-----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, T+M1wAEHxnAzF+CCaN2J0cUa/uTdU+YCzP5xb6IUWZUOgXss0MdEgnANB7qsv/Kn ykah/B3iNtzQVW+UmRtOug== 0000948572-03-000012.txt : 20030303 0000948572-03-000012.hdr.sgml : 20030303 20030303162916 ACCESSION NUMBER: 0000948572-03-000012 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 14 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030303 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: 03589664 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 b10k12312002.txt THE HARTFORD FINANCIAL SERVICES GROUP NOTICE This document is a copy of the Annual Report filed by The Hartford Financial Services Group, Inc. with the Securities and Exchange Commission. It has not been approved or disapproved by the Commission nor has the Commission passed upon its accuracy or adequacy. ================================================================================ 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, 2002 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 No.) HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900 (Address of Principal Executive Offices) (860) 547-5000 (Registrant's Telephone Number, Including Area Code) Securities registered pursuant to Section 12(b) of the Act: the following, all of which are registered on the New York Stock Exchange, Inc.: Common Stock, par value $0.01 per share 7.75% Notes due June 15, 2005 4.7% Notes due September 1, 2007 6.375% Notes due November 1, 2008 4.1% Equity Unit Notes due November 16, 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. [X] As of February 27, 2003, there were outstanding 255,399,358 shares of Common Stock, $0.01 par value per share, of the registrant. Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2) Yes [X] No [ ]. The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant as of June 28, 2002, was $14,673,000,000 based on the closing price of $59.47 per share of the Common Stock on the New York Stock Exchange on June 28, 2002. Documents Incorporated by Reference: Portions of the Registrant's definitive proxy statement for its 2003 annual meeting of shareholders are incorporated by reference in Part III of this Form 10-K. CONTENTS ITEM DESCRIPTION PAGE PART I 1 Business of The Hartford 2 2 Properties 13 3 Legal Proceedings 13 4 Submission of Matters to a Vote of Security Holders 15 PART II 5 Market for The Hartford's Common Stock and Related Stockholder Matters 15 6 Selected Financial Data 16 7 Management's Discussion and Analysis of Financial Condition and Results of Operations 17 7A Quantitative and Qualitative Disclosures About Market Risk 72 8 Financial Statements and Supplementary Data 72 9 Changes in and Disagreements with Accountants on Accounting and Financial Disclosure 72 PART III 10 Directors and Executive Officers of The Hartford 72 11 Executive Compensation 73 12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters 73 13 Certain Relationships and Related Transactions 74 14 Controls and Procedures 74 PART IV 15 Exhibits, Financial Statements Schedules, and Reports on Form 8-K 74 Signatures II-1 Certifications II-2 Exhibits Index II-4 PART I ITEM 1. BUSINESS OF THE HARTFORD (DOLLAR AMOUNTS IN MILLIONS, EXCEPT FOR PER SHARE DATA, UNLESS OTHERWISE STATED) GENERAL The Hartford Financial Services Group, Inc. (together with its subsidiaries, "The Hartford" or the "Company") is a diversified insurance and financial services company. The Hartford, headquartered in Connecticut, is among the largest providers of investment products, individual life, group life and group disability insurance products, and property and casualty insurance products in the United States. Hartford Fire Insurance Company, founded in 1810, is the oldest of The Hartford's subsidiaries. The Hartford writes insurance and reinsurance in the United States and internationally. At December 31, 2002, total assets and total stockholders' equity of The Hartford were $182.0 billion and $10.7 billion, respectively. ORGANIZATION The Hartford strives to maintain and enhance its position as a market leader within the financial services industry and to maximize shareholder value. The Company pursues a strategy of developing and selling diverse and innovative products through multiple distribution channels, continuously developing and expanding those distribution channels, achieving cost efficiencies through economies of scale and improved technology, maintaining effective risk management and prudent underwriting techniques and capitalizing on its brand name and customer recognition of The Hartford Stag Logo, one of the most recognized symbols in the financial services industry. As a holding company that is separate and distinct from its subsidiaries, The Hartford Financial Services Group, Inc. has no significant business operations of its own. Therefore, it relies on the dividends from its insurance company and other subsidiaries as the principal source of cash flow to meet its obligations. Additional information regarding the cash flow and liquidity needs of The Hartford Financial Services Group, Inc. may be found in the Capital Resources and Liquidity section of Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). The Company maintains a retail mutual fund operation, whereby the Company, through wholly-owned subsidiaries, provides investment management and administrative services to The Hartford Mutual Funds, Inc., a family of 33 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"), Hartford Life, Inc. ("HLI"), the holding company parent of The Hartford's significant life insurance subsidiaries, 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 18(a) 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 by means of a number of dispositions. 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 nine operating segments. Additionally, the capital raising and purchase accounting adjustment activities related to The HLI Repurchase, capital raised in 2002 that was not contributed to the Company's insurance subsidiaries, 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 Japan and Latin America; realized capital gains and losses; as well as corporate items not directly allocated to any of its reportable operating segments, principally interest expense; and intersegment eliminations. In January 2002, Property & Casualty integrated its Affinity Personal Lines and Personal Insurance segments, now reported as Personal Lines. As a result, Property & Casualty is now organized into five reportable operating segments: the North American underwriting segments of the Business Insurance, Personal Lines, Specialty Commercial and Reinsurance; and the Other Operations segment, which includes substantially all of the Company's asbestos and environmental exposures. "North American" includes the combined underwriting results of Business Insurance, Personal Lines, Specialty Commercial and Reinsurance underwriting segments along with income and expense items not directly allocated to these segments, such as - 2 - net investment income, net realized capital gains and losses, other expenses including interest, and income taxes. The following is a description of Life and Property & Casualty along with each of their segments, including a discussion of principal products, marketing and distribution and competitive environments. Additional information on The Hartford's reporting segments may be found in the MD&A and Note 17 of Notes to Consolidated Financial Statements. LIFE Life's business is conducted by 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 wealth protection, accumulation and transfer needs for approximately 740,000 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. As of December 31, 2002, retail mutual fund assets were $14.2 billion. 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.) In addition, The Hartford's Japanese operation achieved $1.4 billion in variable annuity sales for the year ended December 31, 2002, bringing account values related to Japan to more than $1.7 billion as of December 31, 2002. HLI is among the largest consolidated life insurance groups in the United States based on statutory assets as of December 31, 2001. In the past year, Life's total assets under management, which include $15.3 billion of third-party assets invested in the Company's mutual funds and 529 College Savings Plans, decreased 2% to $165.1 billion at December 31, 2002 from $168.4 billion at December 31, 2001. Life generated revenues of $6.4 billion, $6.5 billion and $6.0 billion in 2002, 2001 and 2000, respectively. Additionally, Life generated net income of $557, $685 and $575 in 2002, 2001 and 2000, respectively. CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE Life maintains advantageous economies of scale and operating efficiencies due to its growth, attention to expense and claims management and commitment to customer service and technology. These advantages allow the Company to competitively price its products for its distribution network and policyholders. 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 have been reduced since 1992, declining from 43 basis points to 25 basis points in 2002. 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 2002 Annuity Service Award by DALBAR Inc., a recognized independent financial services research organization, for the seventh consecutive year. The Hartford is the only company to receive this prestigious award in every year of the award's existence. Also, in both 2002 and 2001, 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 its second consecutive DALBAR award for service of life insurance customers and its first DALBAR Intermediary Service Award in 2002. RISK MANAGEMENT Life's product designs, prudent underwriting standards and risk management techniques are structured to protect it against disintermediation risk and greater than expected mortality and morbidity experience. As of December 31, 2002, the Company had limited exposure to disintermediation risk on approximately 96% of its domestic life insurance and annuity liabilities through the use of non-guaranteed separate accounts, MVA features, policy loans, surrender charges and non-surrenderability provisions. The Company effectively utilizes prudent underwriting to select and price insurance risks and regularly monitors mortality and morbidity assumptions to determine if experience remains consistent with these assumptions and to ensure that its product pricing remains appropriate. The Company also enforces disciplined claims management to protect itself against greater than expected morbidity experience. 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, 1997 to December 31, 2002, this segment's assets under management grew to $110.2 billion from $71.3 billion, a five year compounded annual growth rate of 9.4%. Investment Products generated revenues of $2.6 billion, $2.5 billion and $2.4 billion in 2002, 2001 and 2000, respectively, of which individual annuities accounted for $1.5 billion in 2002, 2001 and 2000. Net income in the Investment Products segment was $432, $463 and $424 in 2002, 2001 and 2000, 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 $11.6 billion, $10.0 billion and $10.7 billion in 2002, 2001 and 2000, respectively. The Hartford was the largest seller of individual - 3 - retail variable annuities in the United States with sales of $10.3 billion in 2002 and $9.0 billion in 2001 and 2000. In addition, the Company continues to be the largest seller of individual retail variable annuities through banks in the United States. The Company's total account value related to individual annuity products was $74.9 billion as of December 31, 2002. Of this total account value, $64.3 billion, or 86%, related to individual variable annuity products and $10.6 billion, or 14%, related primarily to fixed MVA annuity products. In 2001, the Company's total account value related to individual annuity products was $84.2 billion. 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 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 small and medium size 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 and 403(b) of the Internal Revenue Code of 1986, as amended (referred to as "Section 457" and "403(b)", respectively). The Company also provides structured settlement contracts, terminal funding products and other investment products such as guaranteed investment contracts ("GICs"). In 2002, The Hartford began selling a 529 college savings product. 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%, helped solidify the Company's strong position in variable annuities and strengthened the Company's 401(k) sales. 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. Additionally, the Investment Products segment sells variable annuity contracts that offer various guaranteed death benefits. For certain guaranteed death benefits, The Hartford pays the greater of (1) the account value at death; (2) the sum of all premium payments less prior withdrawals; or (3) the maximum anniversary value of the contract, plus any premium payments since the contract anniversary, minus any withdrawals following the contract anniversary. Policyholders may make deposits of varying amounts at regular or irregular intervals and the value of these assets fluctuates in accordance with the investment performance of the funds selected by the policyholder. To encourage persistency, many of the Company's individual variable annuities are subject to withdrawal restrictions and surrender charges. Surrender charges range up to 8% of the contract's 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 $64.3 billion as of December 31, 2002, 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 88% and 94% of the individual variable annuity account values were held in non-guaranteed separate accounts as of December 31, 2002 and 2001, 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"); Hartford Investment Management Company ("HIMCO"), a wholly-owned subsidiary of The Hartford; Putnam Financial Services, Inc. ("Putnam"); American Funds; MFS Investment Management ("MFS"); Franklin Templeton Group; and AIM Investments ("AIM"). All have an interest in the continued growth in sales of the Company's products and 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 the industry leader in terms of retail 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 and ranks in the top 5 in the industry. 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 $10.6 billion and $9.6 billion as of December 31, 2002 and 2001, respectively. - 4 - 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 33 funds, including the addition of five new fixed income funds introduced in 2002. The Company's funds are managed by Wellington and HIMCO. The Company has entered into agreements with over 960 financial services firms to distribute these mutual funds. The Company charges fees to the shareholders of the mutual funds, which are recorded as revenue by the Company. Investors can purchase shares in the mutual funds, all of which are registered with the Securities and Exchange Commission in accordance with the Investment Company Act of 1940. The mutual funds are owned by the shareholders of those funds and not by the Company. As such, the mutual fund assets and liabilities, as well as related investment returns, are not reflected in the Company's consolidated financial statements. Total retail mutual fund assets under management were $14.2 billion and $15.9 billion as of December 31, 2002 and 2001, respectively. Governmental -- The Company sells retirement plan products and services to municipalities under Section 457 plans. The Company offers a number of different investment products, including variable annuities and a fixed bucket, 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, 2002, the Company administered over 3,000 plans under Sections 457 and 403(b). Total governmental assets under management were $7.9 billion and $8.6 billion as of December 31, 2002 and 2001, respectively. Corporate -- The Company sells retirement plan products and services to corporations under Section 401 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, 2002, the Company administered over 4,100 Section 401(k) plans. Total corporate assets under management were $3.4 billion and $2.6 billion as of December 31, 2002 and 2001, respectively. Institutional Investment Products -- 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. Total institutional investment products assets under management were $9.7 billion and $9.1 billion as of December 31, 2002 and 2001, respectively. Section 529 Plans - The Hartford introduced a tax advantaged college savings product ("529 plan") in March 2002 called SMART 529. SMART 529 is a state-sponsored education savings program established by the State of West Virginia which offers an easy way for both residents of West Virginia and out-of-state participants to plan for a college education. In 1996, Congress created a tax-advantaged college savings program as part of Section 529 of the Internal Revenue Code (the "Code"). The 529 Plan is an investment plan operated by a state and 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. Total 529 Plan assets under management were $87 as of December 31, 2002. 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 retail investment products to customers is consummated). The Hartford maintains a distribution network of approximately 1,500 broker-dealers and approximately 500 banks. As of September 30, 2002, the Company was selling products through 24 of the 25 largest retail banks in the United States, including proprietary relationships with 12 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 529 Plans by providing sales support to registered representatives, financial planners and broker-dealers at brokerage firms and banks across the United States. Owning PLANCO secures an important distribution channel for the Company and gives the Company a wholesale distribution platform which it can expand in terms of both the number of individuals wholesaling its products and the portfolio of products which they wholesale. In addition, the Company uses internal personnel with extensive experience in the Section 457 market, as well as access to the Section 401(k) market, to sell its products and services in the retirement plan and institutional markets. - 5 - Competition - ----------- The Investment Products segment competes with numerous other insurance companies as well as certain banks, securities brokerage firms, independent financial advisors and other financial intermediaries marketing annuities, mutual funds and other retirement-oriented products. Product sales are affected by competitive factors such as investment performance ratings, product design, visibility in the marketplace, financial strength ratings, distribution capabilities, levels of charges and credited rates, reputation and customer service. INDIVIDUAL LIFE - --------------- The Individual Life segment provides life insurance solutions to a wide array of partners to solve the wealth protection, accumulation and transfer needs of their affluent, emerging affluent and business insurance clients. The individual life business acquired from Fortis in 2001 added significant scale to the Company's Individual Life segment, contributing to the significant increase in life insurance in-force. As of December 31, 2002, life insurance in-force increased 5% to $126.7 billion, from $120.3 billion as of December 31, 2001. Account values decreased 4% to $7.6 billion as of December 31, 2002 from $7.9 billion as of December 31, 2001. Revenues were $958, $890 and $640 in 2002, 2001 and 2000, respectively. Net income in the Individual Life segment was $133, $121 and $79 in 2002, 2001 and 2000, respectively. Principal Products - ------------------ The Hartford holds a significant market share in the variable life product market. In 2002, the Company's new sales of individual life insurance were 82% variable life, 13% universal life and other, and 5% 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, the surrender value of the variable life policy will increase or decrease, and, under certain policyholder options or market conditions, the death benefit may also increase or decrease. The Company's 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 for a married couple. Variable life account values were $3.6 billion and $4.0 billion as of December 31, 2002 and 2001, 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 as of December 31, 2002 and 2001. Marketing and Distribution - -------------------------- Consistent with the Company's strategy to access multiple distribution outlets, the Individual Life distribution organization has been developed to penetrate a multitude of retail sales channels. These include independent life insurance sales professionals; agents of other companies; national, regional and independent broker-dealers; banks; financial planners; certified public accountants and property and casualty insurance organizations. The primary organization used to wholesale The Hartford's products to these outlets is a group of highly qualified life insurance professionals with specialized training in sophisticated life insurance sales. These individuals are generally employees of The Hartford who are managed through a regional sales office system. 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, effectiveness of wholesaling support, pricing and availability of reinsurance, and the quality of underwriting and customer service. GROUP BENEFITS The Group Benefits segment sells group life and group disability insurance, as well as other products, including stop loss, accidental death and dismemberment, travel accident and other special risk coverage to employers and associations. The Company also offers disability underwriting, administration, claims processing services and reinsurance to other insurers and self-funded employer plans. Generally, policies sold in this segment are term insurance. Typically, policies are sold with one, two or three year rate guarantees depending on the product. This allows the Company to adjust the rates or terms of its policies in order to minimize the adverse effect of various market trends, including declining interest rates and other factors. In the disability market, the Company focuses on strong underwriting and claims management to derive a competitive advantage. The Group Benefits segment generated revenues of $2.6 billion, $2.5 billion and $2.2 billion in 2002, 2001 and 2000, respectively, of which group disability insurance accounted for $1.2 billion, $1.1 billion and $964 and group life insurance accounted for $1.0 billion, $902 and $810, respectively. The Company held group disability reserves of $2.5 billion and $2.4 billion and group life reserves of $765 and $706, as of December 31, 2002 and 2001, respectively. The Company's net income in the Group Benefits segment was $128, $106 and $90 in 2002, 2001 and 2000, 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 growing "small case" - 6 - and "medium case" group markets, emphasizing name recognition and reputation as well as the Company's managed disability approach to claims and administration. The Company's efforts in the group disability market focus on early intervention, return-to-work programs and successful rehabilitation. Over the last several years, the focus of new disability products introduced is to provide incentives for employees to return to independence. The Company also works with disability claimants to improve the receipt rate of Social Security offsets (i.e., reducing payment of benefits by the amount of Social Security payments received). The Company's short-term disability benefit plans provide a weekly benefit amount (typically 60% to 70% of the employee's earned income up to a specified maximum benefit) to insured employees when they are unable to work due to an accident or illness. Long-term disability insurance provides a monthly benefit for those extended periods of time not covered by a short-term disability benefit plan when insured employees are unable to work due to disability. Employees may receive total or partial disability benefits. Most of these policies begin providing benefits following a 90 or 180 day waiting period and generally continue providing benefits until the employee reaches age 65. Long-term disability benefits are paid monthly and are limited to a portion, generally 50-70%, of the employee's earned income up to a specified maximum benefit. Group Life -- Group term life insurance provides term coverage to employees and their dependents for a specified period and has no accumulation of cash values. The Company offers options for its basic group life insurance coverage, including portability of coverage and a living benefit option, whereby terminally ill policyholders can receive death benefits prior to their deaths. In addition, the Company offers premium waiver and accidental death and dismemberment coverages to employee groups. Other -- 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 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 had been the members of the Retired Officers Association, an organization consisting of retired military officers. Congress passed legislation, effective in the fourth quarter of 2001, whereby retired military officers age 65 and older will receive full medical insurance, eliminating the need for Medicare supplement insurance. This legislation reduced the Company's premium revenue by $131 in 2002, compared to 2001. 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, including brokers, consultants, third-party administrators and trade associations. The Company intends to continue to expand the system over the coming years in areas that offer the highest growth potential. Competition - ----------- The Group Benefits business remains highly competitive. Competitive factors primarily affecting Group Benefits are the variety and quality of products and services offered, the price quoted for coverage and services, the Company's relationships with its third-party distributors, and the quality of customer service. Group Benefits competes with numerous other insurance companies and other financial intermediaries marketing insurance products. However, many of these businesses have relatively high barriers to entry and there have been very few new entrants over the past few years. CORPORATE OWNED LIFE INSURANCE ("COLI") 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 passage of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), the Company sold two principal types of COLI, leveraged and variable products. Leveraged COLI is a fixed premium life insurance policy owned by a company or a trust sponsored by a company. HIPAA phased out the deductibility of interest on policy loans under leveraged COLI at the end of 1998, virtually eliminating all future sales of leveraged COLI. Variable COLI continues to be a product used by employers to fund non-qualified benefits or other postemployment benefit liabilities. Variable COLI account values were $19.7 billion and $18.0 billion as of December 31, 2002 and 2001, respectively. Leveraged COLI account values decreased to $3.3 billion as of December 31, 2002 from $4.3 billion as of December 31, 2001, primarily due to the continuing effects of HIPAA. COLI generated revenues of $592, $719 and $767 in 2002, 2001 and 2000, respectively, and net income of $32, $37 and $34 in 2002, 2001 and 2000, respectively. PROPERTY & CASUALTY Property & Casualty provides (1) workers' compensation, property, automobile, liability, umbrella, specialty casualty, marine, agricultural and bond coverages to commercial accounts primarily throughout the United States; (2) professional liability coverage and directors and officers liability coverage, as well as excess and surplus lines business not normally written by standard commercial lines insurers; (3) automobile, homeowners and home-based business coverage to individuals throughout the United States; (4) assumed reinsurance, primarily through professional reinsurance brokers covering various property, casualty, catastrophe, alternative risk transfer and marine classes of business; and (5) insurance related services. The Hartford is the fourteenth largest property and casualty insurance operation in the United States based on written premiums for the year ended December 31, 2001 according to A.M. Best Company, Inc. ("A.M. Best"). Property & Casualty generated revenues of $9.5 billion, $8.6 billion and $8.7 billion, in 2002, 2001 and 2000, respectively. Written premiums for 2002, 2001 and 2000 were $8.6 billion, $7.6 billion and $7.3 billion, respectively. Additionally, net income (loss) was $469, $(115) and $494 for 2002, 2001 and 2000, respectively. Total - 7 - assets for Property & Casualty were $31.2 billion and $29.2 billion as of December 31, 2002 and 2001, respectively. BUSINESS INSURANCE Business Insurance provides standard commercial insurance coverage to small and middle market commercial businesses primarily throughout the United States. This segment also provides commercial risk management products and services as well as marine coverage. The segment had written premiums of $3.4 billion, $2.9 billion and $2.4 billion in 2002, 2001 and 2000, respectively, and underwriting income (loss) of $44, $(242) (includes $245 of underwriting loss related to September 11) and $(50) in 2002, 2001 and 2000, respectively. Principal Products - ------------------ The Business Insurance segment offers workers' compensation, property, automobile, liability, umbrella and marine coverages. Commercial risk management products and services are also provided. Marketing and Distribution - -------------------------- Business Insurance provides insurance products and services through its home office located in Hartford, Connecticut, and multiple domestic regional office locations and insurance centers. The segment markets its products nationwide utilizing independent agents and involving trade associations and employee groups. Independent agents, who often represent other companies as well, are compensated on a commission basis and are not employees of The Hartford. Competition - ----------- The commercial insurance industry is a highly competitive environment regarding product, price, service and technology. The Hartford competes with other stock companies, mutual companies, alternative risk sharing groups and other underwriting organizations. These companies sell through various distribution channels and business models, across a broad array of product lines, and with a high level of variation regarding geographic, marketing and customer segmentation. The Hartford is the fourteenth largest commercial lines' insurer in the United States based on 2001 written premiums according to A.M. Best. The relatively large size and underwriting capacity of The Hartford provide opportunities not available to smaller companies. In addition, the marketplace is affected by available capacity of the insurance industry as measured by policyholders' surplus. Surplus expands and contracts primarily in conjunction with profit levels generated by the industry. The low interest rate environment is impacting returns and making underwriting decisions even more critical. Overall, in 2002, market conditions in the commercial industry have continued to improve as a result of increased underwriting discipline and a firmer pricing environment, but are still under stress from years of soft market conditions. PERSONAL LINES Personal Lines provides automobile, homeowners' and home-based business coverages to the members of AARP through a direct marketing operation; to individuals who prefer local agent involvement through a network of independent agents in the standard personal lines market; and in the non-standard automobile market through the Company's Omni Insurance Group, Inc. ("Omni") subsidiary. Personal Lines also operates a member contact center for health insurance products offered through AARP's Health Care Options. The Hartford's exclusive licensing arrangement with AARP, which was renewed during the fourth quarter of 2001, continues through January 1, 2010 for automobile, homeowners and home-based business. The Health Care Options agreement continues through 2007. These agreements provide Personal Lines with an important competitive advantage. Personal Lines had written premiums of $3.1 billion, $2.9 billion and $2.6 billion in 2002, 2001 and 2000, respectively. Underwriting income (loss) for 2002, 2001 and 2000 was $(46), $(87) (includes $9 of underwriting loss related to September 11) and $2, respectively. Principal Products - ------------------ Personal Lines provides standard and non-standard automobile, homeowners and home-based business coverages to individuals across the United States, including a special program designed exclusively for members of AARP. Marketing and Distribution - -------------------------- Personal Lines reaches diverse markets through multiple distribution channels including independent agents, direct mail, the Internet and advertising in publications. This segment provides customized products and services to customers through a network of independent agents in the standard personal lines market, and in the non-standard automobile market through Omni. Independent agents, who often represent other companies as well, are compensated on a commission basis and are not employees of The Hartford. Personal Lines has an important relationship with AARP and markets directly to its over 35 million members. Competition - ----------- The personal lines automobile and homeowners businesses continue to remain highly competitive. Personal lines insurance is written by insurance companies of varying sizes that sell products through various distribution channels, including independent agents, captive agents and directly to the consumer. The personal lines market competes on the basis of price; product; service, including claims handling; stability of the insurer and name recognition. For 2001, the industry net written premiums were $163 billion. The Hartford's share of this market was approximately 2% and ranked twelfth in size. The personal lines marketplace reported a combined ratio of 104.9 for the first nine months of 2002. Industry data and The Hartford's market share and ranking in the industry were derived directly from data reported by 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. This arrangement was renewed during the fourth quarter of 2001 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. - 8 - 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 $1.4 billion, $989 (includes $7 of reinsurance cessions related to September 11) and $1.1 billion in 2002, 2001 and 2000, respectively, and underwriting losses of $23, $262 (includes $167 of underwriting loss related to September 11) and $103 in 2002, 2001 and 2000, respectively. Principal Products - ------------------ Specialty Commercial offers a variety of customized insurance products and risk management services. Specialty Commercial provides standard commercial insurance products including workers' compensation, automobile and liability coverages to large-sized companies. Specialty Commercial also provides bond, professional liability, specialty casualty and agricultural coverages, as well as core property and excess and surplus lines coverages not normally written by standard lines insurers. Alternative markets, within Specialty Commercial, provides insurance products and services primarily to captive insurance companies, pools and self-insurance groups. In addition, Specialty Commercial provides third-party administrator services for claims administration, integrated benefits, loss control and performance measurement through Specialty Risk Services. Marketing and Distribution - -------------------------- Specialty Commercial provides insurance products and services through its home office located in Hartford, Connecticut and multiple domestic office locations. The segment markets its products nationwide utilizing a variety of distribution networks including independent agents and brokers as well as wholesalers. Independent agents, who often represent other companies as well, are compensated on a commission basis and are not employees of The Hartford. Competition - ----------- The commercial insurance industry is a highly competitive environment regarding product, price, service and technology. Specialty Commercial is comprised of a diverse group of businesses that are unique to commercial lines. Each line of business operates independently with its own set of business objectives, and focuses on the operational dynamics of their specific industry. These businesses, while somewhat interrelated, each have a unique business model and operating cycle. Specialty Commercial is considered a transactional business and, therefore, competes with other companies for business primarily on an account by account basis due to the complex nature of each transaction. Specialty Commercial competes with other stock companies, mutual companies, alternative risk sharing groups and other underwriting organizations. The relatively large size and underwriting capacity of The Hartford provide opportunities not available to smaller companies. September 11 has significantly affected the Specialty Commercial business by demonstrating the importance of risk aggregation, by driving property pricing increases and by influencing capital decisions. Overall, in 2002, market conditions in the commercial industry have continued to improve as a result of increased underwriting discipline and a firmer pricing environment, but are still under stress from years of soft market conditions. REINSURANCE The Reinsurance segment assumes reinsurance in North America and primarily writes treaty reinsurance through professional reinsurance brokers covering various property, casualty and specialty classes of business. The Reinsurance segment also writes catastrophe, marine and alternative risk transfer business outside of North America. The Reinsurance segment had written premiums of $703, $849 (includes $69 of reinsurance cessions related to September 11) and $826 in 2002, 2001 and 2000, respectively, and underwriting losses of $59, $375 (includes $226 of underwriting loss related to September 11) and $73 in 2002, 2001 and 2000, respectively. Principal Products - ------------------ The Reinsurance segment offers a full range of treaty and facultative reinsurance products including property, casualty, catastrophe, marine and alternative risk transfer which includes non-traditional reinsurance products such as multi-year property catastrophe treaties, aggregate of excess of loss agreements and quota share treaties with event or aggregate loss ratio caps. Marketing and Distribution - -------------------------- The Reinsurance segment assumes insurance from other insurers, primarily through reinsurance brokers, but also through direct channels and pools in the worldwide reinsurance market. Competition - ----------- The property and casualty worldwide reinsurance market remains extremely competitive, although the pricing environment continued to improve in 2002. There are domestic and foreign reinsurers, which compete in this market, with varying levels of financial resources and scope. Reinsurers compete on the basis of financial strength and stability, price, service, capacity and terms and conditions. The Hartford was the eleventh largest reinsurer in the United States based on 2001 net written premiums, according to data published by Reinsurance Associate of America. In the aftermath of the terrorist attack on September 11, the reinsurance landscape has become very dynamic. Several new reinsurers were formed in Bermuda, and existing reinsurers raised additional capital, while several others have either exited the market, announced plans to do so, or are considering other strategic options. In addition, poor underwriting results over the past few years and the decline in equity markets have put pressure on capital. 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, and for - 9 - 2002, the activity in the exited international lines of HartRe following its restructuring in the fourth quarter of 2001. 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. The Hartford Insurance Company (Singapore), Ltd. (formerly People's Insurance Company, Ltd. ("Singapore Insurance")), located in Singapore, was sold in January 2002. The Hartford was a global reinsurer through its Hartford Reinsurance Company ("HartRe") operations in the United Kingdom, France, Italy, Germany, Spain, Hong Kong and Taiwan, writing treaty and facultative assumed reinsurance including property, casualty, fidelity, and specialty coverages. In October 2001, HartRe announced that it was exiting most international lines and in January 2002 these lines were moved to Other Operations. The primary objectives of Other Operations are the proper disposition of claims, the resolution of disputes, and the collection of reinsurance proceeds 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 $189, $168 and $602 in 2002, 2001 and 2000, respectively. Net income (loss) for 2002, 2001 and 2000 was $(13), $10 and $28, respectively. 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 disability or death. Reserves also include unearned premiums, premium deposits, claims incurred but not reported and claims reported but not yet paid. Reserves for assumed reinsurance are computed in a manner that is comparable to direct insurance reserves. (Additional information on Life reserves may be found in the Critical Accounting Estimates section of the MD&A under "Reserves".) PROPERTY & CASUALTY RESERVES The Hartford establishes property and casualty reserves to provide for the estimated costs of paying claims under insurance policies written by The Hartford. These reserves include estimates for both claims that have been reported and those that have been incurred but not reported to The Hartford and include estimates of all expenses associated with processing and settling these claims. This estimation process is primarily based on historical experience and involves a variety of actuarial techniques which analyze trends and other relevant factors. As a result of September 11, the Company established estimated gross and net reserves of $1.1 billion and $556, respectively, related to property and casualty operations. This loss estimate includes coverages related to property, business interruption, workers' compensation and other liability exposures, including those underwritten by the Company's assumed reinsurance operation. The Company based the loss estimate upon a review of insured exposures using a variety of assumptions and actuarial techniques, including estimated amounts for incurred but not reported policyholder losses and costs incurred in settling claims. The Company continues to carry the original incurred amount related to September 11, less any paid losses. Reported losses to date have fallen within the original reserved amounts. However, there is significant uncertainty around September 11, particularly with regard to inhalation claims, stress claims and other bodily injury, as well as the three year statute of limitations in New York State. Included in net reserves was an estimate of amounts recoverable under the Company's ceded reinsurance programs. Although management anticipates certain claims for recovery to be challenged, the impact of these challenges is not expected to be material. Risk of non-collection due to the financial condition of The Hartford's reinsurers has been mitigated as a result of the Company's process of selecting its reinsurers. The Hartford's property and casualty reinsurance is placed with reinsurers that meet strict financial criteria established by the Company's credit committee. As a result of the uncertainties involved in the estimation process, final claim settlements may vary from present estimates. The Hartford continues to receive claims that assert damages from asbestos- and environmental-related exposures. Asbestos claims relate primarily to bodily injuries asserted by those who came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution related clean-up costs. Due to deviations from past experience and a variety of social, economic and legal issues, the Company's ability to estimate the unpaid claims and claim adjustment expenses is significantly impacted. Further discussion may be found in the Critical Accounting Estimates and Other Operations sections of the MD&A. Most of the Company's reserves do not include discounts. However, certain liabilities for unpaid claims where the amount and timing of payments are fixed and reliably determinable, principally for permanently disabled claimants, and certain structured settlement contracts that fund loss run-offs for unrelated parties, have been discounted to present value. The amount of the discount was approximately $424 and $429 as of December 31, 2002 and 2001, respectively, and amortization of - 10 - the discount had no material effect on net income during 2002, 2001 and 2000. As of December 31, 2002, property and casualty reserves for claims and claim adjustment expenses reported on a statutory basis exceeded those reported under Generally Accepted Accounting Principles ("GAAP") by $27. The primary difference resulted from the discounting of GAAP-basis workers' compensation reserves at risk free interest rates, which exceeded the statutory discount rates set by regulators, partially offset by the required exclusion from statutory reserves of assumed retoactive reinsurance. There were no significant changes in the mix of the Company's business that have impacted property and casualty claims and claim adjustment expense reserves; nor has the Company completed any significant loss portfolio transfers, structured settlements or other transactions which would change claim payment patterns. Further discussion on The Hartford's property and casualty reserves, including asbestos and environmental claims reserves, may be found in the Reserves section of the MD&A- Critical Accounting Estimates. A reconciliation of liabilities for unpaid claims and claim adjustment expenses is herein referenced from Note 7 of Notes to Consolidated Financial Statements. A table depicting the historical development of the liabilities for unpaid claims and claim adjustment expenses, net of reinsurance, follows.
LOSS DEVELOPMENT TABLE PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - NET OF REINSURANCE FOR THE YEARS ENDED DECEMBER 31, [1] 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities for unpaid claims and claim adjustment expenses, net of reinsurance $10,498 $10,717 $10,776 $11,024 $12,202 $12,265 $12,401 $12,020 $11,857 $12,437 $12,688 CUMULATIVE PAID CLAIMS AND CLAIM EXPENSES One year later 2,596 2,578 2,654 2,434 2,551 2,447 2,903 2,929 3,183 3,008 Two years later 4,282 4,207 4,179 4,004 4,078 4,223 4,626 4,873 4,851 -- Three years later 5,433 5,268 5,286 5,056 5,390 5,363 5,972 5,944 -- -- Four years later 6,229 6,112 6,040 6,077 6,211 6,303 6,617 -- -- -- Five years later 6,895 6,682 6,877 6,717 6,922 6,702 -- -- -- -- Six years later 7,354 7,391 7,406 7,303 7,178 -- -- -- -- -- Seven years later 7,987 7,861 7,924 7,478 -- -- -- -- -- -- Eight years later 8,411 8,332 8,052 -- -- -- -- -- -- -- Nine years later 8,851 8,426 -- -- -- -- -- -- -- -- Ten years later 8,917 -- -- -- -- -- -- -- -- -- LIABILITIES REESTIMATED One year later 10,757 10,811 11,019 11,988 12,183 12,090 12,176 11,980 11,973 12,668 Two years later 10,970 11,009 12,142 11,992 12,065 11,808 12,048 11,975 12,218 -- Three years later 11,182 12,094 12,127 11,919 11,887 11,638 11,992 12,083 -- -- Four years later 12,304 12,157 12,113 11,789 11,772 11,511 12,008 -- -- -- Five years later 12,406 12,184 12,082 11,769 11,615 11,488 -- -- -- -- Six years later 12,462 12,165 12,088 11,640 11,556 -- -- -- -- -- Seven years later 12,414 12,218 11,981 11,568 -- -- -- -- -- -- Eight years later 12,500 12,154 11,902 -- -- -- -- -- -- -- Nine years later 12,472 12,076 -- -- -- -- -- -- -- -- Ten years later 12,414 -- -- -- -- -- -- -- -- -- DEFICIENCY (REDUNDANCY), NET OF REINSURANCE $1,916 $1,359 $1,126 $544 $(646) $(777) $(393) $63 $361 $231 - ------------------------------------------------------------------------------------------------------------------------------------
The table above shows the cumulative deficiency (redundancy) of the Company's reserves, net of reinsurance, as now estimated with the benefit of additional information. Those amounts are comprised of changes in estimates of gross losses and changes in estimates of related reinsurance recoveries. The table below, for the periods presented, reconciles the net reserves to the gross reserves, as initially estimated and recorded, and as currently estimated and recorded, and computes the cumulative deficiency (redundancy) of the Company's reserves before reinsurance.
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS FOR THE YEARS ENDED DECEMBER 31, [1] 1994 1995 1996 1997 1998 1999 2000 2001 2002 - ------------------------------------------------------------------------------------------------------------------------------------ NET RESERVE, AS INITIALLY ESTIMATED $10,776 $11,024 $12,202 $12,265 $12,401 $12,020 $11,857 $12,437 $12,688 Reinsurance and other recoverables, as initially estimated 5,156 4,829 4,357 3,996 3,275 3,706 3,871 4,176 4,018 - ------------------------------------------------------------------------------------------------------------------------------------ GROSS RESERVE, AS INITIALLY ESTIMATED $15,932 $15,853 $16,559 $16,261 $15,676 $15,726 $15,728 $16,613 $16,706 - ------------------------------------------------------------------------------------------------------------------------------------ NET REESTIMATED RESERVE $11,902 $11,568 $11,556 $11,488 $12,008 $12,083 $12,218 $12,668 Reestimated and other reinsurance recoverables 5,337 4,572 3,896 3,606 3,080 3,858 3,866 4,049 - ------------------------------------------------------------------------------------------------------------------------------------ GROSS REESTIMATED RESERVE $17,239 $16,140 $15,452 $15,094 $15,088 $15,941 $16,084 $16,717 - ------------------------------------------------------------------------------------------------------------------------------------ GROSS DEFICIENCY (REDUNDANCY) $1,307 $287 $(1,107)$(1,167) $(588) $(215) $356 $104 - ------------------------------------------------------------------------------------------------------------------------------------ [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.
- 11 - The above tables exclude the liabilities and claim developments for certain reinsurance coverages written for affiliated parties detailed in the table below.
1994 1995 1996 1997 1998 1999 2000 2001 2002 - ------------------------------------------------------------------------------------------------------------------------------------ Liabilities, net and gross of reinsurance for unpaid claims and claim adjustment expenses excluded $495 $550 $500 $505 $501 $456 $459 $423 $453 ====================================================================================================================================
The following table reconciles the Loss Development Table to the Consolidated Financial Statements: 2002 2001 2000 - ------------------------------------------------------------------ Loss Development Table: Gross reserves $ 16,706 $ 16,613 $ 15,728 Exclusion of international subsidiaries -- -- 106 Reinsurance - affiliated parties 453 423 459 ================================================================== Gross reserves per Consolidated Financial Statements (see Note 7) $ 17,159 $ 17,036 $ 16,293 ================================================================== The following table is derived from the Loss Reserve Development table and summarizes the effect of reserve re-estimates, net of reinsurance, on calendar year operations for the ten-year period ended December 31, 2002. The total of each column details the amount of reserve re-estimates made in the indicated calendar year and shows the accident years to which the re-estimates are applicable. The amounts in the total accident year column on the far right represent the cumulative reserve re-estimates during the ten year period ended December 31, 2002 for the indicated accident year(s).
EFFECT OF NET RESERVE RE-ESTIMATES ON CALENDAR YEAR OPERATIONS CALENDAR YEAR --------------------------------------------------------------------------------------------------------- 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ By Accident year 1992 & Prior $259 $213 $212 $1,122 $102 $56 $(48) $86 $(28) $(58) $1,916 1993 (119) (14) (37) (39) (29) 29 (33) (36) (20) (298) 1994 45 38 (78) (41) (12) (47) (43) (1) (139) 1995 (159) 19 (59) (99) (26) (22) 7 (339) 1996 (23) (45) (48) (95) (28) 13 (226) 1997 (57) (104) (55) 30 36 (150) 1998 57 42 71 39 209 1999 88 51 92 231 2000 121 137 258 2001 (14) (14) - ------------------------------------------------------------------------------------------------------------------------------------ Total $259 $94 $243 $964 $(19) $(175) $(225) $(40) $116 $231 $1,448 ====================================================================================================================================
CEDED REINSURANCE Consistent with industry practice, The Hartford cedes insurance risk to reinsurance companies. For Property & Casualty operations, these reinsurance arrangements are intended to provide greater diversification of business and limit The Hartford's maximum net loss arising from large risks or catastrophes. A major portion of The Hartford's property and casualty reinsurance is effected under general reinsurance contracts known as treaties, or, in some instances, is negotiated on an individual risk basis, known as facultative reinsurance. The Hartford also has in-force excess of loss contracts with reinsurers that protect it against a specified part or all of certain losses over stipulated amounts. Reinsurance does not relieve The Hartford of its primary liability and, as such, failure of reinsurers to honor their obligations could result in losses to The Hartford. The Hartford evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. The Company's monitoring procedures include careful initial selection of its reinsurers, structuring agreements to provide collateral funds where possible, and regularly monitoring the financial condition and ratings of its reinsurers. In accordance with normal industry practice, Life is involved in both the cession and assumption of insurance with other insurance and reinsurance companies. As of December 31, 2002, the largest amount of life insurance retained on any one life by any one of the life operations was approximately $2.5. In addition, the Company reinsures the majority of the minimum death benefit guarantee and the guaranteed withdrawal benefits offered in connection with its variable annuity contracts. 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 and 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 - 12 - 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. Most states have enacted legislation that regulates insurance holding company systems such as The Hartford. This legislation provides that each insurance company in the system is required to register with the insurance department of its state of domicile and furnish information concerning the operations of companies within the holding company system which may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the insurance departments is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and any entity in its holding company system. In addition, certain of such transactions cannot be consummated without the applicable insurance department's prior approval. The extent of insurance regulation on business outside the United States varies significantly among the countries in which The Hartford operates. Some countries have minimal regulatory requirements, while others regulate insurers extensively. Foreign insurers in many countries are faced with greater restrictions than domestic competitors domiciled in that particular jurisdiction. The Hartford's international operations are comprised of insurers licensed in their respective countries and, therefore, are subject to the generally less restrictive domestic insurance regulations. EMPLOYEES The Hartford had approximately 29,000 employees as of December 31, 2002. AVAILABLE INFORMATION The Hartford files annual, quarterly and current reports, proxy statements and other documents with the Securities and Exchange Commission (the "SEC") under the Securities Exchange Act of 1934 (the "Exchange Act"). The public may read and copy any materials that The Hartford files with the SEC at the SEC's Public Reference Room at 450 Fifth Street, NW, Washington, DC 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. Also, the SEC maintains an Internet website that contains reports, proxy and information statements, and other information regarding issuers, including The Hartford, that file electronically with the SEC. The public can obtain any documents that The Hartford files with the SEC at http://www.sec.gov. The Hartford also makes available free of charge on or through its Internet website (http://thehartford.com) The Hartford's Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange Act as soon as reasonably practicable after The Hartford electronically files such material with, or furnishes it to, the SEC. ITEM 2. PROPERTIES The Hartford owns the land and buildings comprising its Hartford location and other properties within the greater Hartford, Connecticut area which total approximately 1.8 million square feet. In addition, The Hartford leases approximately 6.5 million square feet throughout the United States and 37 thousand square feet in other countries. All of the properties owned or leased are used by one or more of all nine operating segments, depending on the location. (For more information on operating segments see Part 1, Item 1, Business of The Hartford - Reporting Segments.) The Company believes its properties and facilities are suitable and adequate for current operations. ITEM 3. LEGAL PROCEEDINGS The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid claim and claim adjustment expense reserves. Subject to the discussion of the litigation involving Mac Arthur Company and its subsidiary, Western MacArthur Company, both former regional distributors of asbestos products (collectively or individually, "MacArthur"), below and the uncertainties discussed in Note 16(b) of Notes to Consolidated Financial Statements under the caption "Asbestos and Environmental Claims," management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of The Hartford. - 13 - The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, premises liability, and inland marine. The Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's consolidated results of operations or cash flows in particular quarterly or annual periods. As further discussed in the MD&A under the caption "Other Operations," The Hartford continues to receive environmental and asbestos claims that involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels, methodologies and reinsurance coverages. Hartford Accident and Indemnity Company ("Hartford A&I"), a subsidiary of the Company, issued primary general liability policies to MacArthur during the period 1967 to 1976. MacArthur sought coverage for asbestos-related claims from Hartford A&I under these policies beginning in 1978. During the period between 1978 and 1987, Hartford A&I paid its full aggregate limits under these policies plus defense costs. In 1987, Hartford A&I notified MacArthur that its available limits under these policies had been exhausted, and MacArthur ceased submitting claims to Hartford A&I under these policies. On October 3, 2000, thirteen years after it had accepted Hartford A&I's notice of exhaustion, MacArthur filed an action against Hartford A&I and another insurer in the U.S. District Court for the Eastern District of New York, seeking for the first time additional coverage for asbestos bodily injury claims under The Hartford A&I primary policies. MacArthur seeks additional coverage on the theory that Hartford A&I has exhausted only its products aggregate limit of liability, not separate limits MacArthur alleges to be available for non-products liability. The complaint seeks a declaration of coverage and unquantified damages. Hartford A&I has moved for summary judgment dismissing MacArthur's claims with prejudice. MacArthur has moved to dismiss the action without prejudice. Both motions are pending. On June 3, 2002, The St. Paul Companies, Inc. ("St. Paul") announced a settlement of a coverage action brought by MacArthur against United States Fidelity and Guaranty Company ("USF&G"), a subsidiary of St. Paul. Under the settlement, St. Paul agreed to pay a total of $975 to resolve its asbestos liability to MacArthur in conjunction with a proposed bankruptcy petition and pre-packaged plan of reorganization to be filed by MacArthur. USF&G provided at least 12 years of primary general liability coverage to MacArthur, but, unlike Hartford A&I, had denied coverage and had refused to pay for defense or indemnity. On October 7, 2002, MacArthur filed an action in the Superior Court in Alameda County, California, against Hartford A&I and two other insurers. As in the New York action, MacArthur seeks a declaration of coverage and damages for asbestos bodily injury claims. Five asbestos claimants who allegedly have obtained default judgments against MacArthur also are joined as plaintiffs; they seek to recover the amount of their default judgments and additional damages directly from the defendant insurers and assert a right to an accelerated trial. In its October 7, 2002 complaint, MacArthur alleges that it has approximately $1.8 billion of unpaid asbestos liability judgments against it to date. The ultimate amount of MacArthur's alleged non-products asbestos liability, including any unresolved current claims and future demands, is currently unknown. On Hartford A&I's motion, the court stayed the action until March 3, 2003, to allow the New York federal court time to rule first on the motions pending there. On November 22, 2002, MacArthur filed a bankruptcy petition and proposed plan of reorganization, which seeks to implement the terms of its settlement with St. Paul. MacArthur's bankruptcy filings indicate that it will seek to have the full amount of its current and future asbestos liability estimated in conjunction with plan confirmation. If such an estimation is made, MacArthur intends to ask the Alameda County court to enter judgment against the insurers for the amount of its total estimated liability, including unliquidated claims and future demands, less the amount ultimately paid by St. Paul. Hartford A&I has filed an adversary complaint in the MacArthur bankruptcy seeking a declaratory judgment that any estimation made in the bankruptcy proceedings is not an adjudication of MacArthur's asbestos liability for purposes of insurance coverage. Hartford A&I intends to defend the MacArthur actions vigorously. Based on the information currently available, management believes that Hartford A&I's liability, if any, to MacArthur will not be finally resolved for at least a year and most probably not for several years. In the opinion of management, the ultimate outcome is highly uncertain for many reasons. It is not yet known, for example, in which venue Hartford A&I's liability, if any, will be determined; whether Hartford A&I's defenses based on MacArthur's long delay in asserting claims for further coverage will be successful; how other significant coverage defenses will be decided; or the extent to which the claims and default judgments against MacArthur involve injury outside of the products and completed operations hazard definitions of the policies. In the opinion of management, an adverse outcome could have a material adverse effect on the Company's results of operations, financial condition and liquidity. In addition, on May 14, 2002, The Hartford announced its participation, along with several dozen other insurance carriers, in a settlement in principle with its insured, PPG Industries ("PPG"), of litigation arising from asbestos exposures involving Pittsburgh Corning Corporation, which is 50% owned by PPG. (For further discussion, see Note 16(b) of Notes to Consolidated Financial Statements.) - 14 - On March 15, 2002, a jury in the U.S. District Court for the Eastern District of Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life Insurance Company ("HLIC"), et al., in favor of Bancorp in the amount of $118. The case involved claims of patent infringement, misappropriation of trade secrets, and breach of contract against HLIC and its affiliate International Corporate Marketing Group, LLC ("ICMG"). The judge dismissed the patent infringement claim on summary judgment. The jury's award was based on the last two claims. On August 28, 2002, the Court entered an order awarding Bancorp prejudgment interest on the breach of contract claim in the amount of $16. HLIC and ICMG have appealed the judgment on the trade secret and breach of contract claims. Bancorp has cross-appealed the pretrial dismissal of its patent infringement claim. The Company's management, based on the advice of its legal counsel, believes that there is a substantial likelihood that the judgment will not survive at its current amount. Based on the advice of legal counsel regarding the potential outcomes of this litigation, the Company recorded an $11 after-tax charge for this matter in the first quarter of 2002 to increase litigation reserves. Should HLIC and ICMG not succeed in eliminating or reducing the judgment, a significant additional expense would be recorded in the future related to this matter. The Company is involved in arbitration with one of its primary reinsurers relating to policies with death benefit guarantees written from 1994 to 1999. The arbitration involves alleged breaches under the reinsurance treaties. Although the Company believes that its position in this pending arbitration is strong, an adverse outcome could result in a decrease to the Company's statutory surplus and capital and potentially increase the death benefit costs incurred by the Company in the future. The arbitration hearing was held during the fourth quarter of 2002, but no decision has been rendered. 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 2002. 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. - ----------------------------------------------------------------- 2002 Common Stock Price High $68.56 $69.97 $58.63 $50.10 Low 59.93 58.04 41.00 37.38 Dividends Declared 0.26 0.26 0.26 0.27 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 ================================================================= As of February 19, 2003, the Company had approximately 115,000 shareholders. The closing price of The Hartford's common stock on the NYSE on February 19, 2003 was $37.11. On October 24, 2002, The Hartford's Board of Directors declared a quarterly dividend of $0.27 per share payable on January 2, 2003 to shareholders of record as of December 2, 2002. 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". - 15 -
ITEM 6. SELECTED FINANCIAL DATA (IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS) 2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME STATEMENT DATA Total revenues [1] $ 15,907 $ 15,147 $ 14,703 $ 13,528 $ 15,022 Income before cumulative effect of accounting changes [2] 1,000 541 974 862 1,015 Net income [2] [3] 1,000 507 974 862 1,015 - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE SHEET DATA Total assets $ 182,043 $ 181,593 $ 171,951 $ 167,486 $ 150,632 Long-term debt 2,596 1,965 1,862 1,548 1,548 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,468 1,412 1,243 1,250 1,250 Total stockholders' equity 10,734 9,013 7,464 5,466 6,423 - ------------------------------------------------------------------------------------------------------------------------------------ EARNINGS PER SHARE DATA BASIC EARNINGS PER SHARE [2] Income before cumulative effect of accounting changes [2] $ 4.01 $ 2.27 $ 4.42 $ 3.83 $ 4.36 Net income [2] [3] 4.01 2.13 4.42 3.83 4.36 DILUTED EARNINGS PER SHARE [2] Income before cumulative effect of accounting changes [2] 3.97 2.24 4.34 3.79 4.30 Net income [2] [3] 3.97 2.10 4.34 3.79 4.30 Dividends declared per common share 1.05 1.01 0.97 0.92 0.85 - ------------------------------------------------------------------------------------------------------------------------------------ OTHER DATA Mutual fund assets [4] $ 15,321 $ 16,809 $ 11,432 $ 6,374 $ 2,506 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING DATA COMBINED RATIOS North American Property & Casualty [5] 99.2 112.4 102.4 103.3 102.9 ==================================================================================================================================== [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 COLI business from MBL Life Assurance Co. of New Jersey. Also, 1998 includes revenues from London & Edinburgh, which was sold in November 1998, of $1,117. [2] 2002 includes $76 tax benefit in Life, $11 after-tax expense in Life related to Bancorp and an $8 after-tax benefit in Life's September 11 exposure. 2001 includes $440 of losses related to September 11 and a $130 tax benefit at Life. [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 No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets". [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] Represents statutory ratio. 2001 includes the impact of September 11. Excluding the impact of September 11, the 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:
2002 2001 2000 1999 1998 - ------------------------------------------------------------------------------------------------------------------------------------ United States Industry Combined Ratios [1] 105.7 116.0 110.1 107.8 105.6 - ------------------------------------------------------------------------------------------------------------------------------------ [1] Represents statutory ratio. U.S. Industry Combined Ratio information obtained from A.M. Best. Combined ratio for 2002 is an A.M. Best estimate prepared as of January 2003.
