-Fortis Series Fund, Inc. Maryland Hartford Global Advisers HLS Fund, Inc. Maryland Hartford Index HLS Fund, Inc. Maryland Hartford Insurance Company of Illinois Illinois Hartford Insurance Company of the Midwest Indiana Hartford Insurance Company of the Southeast Florida Hartford Insurance, Ltd. Bermuda Hartford Integrated Technologies, Inc. Connecticut Hartford International Life Reassurance Corporation Connecticut Hartford International Management Services Company, L.L.C Delaware Hartford International Opportunities HLS Fund, Inc. Maryland Hartford Investment Financial Services, LLC Delaware Hartford Investment Management Company Delaware Hartford Investment Services, Inc. Connecticut
EXHIBIT 21.01 Hartford Investments Canada Corp. Canada Hartford Investor Services, 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 International, Ltd. Connecticut Hartford Life, Inc. Delaware Hartford Life, Ltd. Bermuda Hartford Lloyds Corporation Texas Hartford Lloyds Insurance Company Texas Hartford Management, Ltd. Bermuda Hartford Midcap HLS Fund, Inc. Maryland Hartford Money Market HLS Fund, Inc. Maryland Hartford Mortgage Securities HLS Fund, Inc. Maryland Hartford of Florida, L.L.C Florida Hartford RE Company Connecticut Hartford Re Spain Correduria de Reaseguros S.A Spain Hartford Risk Management, Inc. Delaware Hartford Securities Distribution Company, Inc. Connecticut Hartford Seguros, S.A. de C.V Mexico Hartford Seguros de Retiro S.A Argentina Hartford Series Fund, Inc. Maryland Hartford Small Company HLS Fund, Inc. Maryland Hartford Specialty Company Delaware Hartford Specialty Insurance Services of Texas, LLC Texas Hartford Stock HLS Fund, Inc. Maryland Hartford Technology Service Company Connecticut Hartford Technology Services Company, L.L.C Delaware Hartford Underwriters Insurance Company Connecticut Hartford-Comprehensive Employee Benefit Service Company Connecticut HartRe Company, L.L.C Connecticut Heritage Holdings, Inc. Connecticut Heritage Reinsurance Company, Ltd. Bermuda HL Investment Advisors, LLC Connecticut Hopmeadow Holdings S.A Argentina Horizon Management Group, L.L.C Delaware Horizon Portfolio Management Ltd. U.K. HRA Brokerage Services, Inc. Connecticut HRA 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 Brazil International Corporate Marketing Group, LLC Delaware ISOP Financing Company Limited Partnership Connecticut ITT Hartford International, Ltd U.K. ITT New England Management Company, Inc. Massachusetts Lady Hartford S.A. de C.V Mexico New England Insurance Company Connecticut New England Reinsurance Corporation Connecticut New Ocean Insurance Co. Ltd. Bermuda Nutmeg Administrator, LLC Delaware Nutmeg Insurance Agency, Inc. Connecticut Nutmeg Insurance Company Connecticut Nutmeg Life Insurance Company Iowa Omni General Agency, Inc. Texas Omni Indemnity Company Illinois
EXHIBIT 21.01 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 Sentinel Insurance Company, Ltd. Connecticut Servus Life Insurance Company Connecticut Specialty Insurance Agency, LLC Delaware Specialty Risk Services, Inc. Delaware Terry Associates Inc. Connecticut The Confluence Group, Inc. Connecticut The Evergreen Group, Inc. New York The Hartford 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 International Financial Services Group, LLC Delaware The Hartford Mutual Funds, Inc. Maryland 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 Connecticut Woodbury Financial Agency NM, Inc. New Mexico Woodbury Financial Agency MA, Inc. Massachusetts Woodbury Financial Agency OH, Inc. Ohio Woodbury Financial Agency OK, Inc. Oklahoma Woodbury Financial Agency TX, Inc. Texas Woodbury Financial Services, Inc. Minnesota
EX-23 13 exh23_01.txt EXHIBIT 23.01 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 18, 2002 -----END PRIVACY-ENHANCED MESSAGE-----