- 16 - ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN MILLIONS, EXCEPT FOR PER SHARE DATA, UNLESS OTHERWISE STATED) Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") addresses the financial condition of The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, "The Hartford" or the "Company") as of December 31, 2002, compared with December 31, 2001, and its results of operations for each of the three years in the period ended December 31, 2002. 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 (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 difficulty in predicting the Company's potential exposure for asbestos and environmental claims and related litigation, in particular, significant uncertainty with regard to the outcome of the Company's current dispute with Mac Arthur Company and its subsidiary, Western MacArthur Company (collectively or individually, "MacArthur"); the uncertain nature of damage theories and loss amounts and the development of additional facts related to the September 11 terrorist attack ("September 11"); the uncertain impact on the Company of the Bush Administration's budget proposals relating to the distribution of nontaxable dividends to shareholders and the creation of new tax-favored individual savings accounts; the response of reinsurance companies under reinsurance contracts, the impact of increasing reinsurance rates, and the availability and adequacy of reinsurance to protect the Company against losses; the possibility of more unfavorable loss experience than anticipated; the possibility of general economic and business conditions that are less favorable than anticipated; the incidence and severity of catastrophes, both natural and man-made; the effect of changes in interest rates, the stock markets or other financial markets; stronger than anticipated competitive activity; unfavorable legislative, regulatory or judicial developments; the Company's ability to distribute its products through distribution channels, both current and future; the uncertain effects of emerging claim and coverage issues; the effect of assessments and other surcharges for guaranty funds and second-injury funds and other mandatory pooling arrangements; a downgrade in the Company's claims-paying, financial strength or 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 - -------------------------------------------------------------------------------- Critical Accounting Estimates 17 Consolidated Results of Operations: Operating Summary 23 Life 27 Investment Products 29 Individual Life 30 Group Benefits 31 Corporate Owned Life Insurance (COLI) 32 Property & Casualty 33 Business Insurance 36 Personal Lines 37 Specialty Commercial 38 Reinsurance 40 Other Operations (Including Asbestos and Environmental Claims) 41 Investments 46 Capital Markets Risk Management 50 Capital Resources and Liquidity 64 Effect of Inflation 71 - -------------------------------------------------------------------------------- CRITICAL ACCOUNTING ESTIMATES - -------------------------------------------------------------------------------- The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company has identified the following estimates as critical in that they involve a higher degree of judgment and are subject to a significant degree of variability: reserves; valuation of investments and derivative instruments; deferred policy acquisition costs; pension and other postretirement benefits; and contingencies. In developing these estimates management makes subjective and complex judgments that are inherently uncertain and subject to material change as facts and circumstances develop. Although variability is inherent in these estimates, management believes the amounts provided are appropriate based upon the facts available upon compilation of the financial statements. - 17 - RESERVES LIFE 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. Changes in or deviations from the assumptions used for mortality, morbidity, expected future premiums and interest can significantly affect the Life reserve levels and related future operations. 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. 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. Certain investment contracts include provisions whereby a guaranteed minimum 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. In addition, these contracts contain various provisions for determining the amount of the death benefit guaranteed following the withdrawal of a portion of the account value by the policyholder. Partial withdrawals under certain of these contracts may not result in a reduction in the guaranteed minimum death benefit in proportion to the portion surrendered. The Company records the death benefit costs, net of reinsurance, when deaths occur. 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. PROPERTY & CASUALTY The Hartford establishes property and casualty reserves to provide for the estimated costs of paying claims made under policies written by the Company. 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. Reserve estimates can change over time because of unexpected changes in the external environment. Potential external factors include (1) changes in the inflation rate for goods and services related to covered damages such as medical care, hospital care, auto parts, wages and home repair, (2) changes in the general economic environment that could cause unanticipated changes in the claim frequency per unit insured, (3) changes in the litigious environment as evidenced by changes in claimant attorney representation in the claims negotiation and settlement process, (4) changes in the judicial environment regarding the interpretation of policy provisions relating to the determination of coverage and/or the amount of damages awarded for certain types of damages, (5) changes in the social environment regarding the general attitude of juries in the determination of liability and damages, (6) changes in the regulatory environment regarding rates, rating plans and policy forms, (7) changes in the legislative environment regarding the definition of damages and (8) new types of injuries caused by new types of exposure to injury: past examples include breast implants, tobacco products, lead paint, construction defect and blood product contamination. Reserve estimates can also change over time because of changes in internal company operations. Potential internal factors include (1) periodic changes in claims handling procedures, (2) growth in new lines of business where exposure and loss development patterns are not well established or (3) changes in the quality of risk selection in the underwriting process. In the case of reinsurance, all of the above risks apply. In addition, changes in ceding company case reserving and reporting patterns create additional factors that need to be considered in estimating the reserves. Due to the inherent complexity of the assumptions used, final claim settlements may vary significantly from the present estimates, particularly when those settlements may not occur until well into the future. The Hartford, like other insurance companies, categorizes and tracks its insurance reserves by "line of business", such as general liability, commercial multi-peril, workers' compensation, auto bodily injury, homeowners and assumed reinsurance. Furthermore, The Hartford regularly reviews the appropriateness of reserve levels at the line of business level, taking into consideration the variety of trends that impact the ultimate settlement of claims for the subsets of claims in each particular line of business. Adjustments to previously established reserves, if any, are reflected in the operating results of the period in which the adjustment is determined to be necessary. In the judgment of management, all information currently available has been properly considered in the reserves established for claims and claim adjustment expenses. In the opinion of management, based upon the known facts and current law, the reserves recorded for The Hartford's property and casualty businesses at December 31, 2002 represent the Company's best estimate of its ultimate liability for claims and claim adjustment expenses related to losses covered by policies written by the Company. However, because of the significant uncertainties surrounding environmental and particularly asbestos exposures, it is possible that management's estimate of - 18 - the ultimate liabilities for these claims may change and that the required adjustment to recorded reserves could exceed the currently recorded reserves by an amount that could be material to The Hartford's results of operations, financial condition and liquidity. ASBESTOS AND ENVIRONMENTAL CLAIMS The Hartford continues to receive claims that assert damages from asbestos- and environmental-related exposures. Asbestos claims relate primarily to bodily injuries asserted by those who came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs. The Hartford wrote several different categories of insurance coverage to which asbestos and environmental claims may apply. First, The Hartford wrote direct policies as a primary liability insurance carrier. Second, The Hartford wrote direct excess insurance policies providing additional coverage for insureds that exhaust their primary liability insurance coverage. Third, The Hartford acted as a reinsurer assuming a portion of risks previously assumed by other insurers writing primary, excess and reinsurance coverages. Fourth, The Hartford participated as a London Market company that wrote both direct insurance and assumed reinsurance business. In establishing asbestos reserves, The Hartford evaluates the exposure presented by each insured and the anticipated cost of resolution, if any, for each insured. In the course of this evaluation, The Hartford considers: available insurance coverage, including the role of any umbrella or excess insurance The Hartford has issued to the insured; limits and deductibles; an analysis of each insured's potential liability; the jurisdictions involved; past and anticipated future claim activity; past settlement values of similar claims; allocated claim adjustment expense; potential role of other insurance; the role, if any, of non-asbestos claims or potential non-asbestos claims in any resolution process; and applicable coverage defenses or determinations, if any, including whether some or all of the asbestos claims for which the insured seeks coverage are products or completed operations claims subject to the aggregate limit. In establishing environmental reserves, The Hartford evaluates the exposure presented by each insured and the anticipated cost of resolution, if any, for each insured. In the course of this analysis, The Hartford considers the probable liability, available coverage, relevant judicial interpretations and historical value of similar exposures. In addition, The Hartford considers numerous facts that are unique to each insured, to the extent known, such as the nature of the alleged activities of the insured at each site; the allegations of environmental harm at each site; the number of sites; the total number of potentially responsible parties at each site; the nature of environmental harm and the corresponding remedy at each site; the nature of government enforcement activities at each site; the ownership and general use of each site; the overall nature of the insurance relationship between The Hartford and the insured, including the role of any umbrella or excess insurance The Hartford has issued to the insured; the involvement of other insurers; the potential for other available coverage, including the number of years of coverage; the role, if any, of non-environmental claims or potential non-environmental claims in any resolution process; and the applicable law in each jurisdiction. For both asbestos and environmental reserves, The Hartford also compares its historical direct net loss and expense paid and incurred experience, and net loss and expense paid and incurred experience year by year, to assess any emerging trends, fluctuations or characteristics suggested by the aggregate paid and incurred activity. Once the gross ultimate exposure for indemnity and allocated claim adjustment expense is determined for each insured by each policy year, The Hartford calculates its ceded reinsurance projection based on any applicable facultative and treaty reinsurance and the Company's experience with reinsurance collections. Uncertainties Regarding Adequacy of Asbestos and Environmental Reserves With regard to both environmental and particularly asbestos claims, significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related settlement expenses. Conventional reserving techniques cannot reasonably estimate the ultimate cost of these claims, particularly during periods where theories of law are in flux. As a result of the factors discussed in the following paragraphs, the degree of variability of reserve estimates for these exposures is significantly greater than for other more traditional exposures. In particular, The Hartford believes there is a high degree of uncertainty inherent in the estimation of asbestos loss reserves. In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate development patterns, plaintiffs' expanding theories of liability, the risks inherent in major litigation and inconsistent emerging legal doctrines. Courts have reached inconsistent conclusions as to when losses are deemed to have occurred and which policies provide coverage; what types of losses are covered; whether there is an insurer obligation to defend; how policy limits are determined; whether particular claims are product/completed operation claims subject to an aggregate limit and how policy exclusions and conditions are applied and interpreted. Furthermore, insurers in general, including The Hartford, have recently experienced an increase in the number of asbestos-related claims due to, among other things, more intensive advertising by lawyers seeking asbestos claimants, plaintiffs' increased focus on new and previously peripheral defendants and an increase in the number of insureds seeking bankruptcy protection as a result of asbestos-related liabilities. Plaintiffs and insureds have sought to use bankruptcy proceedings to accelerate and increase loss payments by insurers. In addition, some policyholders have begun to assert new classes of claims for so called "non-product" coverages to which an aggregate limit of liability may not apply. Recently, many insurers, including, in a limited number of instances, The Hartford, also have been sued directly by asbestos claimants asserting that insurers had a duty to protect the public from the dangers of asbestos. Management believes these issues are not likely to be resolved in the near future. In the case of the reserves for environmental exposures, factors contributing to the high degree of uncertainty include court - 19 - decisions that have interpreted the insurance coverage to be broader than originally intended; inconsistent decisions, especially across jurisdictions and uncertainty as to the monetary amount being sought by the claimant from the insured. Further uncertainties include the effect of the recent acceleration in the rate of bankruptcy filings by asbestos defendants on the rate and amount of The Hartford's asbestos claims payments; a further increase or decrease in asbestos and environmental claims which cannot now be anticipated; whether some policyholders' liabilities will reach the umbrella or excess layer of their coverage; the resolution or adjudication of some disputes pertaining to the amount of available coverage for asbestos claims in a manner inconsistent with The Hartford's previous assessment of these claims; the number and outcome of direct actions against The Hartford; and unanticipated developments pertaining to The Hartford's ability to recover reinsurance for environmental and asbestos claims. It is also not possible to predict changes in the legal and legislative environment and their impact on the future development of asbestos and environmental claims. Additionally, the reporting pattern for excess insurance and reinsurance claims is much longer than direct claims. In many instances, it takes months or years to determine that the customer's own obligations have been met and how the reinsurance in question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to the uncertainty of estimating the related reserves. Given the factors and emerging trends described above, The Hartford believes the actuarial tools and other techniques it employs to estimate the ultimate cost of claims for more traditional kinds of insurance exposure are less precise in estimating reserves for its asbestos exposures. The Hartford continually evaluates new information and new methodologies in assessing its potential asbestos exposures. At any time, The Hartford may be conducting an analysis of newly identified information and completion of exposure analyses could cause The Hartford to change its estimates of its asbestos reserves and the effect of these changes could be material to the Company's consolidated operating results, financial condition and liquidity. VALUATION OF INVESTMENTS AND DERIVATIVE INSTRUMENTS 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" as defined in Statement of Financial Accounting Standards ("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, as adjusted for the effect of deducting the life and pension policyholders' share of the immediate participation guaranteed contracts and the change in amortization of deferred policy acquisition costs, reflected in stockholders' equity as a component of accumulated other comprehensive income ("AOCI"). Policy loans are carried at outstanding balance, which approximates fair value. Other invested assets consist primarily of limited partnership investments that are accounted for by the equity method. 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. The fair value of securities is based upon quoted market prices or broker quotations when available. Where market prices or broker quotations are not available, management typically estimates the fair value based upon discounted cash flow, applying current interest rates for similar financial instruments with comparable terms and credit quality. The estimated fair value of a financial instrument may differ significantly from the amount that could be realized if the security were sold immediately. Derivative instruments are reported at fair value based upon internally established valuations that are consistent with external valuation models, quotations furnished by dealers in such instrument or market quotations. One of the significant estimations inherent in the valuation of investments is the evaluation of other than temporary impairments. The evaluation for other than temporary impairments is a quantitative and qualitative process which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition or near term recovery prospects and the effects of changes in interest rates. The Company's accounting policy requires that a decline in the value of a security below its amortized cost basis be assessed to determine if the decline is other than temporary. If so, the security is deemed to be impaired and, a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. The fair value of the impaired investment becomes its new cost basis. The Company has a security monitoring process overseen by a committee of investment and accounting professionals that identifies securities that, due to certain characteristics, are subjected to an enhanced analysis on a quarterly basis. Such characteristics include, but are not limited to: a deterioration of the financial condition of the issuer, the magnitude and duration of unrealized losses, credit rating and industry category. The primary factors considered in evaluating whether a decline in value for corporate issued securities 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 condition and near-term prospects of the issuer, (c) whether the debtor is current on contractually obligated interest and principal payments and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery. Additionally, for certain securitized financial assets with contractual cash flows (including asset-backed securities), Emerging Issues Task Force ("EITF") Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets", requires the Company to periodically update its best estimate of cash flows over the life of the security. If management estimates that the fair value of its securitized financial asset is less than its carrying amount and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, then an other than temporary impairment charge - 20 - is recognized. Projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral. Furthermore, 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 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. 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. The deferred costs are recorded as an asset commonly referred to as deferred policy acquisition costs ("DAC"). At December 31, 2002 and 2001, the carrying value of the Company's Life operations' DAC was $5.2 billion and $5.0 billion, respectively. DAC related to traditional policies are amortized over the premium-paying period in proportion to the present value of annual expected premium income. Adjustments are made each year to recognize actual experience as compared to assumed experience for the current period. DAC 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 estimated gross profits ("EGPs") from projected investment, mortality and expense margins and surrender charges. A portion of the DAC amortization is allocated to realized gains and losses. The DAC balance is also adjusted by an amount that represents the change in amortization of deferred policy acquisition costs that would have been required as a charge or credit to operations had unrealized amounts been realized. Actual gross profits can vary from management's estimates, resulting in increases or decreases in the rate of amortization. The Company regularly evaluates its estimated gross profits to determine if actual experience or other evidence suggests that earlier estimates should be revised. Several assumptions considered to be significant in the development of EGPs include separate account fund performance, surrender and lapse rates, estimated interest spread and estimated mortality. The separate account fund performance assumption is critical to the development of the EGPs related to the Company's variable annuity and variable and interest-sensitive life insurance businesses. The average long-term rate of assumed separate account fund performance used in estimating gross profits for the variable annuity and variable life business was 9% at December 31, 2002 and 2001. For all other products including fixed annuities and other universal life-type contracts the average assumed investment yield ranged from 5% to 8.5% for the years ended December 31, 2002 and 2001. Due to the increased volatility and precipitous decline experienced by the U.S. equity markets in 2002, the Company enhanced its DAC evaluation process during the course of the year. The Company developed sophisticated modeling capabilities, which allowed it to run 250 stochastically determined scenarios of separate account fund performance. These scenarios were then utilized to calculate a reasonable range of estimates for the present value of future gross profits. This range is then compared to the present value of future gross profits currently utilized in the DAC amortization model. As of December 31, 2002, the current estimate falls within the reasonable range, and therefore, the Company does not believe there is evidence to suggest a revision to the EGPs is necessary. Additionally, the Company has performed various sensitivity analyses with respect to separate account fund performance to provide an indication of future separate account fund performance levels, which could result in the need to revise future EGPs. The Company has estimated that a revision to the future EGPs is unlikely in 2003 in the event that the separate account fund performance meets or exceeds the Company's long-term assumption of 9% and that a revision is likely if the overall separate account fund performance is negative for the year. In the event that separate account fund performance falls between 0% and 9% during 2003, the Company will need to evaluate the actual gross profits versus the mean EGPs generated by the stochastic DAC analysis and determine whether or not to make a revision to the future EGPs. Factors that will influence this determination include the degree of volatility in separate account fund performance, when during the year performance becomes negative and shifts in asset allocation within the separate account made by policyholders. The overall return generated by the separate account is dependent on several factors, including the relative mix of the underlying sub-accounts among bond funds and equity funds as well as equity sector weightings. The Company's overall separate account fund performance has been reasonably correlated to the overall performance of the S&P 500 Index, although no assurance can be provided that this correlation will continue in the future. Should the Company change its assumptions utilized to develop EGPs (commonly referred to as "unlocking") the Company would record a charge (or credit) to bring its DAC balance to the level it would have been had EGPs been calculated using the new assumptions from the date of each policy. The Company evaluates all critical assumptions utilized to develop EGPs (e.g. lapse, mortality) and will make a revision to future EGPs to the extent that actual experience is significantly different than expected. The overall recoverability of the DAC asset is dependent on the future profitability of the business. The Company tests the aggregate recoverability of the DAC asset by comparing the amounts deferred to total EGPs. In addition, the Company routinely stress tests its DAC asset for recoverability against severe declines in its separate account assets, which could occur if the equity markets experienced another significant sell-off, as the majority of policyholders' money held in the separate accounts are invested in the equity market. As of December 31, 2002, separate account assets could fall 25% and the Company believes its DAC asset would still be recoverable. PROPERTY & CASUALTY The Property & Casualty operations also incur costs, including commissions, premium taxes and certain underwriting and policy issuance costs, that vary with and are related primarily to the acquisition of property casualty insurance business and are deferred and amortized ratably over the period the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income, and if - 21 - not, are charged to expense. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs. For the years ended December 31, 2002, 2001 and 2000, no material amounts of deferred acquisition costs were charged to expense based on the determination of recoverability. PENSION AND OTHER POSTRETIREMENT BENEFIT OBLIGATIONS Pursuant to accounting principles related to the Company's pension and other postretirement benefit obligations to employees under its various benefit plans, the Company is required to make a significant number of assumptions in order to estimate the related liabilities and expense each period. The two economic assumptions that have the most impact on pension expense are the discount rate and the expected long-term rate of return. In determining the discount rate assumption, the Company utilizes information provided by its plan actuaries. In particular, the Company uses an interest rate yield curve developed and published by its plan actuaries. The yield curve is comprised of AAA/AA bonds with maturities between zero and thirty years. Discounting the cash flows of the Company's pension plan using this yield curve, it was determined that 6.50% is the appropriate discount rate as of December 31, 2002 to calculate the Company's accrued benefit cost liability. Accordingly, the 6.50% discount rate will also be used to determine the Company's 2003 pension expense. The Company determines the long-term rate of return assumption for the pension plan's asset portfolio based on analysis of the portfolio's historical rates of return balanced with future long-term return expectations. Based on its long-term outlook with respect to the markets, which has been influenced by the poor equity market performance in recent years as well as the recent decline in fixed income security yields, the Company lowered its long-term rate of return assumption from 9.75% to 9.00% as of December 31, 2002. To illustrate the impact of these assumptions on annual pension expense for 2003 and going forward, a 25 basis point change in the discount rate will increase/decrease pension expense by approximately $12, and a 25 basis point change in the long-term asset return assumption will increase/decrease pension expense by approximately $5. CONTINGENCIES Management follows the requirements of SFAS No. 5 "Accounting for Contingencies". This statement requires management to evaluate each contingent matter separately. The evaluation is a two-step process, including: determining a likelihood of loss, and, if a loss is probable, developing a potential range of loss. Management establishes reserves for these contingencies at its "best estimate", or, if no one number within the range of possible losses is more probable than any other, the Company records an estimated reserve at the low end of the range of losses. The majority of contingencies currently being evaluated by the Company relate to litigation and tax matters, which are inherently difficult to evaluate and subject to significant changes. - 22 -
- -------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY - -------------------------------------------------------------------------------- OVERVIEW 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 10,301 $ 9,409 $ 8,941 Fee income 2,577 2,633 2,484 Net investment income 2,953 2,850 2,674 Other revenue 476 491 459 Net realized capital gains (losses) (400) (236) 145 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 15,907 15,147 14,703 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 9,524 9,764 8,419 Amortization of deferred policy acquisition costs and present value of future profits 2,241 2,214 2,213 Insurance operating costs and expenses 2,317 2,037 1,958 Goodwill amortization -- 60 28 Other expenses [1] 757 731 667 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 14,839 14,806 13,285 -------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 1,068 341 1,418 Income tax expense (benefit) 68 (200) 390 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE MINORITY INTEREST AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 1,000 541 1,028 Minority interest in consolidated subsidiary -- -- (54) - ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 1,000 541 974 Cumulative effect of accounting changes, net of tax [2] -- (34) -- - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME [3] 1,000 507 974 Less: Restructuring charges, net of tax -- (11) -- Loss from early retirement of debt, net of tax -- (8) -- Cumulative effect of accounting changes, net of tax [2] -- (34) -- Net realized capital gains (losses), after-tax (250) (164) 12 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME [3] $ 1,250 $ 724 $ 962 - ------------------------------------------------------------------------------------------------------------------------------------ [1] For the year ended December 31, 2001, includes $16 of restructuring charges and $13 of accelerated amortization of issuance costs on the Company's 8.35% Cumulative Quarterly Income Preferred Securities, which were redeemed on December 31, 2001. [2] Represents the cumulative impact of the Company's adoption of SFAS No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities" of $(23) and EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" of $(11). [3] 2002 includes a $76 tax benefit at Life, $11 after-tax expense at Life related to Bancorp Services, LLC litigation ("Bancorp") and $8 after-tax benefit in Life's September 11 exposure. 2001 includes $440, after-tax, of losses related to September 11 and a $130 tax benefit at Life.
The Hartford defines "operating income" as after-tax operational results excluding, as applicable, net realized capital gains and losses, restructuring charges, losses from early retirement of debt and the cumulative effect of accounting changes. Operating income is a 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 2002 COMPARED TO 2001 - Revenues increased $760, or 5%. This increase was driven by strong earned premium growth within Business Insurance, Personal Lines and Specialty Commercial whose premiums increased by $496, $237 and $200, respectively. Also contributing to the growth was a $61 increase in fee income for the Individual Life segment. Additionally, 2001 revenues included a reduction of $91 in Property & Casualty earned premiums, resulting from additional reinsurance cessions related to September 11. Partially offsetting the increases described above were higher net realized capital losses, which were $400 in 2002 compared with $236 in 2001. The increase in the net realized capital losses was due primarily to other than temporary write-downs of corporate and asset-backed securities including those in the telecommunication, utility and airline industries. Operating income increased $526, or 73%. The increase was partially due to $440 in losses, after-tax and net of reinsurance, included in 2001 results related to September 11 and the Company's adoption of SFAS No. 142, "Goodwill and Other Intangible Assets", which precluded the amortization of goodwill beginning on January 1, 2002. The Company's goodwill totaled $52, after-tax, in 2001. Improved underwriting results in Property & Casualty, as well as increased operating income in the Group Benefits segment, also contributed to the increase. Partially offsetting the increase was lower operating income in the Investment Products segment. - 23 - Net income increased $493, or 97%. The increase was due primarily to the growth in operating income described in the paragraph above, partially offset by higher after-tax net realized capital losses in 2002 compared to 2001. 2001 COMPARED TO 2000 -- Revenues increased $444, or 3%. Included in revenues in 2001 was a $91 reduction in Property & Casualty earned premiums, resulting from additional reinsurance cessions related to September 11. The increase in revenues was related to continued new business growth in the Group Benefits segment, 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 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%. This decrease was primarily the result of $440 of losses, after-tax and net of reinsurance, related to September 11. Also contributing to the decline were decreased underwriting results in the Personal Lines and Reinsurance segments. Partially offsetting the decrease were a $130 tax benefit at Hartford Life, Inc. ("HLI"), primarily the result of the favorable treatment of certain tax matters related to separate account investment activity during the 1996-2000 tax years and increased operating income in Life's four operating segments. Net income decreased $467, or 48%. The decrease was due primarily to the decline in operating income described above. In addition, net realized capital losses were $236 in 2001, compared with net realized capital gains of $145 in 2000. The change in net realized capital losses resulted from other than temporary impairments on fixed maturities in 2001. NET REALIZED CAPITAL GAINS AND LOSSES See "Investment Results" in the Investments section. INCOME TAXES The effective tax rate for 2002, 2001 and 2000 was 6%, (59)% and 28%, respectively. Excluding the impacts of September 11, net realized capital losses and the HLI federal tax benefits of $76, $130 and $24 in 2002, 2001 and 2000, respectively, the effective tax rate for 2002 was 20% compared with 19% and 22%, respectively, for 2001 and 2000. Tax-exempt interest earned on invested assets and the separate account dividends received deduction were the principal causes of effective rates being lower than the 35% United States statutory rate in all years. Income taxes paid (received) in 2002, 2001 and 2000 were $(102), $(52) and $95, respectively. (For additional information, see Note 15 of Notes to Consolidated Financial Statements.) MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY Prior to the June 27, 2000 acquisition of all of the outstanding shares of HLI that The Hartford did not already own ("The HLI Repurchase"), the minority interest in the consolidated subsidiary's operating results represented approximately 19%. PER COMMON SHARE The following table represents earnings per common share data for the past three years: 2002 2001 2000 - ----------------------------------------------------------------- Basic earnings per share $4.01 $2.13 $4.42 Diluted earnings per share $3.97 $2.10 $4.34 Weighted average common shares outstanding 249.4 237.7 220.6 Weighted average common shares outstanding and dilutive potential common shares 251.8 241.4 224.4 ================================================================= ADOPTION OF FAIR-VALUE RECOGNITION PROVISIONS FOR STOCK COMPENSATION In December 2002, the Financial Accounting Standards Board ("FASB") issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure and Amendment to SFAS No. 123", which provides three optional transition methods for entities that decide to voluntarily adopt the fair value recognition principles of SFAS No. 123, "Accounting for Stock Issued to Employees", and modifies the disclosure requirements of that Statement. Under the prospective method, stock-based compensation expense is recognized for awards granted after the beginning of the fiscal year in which the change is made. The modified prospective method recognizes stock-based compensation expense related to new and unvested awards in the year of change equal to that which would have been recognized had SFAS No. 123 been adopted as of its effective date, fiscal years beginning after December 15, 1994. The retrospective restatement method recognizes stock compensation costs for the year of change and restates financial statements for all prior periods presented as though the fair value recognition provisions of SFAS No. 123 had been adopted as of its effective date. Beginning in January 2003, the Company adopted the fair-value recognition provisions of accounting for employee stock compensation under SFAS No. 123. The Company believes the use of the fair-value method to record employee stock-based compensation expense is consistent with the Company's accounting for all other forms of compensation. The Company had applied the intrinsic value-based provisions set forth in Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees". Under the intrinsic value method, compensation expense is determined on the measurement date, that is the first date on which both the number of shares the employee is entitled to receive and the exercise price are known. Compensation expense, if any, is measured based on the award's intrinsic value, which is the excess of the market price of the stock over the exercise price on the measurement date. For the years ended December 31, 2002, 2001 and 2000, compensation expense related to the Company's stock-based compensation plans, including non-option plans, was $6, $8 and $23 after-tax, respectively. The expense related to stock-based employee compensation included in the determination of net income for 2002 is less than that which would have been recognized if the fair value method had been - 24 - applied to all awards since the effective date of SFAS No. 123. (For further discussion of the Company's stock compensation plans, see Notes 1(f) and 11 of Notes to Consolidated Financial Statements.) SFAS No. 123 permits companies either to use the fair-value method and recognize compensation expense upon the issuance of stock options, thereby lowering earnings, or, alternatively, to disclose the pro-forma impact of the issuance. The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all outstanding and unvested awards in each period.
For the years ended December 31, -------------------------------------------------- (In millions, except for per share data) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Net income, as reported $ 1,000 $ 507 $ 974 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects [1] 3 2 1 Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects (56) (46) (37) - ------------------------------------------------------------------------------------------------------------------------------------ Pro forma net income [2] $ 947 $ 463 $ 938 - ------------------------------------------------------------------------------------------------------------------------------------ Earnings per share: Basic - as reported $ 4.01 $ 2.13 $ 4.42 Basic - pro forma [2] $ 3.80 $ 1.95 $ 4.25 Diluted - as reported $ 3.97 $ 2.10 $ 4.34 Diluted - pro forma [2] $ 3.76 $ 1.92 $ 4.18 - ------------------------------------------------------------------------------------------------------------------------------------ [1] Excludes impact of non-option plans of $3, $6 and $22 for the years ended December 31, 2002, 2001 and 2000, respectively. [2] The pro forma disclosures are not representative of the effects on net income and earnings per share in future years.
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 2002, 2001 and 2000: dividend yield of 1.6% for 2002, 1.6% for 2001 and 1.5% for 2000; expected price variability of 40.8% for 2002, 29.1% for 2001 and 35.7% for 2000; risk-free interest rates of 4.27% for 2002 grants, 4.98% for 2001 grants and 6.41% for 2000 grants; and expected lives of six years for 2002, six years for 2001 and four years for 2000. The use of the fair value recognition method results in compensation expense being recognized in the financial statements in different amounts and in different periods than the related income tax deduction. Generally, the compensation expense recognized under SFAS No. 123 will result in a deferred tax asset since the stock compensation expense is not deductible for tax until the option is exercised. Deferred tax assets arising under SFAS No. 123 will be evaluated as to future realizability to determine whether a valuation allowance is necessary. SEGMENT RESULTS The Hartford is organized into two major operations: Life and Property & Casualty. Within these operations, The Hartford conducts business principally in nine operating segments. Additionally, the capital raising and purchase accounting adjustment activities related to The HLI Repurchase, capital raised in 2002 that was not contributed to the Company's insurance subsidiaries 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 Japan and Latin America; realized capital gains and losses; as well as corporate items not directly allocated to any of its reportable operating segments, principally interest expense; and intersegment eliminations. In January 2002, Property & Casualty integrated its Affinity Personal Lines and Personal Insurance segments, now reported as Personal Lines. As a result, Property & Casualty is now organized into five reportable operating segments: the North American underwriting segments of Business Insurance, Personal Lines, Specialty Commercial and Reinsurance; and the Other Operations segment, which includes substantially all of the Company's asbestos and environmental exposures. "North American" includes the combined underwriting results of Business Insurance, Personal Lines, Specialty Commercial and Reinsurance underwriting segments along with income and expense items not directly allocated to these segments, such as net investment income, net realized capital gains and losses, other expenses including interest, and income taxes. 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. 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 certain net realized capital gains and losses through net investment income, utilizing the duration of the segment's investment portfolios. - 25 - The following is a summary of net income and operating income for each of the Company's Life segments and aggregate net income and operating income for the Company's Property & Casualty operations.
NET INCOME 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Life Investment Products $ 432 $ 463 $ 424 Individual Life 133 121 79 Group Benefits 128 106 90 COLI 32 37 34 Other (168) (42) (52) - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 557 685 575 Property & Casualty North American 482 (125) 466 Other Operations (13) 10 28 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 469 (115) 494 Corporate (26) (63) (95) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NET INCOME $ 1,000 $ 507 $ 974 ==================================================================================================================================== OPERATING INCOME 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Life Investment Products $ 432 $ 463 $ 424 Individual Life 133 121 79 Group Benefits 128 106 90 COLI 32 37 34 Other 28 73 5 - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 753 800 632 Property & Casualty North American 519 (20) 412 Other Operations 4 6 17 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 523 (14) 429 Corporate (26) (62) (99) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING INCOME $ 1,250 $ 724 $ 962 ====================================================================================================================================
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) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Business Insurance $ 44 $ 3 $ (50) Personal Lines (46) (78) 2 Specialty Commercial (23) (95) (103) Reinsurance (59) (149) (73) - ------------------------------------------------------------------------------------------------------------------------------------ Underwriting results excluding September 11 (84) (319) (224) September 11 -- (647) -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (84) $ (966) $ (224) ====================================================================================================================================
In the sections that follow, the Company analyzes the results of operations of its various segments using the performance measurements that the Company believes are meaningful. - 26 - - -------------------------------------------------------------------------------- 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, 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] 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Fee income $ 2,577 $ 2,633 $ 2,484 Earned premiums 2,187 2,142 1,886 Net investment income 1,858 1,779 1,592 Other revenue 120 128 116 Net realized capital losses (317) (133) (88) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 6,425 6,549 5,990 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 3,648 3,611 3,162 Insurance operating costs and expenses 1,438 1,390 1,281 Amortization of deferred policy acquisition costs and present value of future profits 628 642 671 Goodwill amortization -- 24 6 Other expenses 144 117 82 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 5,858 5,784 5,202 -------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 567 765 788 Income tax expense 10 54 213 Cumulative effect of accounting changes, net of tax [2] -- (26) -- - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME [3] 557 685 575 Less: Cumulative effect of accounting changes, net of tax [2] -- (26) -- Net realized capital losses, after-tax (196) (89) (57) - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME [3] $ 753 $ 800 $ 632 ==================================================================================================================================== [1] Life excludes the effect of 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 of $(23) and EITF Issue No. 99-20 of $(3). [3] For the year ended December 31, 2002, includes $76 tax benefit related to separate account investment activity and an $8 after-tax benefit related to September 11. Additionally, for the year ended December 31, 2002, includes $11 after-tax expense related to the Bancorp litigation. 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 Japan and Latin America, and corporate items not directly allocated 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 - 27 - 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 Note 18(a) of Notes to Consolidated Financial Statements.) 2002 COMPARED TO 2001 -- Revenues in the Life operation decreased $124, or 2%, primarily driven by realized capital losses of $317 in 2002 as compared to $133 in 2001. (See the Investments section for further discussion of investment results and related realized capital losses.) Additionally, COLI experienced a decline in revenues of $127, or 18%, as a result of the decrease in leveraged COLI account values as compared to a year ago. However, the Life operation experienced revenue growth across its other operating segments. Revenues related to the Investment Products segment increased $91, or 4%, as a result of continued growth related to its institutional investment product business, which more than offset the decline of $40, or 3%, in revenues within the individual annuity operation. Lower assets under management due to the decline in the equity markets are the principal driver of declining revenues for the individual annuity operation. The Group Benefits segment experienced an increase in revenues of $75, or 3%, as a result of strong sales to new customers and solid persistency within the in-force block of business. Additionally, Individual Life revenues increased by $68, or 8%, as a result of the Fortis acquisition and increased life insurance in force. Expenses increased $30, or 1%, due to a lower benefit recorded related to favorable resolution of dividends received deduction ("DRD") related tax items (see also the discussion of DRD tax matter at Note 16(d) of Notes to Consolidated Financial Statements), an increase in benefits and claims of $37, or 1%, due primarily to growth in the Group Benefits segment and higher death benefits in the Investment Products segment, as a result of the lower equity markets and additional expenses related to the Fortis acquisition. These increases were offset by a decrease in income tax expense due to lower pre-tax income as compared to a year ago. Expenses increased $122, or 6%, in the Investment Products segment, principally related to the growth in the institutional investment product business and a $31 increase in death benefits related to the individual annuity operation, as a result of depressed contractowner account values driven by the lower equity markets. In addition, 2002 expenses include $11, after-tax, of accrued expenses recorded within the COLI segment related to the Bancorp litigation. (For a discussion of the Bancorp litigation, see Note 16(a) of Notes to Consolidated Financial Statements.) Also included in expenses was an after-tax benefit of $8, recorded within "Other", associated with favorable development related to Life's estimated September 11 exposure. Net income and operating income decreased $128, or 19%, and $47, or 6%, respectively, due to the decline in revenues and increase in expenses described above. In 2002, Life recognized an $8 after-tax benefit due to favorable development related to September 11. In 2001, Life recorded a $20 after-tax loss related to September 11. Excluding the impact of September 11, net income decreased $156, or 22%, and operating income decreased $75, or 9%. Net income for the Investment Products segment was down $31, or 7%, as growth in the other investment products businesses, particularly institutional investment products, was more than offset by the decline in revenues in the individual annuity operation, which was negatively impacted by the lower equity markets. COLI net income decreased $5, or 14%. Excluding the impact of September 11, COLI's net income decreased $7, or 18%, primarily the result of the charge associated with the Bancorp litigation. The declines in net income for those segments were partially offset by increases in net income for the Group Benefits and Individual Life segments. Group Benefits earnings increased $22, or 21%. Excluding the impact of September 11, Group Benefits net income increased $20, or 19%. The increases were principally driven by ongoing premium growth and stable loss and expense ratios and improving loss ratios. Individual Life net income increased $12, or 10%. Excluding the impact of September 11, Individual Life's net income increased $9, or 7%, as the result of the Fortis acquisition. Net income for Other decreased $126 and operating income decreased $45, or 62%. In 2002, Life recognized an $8 after-tax benefit due to favorable development related to September 11 in Other. In 2001, Life recorded a $13 after-tax loss related to September 11 in Other. Excluding the impact of September 11, Other net income decreased $147 and operating income decreased $66, or 77%. The decline in net income of the Other segment is principally due to higher realized capitalized losses and a lower tax benefit recorded in 2002 compared to 2001 as discussed above. 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. Net income increased $110, or 19%, and operating income increased $168, or 27%, led by the Individual Life and Group Benefits segments, where net 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 loss 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, net income increased $32, or 6%, and operating income increased $90, or 15%, for the year ended December 31, 2001, as each of the Company's operating segments experienced growth from the prior year. - 28 - - -------------------------------------------------------------------------------- INVESTMENT PRODUCTS - --------------------------------------------------------------------------------
OPERATING SUMMARY 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Fee income and other $ 1,518 $ 1,620 $ 1,639 Net investment income 1,079 886 741 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 2,597 2,506 2,380 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 944 819 700 Insurance operating costs and other expenses 648 608 551 Amortization of deferred policy acquisition costs 444 461 516 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 2,036 1,888 1,767 -------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 561 618 613 Income tax expense 129 155 189 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 432 $ 463 $ 424 -------------------------------------------------------------------------------------------------------------------------- Individual variable annuity account values $ 64,343 $ 74,581 $ 78,174 Other individual annuity account values 10,565 9,572 9,059 Other investment products account values 19,921 19,322 17,376 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ACCOUNT VALUES 94,829 103,475 104,609 Mutual fund assets under management 15,321 16,809 11,432 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 110,150 $ 120,284 $ 116,041 ====================================================================================================================================
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. 2002 COMPARED TO 2001 -- Revenues in the Investment Products segment increased $91, or 4%. These increases in revenues are primarily driven by growth in the institutional investment product business, where related assets under management increased $669, or 7%, to $9.7 billion as of December 31, 2002. This revenue increase was partially offset by lower fee income related to the individual annuity operation as average account values decreased from $85.7 billion to $79.5 billion compared to prior year, primarily due to the lower equity markets. Expenses increased $122, or 6%, driven by increases of $84, or 11%, in interest credited on general account assets, $61, or 6%, in commissions and wholesaling expenses, and $31 in individual annuity death benefit costs due to the lower equity markets, and an increase of $37, or 23%, in operating expenses incurred by other investment products, primarily driven by the mutual fund business. Partially offsetting these increases was a $34, or 8%, decrease in amortization of deferred policy acquisition costs related to the individual annuity business, which declined as a result of lower gross profits, driven by the decrease in fee income and the increase in death benefit costs. Net income decreased $31, or 7%, driven by the continued lower equity markets resulting in the decline in revenues in the individual annuity operation and increases in the death benefit costs incurred by the individual annuity operation. The decrease in individual annuity revenues was significantly offset by growth in revenues related to other investment products, particularly the institutional investment product business. (For discussion of the potential future financial statement impact of continued declines in the equity market on the Investment Products segment, see the Capital Markets Risk Management section under "Market Risk".) 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 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 - 29 - 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. Net 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. OUTLOOK Management believes 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. One factor which could impact the Investment Products segment is the President's 2004 budget proposal. See Capital Resources and Liquidity section under "Legislative Initiatives" for further discussion of this proposed legislation. The individual annuity segment continues to be impacted by the lower equity markets in terms of lower assets under management. However, the Company experienced strong sales of annuities which were $11.6 billion in 2002 as compared to $10.0 billion in 2001. Partially contributing to the growth in sales is The Hartford's introduction of Principal First, a guaranteed withdrawal benefit rider, which was developed in response to the customers' needs. Based on VARDS, the Company had 9.4% market share as of December 31, 2002 as compared to 8.7% at December 31, 2001. (For discussion of the potential future financial statement impact of continued declines in the equity market on the Investment Products segment, see the Capital Markets Risk Management section under "Equity Risk".) 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 introduced 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. 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. In its first year the SMART 529 product has been well received by many Americans saving for college. - -------------------------------------------------------------------------------- INDIVIDUAL LIFE - --------------------------------------------------------------------------------
OPERATING SUMMARY 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Fee income and other $ 697 $ 647 $ 459 Net investment income 261 243 181 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 958 890 640 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 443 385 274 Amortization of deferred policy acquisition costs 160 168 145 Insurance operating costs and other expenses 159 159 103 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 762 712 522 -------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 196 178 118 Income tax expense 63 57 39 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 133 $ 121 $ 79 -------------------------------------------------------------------------------------------------------------------------- Variable life account values $ 3,648 $ 3,993 $ 2,947 Total account values $ 7,557 $ 7,868 $ 5,849 - ------------------------------------------------------------------------------------------------------------------------------------ Variable life insurance in force $ 66,715 $ 61,617 $ 33,460 Total life insurance in force $ 126,680 $ 120,269 $ 75,113 ====================================================================================================================================
The Individual Life segment provides life insurance solutions to a wide array of partners to solve the wealth protection, accumulation and transfer needs of their affluent, emerging affluent and business insurance clients. 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. 2002 COMPARED TO 2001 -- Revenues in the Individual Life segment increased $68, or 8%, primarily driven by business growth, including the impact of the Fortis transaction. However, the Company sold $173 of new business in 2002, as compared to $228 in 2001. Expenses increased $56, or 7%, principally driven by the growth in the business resulting from the Fortis acquisition. In addition, mortality experience (expressed as death claims as a percentage of net amount at risk) for 2002 increased as compared to the prior year, but was in line with management's expectations. Net income increased $12, or 10%. Individual Life incurred an after-tax charge of $3 related to September 11 in the third quarter of 2001. Excluding this charge, Individual Life's earnings increased $9, or 7%, for the year ended December 31, - 30 - 2002, due to the contribution to earnings from the Fortis transaction. 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 2000. 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. Net 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, net income increased $45, or 57%, primarily due to the growth factors described above. OUTLOOK Individual Life sales continue to be impacted by the lower equity markets, uncertainty surrounding estate tax legislation and aggressive competition from universal life providers. However, 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. Additionally, The Hartford continues to introduce new and enhanced products, which are expected to increase universal life sales. - -------------------------------------------------------------------------------- GROUP BENEFITS - --------------------------------------------------------------------------------
OPERATING SUMMARY 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums and other $ 2,327 $ 2,259 $ 1,981 Net investment income 255 248 226 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 2,582 2,507 2,207 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 1,878 1,874 1,643 Insurance operating costs and other expenses 541 498 450 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 2,419 2,372 2,093 -------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 163 135 114 Income tax expense 35 29 24 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 128 $ 106 $ 90 ====================================================================================================================================
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. 2002 COMPARED TO 2001 -- Revenues in the Group Benefits segment increased $75, or 3%, and excluding buyouts, increased $159, or 7%, driven primarily by growth in premiums, which increased $66, or 3%. The growth in premiums was due to an increase of $281, or 14%, in fully insured ongoing premiums, as a result of steady persistency and pricing actions on the in-force block of business and strong sales to new customers. Offsetting this increase was a decrease in military Medicare supplement premiums of $131 resulting from federal legislation effective in the fourth quarter of 2001. This legislation provides retired military officers age 65 and older with full medical insurance paid for by the government, eliminating the need for Medicare supplement insurance. Additionally, premium revenues for 2002 were offset by an $84 decrease in total buyouts. Buyouts involve the acquisition of claim liabilities from another carrier for a purchase price calculated to cover the run off of those liabilities plus administration expenses and profit. Due to the nature of the buyout market place, the predictability of buyout premiums is uncertain. Fully insured ongoing sales were $597, an increase of $66, or 12%. Expenses increased $53, or 2%, and excluding buyouts, increased $137, or 6%. The increase in expenses is consistent with the growth in revenues previously described. Benefits and claims expenses, excluding buyouts, increased $88, or 5%. The segment's loss ratio (defined as benefits, claims and claim adjustment expenses as a percentage of premiums and other considerations, excluding buyouts) was 81% down slightly from 82% in 2001. Insurance operating costs and other expenses increased $43, or 9%, due to the fully insured ongoing premium growth previously described and continued investments in technology and service. The segment's expense ratio of insurance operating costs and other expenses to premiums and other considerations was approximately 23%, consistent with prior year. Net income increased $22, or 21%. Group Benefits incurred an after-tax charge of $2 related to September 11 in the third quarter of 2001. Excluding this charge, earnings increased $20, or 19%, for the year ended December 31, 2002 compared to a year ago. The increase in earnings is due to the increase in premium revenues and favorable loss costs, which was partially offset by increased insurance operating costs and other expenses as previously described. 2001 COMPARED TO 2000 -- Revenues in the Group Benefits segment increased $300, or 14%, driven primarily by growth in - 31 - 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, an increase of $85, or 19%, compared to 2000. 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 ratio has remained relatively consistent compared to the 2000 loss ratio. 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. Net 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, net income increased $18, or 20%. OUTLOOK Employees continue to look to the workplace for a broader and ever expanding array of insurance products. As employers design benefit strategies to attract and retain employees while attempting to control their benefit costs, management believes that the need the Group Benefits segment's products will continue to expand. This, combined with the significant number of employees who currently do not have coverage or adequate levels of coverage, creates unique opportunities for the Group Benefits segment's products and services. Current market conditions, including low interest rates, rising medical costs and cost containment pressure on employers, create a challenging business environment. However, the Company's strength in claim and risk management, service and distribution will enable the Group Benefits segment to continue to capitalize on market opportunities despite the challenging business environment. - -------------------------------------------------------------------------------- CORPORATE OWNED LIFE INSURANCE (COLI) - --------------------------------------------------------------------------------
OPERATING SUMMARY 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Fee income and other $ 316 $ 367 $ 401 Net investment income 276 352 366 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 592 719 767 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 401 514 545 Insurance operating costs and expenses 82 84 102 Dividends to policyholders 62 66 67 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 545 664 714 -------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 47 55 53 Income tax expense 15 18 19 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 32 $ 37 $ 34 -------------------------------------------------------------------------------------------------------------------------- Variable COLI account values $ 19,674 $ 18,019 $ 15,937 Leveraged COLI account values 3,321 4,315 4,978 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ACCOUNT VALUES $ 22,995 $ 22,334 $ 20,915 ====================================================================================================================================
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 passage of the Health Insurance Portability and Accountability Act of 1996 ("HIPAA"), 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. HIPAA 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. 2002 COMPARED TO 2001 -- COLI revenues decreased $127, or 18%, primarily related to lower net investment and fee income due to the declining block of leveraged COLI, where related account values declined by $994, or 23%. Net investment income decreased $76, or 22%, while fee income decreased $50, or 14%. Expenses decreased $122, or 18%, which is relatively consistent with the decrease in revenues described above. However, the decrease was partially offset by $11, after-tax, in accrued litigation expenses related to the Bancorp dispute. (For a discussion of the Bancorp litigation, see Note 16(a) of Notes to Consolidated Financial Statements.) Net income decreased $5, or 14%, compared to prior year. COLI incurred an after-tax charge of $2 related to September 11 in the third quarter of 2001. Excluding the impact of September 11, COLI's net income decreased $7, or 18%, principally due to the $11 after-tax expense accrued in connection with the Bancorp litigation. 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. - 32 - Net 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, net income increased $5, or 15%. 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 has declined in 2002, as compared to 2001. COLI continues to be subject to a changing legislative and regulatory environment that could have a material adverse effect on its business. - -------------------------------------------------------------------------------- PROPERTY & CASUALTY - --------------------------------------------------------------------------------
OPERATING SUMMARY 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 8,114 $ 7,267 $ 7,055 Net investment income 1,075 1,053 1,072 Other revenue [1] 356 363 343 Net realized capital gains (losses) (83) (103) 234 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 9,462 8,580 8,704 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 5,870 6,146 5,253 Amortization of deferred policy acquisition costs 1,613 1,572 1,542 Insurance operating costs and expenses 879 647 677 Goodwill amortization -- 3 5 Other expenses [2] 559 560 543 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 8,921 8,928 8,020 -------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 541 (348) 684 Income tax expense (benefit) 72 (241) 190 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 469 (107) 494 Cumulative effect of accounting change, net of tax [3] -- (8) -- - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) [4] 469 (115) 494 Less: Restructuring charges, net of tax -- (10) -- Cumulative effect of accounting change, net of tax [3] -- (8) -- Loss from early retirement of debt, net of tax -- (8) -- Net realized capital gains (losses), after-tax (54) (75) 65 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME (LOSS) [4] $ 523 $ (14) $ 429 - ------------------------------------------------------------------------------------------------------------------------------------ NORTH AMERICAN PROPERTY & CASUALTY UNDERWRITING RATIOS Loss ratio [5] 59.6 70.3 60.8 Loss adjustment expense ratio [5] 11.2 12.5 11.5 Expense ratio [5] 27.7 29.0 29.7 COMBINED RATIO [5] [6] [7] 99.2 112.4 102.4 ==================================================================================================================================== [1] Primarily servicing revenue. [2] Includes restructuring charges of $15 for the year ended December 31, 2001 and $13 of accelerated amortization of 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 EITF Issue No. 99-20. [4] 2001 includes $420 of after-tax losses related to September 11. [5] For 2001, excluding the impact of September 11, loss ratio was 62.8, loss adjustment expense ratio was 11.4, expense ratio was 28.7 and combined ratio was 103.4. [6] Includes policyholder dividend ratios of 0.7, 0.5, and 0.5 for the years ended December 31, 2002, 2001 (including and excluding the impact of September 11), and 2000, respectively. [7] GAAP combined ratios were 99.8, 112.5 (including a 9.0 point impact related to September 11) and 102.9 for the years ended December 31, 2002, 2001 and 2000, respectively.
2002 COMPARED TO 2001 -- Net income increased $584 primarily due to after-tax losses related to September 11 of $420 in 2001, an increase in operating income as discussed below and a decrease in net realized capital losses. 2001 COMPARED TO 2000 -- Net income decreased $609 primarily due to after-tax losses related to September 11 of $420, an increase in net realized capital losses, and a decrease in operating income as discussed below. In January 2002, Property & Casualty integrated its Affinity Personal Lines and Personal Insurance segments, now reported as Personal Lines. As a result, Property & Casualty is now organized into five reportable operating segments: the North - 33 - American underwriting segments of Business Insurance, Personal Lines, Specialty Commercial and Reinsurance; and the Other Operations segment, which includes substantially all of the Company's asbestos and environmental exposures. 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 allocated to these segments, such as net investment income, net realized capital gains and losses, other expenses including interest and income taxes. RATIOS The previous table and the following segment discussions for the years ended December 31, 2002, 2001 and 2000 include various operating ratios. Management believes that these ratios are useful in understanding the underlying trends in The Hartford's current business. However, these measures should only be used in conjunction with, and not in lieu of, underwriting income and may not be comparable to other performance measures used by the Company's competitors. The "loss ratio" is the ratio of claims expense (exclusive of claim adjustment expenses) to earned premiums. The "loss adjustment expense ratio" represents the ratio of claim adjustment expenses to earned premiums. The "expense ratio" is the ratio of statutory underwriting expenses (commissions; taxes, licenses and fees; as well as other underwriting expenses) to written premiums. The "policyholder dividend ratio" is the ratio of policyholder dividends to earned premiums. The "combined ratio" is the sum of the loss ratio, the loss adjustment expense ratio, the expense ratio and the policyholder dividend ratio. These ratios are relative measurements that describe for every $100 of net premiums earned or written, the cost of losses and statutory expenses, respectively. The combined ratio presents the total cost per $100 of premium production. A combined ratio below 100 demonstrates underwriting profit; a combined ratio above 100 demonstrates underwriting losses. GAAP combined ratios differ from statutory combined ratios primarily due to the deferral and amortization of certain expenses for GAAP reporting purposes and the use of earned premium in the expense ratio rather than written premium. The following is a summary of Property & Casualty operating income, after-tax. Operating income represents after-tax operating results excluding, as applicable, net realized capital gains or losses, losses from early retirement of debt, the cumulative effect of accounting changes and restructuring charges. Operating income is a performance measure used by The Hartford in the management of its operations. Management believes that this performance measure delineates the results of The Hartford's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current business.
2001 ---------------------------------- INCLUDING EXCLUDING (after-tax) 2002 SEPTEMBER 11 SEPTEMBER 11 2000 - ------------------------------------------------------------------------------------------------------------------------------------ North American Underwriting results $ (54) $ (627) $ (207) $ (146) Net investment income 736 722 722 695 Other expenses [1] (163) (115) (115) (137) - ------------------------------------------------------------------------------------------------------------------------------------ NORTH AMERICAN OPERATING INCOME (LOSS) [2] 519 (20) 400 412 Other operations operating income [2] 4 6 6 17 - ------------------------------------------------------------------------------------------------------------------------------------ PROPERTY CASUALTY OPERATING INCOME (LOSS) [2] $ 523 $ (14) $ 406 $ 429 ==================================================================================================================================== [1] Includes interest expense, net servicing income and goodwill amortization. [2] A reconciliation of net income (loss) to operating income (loss) is provided in the preceding table.
Underwriting results are discussed in each of the Business Insurance, Personal Lines, Specialty Commercial and Reinsurance segment sections. Net investment income and net realized capital gains and losses are discussed in the Investments section. (For a further discussion of September 11, see Note 2 of Notes to Consolidated Financial Statements.) 2002 COMPARED TO 2001 -- Operating income, excluding the after-tax $420 impact of September 11, increased $117, or 29%, primarily due to improved underwriting results across each of the North American underwriting segments, particularly in Specialty Commercial and Reinsurance. Partially offsetting the improvement was an increase in other expenses primarily as a result of an increase in e-business research and development expenses and certain employee benefits costs, as well as expenses incurred related to the transfer of the Company's New Jersey personal lines agency auto business to Palisades Safety and Insurance Association and Palisades Insurance Co. 2001 COMPARED TO 2000 -- Operating income, excluding the after-tax $420 impact of September 11, 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. RESERVES As discussed in Notes 1(l), 7 and 16(b) of Notes to Consolidated Financial Statements and in the Critical Accounting Estimates section, reserving for property and casualty losses is an estimation process. As additional experience and other relevant claim data become available, reserve levels are adjusted accordingly. Such adjustments of reserves related to claims incurred in prior years are a natural occurrence in the loss reserving process and are referred to as "reserve development". Reserve development that increases previous estimates of ultimate cost is called "reserve strengthening". Reserve - 34 - development that decreases previous estimates of ultimate cost is called "reserve releases". Reserve development can influence the comparability of year over year underwriting results and are set forth in the paragraphs and tables that follow. Reserve strengthening in the Business Insurance segment for the year ended December 31, 2002 was not significant. In Personal Lines, prior accident year loss and loss adjustment expenses for non-standard auto were strengthened due to heavier than expected frequency, severity and litigation rates on prior accident years. In addition, the prior accident year provision was increased modestly for mold losses. Virtually all of the strengthening in Specialty Commercial is due to deductible workers' compensation losses on a few large accounts. Reserve strengthening in the Reinsurance segment occurred across multiple accident years, primarily 1997 through 2000, and across several lines of business. High reported losses from ceding companies have persisted throughout 2002 and loss ratios have been revised upward. Virtually all of the reserve strengthening in the Other Operations segment related to asbestos. There was little reserve strengthening or weakening by segment in 2001 with the exception of Other Operations, where the strengthening was related almost entirely to non-asbestos and environmental exposures. (For further discussion of reserve activity related to asbestos and environmental, see the Other Operations section of the MD&A.) A rollforward of liabilities for unpaid claims and claim adjustment expenses by segment for Property & Casualty follows:
For the year ended December 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------------ Business Personal Specialty Other Total Insurance Lines Commercial Reinsurance Operations P&C - ------------------------------------------------------------------------------------------------------------------------------------ BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $ 4,440 $ 1,530 $ 5,073 $ 1,956 $ 4,037 $ 17,036 Reinsurance and other recoverables 375 51 2,088 448 1,214 4,176 - ------------------------------------------------------------------------------------------------------------------------------------ BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 4,065 1,479 2,985 1,508 2,823 12,860 - ------------------------------------------------------------------------------------------------------------------------------------ ADD PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Current year 1,943 2,244 820 492 78 5,577 Prior years 19 75 29 77 93 293 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES 1,962 2,319 849 569 171 5,870 - ------------------------------------------------------------------------------------------------------------------------------------ LESS PAYMENTS 1,649 2,155 875 551 359 5,589 Other [1] -- -- -- (300) 300 -- - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 4,378 1,643 2,959 1,226 2,935 13,141 Reinsurance and other recoverables 368 50 2,041 388 1,171 4,018 - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $ 4,746 $ 1,693 $ 5,000 $ 1,614 $ 4,106 $ 17,159 ==================================================================================================================================== [1] $300 represents the transfer of the international lines of the Reinsurance segment to Other Operations.
For the year ended December 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Business Personal Specialty Other Total Insurance Lines Commercial Reinsurance Operations P&C - ------------------------------------------------------------------------------------------------------------------------------------ BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $ 3,954 $ 1,403 $ 5,628 $ 1,416 $ 3,892 $ 16,293 Reinsurance and other recoverables 195 42 2,011 234 1,389 3,871 - ------------------------------------------------------------------------------------------------------------------------------------ BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 3,759 1,361 3,617 1,182 2,503 12,422 - ------------------------------------------------------------------------------------------------------------------------------------ ADD PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Current year 1,944 2,156 897 983 12 5,992 Prior years (10) 17 28 (11) 119 143 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES 1,934 2,173 925 972 131 6,135 - ------------------------------------------------------------------------------------------------------------------------------------ LESS PAYMENTS 1,628 2,055 955 646 308 5,592 Other [1] [2] -- -- (602) -- 497 (105) - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 4,065 1,479 2,985 1,508 2,823 12,860 Reinsurance and other recoverables 375 51 2,088 448 1,214 4,176 - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $ 4,440 $ 1,530 $ 5,073 $ 1,956 $ 4,037 $ 17,036 ==================================================================================================================================== [1] $602 represents the transfer of asbestos and environmental reserves to Other Operations [2] Includes $(101) related to the sale of international subsidiaries.
- 35 -
For the year ended December 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Business Personal Specialty Other Total Insurance Lines Commercial Reinsurance Operations P&C - ------------------------------------------------------------------------------------------------------------------------------------ BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $ 3,913 $ 1,304 $ 5,694 $ 1,330 $ 4,208 $ 16,449 Reinsurance and other recoverables 155 25 1,954 168 1,404 3,706 - ------------------------------------------------------------------------------------------------------------------------------------ BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 3,758 1,279 3,740 1,162 2,804 12,743 - ------------------------------------------------------------------------------------------------------------------------------------ ADD PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Current year 1,492 1,898 857 704 219 5,170 Prior years 14 23 (78) (80) 148 27 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES 1,506 1,921 779 624 367 5,197 - ------------------------------------------------------------------------------------------------------------------------------------ LESS PAYMENTS 1,505 1,839 902 604 484 5,334 Other [1] -- -- -- -- (184) (184) - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 3,759 1,361 3,617 1,182 2,503 12,422 Reinsurance and other recoverables 195 42 2,011 234 1,389 3,871 - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $ 3,954 $ 1,403 $ 5,628 $ 1,416 $ 3,892 $ 16,293 ==================================================================================================================================== [1] Includes $(161) related to the sale of international subsidiaries.
- -------------------------------------------------------------------------------- BUSINESS INSURANCE - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 --------------------------------- INCLUDING EXCLUDING 2002 SEPTEMBER 11 SEPTEMBER 11 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Written premiums $ 3,412 $ 2,871 $ 2,886 $ 2,405 Change in unearned premium reserve 286 241 241 107 - ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 3,126 $ 2,630 $ 2,645 $ 2,298 Benefits, claims and claim adjustment expenses 1,962 1,934 1,704 1,506 Amortization of deferred policy acquisition costs 779 681 681 605 Insurance operating costs and expenses 341 257 257 237 - ------------------------------------------------------------------------------------------------------------------------------------ UNDERWRITING RESULTS $ 44 $ (242) $ 3 $ (50) ------------------------------------------------------------------------------------------------------------------------------- Loss ratio 50.7 59.9 52.3 52.4 Loss adjustment expense ratio 12.0 13.7 12.1 13.1 Expense ratio 31.9 32.3 32.1 33.8 Combined ratio [1] [2] 96.2 107.1 97.8 100.6 ==================================================================================================================================== [1] Includes policyholder dividend ratios of 1.5, 1.3, and 1.3, for the years ended December 31, 2002, 2001 (including and excluding September 11), and 2000, respectively. [2] GAAP combined ratios were 97.0, 108.0 (including a 9.3 point impact related to September 11) and 101.2 for the years ended December 31, 2002, 2001 and 2000, respectively.
Business Insurance provides standard commercial insurance coverage to small and middle market commercial businesses primarily throughout the United States. This segment offers workers' compensation, property, automobile, liability, umbrella and marine coverages. The Business Insurance segment also provides commercial risk management products and services. 2002 COMPARED TO 2001 -- Business Insurance achieved written premium growth of $541 (including $15 of reinsurance cessions related to September 11), or 19%, due to strong growth in both middle market and small commercial. The increase in middle market of $295, or 21%, was due primarily to double-digit pricing increases as well as continued strong new business growth and premium renewal retention. Small commercial increased $231, or 16%, reflecting double-digit written pricing increases, particularly in the property line of business. Business Insurance earned premiums increased $496 (including $15 of reinsurance cessions related to September 11), or 19%, due to strong 2002 and 2001 written pricing increases impacting 2002 earned premiums. Middle market increased $260, or 20%, and small commercial increased $221, or 16%, reflecting double-digit earned pricing increases. Underwriting results improved $286 (including $245 of underwriting loss related to September 11 in 2001), with a corresponding 10.9 point decrease (including a 9.3 point impact related to September 11) in the combined ratio. The improvement in underwriting results and combined ratio, excluding September 11, was primarily due to double-digit earned pricing increases and minimal loss costs. Business Insurance continues to benefit from favorable frequency loss costs. While 2002 catastrophe losses are in line with prior year, the level of catastrophes is below management expectations. In - 36 - addition, the beneficial effects of strong pricing on the underwriting expense ratio have been offset by an increase in taxes, licenses and fees rates, and increased technology spending. 2001 COMPARED TO 2000 -- Written premiums increased $466 (including $15 of reinsurance cessions related to September 11), or 19%, driven by strong growth in small commercial and middle market. Small commercial increased $278, or 24%, as a result of written pricing increases, strong premium renewal retention and the success of product, marketing, technology and service growth initiatives. The increase in middle market of $203, or 16%, was attributable primarily to double-digit pricing increases and improved premium renewal retention as well as strong new business growth. Earned premiums increased $332 (including $15 of reinsurance cessions related to September 11), or 14%, due primarily to strong earned premium growth in both small commercial and middle market. Small commercial increased $252, or 23%, as a result of mid-single digit earned pricing increases, while middle market achieved double-digit earned pricing increases, driving $95, or 8% growth. Underwriting results decreased $192 (including $245 of underwriting loss related to September 11) with a corresponding 6.5 point increase (including a 9.3 point impact related to September 11) in the combined ratio. Excluding the impact of September 11, the improvement in underwriting results and the combined ratio 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 2001 benefits from the field office reorganization and reorganization costs in 2000 not recurring in 2001. OUTLOOK Firming market conditions in the standard commercial sector are expected to continue in 2003, although price competition within many markets of the commercial industry will remain a challenge. Passage of the Terrorism Risk Insurance Act of 2002 alleviates some of the economic uncertainty surrounding the industry in the event of future terrorist attacks. (For further discussion, see Capital Resources and Liquidity section under "Terrorism Risk Insurance Act of 2002".) Management expects the Business Insurance segment to continue to deliver positive results in 2003 despite an expected return to a normal level of catastrophes. Significant growth in small commercial and middle market businesses is expected to be achieved, in part, due to continued strategic actions being implemented. This includes providing a complete product solution for agents and 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 and alliances. Continued pricing and underwriting actions are expected to have a positive impact on the segment's overall profitability in 2003. - -------------------------------------------------------------------------------- PERSONAL LINES - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 --------------------------------- INCLUDING EXCLUDING 2002 SEPTEMBER 11 SEPTEMBER 11 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Written premiums $ 3,050 $ 2,860 $ 2,860 $ 2,647 Change in unearned premium reserve 66 113 113 100 - ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 2,984 $ 2,747 $ 2,747 $ 2,547 Benefits, claims and claim adjustment expenses 2,319 2,173 2,164 1,921 Amortization of deferred policy acquisition costs 415 385 385 377 Insurance operating costs and expenses 296 276 276 247 - ------------------------------------------------------------------------------------------------------------------------------------ UNDERWRITING RESULTS $ (46) $ (87) $ (78) $ 2 ------------------------------------------------------------------------------------------------------------------------------- Loss ratio 66.1 67.4 67.2 64.7 Loss adjustment expense ratio 11.6 11.7 11.6 10.8 Expense ratio 23.0 24.0 24.0 24.6 Combined ratio [1] 100.8 103.1 102.8 100.1 Other revenue [2] $ 123 $ 150 $ 150 $ 166 ==================================================================================================================================== [1] GAAP combined ratios were 101.0, 102.7 (including a 0.3 point impact related to September 11) and 99.6 for the years ended December 31, 2002, 2001 and 2000, respectively. [2] Represents servicing revenue.
Personal Lines provides automobile, homeowners' and home-based business coverages to the members of AARP through a direct marketing operation; to individuals who prefer local agent involvement through a network of independent agents in the standard personal lines market ("Standard") and in the non-standard automobile market through the Company's Omni Insurance Group, Inc. ("Omni") subsidiary. 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. 2002 COMPARED TO 2001 -- Personal Lines written premiums increased $190, or 7%, primarily driven by growth in AARP, partially offset by a reduction in Standard. AARP increased $217, or 13%, primarily as a result of written pricing increases and improved premium renewal retention. Standard decreased $27, or 3%, due primarily to the conversion to six-month policies in certain states. - 37 - Earned premiums increased $237, or 9%, due primarily to growth in AARP and Standard. AARP increased $187, or 12%, and Standard increased $30, or 4%, due primarily to earned pricing increases. Underwriting results improved $41 (including $9 of underwriting loss related to September 11), with a corresponding 2.3 point decrease (including a 0.3 point impact related to September 11) in the combined ratio. While automobile results improved due to favorable frequency loss costs, the line of business was negatively impacted by the increasing severity of automobile claims as a result of medical inflation and higher repair costs. The underwriting experience relating to homeowners has remained favorable due to improved frequency of claims, despite an increase in the severity of individual homeowners' claims. An improvement in the underwriting expense ratio, primarily due to written pricing increases and prudent expense management, resulted in a 1.0 point decrease in the expense ratio over the prior year. 2001 COMPARED TO 2000 -- Written premiums increased $213, or 8%, driven by growth in both the AARP program and Standard. AARP increased primarily as a result of strong new business growth and continued steady premium renewal retention. Written premium growth in the standard automobile and homeowners lines was primarily due to pricing increases and strong premium renewal retention. Earned premiums increased $200, or 8%, driven by growth in AARP and Standard. AARP increased $113, or 8%, and Standard increased $50, or 7%, due primarily to earned pricing increases. Underwriting results decreased $89 (including $9 of underwriting loss related to September 11), with a corresponding 3.0 point increase (including a 0.3 point impact related to September 11) 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 as compared to the prior year, primarily as a result of lower commissions and prudent expense management. OUTLOOK While the personal lines industry operating fundamentals are expected to improve in 2003, the market will continue to face significant challenges. Price increases in automobile and homeowners are expected to continue, but industry rates may remain inadequate. State regulatory constraints may prevent companies from obtaining the necessary rates. Regulatory requirements applying to premium rates vary from state to state, and, in most states, rates are subject to prior regulatory approval. Industry loss costs are expected to continue to increase in 2003, but pricing is expected to exceed loss cost inflation. The deterioration in loss performance since 2000 has been driven primarily by severity loss costs. Issues surrounding mold and medical inflation may continue to impact loss performance in Personal Lines. The Personal Lines segment is focused on managing premium growth to optimize earnings, while investing to enhance its product and technology platforms. Improved financial results in 2003 are expected for the Personal Lines segment as a result of continuing state-driven pricing and underwriting actions, even though catastrophes are expected to return to a normal level. Personal Lines' product breadth, channel diversity and technology position this segment to deal effectively with the market risks that face the personal lines industry. - -------------------------------------------------------------------------------- SPECIALTY COMMERCIAL - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 --------------------------------- INCLUDING EXCLUDING 2002 SEPTEMBER 11 SEPTEMBER 11 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Written premiums $ 1,362 $ 989 $ 996 $ 1,080 Change in unearned premium reserve 140 (33) (33) 46 - ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 1,222 $ 1,022 $ 1,029 $ 1,034 Benefits, claims and claim adjustment expenses 849 925 766 779 Amortization of deferred policy acquisition costs 240 267 267 268 Insurance operating costs and expenses 156 92 91 90 - ------------------------------------------------------------------------------------------------------------------------------------ UNDERWRITING RESULTS $ (23) $ (262) $ (95) $ (103) ------------------------------------------------------------------------------------------------------------------------------- Loss ratio 57.6 73.1 59.5 60.4 Loss adjustment expense ratio 11.8 17.6 15.0 15.1 Expense ratio 27.9 33.8 33.4 31.3 Combined ratio [1] [2] 98.1 124.8 108.3 107.1 Other revenue [3] $ 233 $ 213 $ 213 $ 168 ==================================================================================================================================== [1] Includes policyholder dividend ratios of 0.7, 0.4, and 0.2, for the years ended December 31, 2002, 2001 (including and excluding the impact of September 11), and 2000, respectively. [2] GAAP combined ratios were 99.4, 124.2 (including a 16.5 point impact related to September 11) and 109.7 for the years ended December 31, 2002, 2001 and 2000, respectively. [3] Represents servicing revenue.
- 38 - Specialty Commercial offers a variety of customized insurance products and risk management services. The segment provides standard commercial insurance products including workers' compensation, automobile and liability coverages to large-sized companies. Specialty Commercial also provides bond, professional liability, specialty casualty and agricultural coverages, as well as core property and excess and surplus lines coverages not normally written by standard lines insurers. Alternative markets, within Specialty Commercial, provides insurance products and services primarily to captive insurance companies, pools and self-insurance groups. In addition, Specialty Commercial provides third party administrator services for claims administration, integrated benefits, loss control and performance measurement through Specialty Risk Services. 2002 COMPARED TO 2001 -- Specialty Commercial written premiums increased $373 (including $7 of reinsurance cessions related to September 11), or 38%, primarily driven by the property, specialty casualty and professional liability lines of business. Written premiums for property grew $121, or 43%, while specialty casualty grew $114, or 55%, both primarily due to significant price increases and new business growth reflecting an improving operating environment. Professional liability written premiums grew $71, or 42%, also due to significant price increases. Earned premiums increased $200 (including $7 of reinsurance cessions related to September 11), or 20%, primarily driven by robust earned premium growth in property of $65, or 23%, specialty casualty of $73, or 35%, and professional liability of $83, or 71%, as a result of double-digit earned pricing increases. Underwriting results improved $239 (including $167 of underwriting loss related to September 11), with a corresponding 26.7 point decrease (including a 16.5 point impact related to September 11) in the combined ratio. The improvement in underwriting results and combined ratio, excluding September 11, was primarily due to favorable property, specialty casualty and professional liability results, as a result of the favorable pricing environment. Increased losses incurred in agriculture, due to the Midwest drought; the risk management division, due to deductible workers' compensation losses on a few large accounts; and bond partially mitigated the improvement. In addition, the underwriting expense ratio improved primarily due to pricing increases and prudent expense management. Lower catastrophes, primarily as a result of the Seattle earthquake in the first quarter of 2001, also contributed to the improvement in underwriting results. 2001 COMPARED TO 2000 -- Written premiums decreased $91 (including $7 of reinsurance cessions related to September 11), 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. Earned premiums declined $12 (including $7 of reinsurance cessions related to September 11), or 1%, primarily due to a decrease in earned premiums from the sold or exited business lines referred to above. Partially offsetting the decrease was an increase in earned premiums due to The Hartford's purchase of the financial products and excess and surplus lines businesses of Reliance mentioned above, which resulted in $74 of additional earned premiums as compared with 2000. Underwriting results decreased $159 (including $167 of underwriting loss related to September 11), with a corresponding 17.7 point increase (including a 16.5 point impact related to September 11) in the combined ratio. Excluding the impact of September 11, underwriting results improved despite an 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 were 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 net commissions 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. OUTLOOK Specialty Commercial is made up of a diverse group of businesses that are unique to commercial lines. Each line of business operates independently with its own set of business objectives and focuses on the operational dynamics of its specific industry. These businesses, while somewhat interrelated, each have a unique business model and operating cycle. Firming market conditions in most of the specialty commercial sectors are expected to continue in 2003. Passage of the Terrorism Risk Insurance Act of 2002 alleviates some of the economic uncertainty surrounding the industry in the event of future terrorist attacks. (For further discussion, see the Capital Resources and Liquidity section under "Terrorism Risk Insurance Act of 2002".) Strong written pricing in 2002 will contribute to earned premium growth expected in 2003. Management believes that continued strategic actions being taken, which include focusing on maximizing growth in the segment's most profitable lines; providing innovative new products; expanding non-traditional distribution alternatives; and further leveraging underwriting discipline and capabilities will continue to enable the segment to capitalize on an improved marketplace. - 39 - - -------------------------------------------------------------------------------- REINSURANCE - --------------------------------------------------------------------------------
OPERATING SUMMARY 2001 --------------------------------- INCLUDING EXCLUDING 2002 SEPTEMBER 11 SEPTEMBER 11 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Written premiums $ 703 $ 849 $ 918 $ 826 Change in unearned premium reserve (10) (2) (2) 17 - ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 713 $ 851 $ 920 $ 809 Benefits, claims and claim adjustment expenses 569 972 815 624 Amortization of deferred policy acquisition costs 179 239 239 243 Insurance operating costs and expenses 24 15 15 15 - ------------------------------------------------------------------------------------------------------------------------------------ UNDERWRITING RESULTS $ (59) $ (375) $ (149) $ (73) ------------------------------------------------------------------------------------------------------------------------------- Loss ratio 74.9 108.9 83.7 72.7 Loss adjustment expense ratio 4.9 5.3 4.9 4.4 Expense ratio 27.2 29.7 27.4 31.7 Combined ratio [1] 107.1 143.9 116.1 108.9 ==================================================================================================================================== [1] GAAP combined ratios were 107.9, 144.0 (including a 27.8 point impact related to September 11) and 109.0 for the years ended December 31, 2002, 2001 and 2000, respectively.
The Reinsurance segment offers a full range of treaty and facultative reinsurance products including property, casualty, catastrophe, marine and alternative risk transfer which includes non-traditional reinsurance products such as multi-year property catastrophe treaties, aggregate of excess of loss agreements and quota share treaties with event or aggregate loss ratio caps. The segment assumes insurance from other insurers, primarily through reinsurance brokers, but also through direct channels and pools in the worldwide reinsurance market. 2002 COMPARED TO 2001 -- Reinsurance written premiums decreased $146 (including $69 of reinsurance cessions related to September 11), or 17%, and earned premiums decreased $138 (including $69 related to September 11), or 16%, due to the exclusion of the exited international business, which in January 2002, was transferred to Other Operations and a reduction in the Alternative Risk Transfer ("ART") line of business. Written and earned premiums from the international business in 2001 were $131 and $136, respectively. ART written and earned premiums decreased $97, or 53%, and $94, or 51%, respectively, due primarily to the expiration of a non-recurring loss portfolio reinsurance contract and the non-renewal of a quota share treaty with one ceding company. Excluding ART, international and the impact of September 11, written premiums increased $13, or 2%, and earned premiums increased $23, or 4%, due primarily to significant pricing increases as a result of continued market firming, substantially offset by premium reductions due to underwriting requirements to maintain profitability targets. Underwriting results improved $316 (including $226 of underwriting loss related to September 11), with a corresponding 36.8 point decrease (including a 27.8 point impact related to September 11) in the combined ratio. The improvement in underwriting results and combined ratio, excluding September 11, was primarily due to underwriting initiatives including a shift to excess of loss policies and increased property business mix, as well as the exit from nearly all international lines, an intense focus on returns and lower catastrophes. Underwriting results and the combined ratio were negatively impacted by adverse loss development on prior underwriting years. 2001 COMPARED TO 2000 -- Written premiums increased $23 (including $69 of reinsurance cessions related to September 11), or 3%, and earned premiums increased $42 (including $69 related to September 11), or 5%, primarily due to growth in the ART line of business. ART written and earned premiums increased $91, or 100%, and $98, or 111%, respectively, driven primarily by a significant first quarter ART transaction. The achievement of double-digit pricing increases in traditional reinsurance was offset by the termination of business that failed to meet profitability targets. Underwriting results decreased $302 (including $226 of underwriting loss related to September 11), with a corresponding 35.0 point increase (including a 27.8 point impact related to September 11) in the combined ratio. Excluding September 11, the decrease in underwriting results and corresponding increase in the combined ratio were primarily attributable to reserve development in 2001 compared to 2000. OUTLOOK The property and casualty reinsurance market remains extremely competitive and stressed. The pricing environment continued to improve in 2002, and it is anticipated by management that favorable rates and terms will continue in 2003. Reserve deficiencies, low investment yields and poor historical performance are driving a renewed focus on profitability. The marketplace is also experiencing a flight to quality as customers pay more for reinsurance. Additionally, terrorism remains a key underwriting issue. Terrorism losses incurred by reinsurers are not covered by the Terrorism Risk Insurance Act of 2002. The dislocation of certain broker market competitors continues in the aftermath of September 11. In addition, some companies are raising capital, while others are reviewing their strategic options. New Bermuda companies are emerging with a greater share of the overall market. This will continue to put pressure on industry rates and terms. - 40 - - -------------------------------------------------------------------------------- OTHER OPERATIONS (INCLUDING ASBESTOS AND ENVIRONMENTAL CLAIMS) - --------------------------------------------------------------------------------
OPERATING SUMMARY 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Earned premiums $ 69 $ 17 $ 367 Net investment income 147 146 210 Other revenue -- -- 9 Net realized capital gains (losses) (27) 5 16 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 189 168 602 -------------------------------------------------------------------------------------------------------------------------- Benefits, claims and claim adjustment expenses 171 142 423 Amortization of deferred policy acquisition costs -- -- 49 Insurance operating costs and expenses 62 7 88 Other expenses (25) 5 7 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 208 154 567 -------------------------------------------------------------------------------------------------------------------------- INCOME (LOSS) BEFORE INCOME TAXES (19) 14 35 Income tax expense (benefit) (6) 4 7 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) (13) 10 28 Less: Net realized capital gains (losses), after-tax (17) 4 11 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 4 $ 6 $ 17 ====================================================================================================================================
The Other Operations segment includes operations that are under a single management structure, Heritage Holdings, that was finalized in late 2001 to be responsible for two related activities. The first activity is the management of certain subsidiaries and operations of The Hartford that have discontinued writing new business. The second is the management of claims (and the associated reserves) related to asbestos and environmental exposures. The companies in this segment which are not writing new business include First State Insurance Company and two affiliated subsidiaries, located in Boston, Massachusetts; Heritage Reinsurance Company, Ltd. ("Heritage Re"), headquartered in Bermuda; and Excess Insurance Company, Ltd., located in the United Kingdom. Each of these companies is primarily focused on managing claims, resolving disputes and collecting reinsurance proceeds, related largely to business underwritten and reinsured in 1985 and prior years. While the business that was written in these units on either a direct or reinsurance basis spanned a wide variety of insurance and reinsurance policies and coverages, a significant and increasing proportion of current and future claims activity arising from these businesses relates to environmental and, to a greater extent, asbestos exposures. Other Operations also includes the results of The Hartford's international property-casualty businesses (substantially all of which were disposed of in a series of transactions concluding in 2001) and the international businesses of the Reinsurance segment, exited in the fourth quarter of 2001. (For further discussion of the restructuring, see Note 18(c) of Notes to Consolidated Financial Statements.) In 2001, The Hartford consolidated management and claims handling of all of its asbestos and environmental exposures under the Other Operations' management structure. This action was taken to maximize The Hartford's management expertise in this area. As part of this organizational change, the Company consolidated substantially all of its asbestos and environmental loss reserves into one legal entity, Heritage Re, within Other Operations through intercompany reinsurance agreements. These reinsurance agreements ceded $602 of the then carried reserves (net of reinsurance), primarily related to asbestos and environmental exposures from 1985 and prior, from the Specialty Commercial segment to Other Operations. 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 that was reported in the 2001 investment results of North American. On December 22, 2000, The Hartford completed the sale of its Netherlands-based Zwolsche Algemeene N.V. ("Zwolsche") subsidiary 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 that was reported in the 2000 investment results of North American. 2002 COMPARED TO 2001 -- Revenues for the year increased $21 due to earned premium, offset by net realized capital losses. The increase in earned premium was primarily due to runoff premium from the exited international business of the Reinsurance segment, which was transferred to Other Operations in January 2002. Operating income was relatively flat compared to the prior year period. 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. Asbestos and Environmental Claims The Hartford continues to receive asbestos and environmental claims, both of which affect Other Operations. These claims are made pursuant to several different categories of insurance - 41 - coverage. First, The Hartford wrote direct policies as a primary liability insurance carrier. Second, The Hartford wrote direct excess insurance policies providing additional coverage for insureds that exhaust their primary liability insurance coverage. Third, The Hartford acted as a reinsurer assuming a portion of risks previously assumed by other insurers writing primary, excess and reinsurance coverages. Fourth, The Hartford participated as a London Market company that wrote both direct insurance and assumed reinsurance business. With regard to both environmental and particularly asbestos claims, significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related settlement expenses. Conventional reserving techniques cannot reasonably estimate the ultimate cost of these claims, particularly during periods where theories of law are in flux. As a result of the factors discussed in the following paragraphs, the degree of variability of reserve estimates for these exposures is significantly greater than for other more traditional exposures. In particular, The Hartford believes there is a high degree of uncertainty inherent in the estimation of asbestos loss reserves. In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate development patterns, plaintiffs' expanding theories of liability, the risks inherent in major litigation and inconsistent emerging legal doctrines. Courts have reached inconsistent conclusions as to when losses are deemed to have occurred and which policies provide coverage; what types of losses are covered; whether there is an insurer obligation to defend; how policy limits are determined; whether particular claims are product/completed operation claims subject to an aggregate limit and how policy exclusions and conditions are applied and interpreted. Furthermore, insurers in general, including The Hartford, have recently experienced an increase in the number of asbestos-related claims due to, among other things, more intensive advertising by lawyers, seeking asbestos claimants, plaintiffs' increased focus on new and previously peripheral defendants and an increase in the number of insureds seeking bankruptcy protection as a result of asbestos-related liabilities. Plaintiffs and insureds have sought to use bankruptcy proceedings to accelerate and increase loss payments by insurers. In addition some policyholders have begun to assert new classes of claims for so called "non-product" coverages to which an aggregate limit of liability may not apply. Recently, many insurers, including, in a limited number of instances, The Hartford, also have been sued directly by asbestos claimants asserting that insurers had a duty to protect the public from the dangers of asbestos. Management believes these issues are not likely to be resolved in the near future. In the case of the reserves for environmental exposures, factors contributing to the high degree of uncertainty include: court decisions that have interpreted the insurance coverage to be broader than originally intended; inconsistent decisions, especially across jurisdictions and uncertainty as to the monetary amount being sought by the claimant from the insured. Further uncertainties include the effect of the recent acceleration in the rate of bankruptcy filings by asbestos defendants on the rate and amount of The Hartford's asbestos claims payments; a further increase or decrease in asbestos and environmental claims which cannot now be anticipated; whether some policyholders' liabilities will reach the umbrella or excess layer of their coverage; the resolution or adjudication of some disputes pertaining to the amount of available coverage for asbestos claims in a manner inconsistent with The Hartford's previous assessment of these claims; the number and outcome of direct actions against The Hartford; and unanticipated developments pertaining to The Hartford's ability to recover reinsurance for asbestos and environmental claims. It is also not possible to predict changes in the legal and legislative environment and their impact on the future development of asbestos and environmental claims. Additionally, the reporting pattern for excess insurance and reinsurance claims is much longer than direct claims. In many instances, it takes months or years to determine that the customer's own obligations have been met and how the reinsurance in question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to the uncertainty of estimating the related reserves. Given the factors and emerging trends described above, The Hartford believes the actuarial tools and other techniques it employs to estimate the ultimate cost of claims for more traditional kinds of insurance exposure are less precise in estimating reserves for its asbestos and environmental exposures. The Hartford continually evaluates new information and new methodologies in assessing its potential asbestos exposures. At any time, The Hartford may be conducting an analysis of newly identified information. Completion of exposure analyses could cause The Hartford to change its estimates of its asbestos and environmental reserves and the effect of these changes could be material to the Company's consolidated operating results, financial condition and liquidity. Reserve Activity Reserves and reserve activity in the Other Operations segment are categorized and reported as asbestos, environmental or "all other" activity. The discussion below relates to reserves and reserve activity, net of applicable reinsurance. There are a wide variety of claims that drive the reserves associated with asbestos, environmental and all other categories the Company has defined in Other Operations. Asbestos claims relate primarily to bodily injuries asserted by those who came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs. The all other category of reserves covers a wide range of insurance coverages, including liability for breast implants, blood products, construction defects and lead paint. The Other Operations historic book of business contains policies written from the 1940s to 1992, with the majority of the business spanning the interval 1960 to 1990. The Hartford's experience has been that this book of business has over time produced significantly higher claims and losses than were contemplated at inception. The areas of active claim activity have also shifted based on changes in plaintiff focus and the overall litigation environment. A significant portion of the claim reserves of the Other Operations segment relates to exposure to the insurance businesses of other insurers or reinsurers ("whole account" exposure). Many of these whole account exposures arise from reinsurance agreements previously written by The Hartford. The Hartford's net exposure in these arrangements has increased for a variety of reasons including - 42 - The Hartford's commutation of previous retrocessions of such business. Due to the reporting practices of cedants to their reinsurers, determination of the nature of the individual risks involved in these whole account exposures (such as asbestos, environmental, or other exposures) requires various assumptions and estimates, which are subject to uncertainty, as previously discussed. Consistent with the Company's long-standing reserving practices, The Hartford will continue to regularly review and monitor these reserves and, where future developments indicate, make appropriate adjustments to the reserves. The loss reserving assumptions, drawn from both industry data and the Company's experience, have over time been applied to all of this business and have resulted in strengthening or weakening actions at various times over the past decade. During 2001, the Company observed a decrease in newly reported environmental claims as well as favorable settlements with respect to certain existing environmental claims. Both observations were consistent with longer-term positive trends for environmental liabilities. In the same period, consistent with the reports of other insurers, The Hartford experienced an increase in the number of new asbestos claims by policyholders not previously identified as potentially significant claimants, including installers or handlers of asbestos-containing products. In addition, new classes of claims were beginning to arise whereby some policyholders were asserting that their asbestos-related claims fall within so-called "non-products" coverage contained within their policies rather than products hazard coverage and that the claimed non-products coverage was not subject to any aggregate limit. Also, as previously noted, The Hartford consolidated management and claims handling responsibility of all of its asbestos and environmental exposures within Other Operations in 2001. Based on a review of the environmental claim trends that was completed in the fourth quarter of 2001 under the supervision of the then newly consolidated management structure and in light of the further uncertainties posed by the foregoing asbestos trends, the Company reclassified $100 of environmental reserves to asbestos reserves. During 2002, as part of the Company's ongoing monitoring of reserves, the Company reclassified $600 of reserves from the all other reserve category, of which $540 was reclassified to asbestos and $60 was reclassified to environmental claim reserves. The increase in reserves categorized as environmental of $60 (as contrasted with the $100 decrease in the fourth quarter of 2001) occurred because the reviews in each of the two periods employed actuarial techniques to analyze distinct and non-overlapping blocks of reserves and associated exposures. Facts and circumstances associated with each block determined the resulting changes in category. A portion of the 2002 reclassification relates to re-estimates of the appropriate allocation among the asbestos, environmental and all other categories of the aggregate reserves (net of reinsurance) carried for certain assumed reinsurance, commuted cessions and commuted retrocessions of whole account business. As part of the 2002 reclassification, The Hartford also revised formulas that it will use to allocate (among the asbestos, environmental and all other categories) future claim payments for which reinsurance arrangements were commuted and to allocate claim payments made to effect commutations. As a result of these revisions, payments categorized as asbestos and environmental exposures will be higher in future periods than in prior periods. Approximately $390 of the $600 reclassification resulted from changes in the estimates of the proportions of certain of the Company's broad-based liability and assumed reinsurance reserves that would more appropriately be categorized as asbestos or environmental reserves. The change in allocation did not involve a change in The Hartford's estimated net liability with respect to the policies in question. Instead, the Company's estimate of what type of claims the insured would present against these liabilities changed. To give an example: when the Company writes a broad reinsurance contract for another insurer, it gives the insurer the right to submit a variety of different types of claims, up to a limit, against that policy. The Company establishes a reserve for that policy that considers the exposure for total incurred claims under that policy. Over time, the Company changes its view as to what type of claims may be presented, but its aggregate liability and appropriate reserve are less likely to change, particularly if the reserves are already at the limit payable under the policy. The foregoing $390 reduction of the all other reserves was related to the Company's assessment of trends that suggested noteworthy changes in the claims made against these reserves. These trends indicated that the categories of claims presented were becoming better defined. In response to these noted trends, management decided to study whether sufficient information existed to change estimates of what portions of certain reserves were likely to be used for asbestos and environmental claims. This study was completed in the second quarter of 2002. On a net basis, it resulted in approximately $60 of reserves being categorized as likely to be associated with an environmental claim and approximately $330 as likely to be associated with an asbestos claim. This resulted in a reclassification of $390 of reserves previously categorized in the all other category to the asbestos and environmental reserves categories, respectively. In the 2000 review of non-asbestos or non-environmental latent exposures, the Company noted that business written from 1986 to 1992 has produced less mass tort development over the ensuing 10-15 years than was the case for the business written from 1960 to 1986. At the time of this review, the Company developed an estimated actuarial range that indicated there could be a potential reserve deficiency but there was also a strong potential for reserve redundancy. At that time, the Company concluded that there was insufficient foundation to make a determination of redundancy and that to do so would be aggressive. In the second quarter 2002, The Hartford also completed a separate but related study of liabilities other than asbestos and environmental exposures in Other Operations. The study confirmed a continuation of the trends previously noted. It also produced a conservative end of the actuarial range indicating no material potential deficiency. With this new information, the Company felt sufficient foundation existed to estimate a redundancy of approximately $210 for reserves covering latent exposures in Other Operations other than asbestos and environmental. While the Company was conducting the foregoing studies, the Company was also monitoring the continued adverse trends in the reporting and settlement of asbestos claims. In light of these trends, which management believed likely to continue, - 43 - management decided to increase the Company's reserves for asbestos liability by approximately $210. The following table presents reserve activity, inclusive of estimates for both reported and incurred but not reported claims, net of reinsurance, for Other Operations, categorized by asbestos, environmental and all other claims, for the years ended December 31, 2002, 2001 and 2000. Also included are the remaining asbestos and environmental exposures of North American.
OTHER OPERATIONS CLAIMS AND CLAIM ADJUSTMENT EXPENSES 2002 Asbestos Environmental All Other Total - ------------------------------------------------------------------------------------------------------------------------------------ Beginning liability - net $ 616 $ 654 $ 1,591 $ 2,861 Claims and claim adjustment expenses incurred 88 (11) 89 166 Claims and claim adjustment expenses paid (126) (112) (137) (375) Transfer of international lines of Reinsurance [1] -- -- 300 300 Other [2] 540 60 (600) -- - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITY - NET [3] [4] $ 1,118 $ 591 $ 1,243 $ 2,952 ==================================================================================================================================== 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Beginning liability - net [5] $ 572 $ 911 $ 1,753 $ 3,236 Claims and claim adjustment expenses incurred 28 15 116 159 Claims and claim adjustment expenses paid (84) (172) (176) (432) Other [2] [6] 100 (100) (102) (102) - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITY - NET [3] [4] $ 616 $ 654 $ 1,591 $ 2,861 ==================================================================================================================================== 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Beginning liability - net [5] $ 625 $ 995 $ 1,976 $ 3,596 Claims and claim adjustment expenses incurred 8 8 368 384 Claims and claim adjustment expenses paid (61) (92) (430) (583) Other [6] -- -- (161) (161) - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITY - NET [3] [4] $ 572 $ 911 $ 1,753 $ 3,236 ==================================================================================================================================== [1] Represents the January 1, 2002 transfer of reserves from the exited international reinsurance business from the Reinsurance segment to Other Operations. [2] The nature of these reallocations is described in the preceding discussions. [3] Ending liabilities include reserves for asbestos, environmental and all other reported in North American Property & Casualty of $13, $4 and $0, respectively, as of December 31, 2002, $6, $32 and $0, respectively, as of December 31, 2001, and $236, $430 and $67, respectively, as of December 31, 2000. [4] Gross of reinsurance, reserves for asbestos and environmental were $1,994 and $682, respectively, as of December 31, 2002, $1,633 and $919, respectively, as of December 31, 2001 and $1,506 and $1,483, respectively, as of December 31, 2000. [5] The net beginning liability has been adjusted to reflect the North American liabilities subject to the fourth quarter 2001 intercompany reinsurance cession, primarily related to asbestos and environmental reserves, from the Specialty Commercial segment to Other Operations. Also, excludes reserves of Property & Casualty's international businesses. [6] Includes the net effect of the sale of international subsidiaries.
In comparing environmental claims and claim adjustment expenses paid from year to year, 2001 includes $56 of payments resulting from a global commutation where settlement was reached on both assumed and ceded reinsurance involvements. The trend in all other paid losses, when adjusted for the 2002 inclusion of HartRe international paids of $62, continues to decline year to year. Trends in asbestos paids and incurreds are addressed in the paragraphs preceding the table. The $11 negative incurred of environmental reserve development in 2002 is the result of continued favorable trends in environmental claims, as previously discussed. The Company manages its asbestos and environmental claims in three distinct categories of coverage types as reported in the following table. Direct policies include insurance policies issued to customers providing either primary coverage or excess of loss coverage over either The Hartford's own primary policies or the primary policies of other insurance companies. Assumed Reinsurance includes both "treaty" reinsurance (covering broad categories of claims or blocks of business) and "facultative" reinsurance (covering specific risks or individual policies of primary or excess insurance companies). London Market business includes the business written by one or more subsidiaries in the United Kingdom, which are no longer active in the insurance or reinsurance business. Such business includes both direct insurance and contracts of assumed reinsurance. Exposures on direct policies are the easiest to identify because specific policies can be associated with specific accounts and reserves established, where appropriate, for claims presented. Over the last three years, including the current reporting period, the Company experienced a reduction in newly reported environmental claims on Direct business, and actual claim payments have been made at levels within the Company's previously established provisions for loss. However, with respect to asbestos claims, the Company experienced a variety of negative trends, including: increasing number of policyholders making claims, an apparent increase in the number of claimants under such policies and an accelerated rate of policyholder bankruptcies. The combination of such events has the total value of potential claims higher into the excess - 44 - layers of the Company's policies and into later years of coverage than had been expected. Assumed Reinsurance claims (treaty and facultative) related to asbestos and environmental exposures continue to be reported by customers years after the expiration of their contracts with the Company. The reports the Company has received during 2002 are largely related to asbestos and environmental claims and reflect the same trends as those of the Direct policies, as previously discussed. The asbestos and environmental liability components of the London Market book of business consist of both direct policies of insurance and contracts of assumed reinsurance. As a participant in the London Market (comprised of both Lloyd's of London and London Company Markets), the Company wrote business on a subscription basis, with the Company's involvement being limited to a relatively small percentage of a total contract placement. Claims are reported, via a broker, to the "lead" underwriter and, once agreed to, are presented to the following markets for concurrence. This reporting and claim agreement process makes estimating liabilities for this business the most uncertain of the three categories of claims (Direct, Assumed - Domestic and London Market). Over the last three years, The Hartford has been experiencing lower than previously expected claim activity with respect to claims classified as environmental. During the last two years, The Hartford has been experiencing higher than previously expected claim activity with respect to claims classified as asbestos. The increase in both the number of claims being submitted and the number of customer bankruptcies, being driven by asbestos related issues, have accelerated over the last year. The following table sets forth, for the three years ended December 31, 2002, paid and incurred loss activity by the three categories of claims for asbestos and environmental. The table shows that in this timeframe asbestos payments and incurred losses have been increasing, while environmental activity generally has been improving.
PAID AND INCURRED LOSS AND LOSS ADJUSTMENT EXPENSE ("LAE") DEVELOPMENT - ASBESTOS AND ENVIRONMENTAL ASBESTOS ENVIRONMENTAL -------------------------------------- ------------------------------------ Paid Incurred Paid Incurred 2002 Loss & LAE Loss & LAE Loss & LAE Loss & LAE - ------------------------------------------------------------------------------------------------------------------------------------ GROSS Direct $ 212 $ 559 $ 124 $ (9) Assumed - Domestic 66 89 15 (39) London Market 35 26 24 (26) - ------------------------------------------------------------------------------------------------------------------------------------ Total 313 674 163 (74) Ceded (187) (46) (51) 123 - ------------------------------------------------------------------------------------------------------------------------------------ Net $ 126 $ 628 $ 112 $ 49 ==================================================================================================================================== 2001 - ------------------------------------------------------------------------------------------------------------------------------------ GROSS Direct $ 173 $ 329 $ 148 $ (247) Assumed - Domestic 61 63 68 (65) London Market 31 -- 36 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total 265 392 252 (312) Ceded (181) (264) (80) 227 - ------------------------------------------------------------------------------------------------------------------------------------ Net $ 84 $ 128 $ 172 $ (85) ==================================================================================================================================== 2000 - ------------------------------------------------------------------------------------------------------------------------------------ GROSS Direct $ 181 $ 163 $ 92 $ 15 Assumed - Domestic 25 35 15 -- London Market 21 1 34 -- - ------------------------------------------------------------------------------------------------------------------------------------ Total 227 199 141 15 Ceded (166) (191) (49) (7) - ------------------------------------------------------------------------------------------------------------------------------------ Net $ 61 $ 8 $ 92 $ 8 ====================================================================================================================================
OUTLOOK As previously noted, The Hartford reviews various components of its asbestos and environmental reserves on a periodic basis. Given the continuing adverse development experienced by The Hartford, as well as the negative trends that the insurance industry as a whole has recently seen with respect to asbestos, it was determined that a more in-depth and comprehensive review was necessary. In January 2003, The Hartford announced a comprehensive ground-up study of its asbestos related exposures, and expects the study to be completed by the second quarter 2003. This study will accomplish three objectives: (1) provide a ground-up framework to evaluate the Company's overall asbestos exposure, (2) accumulate the detailed information necessary to provide even more detailed disclosures of the components of asbestos reserves, and (3) evaluate the Company's exposures in relation to current reserve levels. - 45 - - -------------------------------------------------------------------------------- INVESTMENTS - -------------------------------------------------------------------------------- General - ------- The Hartford's investment portfolios are divided between Life and Property & Casualty. The investment portfolios are managed based on the underlying characteristics and nature of each operation's respective liabilities and within established risk parameters. (For a further discussion of 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. Return on general account 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 16%, 17% and 19% of the Company's consolidated revenues for the years ended December 31, 2002, 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 90% and 86% of the fair value of its invested assets as of December 31, 2002 and 2001, 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 2% and 3% of the fair value of its invested assets as of December 31, 2002 and 2001, respectively. 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 decrease in the fair value of any investment that is deemed other than temporary would result in the Company's recognition of a realized loss in its financial results prior to the actual sale of the investment. (For a further discussion, see the Company's discussion of evaluation of other than temporary impairment in Critical Accounting Estimates under "Valuation of Investments and Derivative Instruments".) 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 weighted average duration of the fixed maturity portfolio was 4.8 and 4.9 as of December 31, 2002 and 2001, respectively. Duration is defined as the approximate percentage change in market price of the portfolio for a 100 basis point change in interest rates. For example, if interest rates increased by 100 basis points, the fair value of the portfolio would be expected to decrease by approximately 4.8% and 4.9% as of December 31, 2002 and 2001, respectively. The following table identifies the invested assets by type held in the general account as of December 31, 2002 and 2001.
COMPOSITION OF INVESTED ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 AMOUNT PERCENT AMOUNT PERCENT -------------- -------------- -------------- ------------- Fixed maturities, at fair value $ 29,377 86.7% $ 23,301 82.1% Equity securities, at fair value 458 1.3% 428 1.5% Policy loans, at outstanding balance 2,934 8.7% 3,317 11.7% Limited partnerships, at fair value 519 1.5% 811 2.9% Other investments 603 1.8% 520 1.8% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 33,891 100.0% $ 28,377 100.0% ====================================================================================================================================
During 2002, fixed maturity investments increased 26% primarily due to increased operating cash flows, transfers into the general account from the variable annuity separate account and an increase in fair value due to a lower interest rate environment. Limited partnerships decreased $292, or 36%, due to redemptions and a decision to reallocate funds to other asset classes. The following table identifies, by type, the fixed maturity securities held in the general account as of December 31, 2002 and 2001. - 46 -
FIXED MATURITIES BY TYPE - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 FAIR VALUE PERCENT FAIR VALUE PERCENT ----------------------------------------------------------- Corporate $ 14,596 49.7% $ 11,419 49.0% Commercial mortgage-backed securities (CMBS) 4,234 14.4% 3,029 13.0% Asset-backed securities (ABS) 3,954 13.5% 3,427 14.7% Municipal - tax-exempt 2,000 6.8% 1,565 6.7% Mortgage-backed securities (MBS) - agency 1,851 6.3% 981 4.2% Collateralized mortgage obligations (CMO) 691 2.4% 767 3.3% Government/Government agencies - Foreign 526 1.8% 390 1.7% Government/Government agencies - United States 360 1.2% 374 1.6% Municipal - taxable 31 0.1% 47 0.2% Short-term 1,100 3.7% 1,245 5.3% Redeemable preferred stock 34 0.1% 57 0.3% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 29,377 100.0% $ 23,301 100.0% ====================================================================================================================================
There were no material changes in asset allocation during 2002 and 2001. As of December 31, 2002 and 2001, 18% and 21%, respectively, of Life's fixed maturities were invested in private placement securities (including 11% and 12% of Rule 144A offerings as of December 31, 2002 and 2001, 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 Life 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.
(before-tax) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income - excluding policy loan income $ 1,604 $ 1,472 $ 1,284 Policy loan income 254 307 308 --------------------------------------------------------- Net investment income - total $ 1,858 $ 1,779 $ 1,592 Yield on average invested assets [1] 6.2% 7.0% 7.0% Net realized capital losses $ (317) $ (133) $ (88) ==================================================================================================================================== [1] Represents net investment income (excluding net realized capital losses) divided by average invested assets at cost (fixed maturities at amortized cost).
2002 COMPARED TO 2001 -- Net investment income, excluding policy loan income, increased $132, or 9%. The increase was primarily due to income earned on the previously discussed higher invested asset base partially offset by $36 lower income on limited partnerships and the impact of lower interest rates on new investment purchases. Yields on average invested assets decreased as a result of lower rates on new investment purchases, decreased policy loan income and decreased income on limited partnerships. Included in 2002 net realized capital losses were write-downs for other than temporary impairments on primarily corporate and asset-backed fixed maturities of $363. Write-downs on corporate fixed maturities totaled $185 and included impairments in the communications and technology sector of $142 (including a $74 loss related to securities issued by WorldCom Corporation) and the utilities sector of $32. Write-downs on asset-backed securities totaled $167 and included impairments of securities backed by aircraft lease receivables of $73, corporate debt of $35, manufactured housing receivables of $16, mutual fund fee receivables of $16 and on various other asset-backed securities totaling $27. Also included in 2002 net realized capital losses were write-downs for other than temporary impairments on equity securities of $17. These losses were partially offset by gains from the sale of fixed maturity securities. 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 higher asset base of 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 primarily corporate and asset-backed fixed maturities of $105. Write-downs on corporate securities totaled $63 and included impairments in the utilities sector of $37 and the communications and technology sector of $17. Write-downs on corporate fixed maturities in the utilities sector were on securities issued by Enron Corporation. Write-downs on asset-backed securities totaled $31 and included impairments of securities backed by corporate debt of $14 and on various other asset-backed securities totaling $17. 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. - 47 - 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 $95.6 billion and $104.6 billion as of December 31, 2002 and 2001, respectively, wherein the policyholder assumes substantially all the risk and reward; and guaranteed separate accounts totaling $11.5 billion and $10.1 billion as of December 31, 2002 and 2001, 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. 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 weighted average duration of the fixed maturity portfolio was 4.7 as of December 31, 2002 and 2001. Duration is defined as the approximate percentage change in the market value of the portfolio for a 100 basis point change in interest rates. For example, if interest rates increased by 100 basis points, the fair value of the portfolio would be expected to decrease by approximately 4.7%. The following table identifies the invested assets by type held as of December 31, 2002 and 2001.
COMPOSITION OF INVESTED ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 AMOUNT PERCENT AMOUNT PERCENT -------------- -------------- -------------- ------------- Fixed maturities, at fair value $ 19,446 94.5% $ 16,742 91.5% Equity securities, at fair value 459 2.2% 921 5.0% Limited partnerships, at fair value 362 1.8% 561 3.0% Other investments 306 1.5% 85 0.5% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 20,573 100.0% $ 18,309 100.0% ====================================================================================================================================
During 2002, fixed maturity investments increased 16% due to the investment of increased operating cash flows and an increase in fair value due to a lower interest rate environment. Total equity securities decreased 50% primarily due to the sale of foreign and domestic equity holdings and declines in domestic equity market values. Limited partnerships decreased $199, or 35%, due to redemptions. Other investments increased due to the purchase of a corporate owned life insurance contract and increased investment in mortgage loans. The following table identifies, by type, the fixed maturity securities held as of December 31, 2002 and 2001.
FIXED MATURITIES BY TYPE - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 FAIR VALUE PERCENT FAIR VALUE PERCENT -------------- -------------- -------------- ------------- Municipal - tax-exempt $ 8,846 45.5% $ 8,401 50.2% Corporate 5,459 28.0% 4,179 25.0% Commercial mortgage-backed securities (CMBS) 1,573 8.1% 1,145 6.8% Asset-backed securities (ABS) 731 3.8% 717 4.3% Government/Government agencies - Foreign 1,088 5.6% 613 3.6% Mortgage-backed securities (MBS) - agency 522 2.7% 381 2.3% Government/Government agencies - United States 124 0.6% 201 1.2% Collateralized mortgage obligations (CMO) 49 0.3% 97 0.6% Municipal - taxable 52 0.3% 47 0.3% Short-term 934 4.8% 862 5.1% Redeemable preferred stock 68 0.3% 99 0.6% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 19,446 100.0% $ 16,742 100.0% ====================================================================================================================================
- 48 - There were no material changes in asset allocation during 2002 and 2001. INVESTMENT RESULTS The following table below summarizes Property & Casualty's investment results.
2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Net investment income, before-tax $ 1,075 $ 1,053 $ 1,072 Net investment income, after-tax [1] $ 833 $ 819 $ 836 Yield on average invested assets, before-tax [2] 5.8% 6.1% 6.2% Yield on average invested assets, after-tax [1] [2] 4.5% 4.7% 4.9% Net realized capital gains (losses), before-tax $ (83) $ (103) $ 234 ==================================================================================================================================== [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 (losses)) divided by average invested assets at cost (fixed maturities at amortized cost).
2002 COMPARED TO 2001 -- Both before- and after-tax net investment income increased 2% compared to the prior year as increased operating cash flow resulted in higher investment income on the higher invested asset base. Yields on average invested assets declined due to the lower interest rate environment. Net realized capital losses were $83 compared to $103 for the prior year. Included in 2002 net realized capital losses were write-downs for other than temporary impairments on primarily corporate and asset-backed fixed maturities of $152. Write-downs on corporate securities totaled $109 (including a $36 loss related to securities issued by WorldCom Corporation) and included impairments in the communications and technology sector of $91 and the utilities sector of $11. Write-downs on asset-backed securities totaled $40 and included impairments of securities backed by corporate debt of $12, aircraft lease receivables of $11, manufactured housing receivables of $8 and on various other asset-backed securities totaling $9. Also included in 2002 net realized capital losses were write-downs for other than temporary impairments on equity securities of $47. These losses were partially offset by gains from the sale of fixed maturity and equity securities. 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 on primarily corporate and asset-backed fixed maturities of $61. Write-downs on corporate securities totaled $39 and included impairments in the communications sector of $17 and the utilities sector of $16. Write-downs on corporate fixed maturities in the utilities sector were all on securities issued by Enron Corporation. Write-downs on asset-backed securities totaled $22 and included impairments of securities backed by corporate debt of $9 and on various other asset-backed securities totaling $13. The 2001 net realized capital losses also included write-downs for other than temporary impairments of $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. CORPORATE As of December 31, 2002 and 2001 Corporate held $66 and $3, respectively, of short-term fixed maturity investments. These investments earned $2 of income in 2002. 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 investments' carrying values is reported in Corporate's net investment income. The total amount of before-tax amortization for the years ended December 31, 2002 and 2001 was $18. - 49 - - -------------------------------------------------------------------------------- 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 dedicated risk management units supporting Life, including guaranteed separate accounts, 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 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 of the Board of Directors. 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 basis. The Hartford is not exposed to any credit concentration risk of a single issuer greater than 10% of the Company's stockholders' equity. DERIVATIVE INSTRUMENTS 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 Company periodically enters into swap agreements in which the Company assumes credit exposure from a single entity, referenced index or asset pool. Total return swaps involve the periodic exchange of payments with other parties, at specified intervals, calculated using the agreed upon index 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. Credit default swaps involve a transfer of credit risk from one party to another in exchange for periodic payments. One party to the contract will make a payment based on an agreed upon rate and a notional amount. The second party, who assumes credit exposures, will only make a payment when there is a credit event, and such payment will be equal to the notional value of the swap contract, and in return, the second party will receive the debt obligation of the first party. A credit event is generally defined as default on contractually obligated interest or principal payment or restructure. As of December 31, 2002 and 2001 the notional value of total return and credit default swaps totaled $1.0 billion and $686, respectively, and the swap fair value totaled $(78) and $(105), respectively. 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. In addition, an aging of the gross unrealized loss position is presented for fixed maturity and equity securities. LIFE As of December 31, 2002 and 2001, over 94% and 96%, respectively, of the fixed maturity portfolio was invested in securities rated investment grade (BBB and above). During 2002, the percentage of BB and below rated fixed maturity investments increased due to increased downgrades of corporate and asset-backed securities. - 50 -
FIXED MATURITIES BY CREDIT QUALITY - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 -------------------------------------------------------------------------------- PERCENT OF PERCENT OF AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR COST FAIR VALUE VALUE COST FAIR VALUE VALUE - ------------------------------------------------------------------------------------------------------------------------------------ United States Government/Government agencies $ 3,596 $ 3,737 9.2% $ 2,573 $ 2,639 8.0% AAA 6,519 6,960 17.2% 4,915 5,070 15.3% AA 4,161 4,396 10.9% 3,570 3,644 11.0% A 11,745 12,467 30.8% 11,330 11,528 34.8% BBB 9,211 9,665 23.9% 7,611 7,644 23.1% BB & below 2,148 2,084 5.2% 1,214 1,148 3.4% Short-term 1,153 1,153 2.8% 1,470 1,470 4.4% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 38,533 $ 40,462 100.0% $ 32,683 $ 33,143 100.0% ==================================================================================================================================== Total general account fixed maturities 27,982 29,377 72.6% 23,010 23,301 70.3% Total guaranteed separate account fixed maturities 10,551 11,085 27.4% 9,673 9,842 29.7% - ------------------------------------------------------------------------------------------------------------------------------------
The Company's total and below investment grade ("BIG") fixed maturity and equity securities held as of December 31, 2002 and 2001 that were in an unrealized loss position are presented in the tables below by length of time the security was in an unrealized loss position.
UNREALIZED LOSS AGING AT DECEMBER 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SECURITIES BIG AND EQUITY SECURITIES ------------------------------------------ ----------------------------------------- AMORTIZED UNREALIZED AMORTIZED UNREALIZED COST FAIR VALUE LOSS COST FAIR VALUE LOSS - ------------------------------------------------------------------------------------------------------------------------------------ Three months or less $ 1,532 $ 1,459 $ (73) $ 162 $ 130 $ (32) Greater than three months to six months 1,294 1,239 (55) 208 185 (23) Greater than six months to nine months 568 508 (60) 175 145 (30) Greater than nine months to twelve months 1,334 1,264 (70) 330 293 (37) Greater than twelve months 2,135 1,927 (208) 501 431 (70) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 6,863 $ 6,397 $(466) $ 1,376 $ 1,184 $ (192) ====================================================================================================================================
The total securities that were in an unrealized loss position for longer than six months as of December 31, 2002 primarily consisted of corporate and asset-backed securities. The significant corporate security industry sectors of banking and financial services, utilities, technology and communications and airlines comprised 20%, 13%, 13% and 3%, respectively, of the greater than six months unrealized loss amount. Asset-backed securities comprised 33% of the greater than six month unrealized loss amount and included securities backed by corporate debt, aircraft lease receivables and credit card receivables. At December 31, 2002, the Company held no securities of a single issuer that were at an unrealized loss in excess of 4% of total unrealized losses. The total unrealized loss position of $(466) consisted of $(344) in general account losses and $(122) in guaranteed separate account losses. The BIG and equity securities that were in an unrealized loss position for longer than six months as of December 31, 2002 primarily consisted of corporate securities in the technology and communications and utilities sectors as well as asset-backed securities backed by corporate debt, equipment loans and credit card receivables. The technology and communications and utilities sectors along with diversified equity mutual funds and asset-backed securities comprised 26%, 22%, 18% and 15%, respectively, of the BIG and equity securities that were in an unrealized loss position for greater than six months at December 31, 2002. The total unrealized loss position of BIG and equity securities of $(192) consisted of $(157) in general account losses and $(35) in guaranteed separate account losses.
UNREALIZED LOSS AGING AT DECEMBER 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SECURITIES BIG AND EQUITY SECURITIES ------------------------------------------ ----------------------------------------- AMORTIZED UNREALIZED AMORTIZED UNREALIZED COST FAIR VALUE LOSS COST FAIR VALUE LOSS - ------------------------------------------------------------------------------------------------------------------------------------ Three months or less $ 5,075 $ 4,932 $ (143) $ 269 $ 242 $ (27) Greater than three months to six months 755 686 (69) 99 77 (22) Greater than six months to nine months 487 464 (23) 63 58 (5) Greater than nine months to twelve months 2,128 2,051 (77) 245 217 (28) Greater than twelve months 2,113 1,949 (164) 323 277 (46) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 10,558 $ 10,082 $ (476) $ 999 $ 871 $ (128) ====================================================================================================================================
- 51 - The total securities that were in an unrealized loss position for longer than six months as of December 31, 2001 primarily consisted of corporate and asset-backed securities. The significant corporate security industry sectors that were in an unrealized loss position for greater than six months included banking and financial services of 22%. The communications and technology, utilities and petroleum sectors comprised 13%, 12% and 4%, respectively of the total securities that were in an unrealized loss position for greater than six months at December 31, 2001. Asset-backed securities comprised 19% of the greater than six month unrealized loss amount, and included securities backed by corporate debt, franchise loans, aircraft lease receivables, credit card receivables, and manufactured housing receivables. At December 31, 2001, the Company held no securities of a single issuer that were at an unrealized loss in excess of 3% of total unrealized losses. The total unrealized loss position of $(476) consisted of $(370) in general account losses and $(106) in guaranteed separate account losses. The BIG and equity securities that were in an unrealized loss position for longer than six months as of December 31, 2001 primarily consisted of corporate securities in the utilities and technology and communications sectors as well as asset-backed securities backed primarily by manufactured housing receivables, corporate debt and equipment lease receivables. Diversified equity mutual funds, asset-backed securities, technology and communications sector securities and utilities sector securities comprised 28%, 21%, 18% and 14%, respectively, of the BIG securities in an unrealized loss position for greater than six months at December 31, 2001. The total unrealized loss position of BIG and equity securities of $(128) consisted of $(90) in general account losses and $(38) in guaranteed separate account losses. As part of the Company's ongoing monitoring process by a committee of investment and accounting professionals, the Company has reviewed these securities and concluded that there were no additional other than temporary impairments as of December 31, 2002 and 2001. Due to the issuers' continued satisfaction of the securities' obligations in accordance with their contractual terms and their continued expectation to do so, as well as the evaluation of the fundamentals of the issuers' financial condition, the Company believes that the prices of the securities in the sectors identified above, were temporarily depressed primarily as a result of a market dislocation and generally poor cyclical economic conditions and sentiment. (See the Critical Accounting Estimates section in the MD&A for the factors considered in evaluating other than temporary impairments.) The evaluation for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition or near term recovery prospects and the effects of changes in interest rates. In addition, for securitized financial assets with contractual cash flows (e.g. asset-backed securities), projections of expected future cash flows may change based upon new information regarding the performance of the underlying collateral. PROPERTY & CASUALTY As of December 31, 2002 and 2001, over 94% of the fixed maturity portfolio was invested in securities rated investment grade. During 2002, the percentage of BB and below rated fixed maturity investments increased due to increased downgrades of corporate and asset-backed securities.
FIXED MATURITIES BY CREDIT QUALITY - ------------------------------------------------------------------------------------------------------------------------------------ 2002 2001 -------------------------------------------------------------------------------- PERCENT OF PERCENT OF AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR COST FAIR VALUE VALUE COST FAIR VALUE VALUE - ------------------------------------------------------------------------------------------------------------------------------------ United States Government/Government agencies $ 638 $ 660 3.4% $ 628 $ 639 3.8% AAA 6,825 7,398 38.1% 5,888 6,160 36.8% AA 3,146 3,388 17.4% 3,012 3,126 18.7% A 3,337 3,567 18.3% 3,092 3,193 19.1% BBB 2,320 2,456 12.6% 1,844 1,876 11.2% BB & below 1,035 1,043 5.4% 880 886 5.3% Short-term 934 934 4.8% 862 862 5.1% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 18,235 $ 19,446 100.0% $ 16,206 $ 16,742 100.0% ====================================================================================================================================
The total and BIG fixed maturity and equity securities held as of December 31, 2002 and 2001 that were in an unrealized loss position are presented in the tables below by length of time the security was in an unrealized loss position. - 52 -
UNREALIZED LOSS AGING AT DECEMBER 31, 2002 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SECURITIES BIG AND EQUITY SECURITIES ------------------------------------------ ----------------------------------------- AMORTIZED UNREALIZED AMORTIZED UNREALIZED COST FAIR VALUE LOSS COST FAIR VALUE LOSS - ------------------------------------------------------------------------------------------------------------------------------------ Three months or less $ 510 $ 490 $ (20) $ 112 $ 99 $ (13) Greater than three months to six months 248 224 (24) 100 82 (18) Greater than six months to nine months 135 103 (32) 91 68 (23) Greater than nine months to twelve months 486 455 (31) 246 222 (24) Greater than twelve months 216 176 (40) 109 86 (23) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 1,595 $ 1,448 $(147) $ 658 $ 557 $ (101) ====================================================================================================================================
The total securities that were in an unrealized loss position for longer than six months as of December 31, 2002 primarily consisted of corporate and asset-backed securities. The significant corporate security industry sectors of technology and communications, banking and financial services, utilities and airlines comprised 22%, 8%, 12% and 6%, respectively, of the greater than six months unrealized loss amount. Asset-backed securities comprised 17% of the greater than six month unrealized loss amount and include securities backed by corporate debt, aircraft lease receivables, home equity loans and credit card receivables. At December 31, 2002, the Company held no securities of a single issuer that were at an unrealized loss in excess of 6% of total unrealized losses. The BIG and equity securities that were in an unrealized loss position for longer than six months as of December 31, 2002 primarily consisted of corporate securities in the technology and communications and utilities sectors as well as asset-backed securities backed by corporate debt and aircraft lease receivables. The technology and communications, utilities and airline sectors along with the asset-backed securities comprised 33%, 14%, 6% and 4%, respectively, of the BIG and equity securities that were in an unrealized loss position for greater than six months at December 31, 2002.
UNREALIZED LOSS AGING AT DECEMBER 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SECURITIES BIG AND EQUITY SECURITIES ------------------------------------------ ----------------------------------------- AMORTIZED UNREALIZED AMORTIZED UNREALIZED COST FAIR VALUE LOSS COST FAIR VALUE LOSS - ------------------------------------------------------------------------------------------------------------------------------------ Three months or less $ 1,879 $ 1,829 $ (50) $ 182 $ 164 $ (18) Greater than three months to six months 261 218 (43) 140 103 (37) Greater than six months to nine months 89 74 (15) 57 46 (11) Greater than nine months to twelve months 853 784 (69) 343 286 (57) Greater than twelve months 311 264 (47) 72 49 (23) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 3,393 $ 3,169 $(224) $ 794 $ 648 $ (146) ====================================================================================================================================
The total securities that were in an unrealized loss position for longer than six months as of December 31, 2001 primarily consisted of corporate and asset-backed securities. The significant corporate security industry sectors of communications and technology, utilities and banking and financial services comprised 31%, 16% and 8%, respectively, of the greater than six months unrealized loss amount. Asset-backed securities comprised 14% of the greater than six month unrealized loss amount and included securities backed by corporate debt and manufactured housing receivables. The Company held no securities of a single issuer that were at an unrealized loss in excess of 3% of total unrealized losses at December 31, 2002. The BIG and equity securities that were in an unrealized loss position for longer than six months as of December 31, 2001 primarily consisted of corporate securities in the utilities and technology and communications sectors as well as asset-backed securities backed by manufactured housing receivables, corporate debt and equipment lease receivables. The technology and communications, asset-backed, utilities and banking and financial services sector securities comprised 41%, 11%, 18% and 8%, respectively, of the BIG and equity securities that were in an unrealized loss position for greater than six months at December 31, 2001. As part of the Company's ongoing monitoring process by a committee of investment and accounting professionals, the Company has reviewed these securities and concluded that there were no additional other than temporary impairments as of December 31, 2002 and 2001. Due to the issuers' continued satisfaction of the securities' obligations in accordance with their contractual terms and their continued expectation to do so, as well as the evaluation of the fundamentals of the issuers' financial condition, the Company believes that the prices of the securities in the sectors identified above, were temporarily depressed primarily as a result of a market dislocation and generally poor cyclical economic conditions and sentiment. (See the Critical Accounting Estimates section in the MD&A for the factors considered in evaluating other than temporary impairments.) The evaluation for other than temporary impairments is a quantitative and qualitative process, which is subject to risks and uncertainties in the determination of whether declines in the fair value of investments are other than temporary. The risks and uncertainties include changes in general economic conditions, the issuer's financial condition or near term recovery prospects and the effects of changes in interest rates. In addition, for securitized financial assets with contractual cash flows (e.g. asset-backed securities), projections of expected - 53 - future cash flows may change based upon new information regarding the performance of the underlying collateral pools. MARKET RISK The Hartford has material exposure to both interest rate and equity market risk. 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. 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. 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 2002 resulted in a significant increase in the unrealized appreciation of the fixed maturity security portfolio from 2001. However, The Hartford's asset allocation and its exposure to market risk as of December 31, 2002 have not changed materially from its position at December 31, 2001. The Company is subject to the risk of a change in financial condition due to the effect of interest rate and equity market fluctuations on the calculation of the Company's minimum pension liabilities. As discussed in the Capital Resources and Liquidity section, in the fourth quarter 2002, the Company recorded a minimum pension liability charge directly to stockholders' equity of $364, after-tax. 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 four Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; to control transaction costs; or to enter into income enhancement and replication transactions. 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. 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 used in the management of market risk for both general and guaranteed separate accounts at December 31, 2002 and 2001 totaled $13.2 billion and $10.5 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 - 54 - 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, 2002. Comparative totals are included as of December 31, 2001. 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, 2002 and 2001, 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.
2002 2001 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ CALLABLE BONDS Fixed Rate Par value $ 11 $ 25 $ 123 $ 24 $ 24 $ 3,304 $ 3,511 $ 2,924 WAC 6.6% 7.2% 4.6% 7.6% 8.1% 4.0% 4.1% 4.0% Fair value $ 3,187 $ 2,445 Variable Rate Par value $ 1 $ 6 $ 25 $ 9 $ 6 $ 834 $ 881 $ 1,065 WAC 3.7% 2.5% 3.0% 3.3% 4.0% 3.0% 3.0% 3.4% Fair value $ 804 $ 972 - ------------------------------------------------------------------------------------------------------------------------------------ BONDS - OTHER Fixed Rate Par value $ 2,691 $ 1,397 $ 1,889 $ 2,026 $ 1,725 $ 10,859 $ 20,587 $ 18,245 WAC 5.7% 6.0% 7.2% 6.4% 6.4% 6.4% 6.4% 6.2% Fair value $ 20,990 $ 17,424 Variable Rate Par value $ 273 $ 66 $ 259 $ 113 $ 13 $ 355 $ 1,079 $ 1,047 WAC 3.1% 3.1% 4.1% 2.1% 7.2% 3.6% 3.5% 4.9% Fair value $ 952 $ 947 - ------------------------------------------------------------------------------------------------------------------------------------ ASSET-BACKED SECURITIES Fixed Rate Par value $ 371 $ 461 $ 541 $ 255 $ 137 $ 718 $ 2,483 $ 2,252 WAC 6.8% 6.3% 5.7% 6.1% 6.2% 7.1% 6.4% 6.9% Fair value $ 2,458 $ 2,234 Variable Rate Par value $ 162 $ 314 $ 369 $ 378 $ 361 $ 1,494 $ 3,078 $ 2,396 WAC 2.1% 2.2% 2.3% 2.3% 2.4% 2.4% 2.3% 2.8% Fair value $ 2,884 $ 2,333 - ------------------------------------------------------------------------------------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATIONS Fixed Rate Par value $ 108 $ 95 $ 77 $ 71 $ 63 $ 365 $ 779 $ 968 WAC 6.3% 6.2% 6.2% 6.2% 6.2% 6.3% 6.3% 6.3% Fair value $ 813 $ 960 Variable Rate Par value $ 10 $ 13 $ 10 $ 7 $ 5 $ 46 $ 91 $ 15 WAC 2.4% 2.5% 2.7% 3.0% 3.1% 2.3% 2.5% 6.9% Fair value $ 90 $ 16 - ------------------------------------------------------------------------------------------------------------------------------------
- 55 -
2002 2001 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 68 $ 112 $ 114 $ 243 $ 436 $ 3,073 $ 4,046 $ 3,018 WAC 6.2% 6.6% 6.5% 7.0% 6.9% 6.7% 6.7% 7.1% Fair value $ 4,494 $ 3,123 Variable Rate Par value $ 179 $ 169 $ 109 $ 84 $ 130 $ 745 $ 1,416 $ 1,501 WAC 3.5% 3.3% 4.2% 6.9% 5.5% 7.2% 5.9% 5.8% Fair value $ 1,494 $ 1,498 - ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 303 $ 356 $ 289 $ 197 $ 141 $ 867 $ 2,153 $ 1,168 WAC 6.7% 6.7% 6.6% 6.6% 6.6% 6.6% 6.6% 6.8% Fair value $ 2,260 $ 1,189 Variable Rate Par value $ 2 $ 5 $ 5 $ 5 $ 4 $ 15 $ 36 $ 2 WAC 2.5% 2.4% 2.4% 2.4% 2.4% 2.4% 2.4% 5.4% Fair value $ 36 $ 2 - ------------------------------------------------------------------------------------------------------------------------------------
The table below provides information as of December 31, 2002 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, 2001.
2002 2001 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT Fixed Rate Amount $ -- $ 200 $ -- $ -- $ 200 $ 725 $ 1,125 $ 1,050 Weighted average interest rate -- 6.9% -- -- 7.1% 7.1% 7.1% 7.3% Fair value $ 1,217 $ 1,118 TRUST PREFERRED SECURITIES [1] Fixed Rate Amount $ -- $ -- $ -- $ -- $ -- $ 450 $ 450 $ 450 Weighted average interest rate -- -- -- -- -- 7.4% 7.4% 7.4% Fair value $ 464 $ 461 ==================================================================================================================================== [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. 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, 2002, notional amounts pertaining to derivatives totaled $10.0 billion ($8.3 billion related to insurance investments and $1.7 billion related to life insurance liabilities). Notional amounts pertaining to derivatives totaled $9.3 billion at December 31, 2001 ($7.6 billion related to insurance investments and $1.7 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 - 56 - characteristics equivalent to the associated liabilities or anticipated investments. The notional amounts of anticipatory hedges as of December 31, 2002 and 2001 were $265 and $320, 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 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, 2002 and 2001 were $1.7 billion. 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, 2002 and 2001 were $7.2 billion and $6.2 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, 2002 and 2001 were $910 and $1.1 billion, respectively. The following tables provide information as of December 31, 2002 with comparative totals for December 31, 2001 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.
2002 2001 INTEREST RATE SWAPS [1] 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Pay Fixed/Receive Variable Notional value $ 295 $ 85 $ 126 $ 36 $ 140 $ 491 $ 1,173 $ 937 Weighted average pay rate 4.2% 3.5% 7.5% 6.7% 5.1% 6.7% 5.7% 6.5% Weighted average receive rate 1.5% 1.4% 1.5% 1.8% 1.4% 1.6% 1.6% 2.2% Fair value $ (132) $ (68) Pay Variable/Receive Fixed Notional value $ 473 $ 1,369 $ 1,045 $ 739 $ 664 $ 1,583 $ 5,873 $ 5,045 Weighted average pay rate 1.4% 1.6% 1.5% 1.5% 1.5% 1.5% 1.5% 2.1% Weighted average receive rate 5.6% 5.5% 5.7% 5.5% 5.2% 5.3% 5.5% 5.8% Fair value $ 514 $ 193 Pay Variable/Receive Different Variable Notional value $ 2 $ 141 $ 11 $ -- $ 50 $ -- $ 204 $ 159 Weighted average pay rate 1.7% 2.4% 3.7% -- 1.4% -- 2.2% 3.2% Weighted average receive rate [2] 1.4% 2.8% (11.0)% -- 2.6% -- 2.0% 4.4% Fair value $ 2 $ 1 ==================================================================================================================================== [1] Swap agreements in which the Company assumes credit exposure from a single entity, referenced index or asset pool are not included above, rather they are included in the credit risk discussion. At December 31, 2002 and 2001, these swaps had a notional value of $497 and $230, respectively, and a fair value of $(41) and $(51), respectively. Also, swap agreements that reduce foreign currency exposure in certain fixed maturity investments are not included above, rather they are included in the foreign currency risk discussion. At December 31, 2002 and 2001, these swaps had a notional value of $794 and $435, respectively, and a fair value of $(67) and $6, respectively. [2] Negative weighted average receive rate in 2005 results when payments are required on both sides of an index swap.
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2002 2001 INTEREST RATE CAPS - LIBOR BASED 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Purchased Notional value $ 54 $ -- $ 77 $ -- $ 30 $ -- $ 161 $ 171 Weighted average strike rate (8.0 - 9.9%) 8.5% -- 8.4% -- 8.3% -- 8.4% 8.5% Fair value $ -- $ 1 Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 19 Weighted average strike rate (10.1%) -- -- -- -- -- -- -- 10.1% Fair value $ -- $ -- ====================================================================================================================================
2002 2001 INTEREST RATE CAPS - CMT BASED [1] 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Purchased Notional value $ 250 $ -- $ 250 $ -- $ -- $ -- $ 500 $ 500 Weighted average strike rate (8.7%) 8.7% -- 8.7% -- -- -- 8.7% 8.7% Fair value $ -- $ 3 ==================================================================================================================================== [1] CMT represents the Constant Maturity Treasury Rate.
2002 2001 INTEREST RATE FLOORS - LIBOR BASED 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Purchased Notional value $ -- $ 27 $ -- $ -- $ -- $ -- $ 27 $ 27 Weighted average strike rate (7.9%) -- 7.9% -- -- -- -- 7.9% 7.9% Fair value $ 3 $ 3 Issued Notional value $ 54 $ 34 $ 77 $ -- $ -- $ -- $ 165 $ 193 Weighted average strike rate (4.0 - 5.9%) 5.4% 5.3% 5.3% -- -- -- 5.3% 5.3% Fair value $ (9) $ (8) Notional value $ -- $ 27 $ -- $ -- $ -- $ -- $ 27 $ 27 Weighted average strike rate (7.8%) -- 7.8% -- -- -- -- 7.8% 7.8% Fair value $ (3) $ (3) ====================================================================================================================================
2002 2001 INTEREST RATE FLOORS - CMT BASED [1] 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Purchased Notional value $ 150 $ -- $ -- $ -- $ -- $ -- $ 150 $ 150 Weighted average strike rate (5.5%) 5.5% -- -- -- -- -- 5.5% 5.5% Fair value $ 1 $ 5 ==================================================================================================================================== [1] CMT represents the Constant Maturity Treasury Rate.
2002 2001 INTEREST RATE FUTURES 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Long Contract amount/notional $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 266 Weighted average settlement price $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 105 Short Contract amount/notional $ 11 $ -- $ -- $ -- $ -- $ -- $ 11 $ 25 Weighted average settlement price $ 114 $ -- $ -- $ -- $ -- $ -- $ 114 $ 105 ====================================================================================================================================
2002 2001 OPTION CONTRACTS 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Long Contract amount/notional $ 83 $ 88 $ 45 $ 324 $ 32 $ 78 $ 650 $ 723 Fair value $ 18 $ 28 Short Contract amount/notional $ 172 $ 457 $ 189 $ 225 $ 25 $ 30 $ 1,098 $ 1,056 Fair value $ (37) $ (61) ====================================================================================================================================
- 58 - Currency Exchange Risk - ---------------------- Currency exchange risk exists with respect to investments in non-US dollar denominated securities. The fair value of these fixed maturity securities at December 31, 2002 and 2001 was $1.2 billion and $494, respectively. In order to manage a portion of these currency exposures, the Company enters into foreign currency swaps to hedge the variability in cash flow associated with certain foreign denominated securities. These foreign currency swap agreements are structured to match the foreign currency cash flows of the hedged foreign denominated securities. At December 31, 2002 and 2001, the foreign currency swaps had a notional value of $794 and $435, respectively, and fair value of $(67) and $6, respectively. In the fourth quarter of 2002, the Company entered into a costless collar strategy to temporarily mitigate a portion of its residual currency risk in foreign denominated securities. Accordingly, the Company purchased foreign put options and wrote foreign call options expiring in January 2003. At December 31, 2002 the foreign put and call options had a notional value of $469 and fair value of $(3). The Company had no foreign put or call options at December 31, 2001. 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. 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, 2002 are reflected in the table below by expected maturity year. Comparative totals are included for December 31, 2001. - 59 -
(dollars in billions) 2002 2001 DESCRIPTION [1] 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Fixed rate asset accumulation vehicles $ 1.7 $ 3.0 $ 2.6 $ 2.0 $ 1.9 $ 2.4 $ 13.6 $ 15.8 Weighted average credited rate 6.0% 6.0% 5.9% 5.6% 5.5% 5.7% 5.8% 5.9% Indexed asset accumulation vehicles $ 0.6 $ 0.1 $ -- $ -- $ -- $ -- $ 0.7 $ 0.8 Weighted average credited rate 3.0% 3.0% -- -- -- -- 3.0% 6.5% Interest credited asset accumulation vehicles $ 3.3 $ 3.3 $ 3.2 $ 0.5 $ 0.5 $ 5.2 $ 16.0 $ 8.1 Weighted average credited rate 3.9% 3.9% 3.8% 4.8% 4.8% 4.8% 4.2% 5.7% Long-term pay out liabilities $ 1.0 $ 0.8 $ 0.7 $ 0.5 $ 0.5 $ 5.6 $ 9.1 $ 8.6 Short-term pay out liabilities $ 0.9 $ 0.1 $ -- $ -- $ -- $ -- $ 1.0 $ 1.0 ==================================================================================================================================== [1] As of December 31, 2002 and 2001, the fair values of Life's investment contracts, including guaranteed separate accounts, were $32.4 billion and $26.0 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 is shown in the following table. Change in Net Economic Value 2002 2001 ------------------------------------------ Basis point shift - 100 + 100 - 100 + 100 - ----------------------------------------------------------------- Amount $ 17 $ (51) $ 6 $ (31) Percent of liability value 0.08% (0.23)% 0.03% (0.16)% ================================================================= These fixed liabilities represented about 57% and 61% of Life's general and guaranteed separate account liabilities at December 31, 2002 and 2001, 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, 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. Equity Risk - ----------- The Company's Life operations are significantly influenced by changes in the equity markets. Life's profitability depends largely on the amount of assets under management, which is primarily driven by the level of sales, equity market appreciation and depreciation and the persistency of the in-force block of business. A prolonged and precipitous decline in the equity markets, as has been experienced of late, can have a significant impact on the Company's operations, as sales of variable products may decline and surrender activity may increase, as customer sentiment towards the equity market turns negative. The lower assets under management will have a negative impact on the Company's financial results, primarily due to lower fee income related to the Investment Products and Individual Life segments, where a heavy concentration of equity linked products are administered and sold. Furthermore, the Company may experience a reduction in profit margins if a significant portion of the assets held in the variable annuity separate accounts move to the general account and the Company is unable to earn an acceptable investment spread, particularly in light of the low interest rate environment and the presence of contractually guaranteed minimum interest credited rates, which for the most part are at a 3% rate. In addition, prolonged declines in the equity market may also decrease the Company's expectations of future gross profits, which are utilized to determine the amount of DAC to be amortized in a given financial statement period. A significant decrease in the Company's estimated gross profits would require the Company to accelerate the amount of DAC amortization in a given period, potentially causing a material adverse deviation in that period's net income. Although an acceleration of DAC amortization would have a negative impact on the Company's earnings, it would not affect the Company's cash flow or liquidity position. Additionally, the Investment Products segment sells variable annuity contracts that offer various guaranteed death benefits. For certain guaranteed death benefits, The Hartford pays the greater of (1) the account value at death; (2) the sum of all premium payments less prior withdrawals; or (3) the maximum anniversary value of the contract, plus any premium payments since the contract anniversary, minus any withdrawals following the contract anniversary. The Company currently reinsures a significant portion of these death benefit guarantees associated with its in-force block of business. The Company currently records the death benefit costs, net of reinsurance, as they are incurred. Declines in the equity market may increase the Company's net exposure to death benefits under these contracts. The Company's total gross exposure (i.e. before reinsurance) to these guaranteed death benefits as of December 31, 2002 is $22.4 billion. Due to the fact that 82% of this amount is reinsured, the Company's net exposure is $4.1 billion. This amount is often referred to as the net amount at risk. However, the Company will only incur these guaranteed death benefit payments in the future if the policyholder has an in-the-money guaranteed death benefit at their time of death. In order to analyze the total costs that the Company may incur in the future related to these guaranteed death benefits, the Company performed an actuarial present value analysis. This analysis included developing a model utilizing 250 stochastically generated investment performance scenarios and best estimate assumptions related to mortality and lapse rates. A range of projected costs was developed and discounted back to the statement date utilizing the Company's cost of capital, which for this purpose was assumed to be 9.25%. Based on this analysis, the Company estimated that the present value of the retained - 60 - death benefit costs to be incurred in the future fell within a range of $86 to $349. This range was calculated utilizing a 95% confidence interval. The median of the 250 stochastically generated scenarios was $159. Furthermore, the Company is involved in arbitration with one of its primary reinsurers relating to policies with such death benefit guarantees written from 1994 to 1999. The arbitration involves alleged breaches under the reinsurance treaties. Although the Company believes that its position in this pending arbitration is strong, an adverse outcome could result in a decrease to the Company's statutory surplus and capital and potentially increase the death benefit costs incurred by the Company in the future. The arbitration hearing was held during the fourth quarter of 2002, but no decision has been rendered. 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, 2002 and 2001 of $1.1 billion and $797, 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, 2002, are reflected in the following table. Comparative totals are included as of December 31, 2001. 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, 2002 and 2001, 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 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.
2002 2001 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ CALLABLE BONDS Fixed Rate Par value $ 9 $ 34 $ 137 $ 225 $ 280 $ 7,029 $ 7,714 $ 7,624 WAC 5.9% 5.5% 5.5% 5.4% 5.6% 5.3% 5.3% 5.3% Fair value $ 8,084 $ 7,660 Variable Rate Par value $ 1 $ 2 $ 16 $ 7 $ 2 $ 226 $ 254 $ 266 WAC 5.6% 4.3% 6.6% 3.3% 4.2% 3.9% 4.1% 5.4% Fair value $ 207 $ 214 - ------------------------------------------------------------------------------------------------------------------------------------ BONDS - OTHER Fixed Rate Par value $ 1,205 $ 468 $ 673 $ 774 $ 702 $ 4,111 $ 7,933 $ 6,413 WAC 4.5% 6.6% 6.9% 6.4% 6.5% 6.4% 6.3% 6.4% Fair value $ 8,132 $ 6,297 Variable Rate Par value $ 2 $ 52 $ 2 $ 7 $ 3 $ 106 $ 172 $ 268 WAC 3.0% 2.7% 3.1% 5.8% 5.1% 4.8% 4.2% 4.8% Fair value $ 148 $ 231 - ------------------------------------------------------------------------------------------------------------------------------------ ASSET-BACKED SECURITIES Fixed Rate Par value $ 71 $ 84 $ 102 $ 80 $ 58 $ 167 $ 562 $ 570 WAC 7.0% 6.0% 6.3% 6.4% 7.0% 7.4% 6.7% 7.2% Fair value $ 554 $ 549 Variable Rate Par value $ 3 $ 40 $ 14 $ 21 $ 15 $ 112 $ 205 $ 191 WAC 2.7% 3.0% 2.5% 2.5% 3.3% 2.3% 2.5% 3.8% Fair value $ 177 $ 168 - ------------------------------------------------------------------------------------------------------------------------------------
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2002 2001 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ COLLATERALIZED MORTGAGE OBLIGATIONS Fixed Rate Par value $ 15 $ 7 $ 4 $ 4 $ 2 $ 11 $ 43 $ 87 WAC 6.9% 6.8% 6.6% 6.4% 6.4% 5.1% 6.3% 6.8% Fair value $ 43 $ 88 Variable Rate Par value $ 2 $ 1 $ 1 $ 1 $ -- $ -- $ 5 $ 8 WAC 17.1% 16.6% 16.0% 15.5% -- -- 16.2% 15.1% Fair value $ 6 $ 9 - ------------------------------------------------------------------------------------------------------------------------------------ COMMERCIAL MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 6 $ 15 $ 8 $ 34 $ 117 $ 1,005 $ 1,185 $ 707 WAC 5.9% 6.9% 6.3% 7.1% 7.0% 5.9% 6.1% 7.1% Fair value $ 1,183 $ 728 Variable Rate Par value $ 99 $ 48 $ 22 $ 20 $ 22 $ 154 $ 365 $ 410 WAC 3.4% 4.4% 7.0% 7.9% 6.7% 8.0% 6.2% 6.2% Fair value $ 390 $ 417 - ------------------------------------------------------------------------------------------------------------------------------------ MORTGAGE-BACKED SECURITIES Fixed Rate Par value $ 69 $ 87 $ 81 $ 54 $ 40 $ 167 $ 498 $ 379 WAC 6.7% 6.6% 6.5% 6.5% 6.5% 6.5% 6.5% 6.6% Fair value $ 522 $ 381 ====================================================================================================================================
The following table provides information as of December 31, 2002 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, 2001. The weighted average rates are based on spot rates as of December 31, 2002 and 2001.
THEREAFTER 2002 2001 INTEREST RATE SWAPS [1] 2003 2004 2005 2006 2007 [2] TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Pay Variable/Receive Fixed Notional value $ -- $ 35 $ 15 $ -- $ -- $ 500 $ 550 $ 545 Weighted average pay rate -- 1.5% 1.4% -- -- 2.5% 2.4% 3.1% Weighted average receive rate -- 6.7% 2.8% -- -- 7.5% 7.3% 7.4% Fair value $ 25 $ (29) ==================================================================================================================================== [1] Swap agreements in which the Company assumes credit exposure from a single entity, referenced index or asset pool are not included above, rather they are included in the Credit Risk discussion. At December 31, 2002 and 2001, these swaps had a notional value of $548 and $456, respectively, and fair value of $(37) and $(54), respectively. [2] Interest rate swap agreement of $500 notional value contains an embedded call option. See Note 1(h) in Notes to Consolidated Financial Statements.
2002 2001 INTEREST RATE CAPS - LIBOR BASED 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Purchased Notional value $ -- $ -- $ -- $ -- $ -- $ 500 $ 500 $ -- Weighted average strike rate (8.0%) -- -- -- -- -- 8.0% 8.0% -- Fair value $ 11 $ -- ====================================================================================================================================
Property & Casualty uses option contracts to hedge fixed maturity investments that totaled $141 and $252 in notional value and $0 and $1 in fair value as of December 31, 2002 and 2001, respectively. The table below provides information as of December 31, 2002 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, 2001. - 62 -
2002 2001 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ SHORT-TERM DEBT Variable Rate Amount $ 315 $ -- $ -- $ -- $ -- $ -- $ 315 $ 599 Weighted average interest rate 1.5% -- -- -- -- -- 1.5% 4.2% Fair value $ 315 $ 607 LONG-TERM DEBT Fixed Rate Amount $ -- $ -- $ -- $ -- $ 300 $ 550 $ 850 $ 400 Weighted average interest rate -- -- -- -- 4.7% 6.1% 5.6% 6.8% Fair value $ 889 $ 401 TRUST PREFERRED SECURITIES [1] Fixed Rate Amount $ -- $ -- $ -- $ -- $ -- $ 1,000 $ 1,000 $ 1,000 Weighted average interest rate -- -- -- -- -- 7.6% 7.6% 7.6% Fair value $ 1,015 $ 968 ==================================================================================================================================== [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, 2002 and 2001, grouped by major market type.
2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ PERCENT OF PERCENT OF AMORTIZED TOTAL FAIR AMORTIZED TOTAL FAIR COST FAIR VALUE VALUE COST FAIR VALUE VALUE - ------------------------------------------------------------------------------------------------------------------------------------ EQUITY SECURITIES Domestic Large cap $ 209 $ 204 44.3% $ 386 $ 393 42.7% Midcap/small cap 221 231 50.4% 318 342 37.1% Foreign EAFE [1]/ Canadian 23 23 5.0% 158 184 20.0% Emerging 1 1 0.3% 2 2 0.2% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 454 $ 459 100.0% $ 864 $ 921 100.0% ==================================================================================================================================== [1] Europe, Australia, Far East countries index.
Currency Exchange Risk - ---------------------- Currency exchange risk exists with respect to investments in non-US dollar denominated securities. The fair value of these fixed maturity securities at December 31, 2002 and 2001 was $1 billion and $649, respectively. In the fourth quarter of 2002, the Company entered into a costless collar strategy to temporarily mitigate a portion of its currency risk in certain foreign denominated securities. Accordingly, the Company purchased foreign put options and wrote foreign call options expiring in January 2003. At December 31, 2002, the foreign put and call options had a notional value of $793 and fair value of $(4). Forward foreign contracts with a notional amount of $7 were used to manage currency exchange risk at December 31, 2001. CORPORATE Interest Rate Risk - ------------------ The primary exposure to interest rate risk in Corporate relates to the debt issued in connection with The HLI Repurchase. The table below provides information as of December 31, 2002 on Corporate's debt obligations and reflects principal cash flows and related weighted average interest rates by maturity year. - 63 -
2002 2001 2003 2004 2005 2006 2007 THEREAFTER TOTAL TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ LONG-TERM DEBT Fixed Rate Amount $ -- $ -- $ 250 $ -- $ -- $ 380 $ 630 $ 525 Weighted average interest rate -- -- 7.8% -- -- 6.9% 7.2% 7.8% Fair value $ 698 $ 563 ====================================================================================================================================
- -------------------------------------------------------------------------------- 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, borrow funds at competitive rates and raise new capital to meet operating and growth needs. The capital structure of The Hartford as of December 31, 2002, 2001 and 2000 consisted of debt and equity, summarized as follows:
AS OF DECEMBER 31, ----------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Short-term debt $ 315 $ 599 $ 235 Long-term debt 2,596 1,965 1,862 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures (trust preferred 1,468 1,412 1,243 securities) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DEBT $ 4,379 $ 3,976 $ 3,340 ------------------------------------------------------------------------------------------------------------------------------ Equity excluding accumulated other comprehensive income ("AOCI"), net of tax $ 9,640 $ 8,479 $ 7,095 AOCI, net of tax 1,094 534 369 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 10,734 $ 9,013 $ 7,464 ------------------------------------------------------------------------------------------------------------------------------ TOTAL CAPITALIZATION INCLUDING AOCI $ 15,113 $ 12,989 $ 10,804 ------------------------------------------------------------------------------------------------------------------------------ TOTAL CAPITALIZATION EXCLUDING AOCI $ 14,019 $ 12,455 $ 10,435 ------------------------------------------------------------------------------------------------------------------------------ Debt to equity [1] 41% 44% 45% Debt to capitalization [1] 29% 31% 31% =================================================================================================================================== [1] Excluding trust preferred securities from total debt and AOCI from total stockholders' equity and total capitalization, the debt to equity ratio was 30%, 30% and 30%, and the debt to capitalization ratio was 21%, 21% and 20% as of December 31, 2002, 2001 and 2000, respectively.
CONTRACTUAL OBLIGATIONS AND COMMITMENTS The following table identifies the Company's contractual obligations by payment due period.
2003 2004 2005 2006 2007 THEREAFTER TOTAL - ------------------------------------------------------------------------------------------------------------------------------------ Short-term debt $ 315 $ -- $ -- $ -- $ -- $ -- $ 315 Long-term debt -- 200 250 -- 500 1,655 2,605 Trust preferred securities -- -- -- -- -- 1,450 1,450 - ------------------------------------------------------------------------------------------------------------------------------------ Total debt $ 315 $ 200 $ 250 $ -- $ 500 $ 3,105 $ 4,370 Operating leases 134 121 108 93 78 160 694 - ------------------------------------------------------------------------------------------------------------------------------------ Total contractual obligations $ 449 $ 321 $ 358 $ 93 $ 578 $ 3,265 $ 5,064 ====================================================================================================================================
In addition to the contractual obligations above, The Hartford had certain unfunded commitments at December 31, 2002 to fund limited partnership investments totaling $396. 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. CAPITALIZATION The Hartford endeavors to maintain a capital structure that provides financial and operational flexibility to its insurance subsidiaries, ratings that support its competitive position in the financial services marketplace (see the Ratings section below for further discussion), and strong shareholder returns. As a result, the Company may from time to time raise capital from the issuance of stock, debt or other capital securities. The issuance of common stock, debt or other capital securities could result in the dilution of shareholder interests or reduced net income due to additional interest expense. During the third quarter of 2002, the Company increased its capitalization by $649 through the issuance of $330 in common stock and $319 in equity units. Proceeds of $300 were contributed to the property and casualty insurance subsidiaries, proceeds of $150 were contributed to the life insurance subsidiaries and the balance has been held for general corporate purposes, which may include additional capital contributions to the insurance subsidiaries. - 64 - In addition, as was the case after September 11, the Company may use the capital markets to replace capital upon completion of its asbestos review. During the year ended December 31, 2002, The Hartford's total capitalization increased by $2.1 billion, while total capitalization excluding AOCI increased by $1.6 billion. This increase was a result of 2002 net income; the aforementioned third quarter 2002 capital raising activities; and stock issued related to stock compensation plans. These increases were partially offset by dividends declared. AOCI - AOCI increased by $560 as of December 31, 2002 compared with December 31, 2001. The increase resulted primarily from the impact of decreased interest rates on unrealized gains on the fixed maturity portfolio, the recognition of unrealized losses on other than temporary impairments on fixed maturity and equity securities and the net gain on cash-flow hedging instruments, partially offset by an increase in the Company's minimum pension liability adjustment. The funded status of the Company's pension and postretirement plans is dependent upon many factors, including returns on invested assets and the level of market interest rates. Recent declines in the value of securities traded in equity markets coupled with declines in long-term interest rates have had a negative impact on the funded status of the plans. As a result, the Company has recorded a minimum pension liability as of December 31, 2002, which resulted in an after-tax reduction of stockholders' equity of $383. This minimum pension liability did not affect the Company's results of operations. AOCI increased by $165 as of December 31, 2001 compared with December 31, 2000. The increase resulted primarily from the impact of decreased interest rates on unrealized gains on the fixed maturity portfolio, the recognition of unrealized losses on other than temporary impairments on fixed maturity and equity securities and the net gain on cash-flow hedging instruments. For additional information on stockholders' equity, see Note 9 of Notes to Consolidated Financial Statements. 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, 2002, HLI had $1.0 billion remaining on its shelf. On November 9, 2000, The Hartford filed with the SEC a shelf registration statement and a prospectus, as amended on May 21, 2002, for the potential offering and sale of up to an additional $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. As of December 31, 2002, The Hartford had $1.3 billion remaining on the shelf. DEBT The following discussion describes the Company's debt financing activities. The table below details the Company's short-term debt programs and the applicable balances outstanding.
As of December 31, ----------------------------- Description Effective Date Expiration Date Maximum Available 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Commercial Paper The Hartford 11/10/86 N/A $ 2,000 $ 315 $ 299 HLI 2/7/97 N/A 250 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total commercial paper $ 2,250 $ 315 $ 299 Revolving Credit Facility 5-year revolving credit facility 6/20/01 6/20/06 $ 1,000 $ -- $ -- 3-year revolving credit facility 12/31/02 12/31/05 490 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revolving credit facility $ 1,490 $ -- $ -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM DEBT $ 3,740 $ 315 $ 299 ====================================================================================================================================
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, 2002, the Company had $315 of outstanding borrowings under the program. On December 31, 2002, the Company and HLI entered into a joint three-year $490 competitive advance and revolving credit facility comprised of 12 participating banks, and HLI's previous revolving credit facility was terminated. As of December 31, 2002, there were no outstanding borrowings under the facility. On September 13, 2002, The Hartford issued 6.6 million 6% equity units at a price of $50.00 per unit and received net proceeds of $319. The Hartford contributed $150 of the net proceeds to its property and casualty insurance subsidiaries and $75 of the net proceeds to its life insurance subsidiaries. The remaining balance of the net proceeds is for general corporate purposes, which may include additional capital contributions to subsidiaries. Each equity unit offered initially consists of a corporate unit with a stated amount of $50.00. Each corporate unit consists of one purchase contract for the sale of a certain number of shares of the Company's stock and $50.00 principal amount of senior notes due November 16, 2008. The corporate unit may be converted by the holder into a treasury unit consisting of the purchase contract and a 5% undivided beneficial interest in a zero-coupon U.S. Treasury - 65 - security with a principal amount of one-thousand dollars that matures on November 15, 2006. The holder of an equity unit owns the underlying senior notes or treasury portfolio but has pledged the senior notes or treasury portfolio to the Company to secure the holder's obligations under the purchase contract. The purchase contract obligates the holder to purchase, and obligates The Hartford to sell, on November 16, 2006, for $50.00, a variable number of newly issued common shares of The Hartford. The number of The Hartford's shares to be issued will be determined at the time the purchase contracts are settled based upon the then current price of The Hartford's common stock. If the price of The Hartford's common stock is equal to or less than $47.25, then the Company will deliver 1.0582 shares to the holder of the equity unit. If the price of The Hartford's common stock is greater than $47.25 but less than $57.645, then the Company will deliver a fraction of shares equal to $50.00 divided by the then current price of The Hartford's common stock. Finally, if the price of The Hartford's common stock is equal to or greater than $57.645, then the Company will deliver 0.8674 shares to the holder. Accordingly, upon settlement of the purchase contracts on November 16, 2006, The Hartford will receive proceeds of approximately $330 and will deliver between 5.7 million and 7.0 million common shares in the aggregate. The proceeds will be credited to stockholders' equity and allocated between the common stock and additional paid-in-capital accounts. The Hartford will make quarterly contract adjustment payments to the equity unit holders at a rate of 1.90% of the stated amount per year until the purchase contract is settled. Each corporate unit also includes $50.00 principal amount of senior notes that will mature on November 16, 2008. The notes are pledged by the holders to secure their obligations under the purchase contracts. The Hartford will make quarterly interest payments to the holders of the notes initially at an annual rate of 4.10%. On August 11, 2006, the notes will be remarketed. At that time, The Hartford's remarketing agent will have the ability to reset the interest rate on the notes in order to generate sufficient remarketing proceeds to satisfy the holder's obligation under the purchase contract. In the event of an unsuccessful remarketing, the Company will exercise its rights as a secured party to obtain and extinguish the notes. The total distributions payable on the equity units are at an annual rate of 6.0%, consisting of interest (4.10%) and contract adjustment payments (1.90%). The corporate units are listed on the New York Stock Exchange under the symbol "HIG PrA". The present value of the contract adjustment payments of $23 was accrued upon the issuance of the equity units as a charge to additional paid-in capital and is included in other liabilities in the accompanying consolidated balance sheet as of December 31, 2002. Subsequent contract adjustment payments will be allocated between this liability account and interest expense based on a constant rate calculation over the life of the transaction. Additional paid-in capital as of December 31, 2002 reflected a charge of approximately $9 representing a portion of the equity unit issuance costs that were allocated to the purchase contracts. The equity units have been reflected in the diluted earnings per share calculation using the treasury stock method, which would be used for the equity units at any time before the issuance of shares of The Hartford's common stock upon settlement of the purchase contracts. Under the treasury stock method, the number of shares of common stock used in calculating diluted earnings per share is increased by the excess, if any, of the number of shares issuable upon settlement of the purchase contracts over the number of shares that could be purchased by The Hartford in the market, at the average market price during the period, using the proceeds received upon settlement. The Company anticipates that there will be no dilutive effect on its earnings per share related to the equity units, except during periods when the average market price of a share of the Company's common stock is above the threshold appreciation price of $57.645. Because the average market price of The Hartford's common stock during the period from date of issuance through December 31, 2002 was below this threshold appreciation price, the shares issuable under the purchase contract component of the equity units have not been included in the diluted earnings per share calculation for the period. On August 29, 2002, The Hartford issued 4.7% senior notes due September 1, 2007 and received proceeds before underwriting expenses of $300. Interest on the notes is payable semi-annually on March 1 and September 1, commencing on March 1, 2003. The Company used the proceeds to repay $300 of 6.375% senior notes that matured on November 1, 2002. In March 2002, the Company borrowed $16 of short-term commercial notes for general corporate purposes. 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, 2002, 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. For additional information regarding debt, see Note 8 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. - 66 - For a further discussion of Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures, see Note 8(d) of Notes to Consolidated Financial Statements. STOCKHOLDERS' EQUITY Issuance of common stock - On September 13, 2002, The Hartford issued approximately 7.3 million shares of common stock pursuant to an underwritten offering for net proceeds of $330. 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. Increase in authorized shares - At the Company's annual meeting of shareholders held on April 18, 2002, shareholders approved an amendment to Section (a) Article Fourth of the Amended and Restated Certificate of Incorporation to increase the aggregate authorized number of shares of common stock from 400 million to 750 million. Dividends - The Hartford declared $262 and paid $257 in dividends to shareholders in 2002, declared $242 and paid $235 in 2001 and declared $214 and paid $210 in 2000. On October 24, 2002, The Hartford's Board of Directors declared a quarterly dividend of $0.27 per share payable on January 2, 2003 to shareholders of record as of December 2, 2002. The dividend represented a 4% increase from the prior quarter. PENSION PLANS AND OTHER POSTRETIREMENT BENEFITS The Company maintains a U.S. qualified defined benefit pension plan (the "Plan") that covers substantially all employees, as well as unfunded excess plans to provide benefits in excess of amounts permitted to be paid to participants of the Plan under the provisions of the Internal Revenue Code. Additionally, the Company has entered into individual retirement agreements with certain current and retired directors providing for unfunded supplemental pension benefits. The Company made a voluntary contribution of $90 in cash to the Plan in 2001 and made no contributions in 2002 or 2000. Pension expense reflected in the Company's operating earnings was $67, $57 and $48 in 2002, 2001 and 2000, respectively. The Company estimates its 2003 pension expense will be approximately $135, based on current assumptions provided below. The assumptions that primarily impact the amount of the Company's pension obligations and periodic pension expense are the weighted-average discount rate and the asset portfolio's long-term rate of return. In determining the discount rate assumption, the Company utilizes information provided by its plan actuaries. In particular, the Company uses an interest rate yield curve developed and published by its plan actuaries to make judgments pursuant to EITF Topic No. D-36, "Selection of Discount Rates Used for Measuring Defined Benefit Pension Obligations and Obligations of Postretirement Benefit Plans Other Than Pensions". The yield curve is comprised of AAA/AA bonds with maturities between zero and thirty years. Discounting the cash flows of the Company's pension plan using this yield curve, it was determined that 6.50% is the appropriate discount rate as of December 31, 2002 to calculate the Company's accrued benefit cost liability. Accordingly, as prescribed by SFAS No. 87, "Employers' Accounting for Pensions", the 6.50% discount rate will also be used to determine the Company's 2003 pension expense. The Company determines the long-term rate of return assumption for the Plan's asset portfolio based on analysis of the portfolio's historical compound rates of return since 1979 (the earliest date for which comparable portfolio data is available) over rolling 5 year, 10 year and 20 year periods, balanced along with future long-term return expectations. The Company selected these periods, as well as shorter durations, to assess the portfolio's volatility, duration and total returns as they relate to pension obligation characteristics, which are influenced by the Company's workforce demographics. While the historical return of the Plan's portfolio has been 10.7% since 1979, management lowered its long-term rate of return assumption from 9.75% to 9.00% as of December 31, 2002 based on its long-term outlook with respect to the markets, which has been influenced by the poor equity market performance in recent years coupled with the recent decline in fixed income security yields during 2002. The Plan's asset portfolio is generally structured over time to include approximately 60% equity securities (substantially securities issued by United States-based companies) and 40% fixed income securities (substantially investment grade and above). At December 31, 2002, the portfolio composition varied from the targeted mix and was approximately 55% equity securities and 45% fixed income securities due in part to declines in the equity markets and declining interest rates. As provided for under SFAS No. 87, the Company uses a five-year averaging method to determine the market-related value of Plan assets, which is used to determine the expected return component of pension expense. Under this methodology, asset gains/losses that result from returns that differ from the Company's long-term rate of return assumption are recognized in the market-related value of assets on a level basis over a five year period. Due primarily to the unfavorable performance of the equity markets in 2001 and 2002, the actual asset return/(loss) for the Plan was $(111) and $(119) for the years ended December 31, 2002 and 2001, respectively, as compared to an expected return of $183 and $168 for the years ended December 31, 2002 and 2001, respectively. These differentials will be fully reflected in the market-related value of Plan assets over the next five years using the methodology described above. The effect of the 2002 asset return loss has caused the level of unrecognized net losses to exceed the allowable amortization corridor as defined under SFAS No. 87. Based on the selected 2003 discount rate of 6.50% and taking into account estimated future minimum funding, the differential between actual and expected performance in 2002 will increase annual pension expense in future years by approximately $10 in 2003, increasing to approximately $40 in 2007. Additionally, the decrease in the long-term rate of return assumption from 9.75% - 67 - to 9.00% is expected to increase the Company's annual pension expense by approximately $15. During 2002, the change in the discount rate from 7.50% (as of December 31, 2001) to 6.50% (as of December 31, 2002) increased the projected benefit obligation ("PBO") by $354. The effect of this increase in PBO will serve to increase annual pension expense by approximately $40, assuming no future changes in discount rates going forward. Changes in the economic assumptions used to determine pension expense will impact the Company's pension expense. As mentioned earlier, the two economic assumptions that have the most impact on pension expense are the discount rate and the expected long-term rate of return. To illustrate the impact of these assumptions on annual pension expense for 2003 and going forward, a 25 basis point change in the discount rate will increase/decrease pension expense by approximately $12, and a 25 basis point change in the long-term asset return assumption will increase/decrease pension expense by approximately $5. While the Company has significant discretion in making voluntary contributions to the Plan, the Employee Retirement Income Security Act of 1974 regulations mandate minimum contributions in certain circumstances. Under current assumptions, the 2003 required minimum funding contributions are estimated to be approximately $40. CASH FLOW 2002 2001 2000 - ---------------------------------------------------------------- Net cash provided by operating activities $ 2,649 $ 2,303 $ 2,435 Net cash used for investing activities $ (6,624) $ (5,536) $ (2,164) Net cash provided by (used for) financing activities $ 3,989 $ 3,365 $ (208) Cash - end of year $ 377 $ 353 $ 227 ================================================================ 2002 COMPARED TO 2001 -- The increase in cash provided by operating activities was primarily the result of higher net income reported for the year ended December 31, 2002 than for the prior year as well as an increase in income tax refunds received in 2002 compared with the prior year. The increase in cash provided by financing activities was primarily the result of increased proceeds from investment and universal life-type contracts, partially offset by lower proceeds received from issuances of common stock and no issuances of trust preferred securities in 2002. The increase in cash from financing activities accounted for the majority of the change in cash for investing activities. 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. The cash flows from operating activities were comparable with prior year. Operating cash flows in each of the last three years have been adequate to meet liquidity requirements. RATINGS Ratings are an important factor in establishing the competitive position in the insurance and financial services marketplace. 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. In the event the Company's ratings are downgraded, the level of revenues or the persistency of the Company's business may be adversely impacted. The following table summarizes The Hartford's significant United States member companies' financial ratings from the major independent rating organizations as of February 28, 2003. A.M. STANDARD BEST FITCH & POOR'S MOODY'S - ----------------------------------------------------------------- INSURANCE FINANCIAL STRENGTH 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-2 P-1 Hartford Capital I quarterly income preferred securities a- A- BBB A3 Hartford Capital III trust originated preferred securities a- A- BBB A3 Hartford Life, Inc.: Senior debt a+ A A- A2 Commercial paper -- F-1 A-2 P-1 Hartford Life, Inc.: Capital I and II trust preferred securities a- A- BBB A3 Hartford Life Insurance Company: Short Term Rating -- -- A-1+ P-1 ================================================================= The agencies consider many factors in determining the final rating of an insurance company. One consideration is the relative level of statutory surplus necessary to support the business written. Statutory surplus represents the capital of the insurance company reported in accordance with accounting practices prescribed by the applicable state insurance department. The table below sets forth statutory surplus for the Company's insurance companies. 2002 2001 - ------------------------------------------------------------------ Life Operations $ 3,019 $ 2,991 Property & Casualty Operations 5,131 4,159 - ------------------------------------------------------------------ TOTAL $ 8,150 $ 7,150 ================================================================== On January 28, 2003, following The Hartford's announcement that it is commencing a comprehensive review of its asbestos loss reserves, A.M. Best Co. placed under review with negative implications the commercial paper and debt ratings of The Hartford Financial Services Group, Inc. ("HFSG") and Hartford Life, Inc. Concurrently, the financial strength ratings of The Hartford's various life and property and casualty subsidiaries remain unaffected. On December 16, 2002, all of The - 68 - Hartford's financial strength and debt ratings were affirmed. The under review status is expected to be completed in conjunction with the Company's completion of its asbestos reserve study prior to the end of second quarter 2003. On January 28, 2003, Fitch Ratings placed its fixed income ratings for HFSG and its insurer financial strength ratings for The Hartford Fire Intercompany Pool on Rating Watch Negative. Ratings for HFSG's life insurance subsidiaries and fixed income ratings at the life insurance operation's intermediate holding company, Hartford Life, Inc., were not impacted by Fitch's rating actions and remain on stable outlook. Fitch's rating action followed the Company's announcement that it is commencing a comprehensive review of its asbestos loss reserves. Fitch anticipates responding to the Rating Watch status upon completion of the asbestos review or potentially sooner if certain uncertainties are resolved earlier. On September 19, 2002, Fitch Ratings lowered the ratings of The Hartford Life Group as part of a comprehensive industry review of all North American life insurance company ratings. For The Hartford Life Group, Fitch stated the rating action was driven primarily by Fitch's opinion that most of the very strong, publicly owned insurance organizations are more appropriately rated in the `AA' rating category. Fitch also changed its view on the variable annuity business and stated that it believes that the associated risks, mainly variable earnings, are greater than previously considered. Fitch's long-term fixed income ratings on The Hartford Financial Services Group, Inc. were also lowered, while the affiliated property and casualty insurer financial strength ratings were affirmed. The rating outlooks are stable. On January 28, 2003, Moody's confirmed the ratings of HFSG and its subsidiaries, including the ratings of Hartford Life, Inc. following the Company's announcement that it is commencing a comprehensive review of its asbestos loss reserves. The review is expected to be completed during the second quarter 2003. In the same action, Moody's changed the outlook on the debt ratings for both the parent company and HLI to negative from stable and also placed a negative outlook on the insurance financial strength ratings of members of The Hartford's property and casualty intercompany pool. The negative outlook reflects the significant uncertainty surrounding the Company's asbestos liabilities. The outlook for the insurance financial strength ratings (Aa3) for the life insurance companies remains stable. On September 4, 2002, Moody's revised its outlook on The Hartford's debt ratings to Stable from Negative citing The Hartford's commitment to maintaining its capital strength in the event of a significant unforeseen loss or adverse development that would weaken its capital position. On November 26, 2002, Standard & Poor's removed from CreditWatch its counterparty credit rating on The Hartford Financial Services Group, Inc. and related entities and lowered it to `A-' from `A' reflecting concerns about trends in the retirement and savings sector, the consolidated capitalization of the Company's insurance operations and the increasingly competitive environment for spread-based and equity-linked retirement and savings products. At the same time, Standard & Poor's lowered to AA- from AA the insurance financial strength ratings of Hartford Fire Intercompany Pool and the life insurance subsidiaries of HLI. 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. EQUITY MARKETS For a discussion of the potential impact of the equity markets on capital and liquidity, see the Capital Markets Risk Management section under "Market Risk". 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, common stock, debt securities and borrowings from its credit facilities. 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 unassigned 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 - 69 - 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, 2002, the maximum amount of statutory dividends which may be paid to The Hartford Financial Services Group, Inc. from its insurance subsidiaries in 2003, without prior regulatory approval, is $1.8 billion. 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.) TERRORISM RISK INSURANCE ACT OF 2002 On November 26, 2002, President Bush signed the Terrorism Risk Insurance Act of 2002 (the "Act") into law. The Act established a program that will run through 2005 that provides a backstop for insurance-related losses resulting from any "act of terrorism" certified by the Secretary of the Treasury, in concurrence with the Secretary of State and Attorney General. The Act created a program under which the federal government will pay 90% of covered losses after an insurer's losses exceed a deductible determined by a statutorily prescribed formula, up to a combined annual aggregate limit for the federal government and all insurers of $100 billion. If an act of terrorism or acts of terrorism result in covered losses exceeding the $100 billion annual limit, insurers with losses exceeding their deductibles will not be responsible for additional losses. The statutory formula for determining a company's deductible for each year is based on the company's direct commercial earned premiums for the prior calendar year multiplied by a specified percentage. The specified percentages are 7% for 2003, 10% for 2004 and 15% for 2005. For example, based on The Hartford's 2002 direct commercial earned premiums of $5 billion, The Hartford's 2003 deductible would be $350. The Act applies to a significant portion of The Hartford's commercial property and casualty contracts, but it specifically excludes some of The Hartford's other insurance business, including crop or livestock insurance, reinsurance and personal lines business. The Act currently does not apply to group life insurance contracts but permits the Secretary of the Treasury to extend the backstop protection to them. The Act requires all property and casualty insurers, including The Hartford, to make terrorism insurance coverage available in all of their covered commercial property and casualty insurance policies (as defined in the Act). The Hartford will evaluate risks with terrorism exposures by applying its internally developed underwriting guidelines and control plans. The Hartford does not anticipate significant increases in premiums due to the Act. 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, 2002, each of The Hartford's insurance subsidiaries within Life and Property & Casualty had more than sufficient capital to meet the NAIC's RBC requirements. CONTINGENCIES Legal Proceedings - The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid claim and claim adjustment expense reserves. Subject to the discussion of the litigation involving MacArthur in Part I, Item 3. Legal Proceedings and the uncertainties related to asbestos and environmental claims discussed in the MD&A under the caption "Other Operations," management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of The Hartford. The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, premises liability and inland marine. The Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's consolidated results of operations or cash flows in particular quarterly or annual periods. 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 - 70 - 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. LEGISLATIVE INITIATIVES 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 and annuity products, as well as changes in individual income tax rates and the estate tax. These 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. The Bush Administration's fiscal year 2004 budget contains several proposals that could materially affect the Company's business. In particular, there are proposals that would more fully integrate corporate and individual taxes by permitting the distribution of nontaxable dividends to shareholders under certain circumstances. These proposals, if enacted, could have a material effect on sales of the Company's variable annuities and other retirement savings products, as well as implications for the Company's shareholders, both with respect to the amount of taxable dividends received, as well as the price of and tax basis in their holdings of the Company's common stock. The dividend exclusion proposal, if enacted, also would reduce the federal tax benefits currently received by the Company stemming from the dividends received deduction. There also are proposals in the federal 2004 budget submitted by President Bush that would create new investment vehicles with larger annual contribution limits for individuals to use for savings purposes. Some of these proposed vehicles would have significant tax advantages, and could have material effects on the Company's product portfolio. There have also been proposals regarding certain deferred compensation arrangements that could have negative effects on the Company's product sales. Prospects for enactment of this legislation in 2003 are uncertain. Therefore, any potential effect on the Company's financial condition or results of operations cannot be reasonably estimated at this time. Congress is likely to consider a number of legal reform proposals this year. Among them is legislation that would reduce the number and type of national class actions certified by state judges by updating the federal rules on diversity jurisdiction. Other proposals that will likely be considered by Congress this year include those to reform the asbestos litigation environment by, among other things, implementing medical criteria that must be met by asbestos claimants or establishing an administrative claims facility to compensate those with asbestos-related injuries. Prospects for enactment of these proposals in 2003 are uncertain. 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 $26 in 2002, $6 in 2001 and $2 in 2000. NAIC CODIFICATION The NAIC adopted the Codification of Statutory Accounting Principles ("Codification") in March 1998. The effective date for the statutory accounting guidance was January 1, 2001. Each of The Hartford's domiciliary states has adopted Codification, and the Company has made the necessary changes in its statutory reporting required for implementation. The impact of applying the new guidance resulted in a benefit of approximately $400 in statutory surplus. OTHER For further information on other contingencies, see Note 16 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. - 71 - 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 2003 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 fiscal year covered by this Form 10-K under the caption "Item 1. Election of Directors - Nominees for Directorships" and "Stock Ownership of Directors, Executive Officers and Certain Shareholders - Section 16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by reference. EXECUTIVE OFFICERS OF THE HARTFORD Information about the executive officers of The Hartford who are also nominees for election as directors is set forth in The Hartford's Proxy Statement. Set forth below is information about the other executive officers of the Company: DAVID M. JOHNSON (Executive Vice President and Chief Financial Officer) Mr. Johnson, 42, 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, 52, 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. ROBERT J. PRICE (Senior Vice President and Controller) Mr. Price, 52, is Senior Vice President and Controller of the Company. Mr. Price joined the Company in June 2002 in his current role. Prior to joining the company, Mr. Price was President and Chief Executive Officer of CitiInsurance, the international insurance indirect subsidiary of Citigroup, Inc., from May 2000 to December 2001. From April 1989 to April 2000, Mr. Price held various positions at Aetna, Inc., including Senior Vice President and Chief Financial Officer of Aetna International and Vice President and Corporate Controller. Previously, Mr. Price was an Audit Partner at Price Waterhouse. Mr. Price is a member of the American Institute and the Connecticut Society of Certified Public Accountants. NEAL S. WOLIN (Executive Vice President and General Counsel) Mr. Wolin, 41, 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 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, 42, 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. - 72 - 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 AND RELATED STOCKHOLDER MATTERS Certain of 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. The following table provides information as of December 31, 2002 about the securities authorized for issuance under the Company's equity compensation plans. The Company maintains The Hartford 1995 Incentive Stock Plan (the "1995 Plan"), The Hartford 2000 Incentive Stock Plan (the "2000 Plan"), The Hartford Employee Stock Purchase Plan (the "ESPP"), and The Hartford 1996 Restricted Stock Plan for Non-Employee Directors (the "Director's Plan"), pursuant to which it may grant equity awards to eligible persons. In addition, the Company maintains the 2000 PLANCO Non-employee Option Plan (the "PLANCO Plan"), pursuant to which it may grant awards to non-employee wholesalers of PLANCO products.
EQUITY COMPENSATION PLAN INFORMATION (a) (b) (c) -------------------------- ---------------------- ------------------------------------ Number of Securities to Weighted-average Number of Securities Remaining be Issued Upon Exercise Exercise Price of Available for Future Issuance Under of Outstanding Options, Outstanding Options, Equity Compensation Plans (Excluding Warrants and Rights Warrants and Rights Securities Reflected in Column (a)) - ------------------------------------------------------------------------------------------------------------------------------------ Equity compensation plans approved by stockholders 19,992,631 $49.54 12,334,644 [1] [2] [3] Equity compensation plans not approved by stockholders 179,162 $62.04 -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL 20,171,793 $49.66 12,334,644 ==================================================================================================================================== [1] Of these shares, 3,577,878 shares remain available for purchase under the ESPP. [2] Of these shares, a maximum of 3,035,113 shares remain available for issuance as restricted stock or performance shares under the 2000 Plan. [3] Of these shares, 140,085 shares remain available for issuance under the Director's Plan.
SUMMARY DESCRIPTION OF THE 2000 PLANCO NON-EMPLOYEE OPTION PLAN The Company's Board of Directors adopted the PLANCO Plan on July 20, 2000, and amended it on February 20, 2003 to increase the number of shares of the Company's common stock subject to the plan to 450,000 shares. The stockholders of the Company have not approved the PLANCO Plan. Eligibility - Any non-employee independent contractor serving on the wholesale sales force as an insurance agent who is an exclusive agent of the Company or who derives more than 50% of his or her annual income from the Company is eligible. Terms of options - Nonqualified stock options ("NQSOs") to purchase shares of common stock are available for grant under the PLANCO Plan. The administrator of the PLANCO Plan, the Compensation and Personnel Committee, (i) determines the recipients of options under the PLANCO Plan, (ii) determines the number of shares of common stock covered by such options, (iii) determines the dates and the manner in which options become exercisable (which is typically in three equal annual installments beginning on the first anniversary of the date of grant), (iv) sets the exercise price of options (which may be less than, equal to or greater than the fair market value of common stock on the date of grant) and (v) determines the other terms and conditions of each option. Payment of the exercise price may be made in cash, other shares of the Company's common stock or through a same day sale program. The term of an NQSO may not exceed ten years from the date of grant. If an optionee's relationship with the Company terminates for any reason, other than for cause, the option remains exercisable for a fixed period of three months, not to exceed the remainder of the option's term. If the optionee's relationship is terminated for cause, the options are canceled immediately. Acceleration in Connection with a Change in Control - Upon the occurrence of a change in control, each option outstanding on the date of such change in control, and which is not then fully vested and exercisable, shall immediately vest and become exercisable. In general, a "Change in Control" will be deemed to have occurred upon the acquisition of 20% or more of the outstanding voting stock of the Company, a tender or exchange offer to acquire 15% or more of the outstanding voting stock of the Company, certain mergers or corporate transactions in which the Company is not the surviving entity or a change in greater than 50% of the Board members over a 12-month period. See Note 11 of Notes to Consolidated Financial Statements for a description of the 1995 Plan, the 2000 Plan and the ESPP. - 73 - ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS None. ITEM 14. CONTROLS AND PROCEDURES EVALUATION OF DISCLOSURE The Company's principal executive officer and its principal financial officer, based on their evaluation of the Company's disclosure controls and procedures (as defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days prior to the filing of this Annual Report on Form 10-K, have concluded that the Company's disclosure controls and procedures are adequate and effective for the purposes set forth in the definition thereof in Exchange Act Rule 13a-14(c). CHANGES IN INTERNAL CONTROLS There were no significant changes in the Company's internal controls or in other factors that could significantly affect the Company's internal controls subsequent to the date of their evaluation. PART IV ITEM 15. 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 - During the fourth quarter of 2002, The Hartford filed the following Current Report on Form 8-K: 1. On October 29, 2002, The Hartford filed a Current Report on Form 8-K with the SEC for the purpose of reporting certain litigation matters under Item 9. Pursuant to General Instruction B of Form 8-K, reports submitted under Item 9 are not deemed to be "filed" for the purpose of Section 18 of the Exchange Act or otherwise subject to the liabilities of that section. The Hartford is not incorporating, and will not incorporate, by reference this report into a filing under the Securities Act or the Exchange Act. (c) See Item 15(a)(3). (d) See Item 15(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 - 74 - INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES Page(s) Report of Management F-1 Independent Auditors' Report F-2 Consolidated Statements of Income for the three years ended December 31, 2002 F-3 Consolidated Balance Sheets as of December 31, 2002 and 2001 F-4 Consolidated Statements of Changes in Stockholders' Equity for the three years ended December 31, 2002 F-5 Consolidated Statements of Comprehensive Income for the three years ended December 31, 2002 F-5 Consolidated Statements of Cash Flows for the three years ended December 31, 2002 F-6 Notes to Consolidated Financial Statements F-7-42 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 Deloitte & Touche LLP, independent auditors, in order to perform their audits 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 Hartford's 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. Another important element is management's recognition and acknowledgement within the organization of its responsibility for fostering a strong, ethical climate, thereby firmly establishing an expectation that The Hartford's affairs be 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 INDEPENDENT AUDITORS' REPORT To the Board of Directors and Stockholders of The Hartford Financial Services Group, Inc. Hartford, Connecticut We have audited the accompanying consolidated balance sheets of The Hartford Financial Services Group, Inc. and its subsidiaries (collectively, "the Company") as of December 31, 2002 and 2001, and the related consolidated statements of income, changes in stockholders' equity, comprehensive income and cash flows for each of the three years in the period ended December 31, 2002. Our audits also included the financial statement schedules listed in the Index at Item 15. These financial statements and financial statement schedules are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedules based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States of America. 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, such consolidated financial statements present fairly, in all material respects, the financial position of The Hartford Financial Services Group, Inc. and its subsidiaries as of December 31, 2002 and 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, in conformity with accounting principles generally accepted in the United States of America. Also, in our opinion, such financial statement schedules, when considered in relation to the basic consolidated financial statements taken as a whole, present fairly in all material respects the information set forth therein. As discussed in Note 1 (d) of the consolidated financial statements, the Company changed its method of accounting for goodwill and indefinite-lived intangible assets in 2002. In addition, the Company changed its method of accounting for derivative instruments and hedging activities and its method of accounting for the recognition of interest income and impairment on purchased retained beneficial interests in securitized financial assets in 2001. Deloitte & Touche LLP Hartford, Connecticut February 19, 2003 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) 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------- REVENUES Earned premiums $ 10,301 $ 9,409 $ 8,941 Fee income 2,577 2,633 2,484 Net investment income 2,953 2,850 2,674 Other revenue 476 491 459 Net realized capital gains (losses) (400) (236) 145 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 15,907 15,147 14,703 ------------------------------------------------------------------------------------------------------------------- BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 9,524 9,764 8,419 Amortization of deferred policy acquisition costs and present value of future profits 2,241 2,214 2,213 Insurance operating costs and expenses 2,317 2,037 1,958 Goodwill amortization -- 60 28 Other expenses 757 731 667 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 14,839 14,806 13,285 ------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 1,068 341 1,418 Income tax expense (benefit) 68 (200) 390 - ---------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 1,000 541 1,028 Minority interest in consolidated subsidiary -- -- (54) - ---------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 1,000 541 974 Cumulative effect of accounting changes, net of tax -- (34) -- - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,000 $ 507 $ 974 =================================================================================================================== BASIC EARNINGS PER SHARE Income before cumulative effect of accounting changes $ 4.01 $ 2.27 $ 4.42 Cumulative effect of accounting changes, net of tax -- (0.14) -- - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 4.01 $ 2.13 $ 4.42 DILUTED EARNINGS PER SHARE Income before cumulative effect of accounting changes $ 3.97 $ 2.24 $ 4.34 Cumulative effect of accounting changes, net of tax -- (0.14) -- - ---------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 3.97 $ 2.10 $ 4.34 - ---------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 249.4 237.7 220.6 Weighted average common shares outstanding and dilutive potential common shares 251.8 241.4 224.4 - ---------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share $ 1.05 $ 1.01 $ 0.97 ============================================================================================================================
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) 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------------- ASSETS Investments ----------- Fixed maturities, available for sale, at fair value (amortized cost of $46,241 and $39,154) $ 48,889 $ 40,046 Equity securities, available for sale, at fair value (cost of $937 and $1,289) 917 1,349 Policy loans, at outstanding balance 2,934 3,317 Other investments 1,790 1,977 - ----------------------------------------------------------------------------------------------------------------------------------- Total investments 54,530 46,689 Cash 377 353 Premiums receivable and agents' balances 2,611 2,790 Reinsurance recoverables 5,095 5,162 Deferred policy acquisition costs and present value of future profits 6,689 6,420 Deferred income taxes 545 693 Goodwill 1,721 1,721 Other assets 3,397 3,045 Separate account assets 107,078 114,720 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 182,043 $ 181,593 =========================================================================================================================== LIABILITIES Reserve for future policy benefits and unpaid claims and claim adjustment expenses Property and casualty $ 17,159 $ 17,036 Life 9,505 8,819 Other policyholder funds and benefits payable 23,018 19,355 Unearned premiums 3,989 3,436 Short-term debt 315 599 Long-term debt 2,596 1,965 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,468 1,412 Other liabilities 6,181 5,238 Separate account liabilities 107,078 114,720 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 171,309 172,580 =========================================================================================================================== COMMITMENTS AND CONTINGENCIES (NOTE 16) STOCKHOLDERS' EQUITY Common stock - 750,000,000 and 400,000,000 shares authorized, 258,184,483 and 248,477,367 shares issued, $0.01 par value 3 2 Additional paid-in capital 2,784 2,362 Retained earnings 6,890 6,152 Treasury stock, at cost - 2,943,565 and 2,941,340 shares (37) (37) Accumulated other comprehensive income 1,094 534 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 10,734 9,013 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 182,043 $ 181,593 ===========================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-4
THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY For the years ended December 31, -------------------------------------------------- (In millions, except for share data) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ COMMON STOCK/ADDITIONAL PAID-IN CAPITAL Balance at beginning of period $ 2,364 $ 1,688 $ 1,553 Issuance of common stock in underwritten offerings 330 569 -- Issuance of equity units (33) -- -- Issuance of shares under incentive and stock purchase plans 101 93 (51) Issuance of common stock from treasury -- -- 56 Conversion of Hartford Life, Inc. employee stock options and restricted -- -- 84 shares Tax benefit on employee stock options and awards 25 14 46 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of period 2,787 2,364 1,688 - ------------------------------------------------------------------------------------------------------------------------------------ RETAINED EARNINGS Balance at beginning of period 6,152 5,887 5,127 Net income 1,000 507 974 Dividends declared on common stock (262) (242) (214) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of period 6,890 6,152 5,887 - ------------------------------------------------------------------------------------------------------------------------------------ TREASURY STOCK, AT COST Balance at beginning of period (37) (480) (942) Issuance of common stock in underwritten offerings -- 446 -- Issuance of shares under incentive and stock purchase plans -- 4 212 Issuance of common stock from treasury -- -- 342 Conversion of Hartford Life, Inc. employee stock options and restricted -- -- 8 shares Treasury stock acquired -- (7) (100) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of period (37) (37) (480) - ------------------------------------------------------------------------------------------------------------------------------------ ACCUMULATED OTHER COMPREHENSIVE INCOME Balance at beginning of period 534 369 (272) Change in unrealized gain on securities, net of tax Change in unrealized gain on securities 838 110 695 Cumulative effect of accounting change -- (1) -- Change in net gain on cash-flow hedging instruments, net of tax Change in net gain on cash-flow hedging instruments 65 39 -- Cumulative effect of accounting change -- 24 -- Foreign currency translation adjustments 21 (3) (50) Minimum pension liability adjustment, net of tax (364) (4) (4) - ------------------------------------------------------------------------------------------------------------------------------------ Total other comprehensive income 560 165 641 - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of period 1,094 534 369 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 10,734 $ 9,013 $ 7,464 ==================================================================================================================================== OUTSTANDING SHARES (IN THOUSANDS) Balance at beginning of period 245,536 226,290 217,226 Issuance of common stock in underwritten offerings 7,303 17,042 -- Issuance of shares under incentive and stock purchase plans 2,402 2,331 4,460 Issuance of common stock from treasury -- -- 7,250 Conversion of Hartford Life, Inc. employee stock options and restricted -- -- 186 shares Treasury stock acquired -- (127) (2,832) - ------------------------------------------------------------------------------------------------------------------------------------ Balance at end of period 255,241 245,536 226,290 ====================================================================================================================================
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME For the years ended December 31, --------------------------------------------------- (In millions) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ COMPREHENSIVE INCOME Net income $ 1,000 $ 507 $ 974 - ------------------------------------------------------------------------------------------------------------------------------------ Other Comprehensive Income Change in unrealized gain on securities, net of tax Change in unrealized gain on securities 838 110 695 Cumulative effect of accounting change -- (1) -- Change in net gain on cash-flow hedging instruments, net of tax Change in net gain on cash-flow hedging instruments 65 39 -- Cumulative effect of accounting change -- 24 -- Foreign currency translation adjustments 21 (3) (50) Minimum pension liability adjustment, net of tax (364) (4) (4) - ------------------------------------------------------------------------------------------------------------------------------------ Total other comprehensive income 560 165 641 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL COMPREHENSIVE INCOME $ 1,560 $ 672 $ 1,615 ====================================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-5
THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the years ended December 31, -------------------------------------------------- (In millions) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 1,000 $ 507 $ 974 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Amortization of deferred policy acquisition costs 2,241 2,214 2,213 Additions to deferred policy acquisition costs (2,859) (2,739) (2,573) Change in: Liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 1,702 2,737 1,130 Reinsurance recoverables 191 (599) (85) Receivables, payables and accruals (282) 197 126 Accrued and deferred income taxes 202 (119) 398 Minority interest in consolidated subsidiary -- -- 54 Net realized capital (gains) losses 400 236 (145) Depreciation and amortization 104 85 63 Cumulative effect of accounting changes, net of tax -- 34 -- Other, net (50) (250) 280 - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 2,649 2,303 2,435 ==================================================================================================================================== INVESTING ACTIVITIES Purchase of investments (22,085) (16,871) (15,104) Sale of investments 12,740 9,850 11,985 Maturity of investments 2,910 2,760 2,001 Purchase of business/affiliate, net of cash acquired -- (1,105) (1,391) Sale of affiliates -- 39 545 Additions to property, plant and equipment (189) (209) (200) - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH USED FOR INVESTING ACTIVITIES (6,624) (5,536) (2,164) ==================================================================================================================================== FINANCING ACTIVITIES Short-term debt, net 16 264 4 Issuance of long-term debt 617 400 516 Issuance of trust preferred securities -- 684 -- Repayment of long-term debt (300) (200) -- Repayment of trust preferred securities -- (500) -- Issuance of common stock 330 1,015 398 Net proceeds from (disbursements for) investment and universal life-type contracts charged against policyholder accounts 3,491 1,867 (947) Dividends paid (257) (235) (210) Acquisition of treasury stock -- (7) (100) Proceeds from issuances of shares under incentive and stock purchase plans 92 77 131 - ------------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 3,989 3,365 (208) ==================================================================================================================================== Foreign exchange rate effect on cash 10 (6) (18) - ------------------------------------------------------------------------------------------------------------------------------------ Net increase in cash 24 126 45 Cash - beginning of year 353 227 182 - ------------------------------------------------------------------------------------------------------------------------------------ CASH - END OF YEAR $ 377 $ 353 $ 227 ==================================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - ------------------------------------------------ NET CASH PAID (RECEIVED) DURING THE YEAR FOR: Income taxes $ (102) $ (52) $ 95 Interest $ 260 $ 275 $ 245
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. F-6 THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN MILLIONS, EXCEPT FOR PER SHARE DATA, UNLESS OTHERWISE STATED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (A) BASIS OF PRESENTATION The Hartford Financial Services Group, Inc. and its consolidated subsidiaries ("The Hartford" or the "Company") provide investment products and life and property and casualty insurance to both individual and business customers in the United States and internationally. 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 consolidated financial statements, Zwolsche's operating results are included in The Hartford's Consolidated Statements of Income through the date of sale. (For further discussion of this disposition, see Note 18(b).) 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 18(a).) The consolidated financial statements have been prepared on the basis of accounting principles generally accepted in the United States of America, which differ materially from the accounting prescribed by various insurance regulatory authorities. Less than majority-owned subsidiaries in which The Hartford has at least a 20% interest are reported on the equity basis. All material intercompany transactions and balances between The Hartford, its subsidiaries and affiliates have been eliminated. (B) USE OF ESTIMATES The preparation of financial statements, in conformity with accounting principles generally accepted in the United States of America, requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates include those used in determining reserves; deferred policy acquisition costs; valuation of investments and derivative instruments; pension and other postretirement benefits; and contingencies. (C) RECLASSIFICATIONS Certain reclassifications have been made to prior year financial information to conform to the current year classifications. (D) ADOPTION OF NEW ACCOUNTING STANDARDS In April 2002, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Under historical guidance, all gains and losses resulting from the extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 rescinds that guidance and requires that gains and losses from extinguishments of debt be classified as extraordinary items only if they are both unusual and infrequent in occurrence. SFAS No. 145 also amends SFAS No. 13, "Accounting for Leases" for the required accounting treatment of certain lease modifications that have economic effects similar to sale-leaseback transactions. SFAS No. 145 requires that those lease modifications be accounted for in the same manner as sale-leaseback transactions. In the fourth quarter of 2002, the Company early adopted the provisions of SFAS No. 145 related to the rescission of SFAS No. 4 retroactively and reclassified the 2001 extraordinary loss from early retirement of debt of $13, before-tax, to other expenses. The provisions of SFAS No. 145 related to SFAS No. 13 are effective for transactions occurring after May 15, 2002. Adoption of the provisions of SFAS No. 145 related to SFAS No. 13 did not have a material impact on the Company's consolidated financial condition or results of operations. Effective September 2001, the Company adopted Emerging Issues Task Force ("EITF") Issue No. 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.) 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 that applies to all long-lived assets, including discontinued operations. SFAS No. 144 requires that 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 SFAS No. 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144 did not have a material impact on the Company's consolidated financial condition or results of operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No. 141 eliminates the pooling-of- F-7 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (D) ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED) 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. Adoption of SFAS No. 141 did not have a material impact on the Company's consolidated financial condition or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, effective January 1, 2002 amortization of goodwill is precluded; however, its recoverability must be periodically (at least annually) reviewed and tested for impairment. Goodwill must be tested at the reporting unit level 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 within twelve months of adoption. During the second quarter of 2002, the Company completed the review and analysis of its goodwill asset in accordance with the provisions of SFAS No. 142. The result of the analysis indicated that each reporting unit's fair value exceeded its carrying amount, including goodwill. As a result, goodwill for each reporting unit was not considered impaired. SFAS No. 142 also requires that useful lives for intangibles other than goodwill be reassessed and remaining amortization periods be adjusted accordingly. (For further discussion of the impact of SFAS No. 142, see Note 5.) Effective April 1, 2001, the Company adopted EITF Issue No. 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets". Under the consensus, investors in certain securities with contractual cash flows, primarily asset-backed securities, are required to periodically update their best estimate of cash flows over the life of the security. If the fair value of the securitized financial asset is less than its carrying amount and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, an other than temporary impairment charge is recognized. The estimated cash flows are also used to evaluate whether there have been any changes in the securitized asset's estimated yield. All yield adjustments are accounted for on a prospective basis. Upon adoption of EITF Issue No. 99-20, the Company recorded an $11 charge as the net of tax cumulative effect of the accounting change. Effective January 1, 2001, the Company adopted 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 as the net of tax cumulative effect of the accounting change. This 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 ("AOCI") - Unrealized Gain/Loss on Securities in accordance with SFAS No. 115, "Accounting for Certain Investments in Debt and Equity Securities". 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. Upon adoption, the Company also reclassified $24, net of tax, to AOCI - Gain on Cash-Flow Hedging Instruments from AOCI - Unrealized Gain/Loss on Securities. This reclassification reflects the January 1, 2001 net unrealized gain for all derivatives that were designated as cash-flow hedging instruments. (For further discussion of the Company's derivative-related accounting policies, see Note 1(h).) In September 2000, the 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 consolidated 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, "Accounting for Stock Issued to Employees", regarding the definition of employee, the criteria for determining a non-compensatory plan, the F-8 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (D) ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED) 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 consolidated 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 consolidated financial condition or results of operations. (E) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS In January 2003, the FASB issued Interpretation No. 46, "Consolidation of Variable Interest Entities" ("FIN 46") which requires an enterprise to assess if consolidation of an entity is appropriate based upon its variable economic interests in a variable interest entity ("VIE"). The initial determination of whether an entity is a VIE shall be made on the date at which an enterprise becomes involved with the entity. A VIE is an entity in which the equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. An enterprise shall consolidate a VIE if it has a variable interest that will absorb a majority of the VIEs expected losses if they occur, receive a majority of the entity's expected residual returns if they occur or both. A direct or indirect ability to make decisions that significantly affect the results of the activities of a VIE is a strong indication that an enterprise has one or both of the characteristics that would require consolidation of the VIE. FIN 46 is effective for new VIEs established subsequent to January 31, 2003, and for existing VIEs as of July 1, 2003. The Hartford invests in a variety of investment structures that require analysis under FIN 46, including asset-backed securities, partnerships and certain trust securities and is currently assessing the impact of adopting FIN 46. Based upon a preliminary review, the adoption of FIN 46 is not expected to have a material impact on the Company's financial condition or results of operations as there were no material VIEs identified which would require consolidation. FIN 46 further requires the disclosure of certain information related to VIEs in which the Company holds a significant variable interest. The Company does not believe that it owns any such interests that require disclosure at this time. In November 2002, the FASB issued Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). FIN 45 requires certain guarantees to be recorded at fair value and also requires a guarantor to make new disclosures, even when the likelihood of making payments under the guarantee is remote. In general, the Interpretation applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying that is related to an asset, liability or an equity security of the guaranteed party. The recognition provisions of FIN 45 are effective on a prospective basis for guarantees issued or modified after December 31, 2002. The disclosure requirements are effective for financial statements of interim and annual periods ending after December 15, 2002. See disclosures in Note 1(h), "Other Investment and Risk Management Activities - Specific Strategies". Adoption of this statement is not expected to have a material impact on the Company's consolidated financial condition or results of operations. In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities", which addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies EITF Issue No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring)" ("Issue 94-3"). The principal difference between SFAS No. 146 and Issue 94-3 is that SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred, rather than at the date of an entity's commitment to an exit plan. SFAS No. 146 is effective for exit or disposal activities after December 31, 2002. Adoption of SFAS No. 146 will result in a change in the timing of when a liability is recognized if the Company has restructuring activities after December 31, 2002. (F) EXPENSING STOCK OPTIONS In December 2002, the FASB issued SFAS No. 148, "Accounting for Stock-Based Compensation - Transition and Disclosure and Amendment to FASB No. 123", which provides three optional transition methods for entities that decide to voluntarily adopt the fair value recognition principles of SFAS No. 123, "Accounting for Stock Issued to Employees", and modifies the disclosure requirements of SFAS No. 123. Under the prospective method, stock-based compensation expense is recognized for awards granted after the beginning of the fiscal year in which the change is made. The modified prospective method recognizes stock-based compensation expense related to new and unvested awards in the year of change equal to that which would have been recognized had SFAS No. 123 been adopted as of its effective date, fiscal years beginning after December 15, 1994. The retrospective restatement method recognizes stock compensation costs for the year of change and restates financial statements for all prior periods presented as though the fair value recognition provisions of SFAS No. 123 had been adopted as of its effective date. In January 2003, the Company adopted the fair value recognition provisions of accounting for employee stock compensation. Prior to January 2003, the Company applied the intrinsic value-based provisions set forth in APB Opinion No. 25. Under the F-9 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (F) EXPENSING STOCK OPTIONS (CONTINUED) intrinsic value method, compensation expense is determined on the measurement date, which is the first date on which both the number of shares the employee is entitled to receive, and the exercise price are known. Compensation expense, if any, is measured based on the award's intrinsic value, which is the excess of the market price of the stock over the exercise price on the measurement date. For the years ended December 31, 2002, 2001 and 2000, compensation expense related to the Company's stock-based compensation plans, including non-option plans, was $6, $8 and $23 after-tax, respectively. The expense, including non-option plans, related to stock-based employee compensation included in the determination of net income for 2002 is less than that which would have been recognized if the fair value method had been applied to all awards since the effective date of SFAS No. 123. (For further discussion of the Company's stock compensation plans, see Note 11.) The following table illustrates the effect on net income and earnings per share as if the fair value method had been applied to all outstanding and unvested awards in each period.
For the years ended December 31, -------------------------------------------------- (In millions, except for per share data) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Net income, as reported $ 1,000 $ 507 $ 974 Add: Stock-based employee compensation expense included in reported net income, net of related tax effects [1] 3 2 1 Deduct: Total stock-based employee compensation expense determined under the fair value method for all awards, net of related tax effects (56) (46) (37) - ------------------------------------------------------------------------------------------------------------------------------------ Pro forma net income [2] $ 947 $ 463 $ 938 ==================================================================================================================================== Earnings per share: Basic - as reported $ 4.01 $ 2.13 $ 4.42 Basic - pro forma [2] $ 3.80 $ 1.95 $ 4.25 Diluted - as reported $ 3.97 $ 2.10 $ 4.34 Diluted - pro forma [2] $ 3.76 $ 1.92 $ 4.18 ==================================================================================================================================== [1] Excludes the impact of non-option plans of $3, $6 and $22 for the years ended December 31, 2002, 2001 and 2000, respectively. [2] The pro forma disclosures are not representative of the effects on net income and earnings per share in future years.
The fair value of each option grant was estimated on the date of the grant using the Black-Scholes options-pricing model with the following weighted average assumptions used for grants in 2002, 2001 and 2000: dividend yield of 1.6% for 2002, 1.6% for 2001 and 1.5% for 2000; expected price variability of 40.8% for 2002, 29.1% for 2001 and 35.7% for 2000; risk-free interest rates of 4.27% for 2002 grants, 4.98% for 2001 grants and 6.41% for 2000 grants; and expected lives of six years for 2002, six years for 2001 and four years for 2000. (G) 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" as defined in SFAS No. 115. Accordingly, these securities are carried at fair value with the after-tax difference from amortized cost, as adjusted for the effect of deducting the life and pension policyholders' share related to the Company's immediate participation guaranteed contracts and the related change in amortization of deferred policy acquisition costs, reflected in stockholders' equity as a component of AOCI. 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. The Company's net income from partnerships is included in net investment income. Other investments also include mortgage loans carried at amortized cost and derivatives at fair value. The fair value of securities is based upon quoted market prices when available or broker quotations. Where market prices or broker quotations are not available, management typically estimates the fair value based upon discounted cash flows, applying current interest rates for similar financial instruments with comparable terms and credit quality. The estimated fair value of a financial instrument may differ significantly from the amount that could be realized if the security was sold immediately. Derivative instruments are reported at fair value based upon internally established valuations that are consistent with external valuation models, quotations furnished by dealers in such instrument or market quotations. 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), $(1) and $(9) for the years ended December 31, 2002, 2001 and 2000, 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 and related amortization of deferred policy acquisition costs for certain Life products, are reported as a component of revenues and are determined on a specific identification basis. The Company's accounting policy requires that a decline in the value of a security below its amortized cost basis be assessed to determine if the decline is other than temporary. If so, the security is deemed to be impaired and a charge is recorded in net realized capital losses equal to the difference between the fair value and amortized cost basis of the security. The fair value of the impaired investment becomes its new cost basis. F-10 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (G) INVESTMENTS (CONTINUED) The Company has a security monitoring process overseen by a committee of investment and accounting professionals that identifies securities that, due to certain characteristics, are subjected to an enhanced analysis on a quarterly basis. Such characteristics include, but are not limited to: a deterioration of the financial condition of the issuer, the magnitude and duration of unrealized losses, credit rating and industry category. The primary factors considered in evaluating whether a decline in value for fixed income and equity securities 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, (c) whether the debtor is current on contractually obligated interest and principal payments, and (d) the intent and ability of the Company to retain the investment for a period of time sufficient to allow for any anticipated recovery. Additionally, for certain securitized financial assets with contractual cash flows (including asset-backed securities), EITF Issue No. 99-20 requires the Company to periodically update its best estimate of cash flows over the life of the security. If management determines that the fair value of its securitized financial asset is less than its carrying amount and there has been a decrease in the present value of the estimated cash flows since the last revised estimate, considering both timing and amount, then an other than temporary impairment charge is recognized. Furthermore, 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 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. (H) DERIVATIVE INSTRUMENTS Overview - -------- The Company utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options through one of four Company-approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; to control transaction costs; or to enter into income enhancement and replication transactions. All of the Company's derivative transactions are permitted uses of derivatives under the derivatives use plan filed and/or approved, as applicable, by the State of Connecticut and State of New York insurance departments. The Company does not make a market or trade in these instruments for the express purpose of earning short-term trading profits. 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 investment and 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 AOCI 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 AOCI, depending on whether the hedged 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 foreign currency translation adjustments account within stockholders' equity. Changes in the fair value of derivative instruments held for other investment and risk management purposes are reported in current period earnings as net realized capital gains and losses. As of December 31, 2002, and 2001, the Company carried $299 and $138, respectively, of derivative assets in other investments and $208 and $208, respectively, 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 80-125% of the inverse changes in the fair value or discounted cash flows of the hedged item. Hedge effectiveness is evaluated primarily based on regression analysis or the cumulative change in cash flow or fair value, as appropriate. If it is determined that a derivative is no longer highly effective as a hedge, the Company discontinues hedge accounting in the period in which effectiveness was lost and prospectively, as discussed below under discontinuance of hedge accounting. F-11 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (H) DERIVATIVE INSTRUMENTS (CONTINUED) 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 of the Board of Directors. 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 bifurcated from the host for measurement purposes. The embedded derivative, which is reported with the host instrument, is carried at fair value with changes in value reported in 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 AOCI 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 AOCI 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 years ended December 31, 2002 and 2001, the Company's gross gains and losses representing the total ineffectiveness of all cash-flow hedges were immaterial, with the net impact reported as net realized capital gains and losses. Gains and losses on derivative contracts that are reclassified from AOCI to current period earnings are included in the line item in the statement of income in which the hedged item is recorded. As of December 31, 2002 and 2001, the after-tax deferred net gains on derivative instruments accumulated in AOCI that are expected to be reclassified to earnings during the next twelve months are $7 and $2, respectively. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains/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, 2002 and 2001, the Company held derivative notional value related to strategies categorized as cash-flow hedges of $3.2 billion and $2.6 billion, respectively. For the years ended December 31, 2002 and 2001, the net reclassifications from AOCI to earnings resulting from the discontinuance of cash-flow hedges were immaterial. 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. Ineffectiveness 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, 2002 and 2001, the Company held $2.7 billion F-12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (H) DERIVATIVE INSTRUMENTS (CONTINUED) SFAS No. 133 Categorization of the Company's Hedging Activities (continued) - --------------------------------------------------------------------------- Cash-Flow Hedges (continued) Specific Strategies (continued) and $2.0 billion, respectively, in derivative notional value related to this strategy. The Company enters into foreign currency swaps to hedge the variability in cash flow associated with certain foreign denominated fixed maturity investments. The foreign currency swap agreements are structured to match the foreign currency cash flows of the foreign denominated fixed maturity investments (i.e., par/notional value, currency, initial cost, maturity date, and payment dates). If hedge ineffectiveness exists, it is recorded as net realized capital gain or loss. Notional value of foreign currency swaps at December 31, 2002 and 2001 totaled $389 and $147, respectively. Fair-Value Hedges General For the years ended December 31, 2002 and 2001, the Company's gross gains and losses representing the total ineffectiveness of all fair-value hedges were immaterial, with the net impact reported as net realized capital gains and losses. All components of each derivative's gain or loss are included in the assessment of hedge effectiveness. As of December 31, 2002 and 2001, the Company held $800 and $899, respectively, in derivative notional value related to strategies categorized as fair-value hedges. Specific Strategies During 2001, the Company entered into a callable 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, 2002 and 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 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 par/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, 2002 and 2001, the Company held $180 and $200, respectively, 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 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. Regression calculations are performed quarterly to validate that the changes in value of the swaption offset the inverse changes in value of the aggregate embedded bond call option, within a range of 0.80 to 1.25. 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, 2002 and 2001, the Company held $90 and $133, respectively, in derivative notional value related to this strategy. Other Investment and Risk Management Activities General The Company's other investment and risk management activities primarily relate to strategies used to reduce economic risk or enhance income, and do not receive hedge accounting treatment. Swap agreements, interest rate cap and floor agreements and option contracts are used to reduce economic risk. Income enhancement and replication transactions include F-13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (H) DERIVATIVE INSTRUMENTS (CONTINUED) Other Investment and Risk Management Activities (continued) General (continued) the use of written covered call options, which offset embedded equity call options, total return swaps and synthetic replication of cash market instruments. The change in the value of all derivatives held for other investment and risk management purposes is reported in current period earnings as realized capital gains or losses. For the years ended December 31, 2002 and 2001, the Company recognized an after-tax net gain of $6 and an after-tax net loss of $23, respectively, (reported as net realized capital gains and 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, 2002 and 2001, the Company held $6.8 billion and $4.6 billion, respectively, in derivative notional value related to strategies categorized as Other Investment and 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 experience 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, 2002 and 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 prospectively 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, 2002 and 2001, the Company held $2.5 billion and $2.0 billion, respectively, in derivative notional value related to this strategy. Periodically, the Company enters into swap agreements in which the Company assumes credit exposure from a single entity, referenced index or asset pool. These arrangements are entered into to modify portfolio duration or to increase diversification while controlling transaction costs. The Company assumes credit exposure to individual entities through credit default swaps. In assuming this obligation, the Company receives a periodic fee. These contracts obligate the Company to compensate the derivative counterparty in the event of bankruptcy, failure to pay or restructuring, and in return, the Company receives a debt obligation of the referenced entity. This debt obligation may then be sold to offset the payment made to the counterparty. The maximum potential future exposure to the Company is the notional value of the swap contracts, $137 after-tax as of December 31, 2002. The market value of these swaps was immaterial at December 31, 2002. The Company did not transact credit default swaps in 2001. The term of the credit default swaps range from 3-5 years. The Company also assumes exposure to the change in value of the Lehman CMBS index and an asset pool through total return swaps. As of December 31, 2002 and 2001, the maximum potential future exposure to the Company is $291 and $166, after-tax, respectively. The market value of these swaps at December 31, 2002 and 2001 was a loss of $79 and $105, respectively, which was reported on the consolidated balance sheet in Other Liabilities. The term of the total return swaps range from 6 months to 10 years. At December 31, 2002 and 2001, the Company held $915 and $687, respectively, in derivative notional value related to this strategy. The Company issues an option in an "asset hedging" strategy utilized to monetize the option embedded in certain of its fixed maturity investments. The Company receives a premium for issuing the freestanding option. The written option grants the holder the ability to call the bond at a predetermined strike value. The maximum potential future economic exposure is represented by the then fair value of the bond in excess of the strike value, which is expected to be entirely offset by the appreciation in the value of the embedded long option. The structure is designed such that the fixed maturity investment and freestanding option have identical expected lives, typically 2-5 years. At December 31, 2002 and 2001, the Company held $473 and $580, respectively, in derivative notional value related to the written option and held $473 and $580, respectively, of derivative notional value related to the embedded option. Periodically, in order to mitigate its foreign currency risk, the Company enters into a costless collar strategy. Accordingly, the Company purchases foreign put options and writes foreign call options to hedge the foreign currency exposures in certain of its foreign fixed maturity investments. At December 31, 2002, the maximum potential exposure to the Company was $3 after-tax. At December 31, 2002 and 2001, the Company held $1.1 billion and $0, respectively, in derivative notional value related to this strategy. The term of the options is up to 4 months. During 2002, the Company purchased an interest rate cap as an economic hedge to minimize interest rate risk on Trust Preferred Securities. In a rising interest rate environment, the cap will limit the interest rate to be paid on the interest rate swap that is designated as a fair value hedge of Trust Preferred Securities. At December 31, 2002, the Company held $500 in derivative notional value related to this strategy. F-14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (I) 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 a minimum return to the policyholder. The fees earned for administrative and contractholder maintenance services performed for these separate accounts are included in fee income. (J) 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. The deferred costs are recorded as an asset commonly referred to as deferred policy acquisition costs ("DAC"). At December 31, 2002 and 2001, the carrying value of the Company's Life operations' DAC was $5.2 billion and $5.0 billion, respectively. DAC related to traditional policies are amortized over the premium-paying period in proportion to the present value of annual expected premium income. Adjustments are made each year to recognize actual experience as compared to assumed experience for the current period. DAC 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 estimated gross profits ("EGPs") from projected investment, mortality and expense margins and surrender charges. A portion of the DAC amortization is allocated to realized gains and losses. The DAC balance is also adjusted by an amount that represents the change in amortization of deferred policy acquisition costs that would have been required as a charge or credit to operations had unrealized amounts been realized. Actual gross profits can vary from management's estimates, resulting in increases or decreases in the rate of amortization. The Company regularly evaluates its estimated gross profits to determine if actual experience or other evidence suggests that earlier estimates should be revised. Several assumptions considered to be significant in the development of EGPs include separate account fund performance, surrender and lapse rates, estimated interest spread and estimated mortality. The separate account fund performance assumption is critical to the development of the EGPs related to the Company's variable annuity and variable and interest-sensitive life insurance businesses. The average long-term rate of assumed separate account fund performance used in estimating gross profits for the variable annuity and variable life business was 9% at December 31, 2002 and December 31, 2001. For all other products including fixed annuities and other universal life type contracts the average assumed investment yield ranged from 5% to 8.5% for the years ended December 31, 2002 and 2001. Due to the increased volatility and precipitous decline experienced by the U.S. equity markets in 2002, the Company enhanced its DAC evaluation process during the course of the year. The Company developed sophisticated modeling capabilities, which allowed it to run 250 stochastically determined scenarios of separate account fund performance. These scenarios were then utilized to calculate a reasonable range of estimates for the present value of future gross profits. This range is then compared to the present value of future gross profits currently utilized in the DAC amortization model. As of December 31, 2002, the current estimate falls within the reasonable range, and therefore, the Company does not believe there is evidence to suggest a revision to the EGPs is necessary. Additionally, the Company has performed various sensitivity analyses with respect to separate account fund performance to provide an indication of future separate account fund performance levels, which could result in the need to revise future EGPs. The Company has estimated that a revision to the future EGPs is unlikely in 2003 in the event that the separate account fund performance meets or exceeds the Company's long-term assumption of 9% and that a revision is likely if the overall separate ACCOUNT fund performance is negative for the year. In the event that separate account fund performance falls between 0% and 9% during 2003, the Company will need to evaluate the actual gross profits versus the mean EGPs generated by the stochastic DAC analysis and determine whether or not to make a revision to the future EGPs. Factors that will influence this determination include the degree of volatility in separate account fund performance, when during the year performance becomes negative and shifts in asset allocation within the separate account made by policyholders. The overall return generated by the separate account is dependent on several factors, including the relative mix of the underlying sub-accounts among bond funds and equity funds as well as equity sector weightings. The Company's overall separate account fund performance has been reasonably correlated to the overall performance of the S&P 500 Index, although no assurance can be provided that this correlation will continue in the future. Should the Company change its assumptions utilized to develop EGPs (commonly referred to as "unlocking") the Company would record a charge (or credit) to bring its DAC balance to the level it would have been had EGPs been calculated using the new assumptions from the date of each policy. The Company evaluates all critical assumptions utilized to develop EGPs (e.g. lapse, mortality) and will make a revision to future EGPs to the extent that actual experience is significantly different than expected. The overall recoverability of the DAC asset is dependent on the future profitability of the business. The Company tests the aggregate recoverability of the DAC asset by comparing the DAC to total EGPs. In addition, the Company routinely stress tests its DAC asset for recoverability against severe declines in its separate account assets, which could occur if the equity markets experienced another significant sell-off, as the majority of policyholders' money held in the separate accounts is invested in the equity market. As of December 31, 2002, the Company believed its DAC asset was recoverable. F-15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (J) DEFERRED POLICY ACQUISITION COSTS (CONTINUED) PROPERTY & CASUALTY - The Property & Casualty operations also incur costs including commissions, premium taxes and certain underwriting and policy issuance costs, that vary with and are related primarily to the acquisition of property casualty insurance business and are deferred and amortized ratably over the period the related premiums are earned. Deferred acquisition costs are reviewed to determine if they are recoverable from future income, and if not, are charged to expense. Anticipated investment income is considered in the determination of the recoverability of deferred acquisition costs. For the years ended December 31, 2002, 2001 and 2000 no material amounts of deferred acquisition costs were charged to expense based on the determination of recoverability. (K) RESERVE FOR FUTURE POLICY BENEFITS, UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES 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 disability or death. Reserves also include unearned premiums, premium deposits, claims incurred but not reported and claims reported but not yet paid. Reserves for assumed reinsurance are computed in a manner that is comparable to direct insurance reserves. 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 reserve for future policy benefits in the Consolidated Balance Sheets) resulting primarily from group disability products. For the years ended December 31, -------------------------------- 2002 2001 2000 - ----------------------------------------------------------------- BEGINNING CLAIM RESERVES-GROSS $2,764 $2,384 $2,128 Reinsurance recoverables 264 177 125 - ----------------------------------------------------------------- BEGINNING CLAIM RESERVES-NET 2,500 2,207 2,003 - ----------------------------------------------------------------- INCURRED EXPENSES RELATED TO Current year 1,154 1,272 1,093 Prior years 4 (15) (11) - ----------------------------------------------------------------- TOTAL INCURRED 1,158 1,257 1,082 - ----------------------------------------------------------------- PAID EXPENSES RELATED TO Current year 387 439 410 Prior years 632 525 468 - ----------------------------------------------------------------- TOTAL PAID 1,019 964 878 - ----------------------------------------------------------------- ENDING CLAIM RESERVES-NET 2,639 2,500 2,207 Reinsurance recoverables 275 264 177 - ----------------------------------------------------------------- ENDING CLAIM RESERVES-GROSS $2,914 $2,764 $2,384 ================================================================= (L) RESERVE FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES The Hartford establishes property and casualty reserves to provide for the estimated costs of paying claims made under policies written by the Company. 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 significantly on the assumption that past developments are an appropriate predictor of future events, and involves a variety of actuarial techniques that analyze experience, trends and other relevant factors. The uncertainties involved with the reserving process have become increasingly unpredictable due to a number of complex factors including social and economic trends and changes in the concepts of legal liability and damage awards. Accordingly, final claim settlements may vary from the present estimates, particularly when those payments may not occur until well into the future. The Hartford continually reviews the adequacy of its estimated claims and claim adjustment expense reserves on an overall basis. Adjustments to previously established reserves, if any, are reflected in the operating results of the period in which the adjustment is determined to be necessary. In the judgment of management, all information currently available has been properly considered in the reserves established for claims and claim adjustment expenses. Most of the Company's property and casualty reserves are not discounted. However, certain liabilities for unpaid claims, principally for permanently disabled claimants, and certain structured settlement contracts, that fund loss run-offs for unrelated parties having payment patterns that are fixed and determinable, have been discounted to present value using an average interest rate of 4.9% in 2002 and 5.1% in 2001. At December 31, 2002 and 2001, such discounted reserves totaled $594 and $719, respectively (net of discounts of $424 and $429, respectively). Accretion of this discount did not have a material effect on net income during 2002, 2001 and 2000, respectively. F-16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (M) OTHER POLICYHOLDER FUNDS AND BENEFITS PAYABLE Other policyholder funds and benefits payable include reserves for investment contracts without life contingencies, corporate owned life insurance and universal life insurance contracts. Of the amounts included in this item, $22.2 billion and $18.8 billion, as of December 31, 2002 and 2001, 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. (N) 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 related to a small percentage of the Company's loss-sensitive workers' compensation business. 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. (O) FOREIGN CURRENCY TRANSLATION Foreign currency translation gains and losses are reflected in stockholders' equity as a component of accumulated other comprehensive income. The Company's foreign subsidiaries' 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. Gains and losses on foreign currency transactions are reflected in earnings. The national currencies of the international operations are generally their functional currencies. (P) 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. LIFE - Participating life insurance in force accounted for 6%, 8% and 17% as of December 31, 2002, 2001 and 2000, respectively, of total life insurance in force. Dividends to policyholders were $65, $68 and $67 for the years ended December 31, 2002, 2001 and 2000, respectively. There were no additional amounts of income allocated to participating policyholders. 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. PROPERTY & CASUALTY - Net written premiums for participating property and casualty insurance policies represented 9%, 9% and 9% of total net written premiums for the years ended December 31, 2002, 2001 and 2000, respectively. Dividends to policyholders were $57, $38 and $33 for the years ended December 31, 2002, 2001 and 2000, respectively. (Q) 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 33 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 ("SEC"), 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. (R) REINSURANCE Written premiums, earned premiums and incurred insurance losses and loss adjustment expense all reflect the net effects of assumed and ceded reinsurance transactions. Assumed reinsurance refers to our acceptance of certain insurance risks that other insurance companies have underwritten. Ceded reinsurance means other insurance companies have agreed to share certain risks the Company has underwritten. Reinsurance accounting is followed for assumed and ceded transactions when the risk transfer provisions of SFAS No. 113, "Accounting and Reporting for Reinsurance of Short-Duration and Long-Duration Contracts," have been met. For the years ended December 31, 2002, 2001 and 2000, the Company did not make any significant changes in the terms under which reinsurance is ceded to other insurers. F-17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES (CONTINUED) (S) INCOME TAXES The Company recognizes taxes payable or refundable for the current year and deferred taxes for the future tax consequences of differences between the financial reporting and tax basis of assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years the temporary differences are expected to reverse. 2. SEPTEMBER 11, 2001 As a result of September 11, 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, an estimated net reserve addition of $556 with 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, including estimated amounts for incurred but not reported policyholder losses, costs incurred in settling claims and the impact of reinsurance recoverables, upon a review of insured exposures using a variety of assumptions and actuarial techniques. Since the September 11 terrorist attack was a single event that was unique and had such a substantial impact on such a large number of individuals and businesses, the nature of this unusual event adds to the uncertainty of loss estimates relating to the event. The Company continues to carry the original incurred amount related to September 11, less any paid losses; with the exception of a $12 reserve release related to positive development in Life. Reported losses to date have fallen within the original reserved amounts. However, there is significant uncertainty around September 11, particularly with regard to inhalation claims, stress claims, and other bodily injury, as well as the three year statute of limitations in New York State. Although the Company anticipates certain claims for recovery to be challenged, the impact of these challenges is not expected to be material. As a result of the uncertainties involved in the estimation process, final claims settlement may significantly vary from present estimates.
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS For the years ended December 31, ---------------------------------------------------------- (A) COMPONENTS OF NET INVESTMENT INCOME 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Interest income $ 2,764 $ 2,669 $ 2,544 Dividends 36 39 27 Other investment income 196 178 142 - ----------------------------------------------------------------------------------------------------------------------------------- Gross investment income 2,996 2,886 2,713 Less: Investment expenses 43 36 39 - ----------------------------------------------------------------------------------------------------------------------------------- NET INVESTMENT INCOME $ 2,953 $ 2,850 $ 2,674 =================================================================================================================================== (B) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES) - ----------------------------------------------------------------------------------------------------------------------------------- Fixed maturities $ (378) $ (50) $ (251) Equity securities (42) (34) 148 Sale of affiliates and other [1] 19 (153) 239 Change in liability to policyholders for net realized capital losses 1 1 9 - ----------------------------------------------------------------------------------------------------------------------------------- NET REALIZED CAPITAL GAINS (LOSSES) $ (400) $ (236) $ 145 =================================================================================================================================== [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) COMPONENTS OF UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES - ----------------------------------------------------------------------------------------------------------------------------------- Gross unrealized gains $ 57 $ 177 $ 230 Gross unrealized losses (77) (117) (95) - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses) (20) 60 135 Deferred income taxes and other items (7) 19 45 - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains (losses), net of tax (13) 41 90 Balance - beginning of year 41 90 224 - ----------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES $ (54) $ (49) $ (134) ===================================================================================================================================
F-18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED) For the years ended December 31, ---------------------------------------------------------- (D) COMPONENTS OF UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- Gross unrealized gains $ 3,062 $ 1,369 $ 1,042 Gross unrealized losses (414) (477) (406) Net unrealized losses credited to policyholders (58) (22) (10) - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains 2,590 870 626 Deferred income taxes and other items 1,133 305 219 - ----------------------------------------------------------------------------------------------------------------------------------- Net unrealized gains, net of tax 1,457 565 407 Balance - beginning of year 565 407 (422) - ----------------------------------------------------------------------------------------------------------------------------------- CHANGE IN UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES $ 892 $ 158 $ 829 ===================================================================================================================================
(E) COMPONENTS OF FIXED MATURITY INVESTMENTS As of December 31, 2002 -------------------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Gains Unrealized Losses Fair Value - ------------------------------------------------------------------------------------------------------------------------------------ BONDS AND NOTES U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) $ 467 $ 17 $ -- $ 484 U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) - asset-backed 2,867 95 (3) 2,959 States, municipalities and political subdivisions 10,104 832 (7) 10,929 International governments 1,481 139 (6) 1,614 Public utilities 1,754 102 (49) 1,807 All other corporate including international 16,389 1,230 (186) 17,433 All other corporate - asset-backed 10,189 593 (136) 10,646 Short-term investments 2,097 3 -- 2,100 Certificates of deposit 795 45 (25) 815 Redeemable preferred stock 98 6 (2) 102 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 46,241 $ 3,062 $ (414) $ 48,889 ====================================================================================================================================
As of December 31, 2001 -------------------------------------------------------------------------- Amortized Gross Gross Cost Unrealized Gains Unrealized 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 ====================================================================================================================================
The amortized cost and estimated fair value of fixed maturity investments at December 31, 2002 by contractual maturity year are shown below. Estimated 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 $ 4,911 $ 4,951 Over one year through five years 14,468 15,106 Over five years through ten years 13,022 13,921 Over ten years 13,840 14,911 - ----------------------------------------------------------------- TOTAL $ 46,241 $ 48,889 ================================================================= F-19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED) (F) SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS For the years ended December 31, ----------------------------------- 2002 2001 2000 - ------------------------------------------------------------------ SALE OF FIXED MATURITIES Sale proceeds $ 9,174 $ 8,714 $ 9,606 Gross gains 276 202 187 Gross losses (134) (82) (429) SALE OF EQUITY SECURITIES Sale proceeds $ 649 $ 803 $ 1,306 Gross gains 144 135 258 Gross losses (122) (139) (110) ================================================================== (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 $10.8 billion at December 31, 2002, and $8.0 billion at December 31, 2001. A reconciliation between notional amounts as of December 31, 2002 and 2001 by derivative type and strategy is as follows:
December 31, 2001 Maturities/ December 31, 2002 Notional Amount Additions Terminations [1] Notional Amount - ------------------------------------------------------------------------------------------------------------------------------------ BY DERIVATIVE TYPE Caps $ 603 $ 500 $ 20 $ 1,083 Floors 320 -- 20 300 Swaps/Forwards 5,600 2,791 1,262 7,129 Futures 77 110 187 -- Options 1,408 1,231 383 2,256 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 8,008 $ 4,632 $ 1,872 $ 10,768 BY STRATEGY Liability $ 1,313 $ 500 $ - $ 1,813 Anticipatory 327 300 362 265 Asset 5,469 3,832 1,510 7,791 Portfolio 899 - - 899 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 8,008 $ 4,632 $ 1,872 $ 10,768 ==================================================================================================================================== [1] During 2002, 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. As of December 31, 2002 and 2001, collateral pledged has not been separately reported in the Consolidated Balance Sheets. The classification and carrying amounts of collateral pledged at December 31, 2002 and 2001 were as follows: ASSETS 2002 2001 - ----------------------------------------------------------------- U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) $ 20 $ 1 U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored - asset-backed) 76 53 - ----------------------------------------------------------------- TOTAL $ 96 $ 54 ================================================================= At December 31, 2002 and 2001, The Hartford had accepted collateral consisting of cash, U.S. Government, and U.S. Government agency securities with a fair value of $454 and $167, respectively. At December 31, 2002 and 2001, only cash collateral of $176 and $108, respectively, was invested and recorded on the balance sheet in fixed maturities and other liabilities. The Hartford is only permitted by contract to sell or repledge the noncash collateral in the event of a default by the counterparty and none of the collateral has been sold or repledged at December 31, 2002 and 2001. As of December 31, 2002 and 2001 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. F-20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED) 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 upon internally established valuations that are consistent with external valuation models, quotations furnished by dealers in such instrument or market quotations. 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 equal to market value. The carrying amounts and fair values of The Hartford's financial instruments at December 31, 2002 and 2001 were as follows: 2002 2001 -------------------------------------- Carrying Fair Carrying Fair Amount Value Amount Value - ------------------------------------------------------------------ ASSETS Fixed maturities $48,889 $48,889 $40,046 $40,046 Equity securities 917 917 1,349 1,349 Policy loans 2,934 2,934 3,317 3,317 Limited partnerships [1] 881 881 1,372 1,372 Other investments [2] 909 909 605 605 LIABILITIES Other policyholder funds and benefits payable [3] $20,744 $20,951 $16,077 $15,939 Short-term debt 315 315 599 607 Long-term debt 2,596 2,804 1,965 2,082 Trust preferred securities 1,468 1,479 1,412 1,429 Derivative related liabilities [4] 208 208 208 208 ================================================================== [1] Included in other investments on the balance sheet. [2] 2002 and 2001 include $299 and $138 of derivative related assets, respectively. [3] Excludes group accident and health and universal life insurance contracts, including corporate owned life insurance. [4] Included in other liabilities on the balance sheet. 5. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted SFAS No. 142 and accordingly ceased all amortization of goodwill. The following tables show net income and earnings per share for the years ended December 31, 2002, 2001 and 2000, with the 2001 and 2000 periods adjusted for goodwill amortization recorded.
(In millions, except for per share data) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME Income before cumulative effect of accounting changes $ 1,000 $ 541 $ 974 Goodwill amortization, net of tax -- 52 25 - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted income before cumulative effect of accounting changes 1,000 593 999 Cumulative effect of accounting changes, net of tax -- (34) -- - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted net income $ 1,000 $ 559 $ 999 - ------------------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Income before cumulative effect of accounting changes $ 4.01 $ 2.27 $ 4.42 Goodwill amortization, net of tax -- 0.22 0.11 - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted income before cumulative effect of accounting changes 4.01 2.49 4.53 Cumulative effect of accounting changes, net of tax -- (0.14) -- - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted net income $ 4.01 $ 2.35 $ 4.53 ==================================================================================================================================== DILUTED EARNINGS PER SHARE Income before cumulative effect of accounting changes $ 3.97 $ 2.24 $ 4.34 Goodwill amortization, net of tax -- 0.22 0.11 - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted income before cumulative effect of accounting changes 3.97 2.46 4.45 Cumulative effect of accounting changes, net of tax -- (0.14) -- - ------------------------------------------------------------------------------------------------------------------------------------ Adjusted net income $ 3.97 $ 2.32 $ 4.45 ====================================================================================================================================
F-21 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 5. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) The following table shows the Company's acquired intangible assets that continue to be subject to amortization and aggregate amortization expense. Except for goodwill, the Company has no intangible assets with indefinite useful lives.
2002 2001 ------------------------------------- ------------------------------------ Gross Carrying Accumulated Net Gross Carrying Accumulated Net AMORTIZED INTANGIBLE ASSETS Amount Amortization Amount Amortization - ------------------------------------------------------------------------------------------------------------------------------------ Present value of future profits $ 1,406 $ 274 $ 1,406 $ 164 Renewal rights 42 27 42 20 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1,448 $ 301 $ 1,448 $ 184 ====================================================================================================================================
Net amortization expense for the years ended December 31, 2002, 2001 and 2000 was $117, $128 and $54, respectively. Estimated future net amortization expense for the succeeding five years is as follows. For the year ended December 31, - ----------------------------------------------------------------- 2003 $ 120 2004 $ 114 2005 $ 104 2006 $ 93 2007 $ 78 ================================================================= The carrying amounts of goodwill as of December 31, 2002 and 2001 are shown below. 2002 2001 - ----------------------------------------------------------------- Life $ 796 $ 796 Property & Casualty 153 153 Corporate 772 772 - ----------------------------------------------------------------- TOTAL $ 1,721 $ 1,721 ================================================================= 6. SEPARATE ACCOUNTS The Hartford maintained separate account assets and liabilities totaling $107.1 billion and $114.7 billion at December 31, 2002 and 2001, 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 $95.6 billion and $104.6 billion at December 31, 2002 and 2001, respectively, wherein the policyholder assumes the investment risk, and guaranteed separate accounts totaling $11.5 billion and $10.1 billion at December 31, 2002 and 2001, 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 $384 and $575 at December 31, 2002 and 2001, 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 $1.2 billion, $1.3 billion and $1.4 billion in 2002, 2001 and 2000, 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 6.3% and 6.4% at December 31, 2002 and 2001, respectively. The assets that support these liabilities were comprised of $11.1 billion and $9.8 billion in fixed maturities as of December 31, 2002 and 2001, respectively, and $385 and $234 of other investments as of December 31, 2002 and 2001, 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 $135 and $37 in net carrying value and $3.6 billion and $3.2 billion in notional amounts as of December 31, 2002 and 2001, respectively. 7. RESERVES FOR CLAIMS AND CLAIM ADJUSTMENT EXPENSES As described in Note 1(l), The Hartford establishes reserves for claims and claim adjustment expenses on reported and unreported claims. These reserve estimates are based on known facts and interpretations of circumstances, and consideration of various internal factors including The Hartford's experience with similar cases, historical trends involving claim payment patterns, loss payments, pending levels of unpaid claims, loss control programs and product mix. In addition, the reserve estimates are influenced by consideration of various external factors including court decisions, economic conditions and public attitudes. The effects of inflation are implicitly considered in the reserving process. The establishment of appropriate reserves, including reserves for catastrophes and asbestos and environmental claims, is inherently uncertain. The Hartford regularly updates its reserve estimates as new information becomes available and events unfold that may have an impact on unsettled claims. Changes in prior year reserve estimates, which may be material, are reflected in the results of operations in the period such changes are determined to be necessary. F-22 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 7. RESERVES FOR CLAIMS AND CLAIMS ADJUSTMENT EXPENSES (CONTINUED) A reconciliation of liabilities for unpaid claims and claim adjustment expenses follows: For the years ended December 31, ------------------------------ 2002 2001 2000 ------------------------------ BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $17,036 $16,293 $16,449 Reinsurance and other recoverables 4,176 3,871 3,706 - ----------------------------------------------------------------- BEGINNING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 12,860 12,422 12,743 - ----------------------------------------------------------------- ADD PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES Current year 5,577 5,992 5,170 Prior years 293 143 27 - ----------------------------------------------------------------- TOTAL PROVISION FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES 5,870 6,135 5,197 - ----------------------------------------------------------------- LESS PAYMENTS Current year 2,257 2,349 2,265 Prior years 3,332 3,243 3,069 - ----------------------------------------------------------------- TOTAL PAYMENTS 5,589 5,592 5,334 - ----------------------------------------------------------------- Other [1] -- (105) (184) - ----------------------------------------------------------------- ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-NET 13,141 12,860 12,422 Reinsurance and other recoverables 4,018 4,176 3,871 - ----------------------------------------------------------------- ENDING LIABILITIES FOR UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES-GROSS $17,159 $17,036 $16,293 - ----------------------------------------------------------------- [1] Includes $(101) and $(161) related to the sales of international subsidiaries for the years ended December 31, 2001 and 2000, respectively. 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, aggregation of risk by geographic location and the purchase of catastrophe reinsurance. In the opinion of management, based upon the known facts and current law, the reserves recorded for The Hartford's property and casualty businesses at December 31, 2002 represent the Company's best estimate of its ultimate liability for claims and claim adjustment expenses related to losses covered by policies written by the Company. Based on information or trends that are not presently known, future reserve reestimates may result in adjustments to these reserves. Such adjustments could possibly be significant, reflecting any variety of new and adverse trends, including increases in medical cost inflation rates and physical damage repair costs, as well as further adverse development of asbestos and environmental claims. (For further discussion of asbestos and environmental claims, see Note 16(b).) 8. DEBT AND COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST PREFERRED SECURITIES) 2002 2001 - ------------------------------------------------------------------ SHORT-TERM DEBT Commercial paper $ 315 $ 299 Current maturities of long-term debt -- 300 - ------------------------------------------------------------------ TOTAL SHORT-TERM DEBT $ 315 $ 599 ================================================================== LONG-TERM DEBT [1] 6.9% Notes, due 2004 $ 199 $ 199 7.75% Notes, due 2005 247 246 7.1% Notes, due 2007 198 198 4.7% Notes, due 2007 300 -- 6.375% Notes, due 2008 200 200 4.1% Equity Units Notes, due 2008 330 -- 7.9% Notes, due 2010 274 274 7.3% Notes, due 2015 200 200 7.65% Notes, due 2027 248 248 7.375% Notes, due 2031 400 400 - ------------------------------------------------------------------ TOTAL LONG-TERM DEBT $ 2,596 $ 1,965 ================================================================== [1] 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. (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. As of December 31, 2002, HLI had $1.0 billion remaining on its shelf. On November 9, 2000, The Hartford filed with the SEC a shelf registration statement and a prospectus, as amended on May 21, 2002, for the potential offering and sale of up to an additional $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. As of December 31, 2002, The Hartford had $1.3 billion remaining on the shelf. F-23 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. DEBT AND COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST PREFERRED SECURITIES) (CONTINUED)
(B) SHORT-TERM DEBT As of December 31, ----------------------------- Description Effective Date Expiration Date Maximum Available 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Commercial Paper The Hartford 11/10/86 N/A $ 2,000 $ 315 $ 299 HLI 2/7/97 N/A 250 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total commercial paper $ 2,250 $ 315 $ 299 Revolving Credit Facility 5-year revolving credit facility 6/20/01 6/20/06 $ 1,000 $ -- $ -- 3-year revolving credit facility 12/31/02 12/31/05 490 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Total revolving credit facility $ 1,490 $ -- $ -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL SHORT-TERM DEBT $ 3,740 $ 315 $ 299 ====================================================================================================================================
On December 31, 2002, the Company and HLI entered into a joint three-year $490 competitive advance and revolving credit facility comprised of 12 participating banks. As of December 31, 2002, there were no outstanding borrowings under this facility. (C) LONG-TERM DEBT OFFERINGS Equity Unit Offering - -------------------- On September 13, 2002, The Hartford issued 6.6 million 6% equity units at a price of $50.00 per unit and received net proceeds of $319. Each equity unit offered initially consists of a corporate unit with a stated amount of $50.00 per unit. Each corporate unit consists of one purchase contract for the sale of a certain number of shares of the Company's stock and fifty dollars principal amount of senior notes due November 16, 2008. The corporate unit may be converted by the holder into a treasury unit consisting of the purchase contract and a 5% undivided beneficial interest in a zero-coupon U.S. Treasury security with a principal amount of one thousand dollars that matures on November 15, 2006. The holder of an equity unit owns the underlying senior notes or treasury portfolio but has pledged the senior notes or treasury portfolio to the Company to secure the holder's obligations under the purchase contract. The purchase contract obligates the holder to purchase, and obligates The Hartford to sell, on November 16, 2006, for fifty dollars, a variable number of newly issued common shares of The Hartford. The number of The Hartford's shares to be issued will be determined at the time the purchase contracts are settled based upon the then current applicable market value of The Hartford's common stock. If the applicable market value of The Hartford's common stock is equal to or less than $47.25, then the Company will deliver 1.0582 shares to the holder of the equity unit, or an aggregate of 7.0 million shares. If the applicable market value of The Hartford's common stock is greater than $47.25 but less than $57.645, then the Company will deliver the number of shares equal to fifty dollars divided by the then current applicable market value of The Hartford's common stock to the holder. Finally, if the applicable market value of The Hartford's common stock is equal to or greater than $57.645, then the Company will deliver 0.8674 shares to the holder, or an aggregate of 5.7 million shares. Accordingly, upon settlement of the purchase contracts on November 16, 2006, The Hartford will receive proceeds of approximately $330 and will deliver between 5.7 million and 7.0 million common shares in the aggregate. The proceeds will be credited to stockholders' equity and allocated between the common stock and additional paid-in capital accounts. The Hartford will make quarterly contract adjustment payments to the equity unit holders at a rate of 1.90% of the stated amount per year until the purchase contract is settled. Each corporate unit also includes fifty dollars principal amount of senior notes that will mature on November 16, 2008. The aggregate maturity value of the senior notes is $330. The notes are pledged by the holders to secure their obligations under the purchase contracts. The Hartford will make quarterly interest payments to the holders of the notes initially at an annual rate of 4.10%. On August 11, 2006, the notes will be remarketed. At that time, The Hartford's remarketing agent will have the ability to reset the interest rate on the notes in order to generate sufficient remarketing proceeds to satisfy the holder's obligation under the purchase contract. In the event of an unsuccessful remarketing, the Company will exercise its rights as a secured party to obtain and extinguish the notes. The total distributions payable on the equity units are at an annual rate of 6.0%, consisting of interest (4.10%) and contract adjustment payments (1.90%). The corporate units are listed on the New York Stock Exchange under the symbol "HIG PrA". The present value of the contract adjustment payments of $23 was accrued upon the issuance of the equity units as a charge to additional paid-in capital and are included in other liabilities in the accompanying consolidated balance sheet as of December 31, 2002. Subsequent contract adjustment payments will be allocated between this liability account and interest expense based on a constant rate calculation over the life of the transaction. Additional paid-in capital as of December 31, 2002, also reflected a charge of $9 representing a portion of the equity unit issuance costs that was allocated to the purchase contracts. The equity units are reflected in the diluted earnings per share calculation using the treasury stock method, which would be used for the equity units at any time before the issuance of the shares of The Hartford's common stock upon the settlement of the purchase contracts. Under the treasury stock method, the F-24 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 8. DEBT AND COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUST PREFERRED SECURITIES) (CONTINUED) (C) LONG-TERM DEBT OFFERINGS (CONTINUED) Equity Unit Offering (Continued) - -------------------------------- number of shares of common stock used in calculating diluted earnings per share is increased by the excess, if any, of the number of shares issuable upon settlement of the purchase contracts over the number of shares that could be purchased by The Hartford in the market, at the average market price during the period, using the proceeds received upon settlement. The Company anticipates that there will be no dilutive effect on its earnings per share related to the equity units, except during periods when the average market price of a share of the Company's common stock is above the threshold appreciation price of $57.645. Because the average market price of The Hartford's common stock during the period from the date of issuance through December 31, 2002, was below this threshold appreciation price, the shares issuable under the purchase contract component of the equity units have not been included in the diluted earnings per share calculation. Senior Note Offering - -------------------- On August 29, 2002, The Hartford issued 4.7% senior notes due September 1, 2007 and received net proceeds of $298. Interest on the notes is payable semi-annually on March 1 and September 1, commencing on March 1, 2003. The Company used the proceeds to repay $300 of 6.375% senior notes that matured on November 1, 2002. (D) DESCRIPTION OF TRUST PREFERRED SECURITIES The Hartford, and its subsidiary Hartford Life Insurance Company ("HLIC"), have formed statutory business trusts, which exist for the exclusive purposes of (i) issuing Trust Securities representing undivided beneficial interests in the assets of the Trust; (ii) investing the gross proceeds of the Trust Securities in Junior Subordinated Deferrable Interest Debentures (Junior Subordinated Debentures) of its parent; and (iii) engaging in only those activities necessary or incidental thereto. These Junior Subordinated Debentures and the related income effects are eliminated in the consolidated financial statements. The financial structure of Hartford Capital I, II, and III, and Hartford Life Capital I and II, as of December 31, 2002 and 2001, were as follows (except for Hartford Capital II for which the underlying securities were redeemed on December 31, 2001):
Hartford Hartford Life Hartford Life Hartford Hartford Capital III Capital II Capital I Capital II [4] Capital I - ------------------------------------------------------------------------------------------------------------------------------------ TRUST SECURITIES Issuance date Oct. 26, 2001 Mar. 6, 2001 June 29, 1998 Oct. 30, 1996 Feb. 28, 1996 Securities issued 20,000,000 8,000,000 10,000,000 20,000,000 20,000,000 Liquidation preference per security $25 $25 $25 $25 $25 Liquidation value (in millions) $500 $200 $250 $500 $500 Coupon rate 7.45% 7.625% 7.20% 8.35% 7.70% Distribution payable Quarterly Quarterly Quarterly Quarterly Quarterly Distribution guaranteed by [1] The Hartford HLI HLI The Hartford The Hartford JUNIOR SUBORDINATED DEBENTURES [2] [3] Amount owed (in millions) $500 $200 $250 $500 $500 Coupon rate 7.45% 7.625% 7.20% 8.35% 7.70% Interest payable Quarterly Quarterly Quarterly Quarterly Quarterly Maturity date Oct. 26, 2050 Feb. 15, 2050 June 30, 2038 Oct. 30, 2026 Feb. 28, 2016 Redeemable by issuer on or after Oct. 26, 2006 Mar. 6, 2006 June 30, 2003 Oct. 30, 2001 Feb. 28, 2001 ==================================================================================================================================== [1] 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. [2] For each of the respective debentures, The Hartford or 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 The Hartford or HLI may not declare or pay any cash dividends or distributions on, or purchase, The Hartford's or 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 Junior Subordinated Debentures. The Hartford or 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 Preferred Securities. [3] 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. [4] The securities for Hartford Capital II were redeemed on December 31, 2001.
(E) INTEREST EXPENSE The following table presents interest expense incurred related to debt and trust preferred securities for 2002, 2001 and 2000, respectively. For the years ended December 31, - ---------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------- Short-term debt $ 6 $ 2 $ 16 Long-term debt (including current maturities of long-term debt) 170 177 134 Trust Preferred Securities 89 116 100 - ---------------------------------------------------------------- TOTAL INTEREST EXPENSE $ 265 $ 295 $ 250 ================================================================ F-25 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 9. STOCKHOLDERS' EQUITY (A) COMMON STOCK On September 13, 2002, The Hartford issued approximately 7.3 million shares of common stock pursuant to an underwritten offering at a price of $47.25 per share and received net proceeds of $330. Also on September 13, 2002, The Hartford issued 6.6 million 6% equity units. Each equity unit contains a purchase contract obligating the holder to purchase and The Hartford to sell, a variable number of newly-issued shares of The Hartford's common stock. Upon settlement of the purchase contracts on November 16, 2006, The Hartford will receive proceeds of approximately $330 and will deliver between 5.7 million and 7.0 million shares in the aggregate. (For further discussion of this issuance, see Note 8(c).) At the Company's annual meeting of shareholders held on April 18, 2002, shareholders approved an amendment to Section (a) Article Fourth of the Amended and Restated Certificate of Incorporation to increase the aggregate authorized number of shares of common stock from 400 million to 750 million. 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 contributed to the Company's insurance operations to, in part, replenish the surplus of those operations after 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. (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, 2002 or 2001. (C) STATUTORY RESULTS For the years ended December 31, - ---------------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------- STATUTORY NET INCOME (LOSS) Life operations $ (137)$ (364) $ 422 Property & Casualty operations 4,779 (223) 779 - ---------------------------------------------------------------- TOTAL $ 4,642 $ (587) $ 1,201 ================================================================ As of December 31, ---------------------------- 2002 2001 - --------------------------------------------------------------- STATUTORY SURPLUS Life operations $ 3,019 $ 2,991 Property & Casualty operations 5,131 4,159 - --------------------------------------------------------------- TOTAL $ 8,150 $ 7,150 =============================================================== A significant percentage of the consolidated statutory surplus is permanently invested or is subject to various state and foreign government regulatory restrictions or other agreements which limit the payment of dividends without prior approval. 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 unassigned 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, 2002, the maximum amount of statutory dividends which may be paid to HFSG from its insurance subsidiaries in 2003, without prior approval, is $1.8 billion. The domestic insurance subsidiaries of HFSG prepare their statutory financial statements in accordance with accounting practices prescribed by the applicable state insurance department. Prescribed statutory accounting practices include publications of the National Association of Insurance Commissioners ("NAIC"), as well as state laws, regulations and general administrative rules. The NAIC adopted the Codification of Statutory Accounting Principles ("Codification") in March 1998. The effective date for the statutory accounting guidance was January 1, 2001. Each of The Hartford's domiciliary states has adopted Codification, and the Company has made the necessary changes in its statutory reporting required for implementation. The impact of applying the new guidance resulted in a benefit of approximately $400 in statutory surplus. 10. 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 net income and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share. F-26 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
10. EARNINGS PER SHARE (CONTINUED) (In millions, except for per share data) 2002 Income Shares Per Share Amount - ------------------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Net income available to common shareholders $ 1,000 249.4 $ 4.01 ------------------- DILUTED EARNINGS PER SHARE Options -- 2.4 ---------------------------- Net income available to common shareholders plus assumed conversions $ 1,000 251.8 $ 3.97 ==================================================================================================================================== 2001 - ------------------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Net income available to common shareholders $ 507 237.7 $ 2.13 ------------------- DILUTED EARNINGS PER SHARE Options -- 3.7 ---------------------------- Net income available to common shareholders plus assumed conversions $ 507 241.4 $ 2.10 ==================================================================================================================================== 2000 - ------------------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Net income available to common shareholders $ 974 220.6 $ 4.42 ------------------- DILUTED EARNINGS PER SHARE Options -- 3.8 ---------------------------- Net income available to common shareholders plus assumed conversions $ 974 224.4 $ 4.34 ====================================================================================================================================
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 and the Company's equity units, 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. 11. 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 2000 Plan were substantially similar to the terms of the 1995 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, 2002, The Hartford had not issued any incentive stock options under the 2000 Plan. Performance awards of common stock granted under the 2000 Plan become payable upon the attainment of specific performance goals achieved over a period of not less than two nor more than five years, and the 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 F-27 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 11. STOCK COMPENSATION PLANS (CONTINUED) ESPP, and 408,304, 315,101 and 241,742 shares were sold in 2002, 2001 and 2000, respectively. The per share weighted average fair value of the discount under the ESPP was $11.70, $14.31 and $13.96 in 2002, 2001 and 2000, 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. Currently, the Company applies APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. (See Note 1(f) for discussion of accounting for stock compensation plans beginning January 1, 2003.) A summary of the status of non-qualified options included in the Company's incentive stock plan as of December 31, 2002, 2001 and 2000 and changes during the years ended December 31, 2002, 2001 and 2000 is presented below:
2002 2001 2000 ------------------------------- ------------------------------- ------------------------------ Weighted Average Weighted Average Weighted Average (Shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ Outstanding at beg. of year 18,937 $45.29 16,970 $39.96 12,103 $36.58 Granted 3,800 65.56 4,237 62.10 5,374 37.62 HLI converted options -- -- -- -- 3,770 44.00 Exercised (2,060) 37.32 (1,789) 34.28 (3,894) 30.07 Canceled/Expired (505) 54.63 (481) 45.04 (383) 40.97 ----------- ----------- ----------- Outstanding at end of year 20,172 49.66 18,937 45.29 16,970 39.96 - ------------------------------------------------------------------------------------------------------------------------------------ Exercisable at end of year 12,099 43.47 10,716 40.30 7,885 37.29 Weighted average fair value of options granted $25.20 $20.35 $17.60 ====================================================================================================================================
The following table summarizes information about stock options outstanding and exercisable (shares in thousands) at December 31, 2002:
Options Outstanding Options Exercisable ----------------------------------------------------------------- ----------------------------------------- Number Outstanding Weighted Average Weighted Average Number Weighted Range of at December 31, 2002 Remaining Contractual Exercise Price Exercisable at Average Exercise Prices Life (Years) December 31, 2002 Exercise Price - ------------------------------------------------------------------------------------------------------------------------------------ $15.31 - $22.97 563 2.0 $19.64 563 $19.64 22.97 - 30.63 581 2.9 26.01 580 26.01 30.63 - 38.28 3,917 6.3 34.35 2,914 34.44 38.28 - 45.94 4,055 5.7 43.08 3,667 43.41 45.94 - 53.59 2,163 5.1 48.21 2,111 48.16 53.59 - 61.25 1,170 6.6 57.44 683 57.62 61.25 - 68.91 7,686 8.4 64.03 1,559 62.65 68.91 - 76.56 37 8.0 72.01 22 72.24 - ------------------------------------------------------------------------------------------------------------------------------------ $15.31 - $76.56 20,172 6.7 $49.66 12,099 $43.47 ====================================================================================================================================
12. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS The Company maintains a U.S. qualified defined benefit pension plan ("the Plan") that covers substantially all employees. U.S. employees of the Company and certain affiliates with 5 or more years of service are entitled to annual pension benefits, beginning at normal retirement age (65), equal to 2% of their final average pay per year multiplied by the number of years of credited service up to a maximum of 60% of the average (50% for employees hired prior to January 1, 2001), less 1 2/3% of primary Social Security per year of credited service. Final average pay represents the average of any of their 60 highest paid calendar months during the last 120 calendar months of credited service preceding termination or retirement. Effective for all new employees who joined the Company on or after January 1, 2001, a new component or formula was applied under the Plan referred to as the "cash balance formula". Under the cash balance formula, the Company will contribute a percentage of an employee's pay to the Plan for each pay period, based on the employee's age. Once they become vested, employees can elect to receive the value of their plan benefit (the accumulated sum of their annual plan allocations with interest) in a single cash payment when they leave the Company. Under certain conditions, as described in the Plan document, the Plan permits early retirement at ages 50-64 with a reduced benefit. Employees may elect to receive their pension benefits in the form of a joint and survivor annuity. If employees terminate before rendering 5 years of service, they forfeit the right to receive the portion of their accumulated plan benefits attributable to the Company's contributions. Employees receive the portion of their accumulated plan benefits as a lump-sum distribution upon retirement or termination, if less than five thousand dollars, or they may elect to receive their benefits as a life annuity payable monthly from date of retirement if their accumulated plan benefits are in excess of five thousand dollars. The Company also maintains unfunded excess plans to provide benefits in excess of amounts permitted to be paid to participants F-28 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS (CONTINUED) of the plan under the provisions of the Internal Revenue Code. Additionally, the Company has entered into individual retirement agreements with certain current and retired directors providing for unfunded supplemental pension benefits. 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, 2002, retiree medical, retiree dental and retiree life insurance benefits were eliminated for employees with original hire dates with the Company on or after January 1, 2002. 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, 2002 and 2001. 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 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Benefit obligation - beginning of year $ 2,108 $ 1,880 $ 373 $ 331 Service cost (excluding expenses) 80 67 9 8 Interest cost 156 145 27 25 Plan participants' contributions -- -- 6 5 Amendments -- -- (5) -- Actuarial loss 31 43 7 -- Change in assumption: Discount rate 354 70 44 27 Salary scale (29) -- -- -- Benefits paid (112) (96) (27) (23) Sale of subsidiaries -- (1) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ BENEFIT OBLIGATION - END OF YEAR $ 2,588 $ 2,108 $ 434 $ 373 ==================================================================================================================================== CHANGE IN PLAN ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ Fair value of plan assets - beginning of year $ 1,711 $ 1,839 $ 97 $ 100 Actual return on plan assets (111) (119) 4 3 Employer contribution -- 90 -- -- Benefits paid (101) (93) (5) (6) Expenses paid (12) (6) -- -- - ------------------------------------------------------------------------------------------------------------------------------------ FAIR VALUE OF PLAN ASSETS - END OF YEAR $ 1,487 $ 1,711 $ 96 $ 97 ==================================================================================================================================== Funded status $ (1,101) $ (397) $ (337) $ (276) Unrecognized transition obligation -- -- 2 -- Unrecognized net actuarial (gain) loss 934 280 98 46 Unrecognized prior service cost 26 32 (109) (127) - ------------------------------------------------------------------------------------------------------------------------------------ NET AMOUNT RECOGNIZED $ (141) $ (85) $ (346) $ (357) ====================================================================================================================================
Amounts recognized in the Consolidated Balance Sheets consist of: Pension Benefits Other Benefits ------------------------------- ------------------------------- 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Accrued benefit liability $ (763) $ (115) $ (346) $ (357) Intangible asset 32 -- -- -- Accumulated other comprehensive income 590 30 -- -- - ------------------------------------------------------------------------------------------------------------------------------------ NET AMOUNT RECOGNIZED $ (141) $ (85) $ (346) $ (357) ====================================================================================================================================
Assumptions used in calculating the net amount recognized for the plans were as follows: As of December 31, --------------------- 2002 2001 - ----------------------------------------------------------------- Weighted average discount rate 6.50% 7.50% Rate of increase in compensation levels 4.00% 4.25% ================================================================= For measurement purposes, a 10% annual rate of increase in the per capita cost of covered health care benefits was assumed for 2002. The rate was assumed to decrease gradually to 5.0% for 2007 and remain at that level thereafter. Increasing/decreasing the health care trend rates by one percent per year would have the effect of increasing/decreasing the benefit obligation as of F-29 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 12. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS (CONTINUED) December 31, 2002 by $14 and the annual net periodic expense for the year then ended by $1, for the postretirement health care and life insurance benefit plan. Total pension cost for the years ended December 31, 2002, 2001 and 2000 include the following components:
Pension Benefits Other Benefits ----------------------------------- ---------------------------------- 2002 2001 2000 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Service cost $ 84 $ 70 $ 62 $ 9 $ 8 $ 7 Interest cost 156 145 135 27 25 23 Expected return on plan assets (183) (168) (159) (9) (9) (9) Amortization of prior service cost 6 6 6 (24) (23) (23) Amortization of unrecognized net losses 4 4 3 2 -- -- Amortization of unrecognized net obligation arising from initial application of SFAS No. 87 -- -- 1 -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ NET PENSION COST $ 67 $ 57 $ 48 $ 5 $ 1 $ (2) ====================================================================================================================================
Assumptions used in calculating the net pension cost for the plans were as follows: Twelve Months Ended December 31, ----------------------------- 2002 2001 2000 - ------------------------------------------------------------------ Weighted average discount rate 7.50% 7.75% 8.25% Expected long-term rate of return on plan assets 9.75% 9.75% 9.75% Rate of increase in compensation levels 4.25% 4.25% 4.25% ================================================================== As of December 31, 2002, the Company determined that 6.50% is the appropriate discount rate to calculate the Company's 2003 pension expense. At the same time, the Company lowered its expected long-term rate of return assumption from 9.75% to 9.00%. 13. 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 $34, $30 and $28 for 2002, 2001 and 2000, respectively. 14. REINSURANCE The Hartford cedes insurance to other insurers in order to limit its maximum losses and to diversify its exposures. Such transfer does not relieve The Hartford of its primary liability under policies it wrote 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 also is a member of and participates in several reinsurance pools and associations. The Hartford evaluates the financial condition of its reinsurers and monitors concentrations of credit risk. Virtually all of The Hartford's property and casualty reinsurance is placed with reinsurers that meet strict financial criteria established by a credit committee. As of December 31, 2002, The Hartford had no reinsurance-related concentrations of credit risk greater than 10% of the Company's stockholders' equity. 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, 2002, the largest amount of life insurance retained on any one life by any one of the life operations was approximately $2.5. In addition, the Company reinsures the majority of minimum death benefit guarantee and the guaranteed withdrawal benefits offered in connection with its variable annuity contracts. Life insurance net retained premiums were comprised of the following: For the years ended December 31, ------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------- Gross premiums $ 5,123 $ 5,070 $ 4,731 Assumed 180 232 137 Ceded (419) (398) (303) - ----------------------------------------------------------------- NET RETAINED PREMIUMS $ 4,884 $ 4,904 $ 4,565 ================================================================= Life reinsures certain of its risks to other reinsurers under yearly renewable term, coinsurance, and modified coinsurance arrangements. Yearly renewable term and coinsurance arrangements result in passing a portion of the risk to the reinsurer. Generally, the reinsurer receives a proportionate amount of the premiums less an allowance for commissions and expenses and is liable for a corresponding proportionate amount of all benefit payments. Modified coinsurance is similar to coinsurance except that the cash and investments that support the liabilities for contract benefits are not transferred to the assuming company, and settlements are made on a net basis between the companies. Life also purchases reinsurance covering the death benefit guarantees on a portion of its variable annuity business. The Company is currently in arbitration with one of its reinsurers related to this reinsurance. (See further discussion in Note 16(a).) 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, F-30 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 14. REINSURANCE (CONTINUED) were $484, $392 and $225 for the years ended December 31, 2002, 2001 and 2000, respectively. The effect of reinsurance on property and casualty premiums written and earned was as follows: For the years ended December 31, -------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------- PREMIUMS WRITTEN Direct $ 8,985 $ 7,625 $ 7,109 Assumed 850 1,035 965 Ceded (1,251) (1,075) (826) - ---------------------------------------------------------------- NET $ 8,584 $ 7,585 $ 7,248 ================================================================ PREMIUMS EARNED Direct $ 8,404 $ 7,230 $ 6,770 Assumed 872 1,016 1,001 Ceded (1,162) (980) (795) - ---------------------------------------------------------------- NET $ 8,114 $ 7,266 $ 6,976 ================================================================ Reinsurance cessions, which reduce claims and claim expenses incurred, were $988, $1.2 billion and $727 for the years ended December 31, 2002, 2001 and 2000, respectively. The Hartford records a receivable for reinsured benefits paid and the portion of insurance liabilities that are reinsured, net of a valuation allowance, if necessary. The amounts recoverable from reinsurers are estimated based on assumptions that are consistent with those used in establishing the reserves related to the underlying reinsured contracts. Management believes the recoverables are appropriately established; however, in the event that future circumstances and information require The Hartford to change its estimate of needed loss reserves, the amount of reinsurance recoverables may also require adjustments.
15. INCOME TAX For the years ended December 31, ------------------------------------------------------------------------- 2002 2001 2000 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES U.S. Federal $ 1,068 $ 341 $ 1,381 International -- -- 37 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES $ 1,068 $ 341 $ 1,418 - ----------------------------------------------------------------------------------------------------------------------------------- INCOME TAX EXPENSE (BENEFIT) Current - U.S. Federal $ 136 $ (240) $ 58 International 3 (2) 31 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL CURRENT 139 (242) 89 - ----------------------------------------------------------------------------------------------------------------------------------- Deferred - U.S. Federal $ (70) $ 41 $ 318 International (1) 1 (17) - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DEFERRED (71) 42 301 - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL INCOME TAX EXPENSE (BENEFIT) $ 68 $ (200) $ 390 ===================================================================================================================================
Deferred tax assets (liabilities) include the following as of December 31: U.S. Federal ------------------------- 2002 2001 - ----------------------------------------------------------------- Loss reserves discounted on tax return $ 677 $ 624 Other insurance-related items (212) 1 Employee benefits 377 173 Reserve for bad debts 32 26 Depreciation 27 29 Unrealized gains (940) (324) Other investment-related items 19 (250) Minimum tax credit 338 244 NOL benefit carryover 217 181 Other 10 (11) - ----------------------------------------------------------------- TOTAL $ 545 $ 693 ================================================================= 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 was $104 as of December 31, 2002. F-31 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 15. INCOME TAX (CONTINUED) 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, ----------------------------------------------------------- 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Tax provision at U.S. Federal statutory rate $ 374 $ 119 $ 496 Tax-preferred investment income (225) (221) (181) Sale of International subsidiaries (see Note 18(b)) (8) 9 88 Internal Revenue Service audit settlement (see Note 16(d)) (77) -- (24) Tax adjustment - HLI (see Note 16(d)) -- (130) -- Other 4 23 11 - ------------------------------------------------------------------------------------------------------------------------------------ PROVISION (BENEFIT) FOR INCOME TAX $ 68 $ (200) $ 390 ====================================================================================================================================
16. COMMITMENTS AND CONTINGENCIES (A) LITIGATION The Hartford is involved in claims litigation arising in the ordinary course of business, both as a liability insurer defending third-party claims brought against insureds and as an insurer defending coverage claims brought against it. The Hartford accounts for such activity through the establishment of unpaid claim and claim adjustment expense reserves. Subject to the discussion of the litigation involving Mac Arthur Company and its subsidiary, Western MacArthur Company, both former regional distributors of asbestos products (collectively or individually, "MacArthur"), below and the uncertainties discussed in (b) below under the caption "Asbestos and Environmental Claims," management expects that the ultimate liability, if any, with respect to such ordinary-course claims litigation, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition, results of operations or cash flows of The Hartford. The Hartford is also involved in other kinds of legal actions, some of which assert claims for substantial amounts. These actions include, among others, putative state and federal class actions seeking certification of a state or national class. Such putative class actions have alleged, for example, underpayment of claims or improper underwriting practices in connection with various kinds of insurance policies, such as personal and commercial automobile, premises liability, and inland marine. The Hartford also is involved in individual actions in which punitive damages are sought, such as claims alleging bad faith in the handling of insurance claims. Management expects that the ultimate liability, if any, with respect to such lawsuits, after consideration of provisions made for potential losses and costs of defense, will not be material to the consolidated financial condition of The Hartford. Nonetheless, given the large or indeterminate amounts sought in certain of these actions, and the inherent unpredictability of litigation, it is possible that an adverse outcome in certain matters could, from time to time, have a material adverse effect on the Company's consolidated results of operations or cash flows in particular quarterly or annual periods. The MacArthur Litigation - Hartford Accident and Indemnity Company ("Hartford A&I"), a subsidiary of the Company, issued primary general liability policies to MacArthur during the period 1967 to 1976. MacArthur sought coverage for asbestos-related claims from Hartford A&I under these policies beginning in 1978. During the period between 1978 and 1987, Hartford A&I paid its full aggregate limits under these policies plus defense costs. In 1987, Hartford A&I notified MacArthur that its available limits under these policies had been exhausted, and MacArthur ceased submitting claims to Hartford A&I under these policies. On October 3, 2000, thirteen years after it had accepted Hartford A&I's notice of exhaustion, MacArthur filed an action against Hartford A&I and another insurer in the U.S. District Court for the Eastern District of New York, seeking for the first time additional coverage for asbestos bodily injury claims under the Hartford A&I primary policies. MacArthur seeks additional coverage on the theory that Hartford A&I has exhausted only its products aggregate limit of liability, not separate limits MacArthur alleges to be available for non-products liability. The complaint seeks a declaration of coverage and unquantified damages. Hartford A&I has moved for summary judgment dismissing MacArthur's claims with prejudice. MacArthur has moved to dismiss the action without prejudice. Both motions are pending. On June 3, 2002, The St. Paul Companies, Inc. ("St. Paul") announced a settlement of a coverage action brought by MacArthur against United States Fidelity and Guaranty Company ("USF&G"), a subsidiary of St. Paul. Under the settlement, St. Paul agreed to pay a total of $975 to resolve its asbestos liability to MacArthur in conjunction with a proposed bankruptcy petition and pre-packaged plan of reorganization to be filed by MacArthur. USF&G provided at least twelve years of primary general liability coverage to MacArthur, but, unlike Hartford A&I, had denied coverage and had refused to pay for defense or indemnity. On October 7, 2002, MacArthur filed an action in the Superior Court in Alameda County, California, against Hartford A&I and two other insurers. As in the New York action, MacArthur seeks a declaration of coverage and damages for asbestos bodily injury claims. Five asbestos claimants who allegedly have obtained default judgments against MacArthur also are joined as plaintiffs; they seek to recover the amount of their default judgments and additional damages directly from the defendant insurers and assert a right to an accelerated trial. In its October 7, 2002 complaint, MacArthur alleges that it has approximately $1.8 billion of unpaid asbestos liability judgments against it to date. The ultimate amount of MacArthur's alleged non-products asbestos liability, including F-32 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) (A) LITIGATION (CONTINUED) any unresolved current claims and future demands, is currently unknown. On Hartford A&I's motion, the court stayed the action until March 3, 2003, to allow the New York federal court time to rule first on the motions pending there. On November 22, 2002, MacArthur filed a bankruptcy petition and proposed plan of reorganization, which seeks to implement the terms of its settlement with St. Paul. MacArthur's bankruptcy filings indicate that it will seek to have the full amount of its current and future asbestos liability estimated in conjunction with plan confirmation. If such an estimation is made, MacArthur intends to ask the Alameda County court to enter judgment against the insurers for the amount of its total liability, including unliquidated claims and future demands, less the estimated amount ultimately paid by St. Paul. Hartford A&I has filed an adversary complaint in the MacArthur bankruptcy seeking a declaratory judgment that any estimation made in the bankruptcy proceedings is not an adjudication of MacArthur's asbestos liability for purposes of insurance coverage. Hartford A&I intends to defend the MacArthur actions vigorously. Based on the information currently available, management believes that Hartford A&I's liability, if any, to MacArthur will not be finally resolved for at least a year and most probably not for several years. In the opinion of management, the ultimate outcome is highly uncertain for many reasons. It is not yet known, for example, in which venue Hartford A&I's liability, if any, will be determined; whether Hartford A&I's defenses based on MacArthur's long delay in asserting claims for further coverage will be successful; how other significant coverage defenses will be decided; or the extent to which the claims and default judgments against MacArthur involve injury outside of the products and completed operations hazard definitions of the policies. In the opinion of management, an adverse outcome could have a material adverse effect on the Company's results of operations, financial condition and liquidity. Bancorp Services, LLC - On March 15, 2002, a jury in the U.S. District Court for the Eastern District of Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. HLIC, et al., in favor of Bancorp in the amount of $118. The case involved claims of patent infringement, misappropriation of trade secrets, and breach of contract against HLIC and its affiliate International Corporate Marketing Group, LLC ("ICMG"). The judge dismissed the patent infringement claim on summary judgment. The jury's award was based on the last two claims. On August 28, 2002, the Court entered an order awarding Bancorp prejudgment interest on the breach of contract claim in the amount of $16. HLIC and ICMG have appealed the judgment on the trade secret and breach of contract claims. Bancorp has cross-appealed the pretrial dismissal of its patent infringement claim. The Company's management, based on the advice of its legal counsel, believes that there is a substantial likelihood that the judgment will not survive at its current amount. Based on the advice of legal counsel regarding the potential outcomes of this litigation, the Company recorded an $11 after-tax charge for this matter in the first quarter of 2002 to increase litigation reserves. Should HLIC and ICMG not succeed in eliminating or reducing the judgment, a significant additional expense would be recorded in the future. Reinsurance Arbitration - The Company is involved in arbitration with one of its primary reinsurers relating to policies with death benefit guarantees written from 1994 to 1999. The arbitration involves alleged breaches under the reinsurance treaties. Although the Company believes that its position in this pending arbitration is strong, an adverse outcome could result in a decrease to the Company's statutory surplus and capital and potentially increase the death benefit costs incurred by the Company in the future. The arbitration hearing was held during the fourth quarter of 2002, but no decision has been rendered. (B) ASBESTOS AND ENVIRONMENTAL CLAIMS The Hartford continues to receive claims that assert damages from asbestos- and environmental-related exposures. Asbestos claims relate primarily to bodily injuries asserted by those who came in contact with asbestos or products containing asbestos. Environmental claims relate primarily to pollution and related clean-up costs. The Hartford wrote several different categories of insurance coverage to which asbestos and environmental claims may apply. First, The Hartford wrote direct policies as a primary liability insurance carrier. Second, The Hartford wrote direct excess insurance policies providing additional coverage for insureds that exhaust their primary liability insurance coverage. Third, The Hartford acted as a reinsurer assuming a portion of risks previously assumed by other insurers writing primary, excess and reinsurance coverages. Fourth, The Hartford participated as a London Market company that wrote both direct insurance and assumed reinsurance business. With regard to both environmental and particularly asbestos claims, significant uncertainty limits the ability of insurers and reinsurers to estimate the ultimate reserves necessary for unpaid losses and related settlement expenses. Conventional reserving techniques cannot reasonably estimate the ultimate cost of these claims, particularly during periods where theories of law are in flux. As a result of the factors discussed in the following paragraphs, the degree of variability of reserve estimates for these exposures is significantly greater than for other more traditional exposures. In particular, The Hartford believes there is a high degree of uncertainty inherent in the estimation of asbestos loss reserves. In the case of the reserves for asbestos exposures, factors contributing to the high degree of uncertainty include inadequate development patterns, plaintiffs' expanding theories of liability, the risks inherent in major litigation and inconsistent emerging legal doctrines. Courts have reached inconsistent conclusions as to when losses are deemed to have occurred and which policies provide coverage; what types of losses are covered; whether there is an insurer obligation to defend; how policy limits are determined; whether particular claims are product/completed operation claims subject to an aggregate limit and how policy exclusions and conditions are applied and interpreted. Furthermore, insurers in general, including The F-33 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) (B) ASBESTOS AND ENVIRONMENTAL CLAIMS (CONTINUED) Hartford, have recently experienced an increase in the number of asbestos-related claims due to, among other things, more intensive advertising by lawyers seeking asbestos claimants, plaintiffs' increased focus on new and previously peripheral defendants and an increase in the number of insureds seeking bankruptcy protection as a result of asbestos-related liabilities. Plaintiffs and insureds have sought to use bankruptcy proceedings to accelerate and increase loss payments by insurers. In addition, some policyholders have begun to assert new classes of claims for so called "non-product" coverages to which an aggregate limit of liability may not apply. Recently, many insurers, including, in a limited number of instances, The Hartford, also have been sued directly by asbestos claimants asserting that insurers had a duty to protect the public from the dangers of asbestos. Management believes these issues are not likely to be resolved in the near future. In the case of the reserves for environmental exposures, factors contributing to the high degree of uncertainty include court decisions that have interpreted the insurance coverage to be broader than originally intended; inconsistent decisions, especially across jurisdictions and uncertainty as to the monetary amount being sought by the claimant from the insured. Further uncertainties include, the effect of the recent acceleration in the rate of bankruptcy filings by asbestos defendants on the rate and amount of The Hartford's asbestos claims payments; a further increase or decrease in asbestos and environmental claims which cannot now be anticipated; whether some policyholders' liabilities will reach the umbrella or excess layer of their coverage; the resolution or adjudication of some disputes pertaining to the amount of available coverage for asbestos claims in a manner inconsistent with The Hartford's previous assessment of these claims; the number and outcome of direct actions against The Hartford; and unanticipated developments pertaining to The Hartford's ability to recover reinsurance for asbestos and environmental claims. It is also not possible to predict changes in the legal and legislative environment and their impact on the future development of asbestos and environmental claims. Additionally, the reporting pattern for excess insurance and reinsurance claims is much longer than direct claims. In many instances, it takes months or years to determine that the customer's own obligations have been met and how the reinsurance in question may apply to such claims. The delay in reporting reinsurance claims and exposures adds to the uncertainty of estimating the related reserves. Given the factors and emerging trends described above, The Hartford believes the actuarial tools and other techniques it employs to estimate the ultimate cost of claims for more traditional kinds of insurance exposure are less precise in estimating reserves for its asbestos exposures. The Hartford continually evaluates new information and new methodologies in assessing its potential asbestos exposures. At any time, The Hartford may be conducting an analysis of newly identified information. Completion of exposure analyses could cause The Hartford to change its estimates of its asbestos reserves and the effect of these changes could be material to the Company's consolidated operating results, financial condition and liquidity. On May 14, 2002, The Hartford announced its participation, along with several dozen other insurance carriers, in a settlement in principle with its insured, PPG Industries ("PPG"), of litigation arising from asbestos exposures involving Pittsburgh Corning Corporation ("Pittsburgh Corning"), which is 50% owned by PPG. The structure of the settlement will allow The Hartford to make fixed payments to a settlement trust over a 20-year period beginning in 2004 and allows The Hartford to prepay its obligations at any time at a fixed discount rate of 5.5%. The settlement is subject to a number of contingencies, including the negotiation of a definitive agreement among the parties and approval of the bankruptcy court supervising the reorganization of Pittsburgh Corning. The Hartford estimated the settlement amount to be approximately $130 (non tax-effected) on a discounted basis and net of anticipated reinsurance recoveries. The settlement was covered by existing asbestos reserves, and as a result, did not have a material impact on the Company's consolidated financial condition or results of operations. As of December 31, 2002 and 2001, the Company reported $1.1 billion and $616 of net asbestos and $591 and $654 of net environmental reserves, respectively. Because of the significant uncertainties previously described, principally those related to asbestos, the ultimate liabilities may exceed the currently recorded reserves. Any such additional liability (or any range of additional amounts) cannot be reasonably estimated now but could be material to The Hartford's future consolidated operating results, financial condition and liquidity. Consistent with the Company's longstanding reserving practices, The Hartford will continue to regularly review and monitor these reserves and, where future circumstances indicate, make appropriate adjustments to the reserves. (C) LEASE COMMITMENTS Total rental expense on operating leases was $192 in 2002, $181 in 2001 and $179 in 2000. Future minimum lease commitments are as follows: 2003 $ 134 2004 121 2005 108 2006 93 2007 78 Thereafter 160 - ---------------------------------------------------------------- TOTAL $ 694 ================================================================ (D) TAX MATTERS The Company's Federal income tax returns are routinely audited by the Internal Revenue Service ("IRS"). Throughout the audit of the 1996-1997 years, the Company and the IRS have been engaged in an ongoing dispute regarding what portion of the separate account dividends-received deduction ("DRD") is deductible by the Company. During 2001 the Company continued its discussions with the IRS. As part of the Company's due diligence with respect to this issue, the Company closely monitored the activities of the IRS with F-34 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 16. COMMITMENTS AND CONTINGENCIES (CONTINUED) (D) TAX MATTERS (CONTINUED) respect to other taxpayers on this issue and consulted with outside tax counsel and advisors on the merits of the Company's separate account DRD. The due diligence was completed during the third quarter of 2001 and the Company concluded that it was probable that a greater portion of the separate account DRD claimed on its filed returns would be realized. Based on the Company's assessment of the probable outcome, the Company concluded an additional $130 tax benefit was appropriate to record in the third quarter of 2001, relating to the tax years 1996-2000. Additionally, the Company increased its estimate of the separate account DRD recognized with respect to tax year 2001 from $44 to $60. Furthermore, for the tax year 2002 this amount was $63. During 2000, the Company had recorded a $24 tax benefit as a result of a final settlement with the IRS on different aspects of the Company's share of the DRD for the 1993-1995 tax years. Earlier in 2002, the Company and its IRS agent requested advice from the National Office of the IRS with respect to certain aspects of the computation of the separate account DRD that had been claimed by the Company for the 1996-1997 audit period. During September 2002 the IRS National Office issued a ruling that confirmed that the Company had properly computed the items in question in the separate account DRD claimed on its 1996-1997 tax returns. Additionally, during the third quarter, the Company reached agreement with the IRS on all other issues with respect to the 1996-1997 tax years. The Company recorded a benefit of $76 during the third quarter of 2002, primarily relating to the tax treatment of such issues for the 1996-1997 tax years, as well as appropriate carryover adjustments to the 1998-2002 years. The Company will continue to monitor further developments surrounding the computation of the separate account DRD, as well as other items, and will adjust its estimate of the probable outcome of these issues as developments warrant. 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, 2002, The Hartford has outstanding commitments to fund limited partnership investments totaling $396. 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 has not been fully funded, The Hartford is not required to fund the remaining unfunded commitment but may elect to do so. 17. SEGMENT INFORMATION The Hartford is organized into two major operations: Life and Property & Casualty. Within these operations, The Hartford conducts business principally in nine operating segments. Additionally, the capital raising and purchase accounting adjustment activities related to the June 27, 2000 acquisition of all of the outstanding shares of HLI that the Company did not already own, capital raised in 2002 that was not contributed to the Company's insurance subsidiaries, 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 Japan and Latin America; realized capital gains and losses; as well as corporate items not directly allocated to any of its reportable operating segments, principally interest expense; and intersegment eliminations. In January 2002, Property & Casualty integrated its Affinity Personal Lines and Personal Insurance segments, now reported as Personal Lines. As a result, Property & Casualty is now organized into five reportable operating segments: the North American underwriting segments of Business Insurance, Personal Lines, Specialty Commercial and Reinsurance; and the Other Operations segment, which includes substantially all of the Company's asbestos and environmental exposures. "North American" includes the combined underwriting results of the Business Insurance, Personal Lines, Specialty Commercial and Reinsurance underwriting segments along with income and expense items allocated to these segments, such as net investment income, net realized capital gains and losses, other expenses including interest, and income taxes. Business Insurance provides standard commercial insurance coverage to small commercial and middle market commercial business primarily throughout the United States. This segment offers workers' compensation, property, automobile, liability, umbrella and marine coverages. Commercial risk management products and services are also provided. Personal Lines provides automobile, homeowners' and home-based business coverages to the members of AARP through a direct marketing operation; to individuals who prefer local agent involvement through a network of independent agents in the standard personal lines market; and through the Omni Insurance Group in the non-standard automobile market. Personal Lines also operates a member contact center for health insurance products offered through AARP's Health Care Options. The Specialty Commercial segment offers a variety of customized insurance products and risk management services. Specialty Commercial provides standard commercial insurance products including workers' compensation, automobile and liability coverages to large-sized companies. Specialty Commercial also provides bond, professional liability, specialty casualty and F-35 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT INFORMATION (CONTINUED) agricultural coverages, as well as core property and excess and surplus lines coverages not normally written by standard lines insurers. Alternative markets, within Specialty Commercial, provides insurance products and services primarily to captive insurance companies, pools and self-insurance groups. In addition, Specialty Commercial provides third party administrator services for claims administration, integrated benefits, loss control and performance measurement through Specialty Risk Services. The Reinsurance segment assumes reinsurance in North America and primarily writes treaty reinsurance through professional reinsurance brokers covering various property, casualty, property catastrophe, marine and alternative risk transfer ("ART") products. ART includes non-traditional reinsurance products such as multi-year property catastrophe treaties, aggregate of excess of loss agreements and quota share treaties with event or aggregate loss ratio caps. International property catastrophe, marine and ART are also sourced outside of North America through a London contact office. The Other Operations segment consists of certain property and casualty insurance operations of The Hartford which have discontinued writing new business and includes substantially all of the Company's asbestos and environmental exposures. The Other Operations segment results also include activity for the Company's international property and casualty businesses up until their dates of sale, and for 2002 include the activity in the exited international lines of Reinsurance as a result of its restructuring in October 2001. (For further discussion of this restructuring, see Note 18(c).) 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. Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses. "Operating income" is defined as after-tax operational results excluding, as applicable, net realized capital gains or 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. 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 certain net realized capital gains and losses through net investment income utilizing the duration of the segment's investment portfolios. On December 1, 2002, The Hartford entered into a contract with a subsidiary, Fencourt Reinsurance Company, Ltd. ("Fencourt"), whereby Fencourt will provide reinsurance for the Property & Casualty operations. The financial results of this reinsurance program, net of retrocessions to unrelated reinsurers, will be included in the Specialty Commercial segment. F-36 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT INFORMATION (CONTINUED) The following tables present revenues and operating income (loss). Underwriting results are presented for the Business Insurance, Personal Lines, 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 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Life Investment Products $ 2,597 $ 2,506 $ 2,380 Individual Life 958 890 640 Group Benefits 2,582 2,507 2,207 COLI 592 719 767 Other [1] (304) (73) (4) - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 6,425 6,549 5,990 - ------------------------------------------------------------------------------------------------------------------------------------ Property & Casualty North American Earned premiums and other revenue Business Insurance 3,126 2,645 2,298 Personal Lines 3,107 2,897 2,713 Specialty Commercial 1,455 1,242 1,202 Reinsurance 713 920 809 Ceded premiums related to September 11 [2] -- (91) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total earned premiums and other revenue 8,401 7,613 7,022 Net investment income 928 907 862 Net realized capital gains (losses) (56) (108) 218 - ------------------------------------------------------------------------------------------------------------------------------------ Total North American 9,273 8,412 8,102 Other Operations 189 168 602 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 9,462 8,580 8,704 Corporate 20 18 9 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 15,907 $ 15,147 $ 14,703 ==================================================================================================================================== [1] Amounts include net realized capital losses of $(317), $(133) and $(88) for the years ended December 31, 2002, 2001 and 2000, respectively. [2] 2001 includes reinsurance cessions of $(15) related to Business Insurance, $(7) related to Specialty Commercial and $(69) related to Reinsurance.
F-37 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
17. SEGMENT INFORMATION (CONTINUED) For the years ended December 31, ------------------------------------------------------------ NET INCOME (LOSS) 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Operating Income (Loss) Life Investment Products $ 432 $ 463 $ 424 Individual Life 133 121 79 Group Benefits 128 106 90 COLI 32 37 34 Other 28 73 5 - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 753 800 632 - ------------------------------------------------------------------------------------------------------------------------------------ Property & Casualty North American Underwriting results Business Insurance 44 3 (50) Personal Lines (46) (78) 2 Specialty Commercial (23) (95) (103) Reinsurance (59) (149) (73) - ------------------------------------------------------------------------------------------------------------------------------------ Underwriting results excluding September 11 (84) (319) (224) September 11 [1] -- (647) -- - ------------------------------------------------------------------------------------------------------------------------------------ Total North American underwriting results (84) (966) (224) Net servicing and other income [2] 15 22 9 Net investment income 928 907 862 Other expenses [3] (243) (189) (216) Income tax (expense) benefit (97) 206 (19) - ------------------------------------------------------------------------------------------------------------------------------------ Total North American 519 (20) 412 Other Operations 4 6 17 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 523 (14) 429 Corporate (26) (62) (99) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING INCOME 1,250 724 962 Restructuring charges, net of tax -- (11) -- 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 (250) (164) 12 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 1,000 $ 507 $ 974 ==================================================================================================================================== [1] 2001 includes underwriting losses related to September 11 of $(245) in Business Insurance, $(9) in Personal Lines, $(167) in Specialty Commercial and $(226) in Reinsurance. [2] Net of expenses related to service business. [3] 2001 excludes $15 related to restructuring charges.
As of December 31, ------------------------------------------------------------ ASSETS 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Life $ 149,794 $ 151,609 $ 143,621 Property & Casualty 31,197 29,187 27,513 Corporate 1,052 797 817 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 182,043 $ 181,593 $ 171,951 ==================================================================================================================================== GEOGRAPHICAL SEGMENT INFORMATION For the years ended December 31, ------------------------------------------------------------ REVENUES 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ North America $ 15,779 $ 15,003 $ 14,062 Other 128 144 641 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 15,907 $ 15,147 $ 14,703 ====================================================================================================================================
F-38 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 17. SEGMENT INFORMATION (CONTINUED)
REVENUES BY PRODUCT LINE For the years ended December 31, ------------------------------------------------------------ REVENUES 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ Life Investment Products Individual annuity $ 1,452 $ 1,492 $ 1,538 Other 1,145 1,014 842 - ------------------------------------------------------------------------------------------------------------------------------------ Total Investment Products 2,597 2,506 2,380 Individual Life 958 890 640 Group Benefits 2,582 2,507 2,207 COLI 592 719 767 Other [1] (304) (73) (4) - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 6,425 6,549 5,990 - ------------------------------------------------------------------------------------------------------------------------------------ Property & Casualty North American Business Insurance Workers' Compensation 1,079 891 764 Property 927 770 646 Automobile 590 512 445 Liability 382 345 331 Other 148 127 112 - ------------------------------------------------------------------------------------------------------------------------------------ Total Business Insurance 3,126 2,645 2,298 Personal Lines Automobile 2,232 2,067 1,956 Homeowners and other [2] 875 830 757 - ------------------------------------------------------------------------------------------------------------------------------------ Total Personal Lines 3,107 2,897 2,713 Specialty Commercial Workers' Compensation 112 126 118 Property 198 108 86 Automobile 19 20 19 Liability 238 151 72 Other [2] 888 837 907 - ------------------------------------------------------------------------------------------------------------------------------------ Total Specialty Commercial 1,455 1,242 1,202 Reinsurance 713 920 809 Ceded premiums related to September 11 -- (91) -- Net investment income 928 907 862 Net realized capital gains (losses) (56) (108) 218 - ------------------------------------------------------------------------------------------------------------------------------------ Total North American 9,273 8,412 8,102 Other Operations 189 168 602 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 9,462 8,580 8,704 Corporate 20 18 9 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 15,907 $ 15,147 $ 14,703 ==================================================================================================================================== [1] Amounts include net realized capital losses of $(317), $(133) and $(88) for the years ended December 31, 2002, 2001 and 2000, respectively. [2] Represents servicing revenue.
18. ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING (A) 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 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. 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 ================================================================= F-39 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 18. ACQUISITIONS, DISPOSITIONS AND RESTRUCTURING (CONTINUED) (A) ACQUISITIONS (CONTINUED) Fortis (continued) - ------------------ The assets and liabilities acquired in this transaction were recorded at values prescribed by applicable purchase accounting rules, which 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 years ended December 31, 2002 and 2001, amortization of PVP amounted to $62 and $66, respectively. 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, when amortization ceased under the provisions of SFAS No. 142. HLI Repurchase - -------------- On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI that it did not already own. The HLI Repurchase has been recorded as a purchase transaction. Consideration totaled $1.4 billion and resulted in recognition of goodwill (excess of the purchase price over the fair value of the net assets acquired) of $862, which was amortized on a straight-line basis until January 1, 2002, when amortization ceased under the provisions of SFAS No. 142. 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, 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, 2002, 2001 and 2000, amortization of PVP amounted to $70, $79 and $47, respectively. (B) DISPOSITIONS 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 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 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 of 2001, the Boards of Directors for both The Hartford Bank and HFSG, approved The Hartford Bank's dissolution plan. 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. 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. As of December 31, 2002, the Company has paid approximately $6 in employee-related restructuring costs, $2 in occupancy-related costs and $1 in other restructuring-related costs. F-40 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 19. ACCUMULATED OTHER COMPREHENSIVE INCOME ("AOCI") Comprehensive income is defined as all changes in stockholders' equity, except those arising from transactions with stockholders. Comprehensive income includes net income and other comprehensive income, which for the Company consists of changes in unrealized appreciation or depreciation of investments carried at market value, changes in gains or losses on cash-flow hedging instruments, changes in foreign currency translation gains or losses and changes in the Company's minimum pension liability. The components of AOCI or loss were as follows:
FOR THE YEAR ENDED DECEMBER 31, 2002 Net Gain on Foreign Unrealized Cash-Flow Currency Minimum Pension Accumulated Gain on Hedging Cumulative Liability Other Securities, Instruments, Translation Adjustment, Comprehensive net of tax net of tax Adjustments net of tax Income (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD $606 $63 $(116) $(19) $534 Unrealized gain on securities [1] [2] 838 -- -- -- 838 Foreign currency translation adjustments [1] -- -- 21 -- 21 Net gain on cash-flow hedging instruments [1] [3] -- 65 -- -- 65 Minimum pension liability adjustment [1] -- -- -- (364) (364) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $1,444 $128 $(95) $(383) $1,094 ==================================================================================================================================== FOR THE YEAR ENDED DECEMBER 31, 2001 Net Gain on Foreign Unrealized Cash-Flow Currency Minimum Pension Accumulated Gain on Hedging Cumulative Liability Other Securities, Instruments, Translation Adjustment, Comprehensive net of tax net of tax Adjustments net of tax Income (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD $497 $-- $(113) $(15) $369 Cumulative effect of accounting change [4] (1) 24 -- -- 23 Unrealized gain on securities [1] [2] 110 -- -- -- 110 Foreign currency translation adjustments [1] -- -- (3) -- (3) Net gain on cash-flow hedging instruments [1] [3] -- 39 -- -- 39 Minimum pension liability adjustment [1] -- -- -- (4) (4) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $606 $63 $(116) $(19) $534 ==================================================================================================================================== FOR THE YEAR ENDED DECEMBER 31, 2000 Unrealized Gain Foreign Currency Minimum Pension (Loss) on Cumulative Liability Accumulated Other Securities, Translation Adjustment, Comprehensive net of tax Adjustments net of tax Income (Loss) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD $(198) $(63) $(11) $(272) Unrealized gain on securities [1] 695 -- -- 695 Foreign currency translation adjustments [1] -- (50) -- (50) Minimum pension liability adjustment [1] -- -- (4) (4) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $497 $(113) $(15) $369 ==================================================================================================================================== [1] Unrealized gain (loss) on securities is net of tax and other items of $810, $60 and $370 for the years ended December 31, 2002, 2001 and 2000, respectively. Net gain on cash-flow hedging instruments is net of tax of $35 and $21 for the years ended December 31, 2002 and 2001. Minimum pension liability adjustment is net of tax of $(196), $(2) and $(2) for the years ended December 31, 2002, 2001 and 2000, respectively. [2] Net of reclassification adjustment for gains (losses) realized in net income of $(252), $(72) and $(57) for the years ended December 31, 2002, 2001 and 2000, respectively. [3] Net of amortization adjustment of $5 and $6 to net investment income for the years ended December 31, 2002 and 2001, respectively. [4] For the year ended December 31, 2001, 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.
F-41 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) 20. QUARTERLY RESULTS FOR 2002 AND 2001 (UNAUDITED)
Three Months Ended ----------------------------------------------------------------------------------- March 31, June 30, September 30, December 31, ----------------------------------------------------------------------------------- 2002 2001 2002 2001 2002 2001 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ Revenues $ 3,900 $ 3,722 $ 3,885 $ 3,847 $ 3,961 $ 3,722 $ 4,161 $ 3,856 Benefits, claims and expenses $ 3,532 $ 3,401 $ 3,685 $ 3,552 $ 3,767 $ 4,148 $ 3,855 $ 3,705 Net income (loss) [1] $ 292 $ 240 $ 185 $ 226 $ 265 $ (103) $ 258 $ 144 Income (loss) before cumulative effect of accounting change [1] $ 292 $ 263 $ 185 $ 237 $ 265 $ (103) $ 258 $ 144 Basic earnings (loss) per share [1] $ 1.19 $ 1.04 $ 0.75 $ 0.95 $ 1.06 $ (0.43) $ 1.01 $ 0.59 Basic earnings (loss) per share before cumulative effect of accounting change [1] $ 1.19 $ 1.14 $ 0.75 $ 1.00 $ 1.06 $ (0.43) $ 1.01 $ 0.59 Diluted earnings (loss) per share [1] [2] $ 1.17 $ 1.02 $ 0.74 $ 0.94 $ 1.06 $ (0.43) $ 1.01 $ 0.58 Diluted earnings (loss) per share before cumulative effect of accounting change [1] [2] $ 1.17 $ 1.12 $ 0.74 $ 0.98 $ 1.06 $ (0.43) $ 1.01 $ 0.58 Weighted average common shares outstanding 246.1 231.5 247.4 237.3 248.9 238.0 255.2 244.1 Weighted average common shares outstanding and dilutive potential common shares [2] 249.7 235.5 250.7 241.3 250.5 238.0 256.3 247.1 - ------------------------------------------------------------------------------------------------------------------------------------ [1] Included in the quarter ended March 31, 2002 is an after-tax expense of $11 in Life related to Bancorp Services, LLC litigation and $8 after-tax benefit in Life's September 11 exposure. Included in the quarter ended September 30, 2002 are $76 of tax benefits in Life related to the favorable treatment of certain tax items arising during the 1996-2002 tax years. Included in the quarter ended September 30, 2001 are after-tax losses of $440 related to September 11 and $130 of tax benefit in Life primarily related to the expected favorable treatment of certain tax items arising during the 1996-2000 tax years. [2] As a result of the net loss in the quarter ended September 30, 2001, SFAS No. 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-42
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE I SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES (In millions) As of December 31, 2002 --------------------------------------------------------- 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) $ 467 $ 484 $ 484 U.S. Gov't and Gov't agencies and authorities (guaranteed and sponsored) - asset-backed 2,867 2,959 2,959 States, municipalities and political subdivisions 10,104 10,929 10,929 International governments 1,481 1,614 1,614 Public utilities 1,754 1,807 1,807 All other corporate including international 16,389 17,433 17,433 All other corporate - asset-backed 10,189 10,646 10,646 Short-term investments 2,097 2,100 2,100 Certificates of deposit 795 815 815 Redeemable preferred stock 98 102 102 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED MATURITIES 46,241 48,889 48,889 - --------------------------------------------------------------------------------------------------------------------------------- EQUITY SECURITIES Common stocks Public utilities 7 7 7 Banks, trusts and insurance companies 35 38 38 Industrial and miscellaneous 486 458 458 Nonredeemable preferred stocks 409 414 414 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL EQUITY SECURITIES 937 917 917 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED MATURITIES AND EQUITY SECURITIES 47,178 49,806 49,806 - --------------------------------------------------------------------------------------------------------------------------------- REAL ESTATE 2 2 2 OTHER INVESTMENTS Mortgage loans on real estate 463 463 463 Policy loans 2,934 2,934 2,934 Investments in partnerships and trusts 885 881 881 Futures, options and miscellaneous 225 444 444 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL OTHER INVESTMENTS 4,507 4,722 4,722 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENTS $ 51,687 $ 54,530 $ 54,530 =================================================================================================================================
S-1
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE II CONDENSED FINANCIAL INFORMATION OF THE HARTFORD FINANCIAL SERVICES GROUP, INC. (REGISTRANT) (In millions) BALANCE SHEETS As of December 31, --------------------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- ASSETS Receivables from affiliates $ 333 $ 162 Other assets 263 216 Investment in affiliates 13,351 11,254 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS 13,947 11,632 ================================================================================================================================== LIABILITIES AND STOCKHOLDERS' EQUITY Short-term debt 315 599 Long-term debt 1,551 919 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely parent junior subordinated debentures 1,023 968 Other liabilities 324 133 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 3,213 2,619 TOTAL STOCKHOLDERS' EQUITY 10,734 9,013 - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 13,947 $ 11,632 ================================================================================================================================== (In millions) STATEMENTS OF INCOME For the years ended December 31, ---------------------------------------------------------- 2002 2001 2000 - ---------------------------------------------------------------------------------------------------------------------------------- Earnings of subsidiaries $ 1,104 $ 641 $ 1,096 Interest expense (net of interest income) 155 190 186 Other expenses (income) 5 16 3 - ---------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES 944 435 907 Income tax expense (benefit) (56) (72) (67) - ---------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1,000 $ 507 $ 974 ==================================================================================================================================
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, -------------------------------------------------------------- 2002 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING ACTIVITIES Net income $ 1,000 $ 507 $ 974 Undistributed earnings of subsidiaries (877) (555) (436) Change in working capital (128) 45 48 - ------------------------------------------------------------------------------------------------------------------------------------ CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (5) (3) 586 - ------------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Net sale (purchase) of short-term investments 6 (41) -- Capital contribution to subsidiary (498) (854) (1,325) - ------------------------------------------------------------------------------------------------------------------------------------ CASH USED FOR INVESTING ACTIVITIES (492) (895) (1,325) - ------------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Net increase in debt 333 48 520 Issuance of common stock 330 1,015 398 Dividends paid (257) (235) (210) Acquisition of treasury stock -- (7) (100) Proceeds from issuances of shares under incentive and stock purchase plans 92 77 131 - ------------------------------------------------------------------------------------------------------------------------------------ CASH PROVIDED BY FINANCING ACTIVITIES 498 898 739 - ------------------------------------------------------------------------------------------------------------------------------------ Net change in cash 1 -- -- Cash - beginning of year -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ CASH - END OF YEAR $ 1 $ -- $ -- ==================================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION - ------------------------------------------------ NET CASH PAID DURING THE YEAR FOR: Interest $ 150 $ 186 $ 180
S-3
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 Future (In millions) Policy Benefits, Unpaid Other Deferred Claims and Policyholder Earned Policy Claim Funds and Premiums, Net Acquisition Adjustment Unearned Benefits Fee Income and Investment Costs [1] Expenses Premiums Payable Other Income - ---------------------------------------------------------------------------------------------- 2002 Life $ 5,758 $ 9,521 $ 54 $ 23,019 $ 4,884 $ 1,858 P&C 930 17,159 3,942 -- 8,470 1,075 Corporate 1 (16) (7) (1) -- 20 - ---------------------------------------------------------------------------------------------- CONSOLIDATED $ 6,689 $ 26,664 $ 3,989 $ 23,018 $ 13,354 $ 2,953 ============================================================================================== 2001 Life $ 5,572 $ 8,842 $ 45 $ 19,357 $ 4,903 $ 1,779 P&C 847 17,036 3,399 -- 7,630 1,053 Corporate 1 (23) (8) (2) -- 18 - ---------------------------------------------------------------------------------------------- CONSOLIDATED $ 6,420 $ 25,855 $ 3,436 $ 19,355 $ 12,533 $ 2,850 ============================================================================================== 2000 Life $ 4,527 $ 7,074 $ 54 $ 15,849 $ 4,486 $ 1,592 P&C 777 16,293 3,048 2 7,398 1,072 Corporate 1 (29) (9) (3) __ 10 - ---------------------------------------------------------------------------------------------- CONSOLIDATED $ 5,305 $ 23,338 $ 3,093 $ 15,848 $ 11,884 $ 2,674 ============================================================================================== [1] Also includes present value of future profits. Note: Certain reclassifications have been made to prior year financial information to conform to current year presentation. N/A - Not applicable to life insurance pursuant to Regulation S-X.
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE III SUPPLEMENTARY INSURANCE INFORMATION FOR THE YEARS ENDED DECEMBER 31, 2002, 2001 AND 2000 (In millions) Benefits, Amortization Claims and of Deferred Net Realized Claim Policy Net Capital Adjustment Acquisition Other Written Earned Gains(Losses) Expenses Costs [1] Expenses Premiums Premiums - --------------------------------------------------------------------------------------------- 2002 Life $ (317) $ 3,648 $ 628 $ 1,582 $ N/A $ N/A P&C (83) 5,870 1,613 1,438 8,584 8,114 Corporate -- 6 -- 54 N/A N/A - --------------------------------------------------------------------------------------------- CONSOLIDATED $ (400) $ 9,524 $ 2,241 $ 3,074 $ 8,584 $ 8,114 - --------------------------------------------------------------------------------------------- 2001 Life $ (133) $ 3,611 $ 642 $ 1,531 $ N/A $ N/A P&C (103) 6,146 1,572 1,210 7,585 7,266 Corporate -- 7 -- 87 N/A N/A - --------------------------------------------------------------------------------------------- CONSOLIDATED $ (236) $ 9,764 $ 2,214 $ 2,828 $ 7,585 $ 7,266 - --------------------------------------------------------------------------------------------- 2000 Life $ (88) $ 3,162 $ 671 $ 1,369 $ N/A $ N/A P&C 234 5,253 1,542 1,225 7,248 6,976 Corporate (1) 4 __ 59 N/A N/A - --------------------------------------------------------------------------------------------- CONSOLIDATED $ 145 $ 8,419 $ 2,213 $ 2,653 $ 7,248 $ 6,976 =============================================================================================
S-4
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE IV REINSURANCE Ceded to Assumed From Percentage of Gross Other Other Net Amount Amount Assumed (In millions) Amount Companies Companies to Net - ---------------------------------------------------------------------------------------------------------------------------- FOR THE YEAR ENDED DECEMBER 31, 2002 Life insurance in force $ 629,028 $ 209,608 $ 65,590 $ 485,010 14% ============================================================================================================================ INSURANCE REVENUES Property and casualty insurance $ 8,404 $ 1,162 $ 872 $ 8,114 11% Life insurance and annuities 3,556 278 84 3,362 2% Accident and health insurance 1,567 141 96 1,522 6% - ---------------------------------------------------------------------------------------------------------------------------- TOTAL INSURANCE REVENUES $ 13,527 $ 1,581 $ 1,052 $ 12,998 8% ============================================================================================================================ 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 $ 7,230 $ 980 $ 1,016 $ 7,266 14% Life insurance 3,661 282 81 3,460 2% Accident and health insurance 1,408 116 151 1,443 10% - ---------------------------------------------------------------------------------------------------------------------------- TOTAL INSURANCE REVENUES $ 12,299 $ 1,378 $ 1,248 $ 12,169 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 $ 6,770 $ 795 $ 1,001 $ 6,976 14% Life insurance 3,392 197 64 3,259 2% Accident and health insurance 1,339 106 73 1,306 6% - ---------------------------------------------------------------------------------------------------------------------------- TOTAL INSURANCE REVENUES $ 11,501 $ 1,098 $ 1,138 $ 11,541 10% ============================================================================================================================
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, - -------------------------------------------------------------------------------------------------------------------------------- 2002 ---- Allowance for doubtful accounts $ 133 $ 96 $ (11) $ (76) $ 142 Accumulated depreciation of plant, property and equipment 721 107 -- (29) 799 Reserve for restructuring charges 16 -- -- (9) 7 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 ================================================================================================================================
THE HARTFORD FINANCIAL SERVICES GROUP, INC. SCHEDULE VI SUPPLEMENTAL INFORMATION CONCERNING PROPERTY AND CASUALTY INSURANCE OPERATIONS Discount Claims and Claim Adjustment Expenses Paid Claims and Deducted From Incurred Related to: Claim Adjustment --------------------------------------- (In millions) Liabilities [1] Current Year Prior Years Expenses - ----------------------------------------------------------------------------------------------------------------------------------- Years ended December 31, 2002 $ 424 $ 5,577 $ 293 $ 5,589 2001 $ 429 $ 5,992 $ 143 $ 5,592 2000 $ 396 $ 5,170 $ 27 $ 5,334 =================================================================================================================================== [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 4.9%, 5.1% and 5.7% for 2002, 2001 and 2000, 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/ Robert J. Price ----------------------------------- Robert J. Price Senior Vice President and Controller Date: March 3, 2003 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
SIGNATURE TITLE DATE /S/ RAMANI AYER Chairman, President, Chief March 3, 2003 - ---------------------------------------- Ramani Ayer Executive Officer and Director /S/ THOMAS M. MARRA Executive Vice President and Director March 3, 2003 - ---------------------------------------- Thomas M. Marra /S/ DAVID K. ZWIENER Executive Vice President and Director March 3, 2003 - ---------------------------------------- David K. Zwiener /S/ DAVID M. JOHNSON Executive Vice President March 3, 2003 - ---------------------------------------- and Chief Financial Officer David M. Johnson /S/ ROBERT J. PRICE Senior Vice President March 3, 2003 - ---------------------------------------- Robert J. Price and Controller /S/ RAND V. ARASKOG Director March 3, 2003 - ---------------------------------------- Rand V. Araskog /S/ DONALD R. FRAHM Director March 3, 2003 - ---------------------------------------- Donald R. Frahm /S/ EDWARD J. KELLY, III Director March 3, 2003 - ---------------------------------------- Edward J. Kelly, III /S/ PAUL G. KIRK, JR. Director March 3, 2003 - ---------------------------------------- Paul G. Kirk, Jr. /S/ ROBERT W. SELANDER Director March 3, 2002 - ---------------------------------------- Robert W. Selander /S/ CHARLES B. STRAUSS Director March 3, 2003 - ---------------------------------------- Charles B. Strauss /S/ H. PATRICK SWYGERT Director March 3, 2003 - ---------------------------------------- H. Patrick Swygert /S/ GORDON I. ULMER Director March 3, 2003 - ---------------------------------------- Gordon I. Ulmer
II-1 CERTIFICATIONS I, Ramani Ayer, certify that: 1. I have reviewed this annual report on Form 10-K of The Hartford Financial Services Group, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 3, 2003 /s/ Ramani Ayer -------------------------------------------- Ramani Ayer Chairman, President and Chief Executive Officer II-2 I, David M. Johnson, certify that: 1. I have reviewed this annual report on Form 10-K of The Hartford Financial Services Group, Inc.; 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officers and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officers and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent functions): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officers and I have indicated in this annual report whether there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 3, 2003 /s/ David M. Johnson -------------------------------------------- David M. Johnson Executive Vice President and Chief Financial Officer II-3 THE HARTFORD FINANCIAL SERVICES GROUP, INC. FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 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"), effective May 21, 1998, as amended by Amendment No. 1, effective May 1, 2002 (incorporated herein by reference to Exhibit 3.01 to The Hartford's Form 10-Q for the quarterly period ended March 31, 2002). 3.02 Amended and Restated By-Laws of The Hartford, amended effective February 20, 2003. + 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 hereto, 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 (incorporated herein by reference to Exhibit 4.02 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 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 herein by reference as Exhibit 4.02 hereto). 4.04 Form of Right Certificate (attached as Exhibit B to the Rights Agreement that is incorporated herein by reference as Exhibit 4.02 hereto). 4.05 Senior Indenture, dated as of October 20, 1995, between The Hartford and The Chase Manhattan Bank (National Association) as Trustee (incorporated herein by reference to Exhibit 4.08 to The Hartford's Report on Form 8-K, dated November 15, 1995). 4.06 Form of The Hartford's 7.30% Debentures due November 1, 2015 (incorporated herein by reference to Exhibit 4.10 of The Hartford's Report on Form 8-K dated November 15, 1995). 4.07 Form of The Hartford's 6.375% Notes due November 1, 2008 (incorporated herein by reference to Exhibit 4.09 to The Hartford's Form 10-K for the fiscal year ended December 31, 1998). 4.08 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") (incorporated herein by reference to Exhibit 4.09 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 4.09 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 (incorporated herein by reference to Exhibit 4.10 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 4.10 Form of The Hartford's 7.70% Junior Subordinated Deferrable Interest Debenture, Series A, due February 28, 2016 (included in the Indenture incorporated herein by reference as Exhibit 4.10 hereto). 4.11 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") (incorporated herein by reference to Exhibit 4.12 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 4.12 Agreement as to Expenses and Liabilities, dated as of February 28, 1996, between The Hartford and Hartford Capital I (incorporated herein by reference to Exhibit 4.13 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). II-4 EXHIBITS INDEX (CONTINUED) EXHIBIT NO. - ----------- 4.13 Preferred Security Certificate for Hartford Capital I (included as Exhibit E to the Trust Agreement incorporated herein by reference as Exhibit 4.11 hereto). 4.14 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 (incorporated herein by reference to Exhibit 4.15 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 4.15 Form of The Hartford's 7.75% Senior Notes due June 15, 2005 (incorporated herein by reference to Exhibit 4.24 to The Hartford's Form 10-K for the fiscal year ended December 31, 2000). 4.16 Form of The Hartford's 7.90% Senior Notes due June 15, 2010 (incorporated herein by reference to Exhibit 4.25 to The Hartford's Form 10-K for the fiscal year ended December 31, 2000). 4.17 Junior Subordinated Indenture, dated as of October 30, 1996, between The Hartford and Wilmington Trust Company, as Trustee (incorporated herein by reference to Exhibit 4.16 to The Hartford's Form 10-K for the fiscal year ended December 31, 1996). 4.18 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 (incorporated herein by reference to Exhibit 4.27 to The Hartford's Form 10-K for the fiscal year ended December 31, 2001). 4.19 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") (incorporated herein by reference to Exhibit 4.28 to The Hartford's Form 10-K for the fiscal year ended December 31, 2001). 4.20 Agreement as to Expenses and Liabilities, dated as of October 26, 2001, between The Hartford and Hartford Capital III (incorporated herein by reference to Exhibit 4.29 to The Hartford's Form 10-K for the fiscal year ended December 31, 2001). 4.21 Preferred Security Certificate for Hartford Capital III (incorporated herein by reference to Exhibit 4.30 to The Hartford's Form 10-K for the fiscal year ended December 31, 2001). 4.22 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 (incorporated herein by reference to Exhibit 4.31 to The Hartford's Form 10-K for the fiscal year ended December 31, 2001). 4.23 Supplemental Indenture No.1, dated as of December 27, 2000, to the Senior Indenture filed as Exhibit 4.05 hereto, between The Hartford and The Chase Manhattan Bank, as Trustee (incorporated herein by reference to Exhibit 4.30 to The Hartford's Registration Statement on Form S-3 (Amendment No. 1) dated December 27, 2000) (Registration No. 333-49666). 4.24 Supplemental Indenture No. 2, dated as of September 13, 2002, to the Senior Indenture filed as Exhibit 4.05 hereto, between The Hartford and JPMorgan Chase Bank, as Trustee (incorporated herein by reference to Exhibit 4.1 to The Hartford's Report on Form 8-K, filed September 17, 2002). 4.25 Form of Global Security (included in Exhibit 4.24). 4.26 Purchase Contract Agreement, dated as of September 13, 2002, between The Hartford and JPMorgan Chase Bank, as Purchase Contract Agent (incorporated herein by reference to Exhibit 4.2 to The Hartford's Report on Form 8-K, filed September 17, 2002) 4.27 Form of Corporate Unit Certificate (included in Exhibit 4.26). 4.28 Pledge Agreement, dated as of September 13, 2002, among The Hartford and JPMorgan Chase Bank, as Collateral Agent, Custodial Agent, Securities Intermediary and JPMorgan Chase Bank as Purchase Contract Agent (incorporated herein by reference to Exhibit 4.3 to The Hartford's Report on Form 8-K, filed September 17, 2002). II-5 EXHIBITS INDEX (CONTINUED) EXHIBIT NO. - ----------- 4.29 Remarketing Agreement, dated as of September 13, 2002, between The Hartford and Morgan Stanley & Co. Incorporated, as Remarketing Agent, and JPMorgan Chase Bank, as Purchase Contract Agent (incorporated herein by reference to Exhibit 4.4 to The Hartford's Report on Form 8-K, filed September 17, 2002). 4.30 Global Security representing $300,000,000 of The Hartford's 4.7% senior notes due September 1, 2007. 10.01 Distribution Agreement, dated as of November 1, 1995, among ITT Corporation, ITT Destinations, Inc. and The Hartford (incorporated herein by reference to Exhibit 10.01 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 10.02 Intellectual Property License Agreement, dated as of November 1, 1995, between and among ITT Corporation, ITT Destinations, Inc. and The Hartford (incorporated herein by reference to Exhibit 10.02 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 10.03 Tax Allocation Agreement, dated as of November 1, 1995, among ITT Corporation, ITT Destinations, Inc. and The Hartford (incorporated herein by reference to Exhibit 10.03 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 10.05 Form of Trade Name and Service Mark License Agreement, effective as of November 1, 1995, between ITT Corporation and The Hartford (incorporated herein by reference to Exhibit 10.04 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 10.06 License Assignment Agreement, effective as of December 19, 1995, among ITT Destinations, Inc., The Hartford and Nutmeg Insurance Company (incorporated herein by reference to Exhibit 10.05 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 10.06 License Assignment Agreement, effective as of December 19, 1995, among ITT Destinations, Inc., Nutmeg Insurance Company and Hartford Fire Insurance Company (incorporated herein by reference to Exhibit 10.06 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 10.07 Employee Benefit Services and Liability Agreement, dated as of November 1, 1995, among ITT Corporation, ITT Destinations, Inc. and The Hartford (incorporated herein by reference to Exhibit 10.07 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). 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 (incorporated herein by reference to Exhibit 10.10 to The Hartford's Form 10-K for the fiscal year ended December 31, 1995). *10.09 Employment Agreement, dated July 1, 1997, between The Hartford and Ramani Ayer (incorporated herein by reference to Exhibit 10.01 to The Hartford's Form 10-Q for the quarterly period ended September 30, 1997). *10.10 Employment Agreement, dated July 1, 1997, between The Hartford and David K. Zwiener (incorporated herein by reference to Exhibit 10.03 to The Hartford's Form 10-Q for the quarterly period ended September 30, 1997). *10.11 Employment Agreement, dated July 1, 2000, between The Hartford and Thomas M. Marra (incorporated herein by reference to Exhibit 10.1 to The Hartford's Form 10-Q for the quarterly period ended September 30, 2000). *10.12 Form of Employment Protection Agreement between The Hartford and certain executive officers of The Hartford (incorporated herein by reference to Exhibit 10.15 to The Hartford's Form 10-K for the fiscal year ended December 31, 1997). *10.13 The Hartford Restricted Stock Plan for Non-Employee Directors, as amended. + *10.14 The Hartford Incentive Stock Plan, as amended. + II-6 EXHIBITS INDEX (CONTINUED) EXHIBIT NO. - ----------- *10.15 The Hartford Deferred Restricted Stock Unit Plan, as amended. + *10.16 The Hartford Deferred Compensation Plan, as amended. + *10.17 The Hartford Senior Executive Severance Pay Plan, as amended. + *10.18 The Hartford Executive Severance Pay Plan I, as amended. + *10.19 The Hartford Planco Non-Employee Option Plan, as amended. + 10.20 Master Intercompany Agreement, dated May 19, 1997, among Hartford Life, Inc. ("Hartford Life") The Hartford and with respect to Articles VI and XII, Hartford Fire Insurance Company (incorporated herein by reference to Exhibit 10.1 to Hartford Life's Form 10-Q for the quarterly period ended June 30, 1997). 10.21 Tax Sharing Agreement, dated May 19, 1997, among The Hartford and its subsidiaries, including Hartford Life (incorporated herein by reference to Exhibit 10.2 to Hartford Life's Form 10-Q for the quarterly period ended June 30, 1997). 10.22 Management Agreement, dated March 31, 1997, between Hartford Life Insurance Company and The Hartford Investment Management Company (incorporated herein by reference to Exhibit 10.3 to Hartford Life's Form 10-Q for the quarterly period ended June 30, 1997). 10.23 Management Agreement, dated March 31, 1997, among certain subsidiaries of Hartford Life and Hartford Investment Services, Inc. (incorporated herein by reference to Exhibit 10.4 to Hartford Life's Form 10-Q for the quarterly period ended June 30, 1997). 10.24 Sublease Agreement, dated May 19, 1997, between Hartford Fire Insurance Company and Hartford Life (incorporated herein by reference to Exhibit 10.5 to Hartford Life's Form 10-Q for the quarterly period ended June 30, 1997). *10.25 Employment Agreement, dated as of March 20, 2001, between The Hartford and Neal Wolin as Executive Vice President and General Counsel (incorporated herein by reference to Exhibit 10.1 to The Hartford's Form 10-Q for the quarterly period ended March 31, 2001). *10.26 Employment Agreement, dated as of April 26, 2001, between The Hartford and David M. Johnson as Executive Vice President and Chief Financial Officer (incorporated herein by reference to Exhibit 10.2 to The Hartford's Form 10-Q for the quarterly period ended March 31, 2001). 10.27 Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement, dated as of February 26, 2003, 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. + 10.28 Three-Year Competitive Advance and Revolving Credit Facility Agreement, dated as of December 31, 2002 among The Hartford, Hartford Life, the Lenders named therein and JPMorgan Chase Bank and Citibank, N.A. as Co-Administrative Agents. + 12.01 Statement Re: Computation of Ratio of Earnings to Fixed Charges. + 21.01 Subsidiaries of The Hartford Financial Services Group, Inc. + 23.01 Consent of Deloitte & Touche LLP the incorporation by reference into The Hartford's Registration Statements on Forms S-8 and Forms S-3 of the report of Deloitte & Touche 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-7 EX-3.(II) 3 exh3_02.txt THE HARTFORD FINANCIAL SERVICES GROUP - -------------------------------------------------------------------------------- Amended and Restated BY-LAWS Of THE HARTFORD FINANCIAL SERVICES GROUP, INC. Adopted by the Board of Directors On October 10, 1995 And Amended on May 2, 1997 December 18,1997 February 18, 1999 February 20, 2003 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Section Page ------- ---- - -------------------------------------------------------------------------------- 1. STOCKHOLDERS - -------------------------------------------------------------------------------- 1.1 Place of Stockholders' Meetings 1 - -------------------------------------------------------------------------------- 1.2 Day and Time of Annual Meetings of Stockholders 1 - -------------------------------------------------------------------------------- 1.3 Purposes of Annual Meetings 1 - -------------------------------------------------------------------------------- 1.4 Special Meetings of Stockholders 2 - -------------------------------------------------------------------------------- 1.5 Notice of Meetings of Stockholders 2 - -------------------------------------------------------------------------------- 1.6 Quorum of Stockholders 3 - -------------------------------------------------------------------------------- 1.7 Chairman and Secretary of Meeting 4 - -------------------------------------------------------------------------------- 1.8 Voting by Stockholders 4 - -------------------------------------------------------------------------------- 1.9 Proxies 4 - -------------------------------------------------------------------------------- 1.10 Inspectors 4 - -------------------------------------------------------------------------------- 1.11 List of Stockholders 5 - -------------------------------------------------------------------------------- 1.12 Confidential Voting 6 - -------------------------------------------------------------------------------- 2. DIRECTORS 6 - -------------------------------------------------------------------------------- 2.1 Powers of Directors 6 - -------------------------------------------------------------------------------- 2.2 Number, Method of Election, Terms of Office of Directors 6 - -------------------------------------------------------------------------------- 2.3 Vacancies on Board 8 - -------------------------------------------------------------------------------- 2.4 Meetings of the Board 8 - -------------------------------------------------------------------------------- 2.5 Quorum and Action 9 - -------------------------------------------------------------------------------- 2.6 Presiding Officer and Secretary of Meeting 9 - -------------------------------------------------------------------------------- 2.7 Action by Consent without Meeting 9 - -------------------------------------------------------------------------------- 2.8 Standing Committees 10 - -------------------------------------------------------------------------------- 2.9 Other Committee 11 - -------------------------------------------------------------------------------- 2.10 Compensation of Directors 11 - -------------------------------------------------------------------------------- 2.11 Independent Directors 12 - -------------------------------------------------------------------------------- 3. OFFICERS 12 - -------------------------------------------------------------------------------- 3.1 Officers, Titles, Elections, Terms 12 - -------------------------------------------------------------------------------- 3.2 General Powers of Officers 13 - -------------------------------------------------------------------------------- 3.3 Powers and Duties of the Chairman 14 - -------------------------------------------------------------------------------- 3.4 Powers and Duties of the President 14 - -------------------------------------------------------------------------------- 3.5 Powers and Duties of Executive Vice Presidents, Senior Vice President and Vice Presidents 14 - -------------------------------------------------------------------------------- 3.6 Powers and Duties of the Chief Financial Officer 14 - -------------------------------------------------------------------------------- 3.7 Powers and Duties of the Controller and Assistant Controllers 15 - -------------------------------------------------------------------------------- 3.8 Powers and Duties of the Treasurer and Assistant Treasurers 15 - -------------------------------------------------------------------------------- 3.9 Powers and Duties of the Secretary And Assistant Secretaries 16 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- Section Page ------- ---- - -------------------------------------------------------------------------------- 4. INDEMNIFICATION 16 - -------------------------------------------------------------------------------- 4.1 Right to Indemnification and Effect Of Amendments 16 - -------------------------------------------------------------------------------- 4.2 Insurance, Contracts and Funding 17 - -------------------------------------------------------------------------------- 4.3 Indemnification; Not Exclusive Right 18 - -------------------------------------------------------------------------------- 4.4 Advancement of Expenses 18 - -------------------------------------------------------------------------------- 4.5 Indemnification Procedures; Presumptions and Effect of Certain Proceedings; Remedies 18 - -------------------------------------------------------------------------------- 4.6 Indemnification of Employees and Agents 23 - -------------------------------------------------------------------------------- 4.7 Severability 23 - -------------------------------------------------------------------------------- 5. CAPITAL STOCK 23 - -------------------------------------------------------------------------------- 5.1 Stock Certificates 23 - -------------------------------------------------------------------------------- 5.2 Record Ownership 24 - -------------------------------------------------------------------------------- 5.3 Transfer of Record Ownership 24 - -------------------------------------------------------------------------------- 5.4 Lost, Stolen or Destroyed Certificates 25 - -------------------------------------------------------------------------------- 5.5 Transfer Agent; Registrar; Rules Respecting Certificates 25 - -------------------------------------------------------------------------------- 5.6 Fixing Record Date for Determination of Stockholders of Record 25 - -------------------------------------------------------------------------------- 6. SECURITIES HELD BY THE CORPORATION 26 - -------------------------------------------------------------------------------- 6.1 Voting 26 - -------------------------------------------------------------------------------- 6.2 General Authorization to Transfer Securities Held by the Corporation 26 - -------------------------------------------------------------------------------- 7. DEPOSITARIES AND SIGNATORIES 27 - -------------------------------------------------------------------------------- 7.1 Depositaries 27 - -------------------------------------------------------------------------------- 7.2 Signatories 27 - -------------------------------------------------------------------------------- 8. SEAL 27 - -------------------------------------------------------------------------------- 9. FISCAL YEAR 28 - -------------------------------------------------------------------------------- 10. WAIVER OF OR DISPENSING WITH NOTICE 28 - -------------------------------------------------------------------------------- 11. AMENDMENT OF BY-LAWS 28 - -------------------------------------------------------------------------------- 12. OFFICES AND AGENT 29 - -------------------------------------------------------------------------------- BY-LAWS of THE HARTFORD FINANCIAL SERVICES GROUP, INC. (a Delaware Corporation, the "Corporation") 1. STOCKHOLDERS. 1.1 Place of Stockholders' Meetings. All meetings of the stockholders of the Corporation shall be held at such place or places, within or outside the state of Delaware, as may be fixed by the Corporation's Board of Directors (the "Board", and each member thereof a "Director") from time to time or as shall be specified in the respective notices thereof. 1.2 Day and Time of Annual Meetings of Stockholders. An annual meeting of stockholders shall be held at such place (within or outside the state of Delaware), date and hour as shall be determined by the Board and designated in the notice thereof. 1.3 Purposes of Annual Meetings. (a) At each annual meeting, the stockholders shall elect the members of the Board for the succeeding year. At any such annual meeting any business properly brought before the meeting may be transacted. (b) To be properly brought before an annual meeting, business must be (i) specified in the notice of the meeting (or any supplement thereto) given by or at the direction of the Board, (ii) otherwise properly brought before the meeting by or at the direction of the Board or (iii) otherwise properly brought before the meeting by a stockholder. For business to be properly brought before an annual meeting by a stockholder, the stockholder must have given written notice thereof, either by personal delivery or by United States mail, postage prepaid, to the Secretary, not later than 90 days in advance of the anniversary date of the immediately preceding annual meeting (or not more than ten days after the first public disclosure, which may include any public filing with the Securities and Exchange Commission, of the Originally Scheduled Date of the annual meeting, whichever is earlier). Any such notice shall set forth as to each matter the stockholder proposes to bring before the annual meeting (i) a brief description of the business desired to be brought before - 1 - the meeting and the reasons for conducting such business at the meeting and in the event that such business includes a proposal to amend either the Certificate of Incorporation or By-laws of the Corporation, the language of the proposed amendment, (ii) the name and address of the stockholder proposing such business and of the beneficial owner, if any, on whose behalf the proposal is made and the class and number of shares of the Corporation which are owned beneficially and of record by such stockholder and such beneficial owner, (iii) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to propose such business, (iv) any material interest of the stockholder in such business and (v) if the stockholder intends to solicit proxies in support of such stockholder's proposal, a representation to that effect. No business shall be conducted at an annual meeting of stockholders except in accordance with this Section 1.3(b), and the presiding officer of any annual meeting of stockholders may refuse to permit any business to be brought before an annual meeting without compliance with the foregoing procedures or if the stockholder solicits proxies in support of such stockholder's proposal without such stockholder having made the representation required by clause (v) of the preceding sentence. For purposes of this Section 1.3(b), the "Originally Scheduled Date" of any meeting of stockholders shall be the date first publicly disclosed on which such meeting is scheduled to occur regardless of whether such meeting is continued or adjourned and regardless of whether any subsequent notice is given for such meeting or the record date of such meeting is changed. 1.4 Special Meetings of Stockholders. Except as otherwise expressly required by applicable law, special meetings of the stockholders or of any class or series entitled to vote may be called for any purpose or purposes by the Chairman or by a majority vote of the entire Board, to be held at such place (within or outside the state of Delaware), date and hour as shall be determined by the Board and designated in the notice thereof. Only such business as is specified in the notice of any special meeting of the stockholders shall come before such meeting. 1.5 Notice of Meetings of Stockholders. Except as otherwise expressly required or permitted by applicable law, not less than ten days nor more than sixty days before the date of every stockholders' meeting the Secretary shall cause to be delivered to each stockholder of record entitled to vote at such meeting written notice stating the place, day and time of the meeting and, in the case of a special meeting, the purpose or purposes for which the meeting is called. - 2 - Except as provided in Section 1.6(d) or as otherwise expressly required by applicable law, notice of any adjourned meeting of stockholders need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. Any notice, if mailed, shall be deemed to be given when deposited in the United States mail, postage prepaid, addressed to the stockholder at the address for notices to such stockholder as it appears on the records of the Corporation. 1.6 Quorum of Stockholders. (a) Unless otherwise expressly required by applicable law, at any meeting of the stockholders, the presence in person or by proxy of stockholders entitled to cast a majority of votes thereat shall constitute a quorum for the entire meeting, notwithstanding the withdrawal of stockholders entitled to cast a sufficient number of votes in person or by proxy to reduce the number of votes represented at the meeting below a quorum. Shares of the Corporation's stock belonging to the Corporation or to another corporation, if a majority of the shares entitled to vote in an election of the directors of such other corporation is held by the Corporation, shall neither be counted for the purpose of determining the presence of a quorum nor entitled to vote at any meeting of the stockholders. (b) At any meeting of the stockholders at which a quorum shall be present, a majority of those present in person or by proxy may adjourn the meeting from time to time without notice other than announcement at the meeting. In the absence of a quorum, the officer presiding thereat shall have power to adjourn the meeting from time to time until a quorum shall be present. Notice of any adjourned meeting other than announcement at the meeting shall not be required to be given, except as provided in Section 1.6(d) below and except where expressly required by applicable law. (c) At any adjourned meeting at which a quorum shall be present, any business may be transacted which might have been transacted at the meeting originally called, but only those stockholders entitled to vote at the meeting as originally noticed shall be entitled to vote at any adjournment or adjournments thereof unless a new record date is fixed by the Board. (d) If an adjournment is for more than thirty days, or if after the adjournment a new record date is fixed for the adjourned meeting, a notice of the adjourned meeting shall be given in the manner specified in Section 1.5 to each stockholder of record entitled to vote at the meeting. - 3 - 1.7 Chairman and Secretary of Meeting. The Chairman or, in his or her absence, another officer of the Corporation designated by the Chairman, shall preside at meetings of the stockholders. The Secretary shall act as secretary of the meeting, or in the absence of the Secretary, an Assistant Secretary shall so act, or if neither is present, then the presiding officer may appoint a person to act as secretary of the meeting. 1.8 Voting by Stockholders. (a) Except as otherwise expressly required by applicable law, at every meeting of the stockholders each stockholder shall be entitled to the number of votes specified in the Certificate of Incorporation or any certificate of designations providing for the creation of any series of Preferred Stock, in person or by proxy, for each share of stock standing in his or her name on the books of the Corporation on the date fixed pursuant to the provisions of Section 5.6 of these By-laws as the record date for the determination of the stockholders who shall be entitled to receive notice of and to vote at such meeting. (b) When a quorum is present at any meeting of the stockholders, all questions shall be decided by the vote of a majority in voting power of the stockholders present in person or by proxy and entitled to vote at such meeting, unless a question is one upon which by express provision of law, the Certificate of Incorporation or these By-laws, a different vote is required, in which case such express provision shall govern and control the decision of such question. (c) Except as required by applicable law, the vote at any meeting of stockholders on any question need not be by ballot, unless so directed by the presiding officer of the meeting. On a vote by ballot, each ballot shall be signed by the stockholder voting, or by his or her attorney-in- fact, if authorized by proxy, and shall state the number of shares voted. 1.9 Proxies. Any stockholder entitled to vote at any meeting of stockholders may vote either in person or by his or her attorney-in-fact or proxy. 1.10 Inspectors. (a) The election of Directors and any other vote by ballot at any meeting of the stockholders shall be supervised by one or more inspectors. Such inspectors may be appointed by the Chairman before or at the meeting. If the Chairman shall not have so appointed such inspectors or if one or both inspectors so appointed shall refuse to serve or shall not be present, such appointment shall be made by the officer presiding at the meeting. Each inspector, before entering upon the discharge of his or her duties, shall take - 4 - and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. (b) The inspectors shall (i) ascertain the number of shares of the Corporation outstanding and the voting power of each, (ii) determine the shares represented at any meeting of stockholders and the validity of the proxies and ballots, (iii) count all proxies and ballots, (iv) determine and retain for a reasonable period a record of the disposition of any challenges made to any determination by the inspectors, and (v) certify their determination of the number of shares represented at the meeting, and their count of all proxies and ballots. The inspectors may appoint or retain other persons or entities to assist the inspectors in the performance of the duties of the inspectors. (c) If there are three or more inspectors, the act of a majority shall govern. On request of the officer presiding at such meeting, the inspectors shall make a report of any challenge, question or matter determined by them and execute a certificate of any fact found by them. Any report or certificate made by them shall be prima facie evidence of the facts therein stated and of the vote as certified by them, and such report or certificate shall be filed with the minutes of such meeting. 1.11 List of Stockholders. (a) At least ten days before every meeting of stockholders, the Chief Financial Officer shall cause to be prepared and made a complete list of the stockholders entitled to vote at the meeting, arranged in alphabetical order and showing the address of each stockholder and the number of shares registered in the name of each stockholder. (b) During ordinary business hours for a period of at least ten days prior to the meeting, such list shall be open to examination by any stockholder for any purpose germane to the meeting, either at a place within the city where the meeting is to be held, which place shall be specified in the notice of the meeting, or if not so specified, at the place where the meeting is to be held. (c) The list shall also be produced and kept at the time and place of the meeting during the whole time of the meeting, and it may be inspected by any stockholder who is present. (d) The stock ledger shall be the only evidence as to who are the stockholders entitled to examine the stock ledger, the list required - 5 - by this Section 1.11 or the books of the Corporation, or to vote in person or by proxy at any meeting of stockholders. 1.12 Confidential Voting. (a) Proxies and ballots that identify the votes of specific stockholders shall be kept in confidence by the tabulators and the inspectors of election unless (i) there is an opposing solicitation with respect to the election or removal of Directors, (ii) disclosure is required by applicable law, (iii) a stockholder expressly requests or otherwise authorizes disclosure, or (iv) the Corporation concludes in good faith that a bona fide dispute exists as to the authenticity of one or more proxies, ballots or votes, or as to the accuracy of any tabulation of such proxies, ballots or votes. (b) The tabulators and inspectors of election and any authorized agents or other persons engaged in the receipt, count and tabulation of proxies and ballots shall be advised of this By-law and instructed to comply herewith. (c) The inspectors of election shall certify, to the best of their knowledge based on due inquiry, that proxies and ballots have been kept in confidence as required by this Section 1.12. 1.13 Action by Written Consent. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special stockholders' meeting and may not be effected by consent in writing by such stockholders. 2. DIRECTORS. 2.1 Powers of Directors. The business and affairs of the Corporation shall be managed by or under the direction of the Board, which may exercise all the powers of the Corporation except such as are by applicable law, the Certificate of Incorporation or these By-laws required to be exercised or performed by the stockholders. 2.2 Number, Method of Election, Terms of Office of Directors. The number of Directors which shall constitute the whole Board shall be such as from time to time shall be determined by resolution adopted by a majority of the entire Board, but the number shall not be less than three nor more than twenty-five, provided that the tenure of a Director shall not be affected by any decrease in the number of Directors so made by the Board. Each Director shall hold office until the next annual meeting of stockholders and until his or her successor is elected and qualified or until his or her earlier death, - 6 - retirement, resignation or removal from office in accordance with these By-laws or any applicable law or pursuant to an order of a court. Directors need not be stockholders of the Corporation or citizens of the United States of America. Nominations of persons for election as Directors may be made by the Board or by any stockholder entitled to vote for the election of Directors. Any stockholder entitled to vote for the election of Directors may nominate a person or persons for election as Directors only if written notice of such stockholder's intent to make such nomination is given in accordance with the procedures for bringing business before the meeting set forth in Section 1.3(b) of these By-laws, either by personal delivery or by United States mail, postage prepaid, to the Secretary not later than (i) with respect to an election to be held at an annual meeting of stockholders, 90 days in advance of the anniversary date of the immediately preceding annual meeting (or not more than ten days after the first public disclosure, which may include any public filing with the Securities and Exchange Commission, of the Originally Scheduled Date of the annual meeting, whichever is earlier) and (ii) with respect to an election to be held at a special meeting of stockholders for the election of Directors, the close of business on the seventh day following the date on which notice of such meeting is first given to stockholders. Each such notice shall set forth: (a) the name and address of the stockholder who intends to make the nomination and of the person or persons to be nominated; (b) a representation that the stockholder is a holder of record of stock of the Corporation entitled to vote at such meeting and intends to appear in person or by proxy at the meeting to nominate the person or persons specified in the notice; (c) a description of all arrangements or understandings between the stockholder and each nominee and any other person or persons (naming such person or persons) pursuant to which the nomination or nominations are to be made by the stockholder; (d) such other information regarding each nominee proposed by such stockholder as would have been required to be included in a proxy statement filed pursuant to the proxy rules of the Securities and Exchange Commission had each nominee been nominated, or intended to be nominated, by the Board; (e) the consent of each nominee to serve as a Director if so elected and (f) if the stockholder intends to solicit proxies in support of such stockholder's nominee(s), a representation to that effect. The presiding officer of any meeting of stockholders to elect Directors and the Board may refuse to acknowledge the nomination of any person not made in compliance with the foregoing procedure or if the stockholder solicits proxies in support of such stockholder's nominee(s) without such stockholder having made the - 7 - representation required by clause (f) of the preceding sentence. For purposes of this Section 2.2, the "Originally Scheduled Date" of any meeting of stockholders shall be the date first publicly disclosed on which such meeting is scheduled to occur regardless of whether such meeting is continued or adjourned and regardless of whether any subsequent notice is given for such meeting or the record date of such meeting is changed. At each meeting of the stockholders for the election of Directors at which a quorum is present, the persons receiving the greatest number of votes, up to the number of Directors to be elected, shall be the Directors. 2.3 Vacancies on Board. (a) Any Director may resign from office at any time by delivering a written resignation to the Chairman or the Secretary. The resignation will take effect at the time specified therein, or, if no time is specified, at the time of its receipt by the Corporation. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. (b) Any vacancy and any newly created Directorship resulting from any increase in the authorized number of Directors may be filled by vote of a majority of the Directors then in office, though less than a quorum, and any Director so chosen shall hold office until the next annual election of Directors by the stockholders and until a successor is duly elected and qualified or until his or her earlier death, retirement, resignation or removal from office in accordance with these By-laws or any applicable law or pursuant to an order of a court. If there are no Directors in office, then an election of Directors may be held in the manner provided by applicable law. 2.4 Meetings of the Board. (a) The Board may hold its meetings, both regular and special, either within or outside the state of Delaware, at such places as from time to time may be determined by the Board or as may be designated in the respective notices or waivers of notice thereof. (b) Regular meetings of the Board shall be held at such times and at such places as from time to time shall be determined by the Board. (c) The first meeting of each newly elected Board shall be held as soon as practicable after the annual meeting of the stockholders and shall be for the election of officers and the transaction of such other business as may come before it. - 8 - (d) Special meetings of the Board shall be held whenever called by direction of the Chairman or at the request of a majority of the Directors then in office. (e) Members of the Board or any Committee of the Board may participate in a meeting of the Board or Committee, as the case may be, by means of conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and such participation shall constitute presence in person at such meeting. (f) The Secretary shall give notice to each Director of any meeting of the Board by mailing the same at least two days before the meeting or by telegraphing or delivering the same not later than the day before the meeting. Such notice need not include a statement, of the business to be transacted at, or the purpose of, any such meeting. Any and all business may be transacted at any meeting of the Board. No notice of any adjourned meeting need be given. No notice to or waiver by any Director shall be required with respect to any meeting at which the Director is present. 2.5 Quorum and Action. Except as otherwise expressly required by applicable law, the Certificate of Incorporation or these By-laws, at any meeting of the Board, the presence of at least one-third of the entire Board shall constitute a quorum for the transaction of business; but if there shall be less than a quorum at any meeting of the Board, a majority of those present may adjourn the meeting from time to time. Unless otherwise provided by applicable law, the Certificate of Incorporation or these By-laws, the vote of a majority of the Directors present (and not abstaining) at any meeting at which a quorum is present shall be necessary for the approval and adoption of any resolution or the approval of any act of the Board. 2.6 Presiding Officer and Secretary of Meeting. The Chairman or, in the absence of the Chairman, a member of the Board selected by the members present, shall preside at meetings of the Board. The Secretary shall act as secretary of the meeting, but in the Secretary's absence the presiding officer may appoint a secretary of the meeting. 2.7 Action by Consent without Meeting. Any action required or permitted to be taken at any meeting of the Board or of any Committee thereof may be taken without a meeting if all members of the Board or Committee, as the case may be, consent thereto in writing and the - 9 - writing or writings are filed with the minutes of proceedings of the Board or Committee. 2.8 Standing Committees. By resolution adopted by a majority of the entire Board, the Board shall elect, from among its members, individuals to serve on the Standing Committees established by this Section 2.8. Each Standing Committee shall be comprised of such number of Directors, not less than three, as shall be elected to such Committee, provided that no officer or employee of the Corporation shall be eligible to serve on the Audit, Compensation and Personnel or Nominating and Corporate Governance Committees. Each Committee shall keep a record of all its proceedings and report the same to the Board. One-third of the members of a Committee, but not less than two, shall constitute a quorum, and the act of a majority of the members of a Committee present at any meeting at which a quorum is present shall be the act of the Committee. Each Standing Committee shall meet at the call of its chairman or any two of its members. The chairmen of the various Committees shall preside, when present, at all meetings of such Committees, and shall have such powers and perform such duties as the Board may from time to time prescribe. The Standing Committees of the Board, and functions of each, are as follows: (a) Compensation and Personnel Committee. The Compensation and Personnel Committee shall exercise the power of oversight of the compensation and benefits of the employees of the Corporation, and shall be charged with evaluating management performance, and establishing executive compensation. This Committee shall have access to its own independent outside compensation counsel and shall consist of a majority of independent directors. For purposes of this Section 2.8(a), "independent director" shall mean a Director who: (i) has not been employed by the Corporation in an executive capacity within the past five years; (ii) is not, and is not affiliated with a company or firm that is, an advisor or consultant to the Corporation; (iii) is not affiliated with a significant customer or supplier of the Corporation; (iv) has no personal services contract(s) with the Corporation; (v) is not affiliated with a tax-exempt entity that receives significant contributions from the Corporation; and (vi) is not a familial relative of any person described by Clauses (i) through (v). This By-law shall not be amended or repealed except by a majority of the voting power of the stockholders present in person or by proxy and entitled to vote at any meeting at which a quorum is present. (b) Audit Committee. The Audit Committee shall monitor the integrity of the financial statements of the Corporation, shall - 10 - select the independent auditor, shall assess the independent auditor's qualifications and independence, shall review the performance of the Corporation's independent auditor and internal audit function, and shall oversee the compliance of the Corporation with related legal and regulatory requirements. (c) Legal and Public Affairs Committee. The Legal and Public Affairs Committee shall review and consider the legal, regulatory, intellectual property and governmental policy matters affecting the Corporation, shall review and approve management policies and programs relating to compliance with legal, regulatory and ethical requirements, and shall review and define the Corporation's social responsibilities, including issues of significance to the Corporation, its stockholders and its employees. (d) Finance Committee. The Finance Committee shall have the responsibility for reviewing capital expenditures and appropriations and maximizing the effective use of the assets of the Corporation and its subsidiaries. The Finance Committee shall also have the responsibility for directing investment allocation and risk management policies. (e) Nominating and Corporate Governance Committee. The Nominating and Corporate Governance Committee shall make recommendations as to the organization, size and composition of the Board and the Committees thereof, identify individuals qualified to become members of the Board, propose nominees for election to the Board and the Committees thereof, and consider the qualifications, compensation and retirement of Directors. The Nominating and Corporate Governance Committee also shall develop and recommend to the Board a set of corporate governance principles. 2.9 Other Committees. By resolution passed by a majority of the entire Board, the Board may also appoint from among its members such other Committees, Standing or otherwise, as it may from time to time deem desirable and may delegate to such Committees such powers of the Board as it may consider appropriate, consistent with applicable law, the Certificate of Incorporation and these By-laws. 2.10 Compensation of Directors. Unless otherwise restricted by the Certificate of Incorporation or these By-laws, Directors shall receive for their services on the Board or any Committee thereof such compensation and benefits, including the granting of options, together with expenses, if any, as the Board may from time to time determine. The Directors may be paid a fixed sum for attendance at each meeting of the Board or Committee thereof and/or a stated annual - 11 - sum as a Director, together with expenses, if any, of attendance at each meeting of the Board or Committee thereof. Nothing herein contained shall be construed to preclude any Director from serving the Corporation in any other capacity and receiving compensation therefor. 2.11 Independent Directors. (a) Independence of Nominees for Election as Directors at the Annual Meeting. The persons nominated by the Board for election as Directors at any annual meeting of the stockholders of the Corporation shall include a sufficient number of persons who have been, on the date of their nomination, determined by the Board to be eligible to be classified as independent directors such that if all such nominees are elected, the majority of all Directors holding office would be independent directors. (b) Directors Elected to Fill Vacancies on the Board. If the Board elects Directors between annual meetings of stockholders to fill vacancies or newly created Directorships, the majority of all Directors holding office immediately after such elections shall be independent directors. (c) Definition of Independent Director. For purposes of this Section 2.11, "independent director" shall mean a Director who: (i) has not been employed by the Corporation in an executive capacity within the past five years; (ii) is not, and is not affiliated with a company or a firm that is, an adviser or consultant to the Corporation; (iii) is not affiliated with a significant customer or supplier of the Corporation; (iv) has no personal services contract(s) with the Corporation; (v) is not affiliated with a tax-exempt entity that receives significant contributions from the Corporation; (vi) is not a familial relative of any person described by Clauses (i) through (v); and (vii) is free of any other relationship which would interfere with the exercise of independent judgment by such Director. 3. OFFICERS. 3.1 Officers, Titles, Elections, Terms. (a) The Board may from time to time elect a Chairman, a President, one or more Executive Vice Presidents, one or more Senior Vice Presidents, one or more Vice Presidents, a Chief Financial Officer, a Controller, a Treasurer, a Secretary, a General Counsel, one or more Assistant Controllers, one or more Assistant Treasurers, one or more Assistant Secretaries, and one or more Associate or Assistant General Counsels, to serve at the pleasure of the Board or otherwise as shall be specified by the Board - 12 - at the time of such election and until their successors are elected and qualified or until their earlier death, retirement, resignation or removal from office in accordance with these By-laws or any applicable law or pursuant to an order of a court. (b) The Board may elect or appoint at any time such other officers or agents with such duties as it may deem necessary or desirable. Such other officers or agents shall serve at the pleasure of the Board or otherwise as shall be specified by the Board at the time of such election or appointment and, in the case of such other officers, until their successors are elected and qualified or until their earlier death, retirement, resignation or removal from office in accordance with these By-laws or any applicable law or pursuant to an order of a court. Each such officer or agent shall have such authority and shall perform such duties as may be provided herein or as the Board may prescribe. The Board may from time to time authorize any officer or agent to appoint and remove any other such officer or agent and to prescribe such person's authority and duties. (c) No person may be elected or appointed an officer who is not a citizen of the United States of America if such election or appointment is prohibited by applicable law or regulation. (d) Any vacancy in any office may be filled for the unexpired portion of the term by the Board. Each officer elected or appointed during the year shall hold office until the next annual meeting of the Board at which officers are regularly elected or appointed and until his or her successor is elected or appointed and qualified or until his or her earlier death, retirement, resignation or removal from office in accordance with these By-laws or any applicable law or pursuant to an order of a court. (e) Any officer or agent elected or appointed by the Board may be removed at any time by the affirmative vote of a majority of the entire Board. (f) Any officer may resign from office at any time. Such resignation shall be made in writing and given to the President or the Secretary. Any such resignation shall take effect at the time specified therein, or, if no time is specified, at the time of its receipt by the Corporation. The acceptance of a resignation shall not be necessary to make it effective, unless expressly so provided in the resignation. 3.2 General Powers of Officers. Except as may be otherwise provided by applicable law or in Article 6 or Article 7 of these By-laws, the - 13 - Chairman, the President, any Executive Vice President, any Senior Vice President, any Vice President, the Chief Financial Officer, the General Counsel, the Controller, the Treasurer and the Secretary, or any of them, may (i) execute and deliver in the name of the Corporation, in the name of any Division of the Corporation or in both names any agreement, contract, instrument, power of attorney or other document pertaining to the business or affairs of the Corporation or any Division of the Corporation, including without limitation agreements or contracts with any government or governmental department, agency or instrumentality, and (ii) delegate to any employee or agent the power to execute and deliver any such agreement, contract, instrument, power of attorney or other document. 3.3 Powers and Duties of the Chairman. The Chairman shall be the Chief Executive of the Corporation and shall report directly to the Board. Except in such instances as the Board may confer powers in particular transactions upon any other officer, and subject to the control and direction of the Board, the Chairman shall manage and direct the business and affairs of the Corporation and shall communicate to the Board and any Committee thereof reports, proposals and recommendations for their respective consideration or action. He or she may do and perform all acts on behalf of the Corporation and shall preside at meetings of the Board and the stockholders. 3.4 Powers and Duties of the President. The President shall have such powers and perform such duties as the Board or the Chairman may from time to time prescribe or as may be prescribed in these By-laws. 3.5 Powers and Duties of Executive Vice Presidents, Senior Vice Presidents and Vice Presidents. Executive Vice Presidents, Senior Vice Presidents and Vice Presidents shall have such powers and perform such duties as the Board or the Chairman may from time to time prescribe or as may be prescribed in these By-laws. 3.6 Powers and Duties of the Chief Financial Officer. The Chief Financial Officer shall have such powers and perform such duties as the Board or the Chairman may from time to time prescribe or as may be prescribed in these By-laws. The Chief Financial Officer shall cause to be prepared and maintained (i) at the office of the Corporation, a stock ledger containing the names and addresses of all stockholders and the number of shares held by each and (ii) the list of stockholders for each meeting of the stockholders as required by Section 1.11 of these By-laws. The Chief Financial Officer shall be responsible for the custody of all stock books and of all unissued stock certificates. - 14 - 3.7 Powers and Duties of the Controller and Assistant Controllers. (a) The Controller shall be responsible for the maintenance of adequate accounting records of all assets, liabilities, capital and transactions of the Corporation. The Controller shall prepare and render such balance sheets, income statements, budgets and other financial statements and reports as the Board or the Chairman may require, and shall perform such other duties as may be prescribed or assigned pursuant to these By-laws and all other acts incident to the position of Controller. (b) Each Assistant Controller shall perform such duties as from time to time may be assigned by the Controller or by the Board. In the event of the absence, incapacity or inability to act of the Controller, then any Assistant Controller may perform any of the duties and may exercise any of the powers of the Controller. 3.8 Powers and Duties of the Treasurer and Assistant Treasurers. (a) The Treasurer shall have the care and custody of all the funds and securities of the Corporation except as may be otherwise ordered by the Board, and shall cause such funds (i) to be invested or reinvested from time to time for the benefit of the Corporation as may be designated by the Board, the Chairman, the President, the Chief Financial Officer or the Treasurer or (ii) to be deposited to the credit of the Corporation in such banks or depositories as may be designated by the Board, the Chairman, the President, the Chief Financial Officer or the Treasurer, and shall cause such securities to be placed in safekeeping in such manner as may be designated by the Board, the Chairman, the President, the Chief Financial Officer or the Treasurer. (b) The Treasurer, any Assistant Treasurer or such other person or persons as may be designated for such purpose by the Board, the Chairman, the President, the Chief Financial Officer or the Treasurer may endorse in the name and on behalf of the Corporation all instruments for the payment of money, bills of lading, warehouse receipts, insurance policies and other commercial documents requiring such endorsement. (c) The Treasurer, any Assistant Treasurer or such other person or persons as may be designated for such purpose by the Board, the Chairman, the President, the Chief Financial Officer or the Treasurer (i) may sign all receipts and vouchers for payments made to the Corporation, (ii) shall render a statement of the cash account of the Corporation to the Board as often as it shall require the same; and (iii) shall enter regularly in books to be kept for that purpose full and accurate account of all moneys received and paid on account of - 15 - the Corporation and of all securities received and delivered by the Corporation. (d) The Treasurer shall perform such other duties as may be prescribed or assigned pursuant to these By-laws and all other acts incident to the position of Treasurer. Each Assistant Treasurer shall perform such duties as may from time to time be assigned by the Treasurer or by the Board. In the event of the absence, incapacity or inability to act of the Treasurer, then any Assistant Treasurer may perform any of the duties and may exercise any of the powers of the Treasurer. 3.9 Powers and Duties of the Secretary and Assistant Secretaries. (a) The Secretary shall keep the minutes of all proceedings of the stockholders, the Board and the Committees of the Board. The Secretary shall attend to the giving and serving of all notices of the Corporation, in accordance with the provisions of these By-laws and as required by applicable law. The Secretary shall be the custodian of the seal of the Corporation. The Secretary shall affix or cause to be affixed the seal of the Corporation to such contracts, instruments and other documents requiring the seal of the Corporation, and when so affixed may attest the same and shall perform such other duties as may be prescribed or assigned pursuant to these By-laws and all other acts incident to the position of Secretary. (b) Each Assistant Secretary shall perform such duties as may from time to time be assigned by the Secretary or by the Board. In the event of the absence, incapacity or inability to act of the Secretary, then any Assistant Secretary may perform any of the duties and may exercise any of the powers of the Secretary. 4. INDEMNIFICATION. 4.1 Right to Indemnification and Effect of Amendment. (a) Right to Indemnification. The Corporation, to the fullest extent permitted by applicable law as then in effect, shall indemnify any person who is or was a Director or officer of the Corporation and who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed investigation, claim, action, suit or proceeding, whether civil, criminal, administrative or investigative (including, without limitation, any action, suit or proceeding by or in the right of the Corporation to procure a judgment in its favor) (a "Proceeding") by reason of the fact that such person is or was a Director, officer, employee or agent of the Corporation or is or was serving at the request of the Corporation as a director, officer, employee, fiduciary or agent of another corporation, partnership, - 16 - joint venture, trust or other enterprise (including, without limitation, any employee benefit plan) (a "Covered Entity"), against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding. Any such former or present Director or officer of the Corporation finally determined to be entitled to indemnification as provided in this Article 4 is hereinafter called an "Indemnitee." Until such final determination is made, such former or present Director or officer shall be a "Potential Indemnitee" for purposes of this Article 4. Notwithstanding the foregoing provisions of this Section 4.1(a), the Corporation shall not indemnify an Indemnitee with respect to any Proceeding commenced by such Indemnitee unless the commencement of such Proceeding by such Indemnitee has been approved by a majority vote of the Disinterested Directors (as defined in Section 4.5(d); provided, however, that such approval of a -------- ------- majority of the Disinterested Directors shall not be required with respect to any Proceeding commenced by such Indemnitee after a Change in Control (as defined in Section 4.5(d)) has occurred. (b) Effect of Amendments. Neither the amendment or repeal of, nor the adoption of a provision inconsistent with, any provision of this Article 4 (including, without limitation, this Section 4.1(b)) shall adversely affect the rights of any Director or officer under this Article 4 (i) with respect to any Proceeding commenced or threatened prior to such amendment, repeal or adoption of an inconsistent provision or (ii) after the occurrence of a Change in Control, with respect to any Proceeding arising out of any action or omission occurring prior to such amendment, repeal or adoption of an inconsistent provision, in either case without the written consent of such Director or officer. 4.2 Insurance, Contracts and Funding. The Corporation may purchase and maintain insurance to protect itself and any Director, officer, employee or agent of the Corporation against any expenses, judgments, fines and amounts paid in settlement as specified in Section 4.1(a) or Section 4.6 of this Article 4 or incurred by any Director, officer, employee or agent of the Corporation in connection with any Proceeding referred to in such Sections, to the fullest extent permitted by applicable law as then in effect. The Corporation may enter into contracts with any Director, officer, employee or agent of the Corporation or any director, officer, employee, fiduciary or agent of any Covered Entity in furtherance of the provisions of this Article 4 and may create a trust fund or use other means (including, without limitation, a letter of credit) to ensure the payment of such amounts as may be necessary to effect indemnification as provided in this Article 4. - 17 - 4.3 Indemnification; Not Exclusive Right. The right of indemnification provided in this Article 4 shall not be exclusive of any other rights to which any Indemnitee or Potential Indemnitee may otherwise be entitled, and the provisions of this Article 4 shall inure to the benefit of the heirs and legal representatives of any Indemnitee or Potential Indemnitee under this Article 4 and shall be applicable to Proceedings commenced or continuing after the adoption of this Article 4, whether arising from acts or omissions occurring before or after such adoption. 4.4 Advancement of Expenses. Each Potential Indemnitee shall be entitled to receive advance payment of any expenses actually and reasonably incurred by such Potential Indemnitee in connection with such Proceeding prior to a determination of entitlement to indemnification pursuant to Section 4.5(a). Each Potential Indemnitee shall submit a statement or statements to the Corporation requesting such advance or advances from time to time, whether prior to or after final disposition of such Proceeding, reasonably evidencing the expenses incurred by such Potential Indemnitee and accompanied by an undertaking by or on behalf of such Potential Indemnitee to repay the amounts advanced if ultimately it should be determined that such Potential Indemnitee is not entitled to be indemnified against such expenses pursuant to this Article 4. A determination of the reasonableness of such expenses shall be made and such reasonable expenses shall be advanced pursuant to procedures to be established from time to time by the Board or its designee(s) (the "Advancement Procedures"). The amendment or repeal of, and the adoption of a provision inconsistent with, any provision of the Advancement Procedures shall be governed by Section 4.1(b) of this Article 4. Notwithstanding the foregoing provisions of this Section 4.4, the Corporation shall not advance expenses to a Potential Indemnitee with respect to any Proceeding commenced by such Potential Indemnitee unless the commencement of such Proceeding by such Potential Indemnitee has been approved by a majority vote of the Disinterested Directors; provided, however, that such approval of a -------- ------- majority of the Disinterested Directors shall not be required with respect to any Proceeding commenced by such Potential Indemnitee after a Change in Control has occurred. 4.5 Indemnification Procedures; Presumptions and Effect of Certain Proceedings; Remedies. In furtherance, but not in limitation, of the foregoing provisions of this Artic1e 4, the following procedures, presumptions and remedies shall apply with respect to the right to indemnification under this Article 4: (a) Procedures for Determination of Entitlement to Indemnification. (i) To obtain indemnification under this Article 4, a Potential - 18 - Indemnitee shall submit to the Secretary of the Corporation a written request, including such documentation and information as is reasonably available to the Potential Indemnitee and reasonably necessary to determine whether and to what extent the Potential Indemnitee is entitled to indemnification (the "Supporting Documentation"). The determination of the Potential Indemnitee's entitlement to indemnification shall be made not later than 60 days after the later of (A) the receipt by the Corporation of the written request for indemnification together with the Supporting Documentation and (B) the receipt by the Corporation of written notice of final disposition of the Proceeding for which indemnification is sought. The Secretary of the Corporation shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that the Indemnitee has requested indemnification. (ii) The Potential Indemnitee's entitlement to indemnification under this Article 4 shall be determined in one of the following ways: (A) by a majority vote of the Disinterested Directors whether or not they constitute a quorum of the Board; (B) by a committee of the Disinterested Directors designated by a majority vote of the Disinterested Directors, whether or not they constitute a quorum of the Board; (C) by a written opinion of Independent Counsel as defined in Section 4.5(d)) if (x) a Change in Control shall have occurred and the Potential Indemnitee so requests or (y) there are no Disinterested Directors or a majority of such Disinterested Directors so directs; (D) by the stockholders of the Corporation; or (E) as provided in Section 4.5(b) of this Article 4. (iii) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 4.5(a)(ii), a majority of the Disinterested Directors (or, if there are no Disinterested Directors, the General Counsel of the Corporation or, if the General Counsel is or was a party to the Proceeding in respect of which indemnification is sought, the highest ranking officer of the Corporation who is not and was not a party to such Proceeding) shall select the Independent Counsel, but only an Independent Counsel to which the Potential Indemnitee does not reasonably object; provided, -------- however, that if a Change in Control shall have occurred, the Potential - ------- Indemnitee shall select such Independent Counsel, but only an Independent Counsel to which a majority of the Disinterested Directors does not reasonably object. (b) Presumptions and Effect of Certain Proceedings. Except as otherwise expressly provided in this Article 4, if a Change in Control shall have occurred, the Potential Indemnitee shall be - 19 - presumed to be entitled to indemnification under this Article 4 (with respect to actions or failures to act occurring prior to such Change in Control) upon submission of a request for indemnification together with the Supporting Documentation in accordance with Section 5(a)(i)(b) of this Article 4, and thereafter the Corporation shall have the burden of proof to overcome that presumption in reaching a contrary determination. In any event, if the person or persons empowered under Section 4.5(a) of this Article 4 to determine entitlement to indemnification shall not have been appointed or shall not have made a determination within 60 days after the later of (x) receipt by the Corporation of the written request for indemnification together with the Supporting Documentation and (y) the receipt by the Corporation of written notice of final disposition of the Proceeding for which indemnification is sought, the Potential Indemnitee shall be deemed to be, and shall be, entitled to indemnification. The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not, of itself, adversely affect the right of the Potential Indemnitee to indemnification or create a presumption that the Potential Indemnitee did not act in good faith and in a manner which the Indemnitee reasonably believed to be in or not opposed to the best interests of the Corporation or, with respect to any criminal Proceeding, that the Potential Indemnitee had reasonable cause to believe that his or her conduct was unlawful. (c) Remedies. (i) In the event that a determination is made pursuant to Section 4.5(a) of this Article 4 that the Potential Indemnitee is not entitled to indemnification under this Article 4, (A) the Potential Indemnitee shall be entitled to seek an adjudication of his or her entitlement to such indemnification either, at the Potential Indemnitee's sole option, in (x) an appropriate court of the state of Delaware or any other court of competent jurisdiction or (y) an arbitration to be conducted by a single arbitrator pursuant to the rules of the American Arbitration Association; (B) any such judicial proceeding or arbitration shall be de novo and the Indemnitee shall not be prejudiced by reason of such adverse determination; and (C) if a Change in Control shall have occurred, in any such judicial proceeding or arbitration, the Corporation shall have the burden of proving that the Potential Indemnitee is not entitled to indemnification under this Article 4 (with respect to actions or omissions occurring prior to such Change in Control). (ii) If a determination shall have been made or deemed to have been made, pursuant to Section 4.5(a) or (b) of this Article 4, that the - 20 - Potential Indemnitee is entitled to indemnification, the Corporation shall be obligated to pay the amounts constituting such indemnification within five days after such determination has been made or deemed to have been made and shall be conclusively bound by such determination unless (A) the Indemnitee misrepresented or failed to disclose a material fact in making the request for indemnification or in the Supporting Documentation or (B) such indemnification is prohibited by law. In the event that payment of indemnification is not made within five days after a determination of entitlement to indemnification has been made or deemed to have been made pursuant to Section 4.5(a) or (b) of this Article 4, the Indemnitee shall be entitled to seek judicial enforcement of the Corporation's obligation to pay to the Indemnitee such indemnification. Notwithstanding the foregoing, the Corporation may bring an action, in an appropriate court in the state of Delaware or any other court of competent jurisdiction, contesting the right of the Indemnitee to receive indemnification hereunder due to the occurrence of an event described in Subclause (A) or (B) of this subsection (each, a "Disqualifying Event"); provided, however, that in any such action the Corporation shall have the burden of proving the occurrence of such Disqualifying Event. (iii) The Corporation shall be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 4.5(c) that the procedures and presumptions of this Article 4 are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Corporation is bound by all the provisions of this Article 4. (iv) In the event that the Indemnitee or Potential Indemnitee, pursuant to this Section 4.5(c), seeks a judicial adjudication of or an award in arbitration to enforce his or her rights under, or to recover damages for breach of, this Article 4, such person shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any expenses actually and reasonably incurred by such person in connection with such judicial adjudication or arbitration. If it shall be determined in such judicial adjudication or arbitration that such person is entitled to receive part but not all of the indemnification or advancement of expenses sought, the expenses incurred by such person in connection with such judicial adjudication or arbitration shall be prorated accordingly. (d) Definitions. For purposes of this Article 4: (i) "Change in Control" means a change in control of the Corporation of a nature that would be required to be reported in response to Item - 21 - 6(e) (or any successor provision) of Schedule 14A of Regulation 14A (or any amendment or successor provision thereto) promulgated under the Securities Exchange Act of 1934, as amended (the "Act"), whether or not the Corporation is then subject to such reporting requirement; provided that, without limitation, such a change in control shall be deemed to have occurred if (A) any "person" (as such term is used in Sections 13(d) and 14(d) of the Act) is or becomes the "beneficial owner" (as defined in Rule 13d-3 under the Act), directly or indirectly, of securities of the Corporation representing 20% or more of the voting power of all outstanding shares of stock of the Corporation entitled to vote generally in an election of Directors without the prior approval of at least two-thirds of the members of the Board in office immediately prior to such acquisition; (B) the Corporation is a party to any merger or consolidation in which the Corporation is not the continuing or surviving corporation or pursuant to which shares of the Corporation's common stock would be converted into cash, securities or other property, other than a merger of the Corporation in which the holders of the Corporation's common stock immediately prior to the merger have the same proportionate ownership of common stock of the surviving corporation immediately after the merger; (C) there is a sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all, or substantially all, the assets of the Corporation, or liquidation or dissolution of the Corporation; (D) the Corporation is a party to a merger, consolidation, sale of assets or other reorganization, or a proxy contest, as a consequence of which members of the Board in office immediately prior to such transaction or event constitute less than a majority of the Board thereafter; or (E) during any period of two consecutive years, individuals who at the beginning of such period constituted the Board (including for this purpose any new Director whose election or nomination for election by the stockholders was approved by a vote of at least two-thirds of the Directors then still in office who were Directors at the beginning of such period) cease for any reason to constitute at least a majority of the Board. (ii) "Disinterested Director" means a Director who is not or was not a party to the Proceeding in respect of which indemnification is sought by the Indemnitee or Potential Indemnitee. (iii) "Independent Counsel" means a law firm or a member of a law firm that neither presently is, nor in the past five years has been, retained to represent: (a) the Corporation or the Indemnitee in any matter material to either such party or (b) any other party to the Proceeding giving rise to a claim for indemnification under this Article 4. Notwithstanding the foregoing, the term "Independent Counsel" shall not include any person who, under applicable standards of professional conduct then prevailing under the law of the State of - 22 - Delaware, would have a conflict of interest in representing either the Corporation or the Indemnitee or Potential Indemnitees in an action to determine the Indemnitee's or Potential Indemnitee's rights under this Article 4. 4.6 Indemnification of Employees and Agents. Notwithstanding any other provision of this Article 4, the Corporation, to the fullest extent permitted by applicable law as then in effect, may indemnify any person other than a Director or officer of the Corporation who is or was an employee or agent of the Corporation and who is or was involved in any manner (including, without limitation, as a party or a witness) or is threatened to be made so involved in any threatened, pending or completed Proceeding by reasons of the fact that such person is or was an employee or agent of the Corporation or was or is serving, at the request of the Corporation, as a director, officer, employee, or agent of a Covered Entity against all expenses (including attorneys' fees), judgments, fines and amounts paid in settlement actually and reasonably incurred by such person in connection with such Proceeding. The Corporation may also advance expenses incurred by such employee, fiduciary or agent in connection with any such Proceeding, consistent with the provisions of applicable law as then in effect. If made or advanced, such indemnification shall be made and such reasonable expenses shall be advanced pursuant to procedures to be established from time to time by the Board or its designee(s). 4.7 Severability. If any of this Article 4 shall be held to be invalid, illegal or unenforceable for any reason whatsoever: (i) the validity, legality and enforceability of the remaining provisions of this Article 4 (including, without limitation, all portions of any Section of this Article 4 containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby; and (ii) to the fullest extent possible, the provisions of this Article 4 (including, without limitation, all portions of any Section of this Article 4 containing any such provision held to be invalid, illegal or unenforceable, that are not themselves invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested by the provision held invalid, illegal or unenforceable. 5. CAPITAL STOCK. 5.1 Stock Certificates. (a) Every holder of stock in the Corporation shall be entitled to have a certificate certifying the number of shares owned by him or her in the Corporation and designating the class and series of stock to which such shares belong, which certificate shall otherwise be in such form as the - 23 - Board shall prescribe and as provided in Section 5.1(d). Each such certificate shall be signed by, or in the name of, the Corporation by the Chairman or the President or any Vice President, and by the Treasurer or any Assistant Treasurer or the Secretary or any Assistant Secretary. (b) If such certificate is countersigned by a transfer agent other than the Corporation or its employee, or by a registrar other than the Corporation or its employee, the signatures of the officers of the Corporation may be facsimiles, and, if permitted by applicable law, any other signature on the certificate may be a facsimile. (c) In case any officer who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be such officer before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer at the date of issue. (d) Certificates of stock shall be issued in such form not inconsistent with the Certificate of Incorporation. They shall be numbered and registered in the order in which they are issued. No certificate shall be issued until fully paid. (e) All certificates surrendered to the Corporation shall be cancelled (other than treasury shares) with the date of cancellation and shall be retained by the Chief Financial Officer, together with the powers of attorney to transfer and the assignments of the shares represented by such certificates, for such period of time as such officer shall designate. 5.2 Record Ownership. A record of the name of the person, firm or corporation and address of such holder of each certificate, the number of shares represented thereby and the date of issue thereof shall be made on the Corporation's books. The Corporation shall be entitled to treat the holder of record of any share of stock as the holder in fact thereof, and accordingly shall not be bound to recognize any equitable or other claim to or interest in any share on the part of any person, whether or not it shall have express or other notice thereof, except as required by applicable law. 5.3 Transfer of Record Ownership. Transfers of stock shall be made on the books of the Corporation only by direction of the person named in the certificate or such person's attorney, lawfully constituted in writing, and only upon the surrender of the certificate therefor and a written assignment of the shares evidenced thereby. Whenever any transfer of stock shall be made for collateral security, and not - 24 - absolutely, it shall be so expressed in the entry of the transfer if, when the certificates are presented to the Corporation for transfer, both the transferor and transferee request the Corporation to do so. 5.4 Lost, Stolen or Destroyed Certificates. Certificates representing shares of the stock of the Corporation shall be issued in place of any certificate alleged to have been lost, stolen or destroyed in such manner and on such terms and conditions as the Board from time to time may authorize in accordance with applicable law. 5.5 Transfer Agent; Registrar; Rules Respecting Certificates. The Corporation shall maintain one or more transfer offices or agencies where stock of the Corporation shall be transferable. The Corporation shall also maintain one or more registry offices where such stock shall be registered. The Board may make such rules and regulations as it may deem expedient concerning the issue, transfer and registration of stock certificates in accordance with applicable law. 5.6 Fixing Record Date for Determination of Stockholders of Record. (a) The Board may fix, in advance, a date as the record date for the purpose of determining the stockholders entitled to notice of, or to vote at, any meeting of the stockholders or any adjournment thereof, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date shall not be more than sixty days nor less than ten days before the date of a meeting of the stockholders. If no record date is fixed by the Board, the record date for determining the stockholders entitled to notice of or to vote at a stockholders' meeting shall be at the close of business on the day next preceding the day on which notice is given, or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held. A determination of stockholders of record entitled to notice of or to vote at a meeting of stockholders shall apply to any adjournment of the meeting; provided, however, that the Board may fix a new record date for the adjourned meeting. (b) The Board may fix, in advance, a date as the record date for the purpose of determining the stockholders entitled to receive payment of any dividend or other distribution or the allotment of any rights, or entitled to exercise any rights in respect of any change, conversion or exchange of stock, or in order to make a determination of the stockholders for the purpose of any other lawful action, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board, and which record date - 25 - shall not be more than sixty calendar days prior to such action. If no record date is fixed by the Board, the record date for determining the stockholders for any such purpose shall be at the close of business on the day on which the Board adopts the resolution relating thereto. 6. SECURITIES HELD BY THE CORPORATION. 6.1 Voting. Unless the Board shall otherwise order, the Chairman, the President, any Executive Vice President, any Senior Vice President, any Vice President, the Chief Financial Officer, the Controller, the Treasurer or the Secretary shall have full power and authority, on behalf of the Corporation, to attend, act and vote at any meeting of the stockholders of any corporation in which the Corporation may hold stock and at such meeting to exercise any or all rights and powers incident to the ownership of such stock, and to execute on behalf of the Corporation a proxy or proxies empowering another or others to act as aforesaid. The Board from time to time may confer like powers upon any other person or persons. 6.2 General Authorization to Transfer Securities Held by the Corporation. (a) Any of the following officers, to wit: the Chairman, the President, any Executive Vice President, any Senior Vice President, any Vice President, the Chief Financial Officer, the Controller, the Treasurer, any Assistant Controller, any Assistant Treasurer, and each of them, hereby is authorized and empowered to transfer, convert, endorse, sell, assign, set over and deliver any and all shares of stock, bonds, debentures, notes, subscription warrants, stock purchase warrants, evidences of indebtedness, or other securities now or hereafter standing in the name of or owned by the Corporation, and to make, execute and deliver any and all written instruments of assignment and transfer necessary or proper to effectuate the authority hereby conferred. (b) Whenever there shall be annexed to any instrument of assignment and transfer executed pursuant to and in accordance with the foregoing Section 6.2(a), a certificate of the Secretary or any Assistant Secretary in office at the date of such certificate setting forth the provisions hereof and stating that they are in full force and effect and setting forth the names of persons who are then officers of the Corporation, all persons to whom such instrument and annexed certificate shall thereafter come shall be entitled, without further inquiry or investigation and regardless of the date of such certificate, to assume and to act in reliance upon the assumption that (i) the shares of stock or other securities named in such - 26 - instrument were theretofore duly and properly transferred, endorsed, sold, assigned, set over and delivered by the Corporation, and (ii) with respect to such securities, the authority of these provisions of these By-laws and of such officers is still in full force and effect. 7. DEPOSITARIES AND SIGNATORIES. 7.1 Depositaries. The Chairman, the President, the Chief Financial Officer, and the Treasurer are each authorized to designate depositaries for the funds of the Corporation deposited in its name or that of a Division of the Corporation, or both, and the signatories with respect thereto in each case, and from time to time, to change such depositaries and signatories, with the same force and effect as if each such depositary and the signatories with respect thereto and changes therein had been specifically designated or authorized by the Board; and each depositary designated by the Board or by the Chairman, the President, the Chief Financial Officer, or the Treasurer shall be entitled to rely upon the certificate of the Secretary or any Assistant Secretary of the Corporation or of a Division of the Corporation setting forth the fact of such designation and of the appointment of the officers of the Corporation or of the Division or of both or of other persons who are to be signatories with respect to the withdrawal of funds deposited with such depositary, or from time to time the fact of any change in any depositary or in the signatories with respect thereto. 7.2 Signatories. Unless otherwise designated by the Board or by the Chairman, the President, the Chief Financial Officer or the Treasurer, all notes, drafts, checks, acceptances, orders for the payment of money and all other negotiable instruments obligating the Corporation for the payment of money shall be (a) signed by the Treasurer or any Assistant Treasurer and (b) countersigned by the Controller or any Assistant Controller, or (c) either signed or countersigned by the Chairman, the President, any Executive Vice President, any Senior Vice President or any Vice President in lieu of either the officers designated in Clause (a) or the officers designated in Clause (b) of this Section 7.2. 8. SEAL. The seal of the Corporation shall be in such form and shall have such content as the Board shall from time to time determine. - 27 - 9. FISCAL YEAR. The fiscal year of the Corporation shall end on December 31 in each year or on such other date as the Board shall determine. 10. WAIVER OF OR DISPENSING WITH NOTICE. (a) Whenever any notice of the time, place or purpose of any meeting of the stockholders is required to be given by applicable law, the Certificate of Incorporation or these By-laws, a written waiver of notice, signed by a stockholder entitled to notice of a stockholders' meeting, whether by telegraph, cable or other form of recorded communication, whether signed before or after the time set for a given meeting, shall be deemed equivalent to notice of such meeting. Attendance of a stockholder in person or by proxy at a stockholders' meeting shall constitute a waiver of notice to such stockholder of such meeting, except when the stockholder attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting was not lawfully called or convened. (b) Whenever any notice of the time or place of any meeting of the Board or Committee of the Board is required to be given by applicable law, the Certificate of Incorporation or these By-laws, a written waiver of notice signed by a Director, whether by telegraph, cable or other form of recorded communication, whether signed before or after the time set for a given meeting, shall be deemed equivalent to notice of such meeting. Attendance of a Director at a meeting in person (or by conference telephone or similar communications equipment) shall constitute a waiver of notice to such Director of such meeting. (c) No notice need be given to any person with whom communication is made unlawful by any law of the United States or any rule, regulation, proclamation or executive order issued under any such law. 11. AMENDMENT OF BY-LAWS. Except as otherwise provided in Section 2.8(a) of these By-laws, these By-laws, or any of them, may from time to time be supplemented, amended or repealed, or new By-laws may be adopted, by the Board at any regular or special meeting of the Board, if such supplement, amendment, repeal or adoption is approved by a majority of the entire Board. These By-laws, or any of them, may from time to time be supplemented, amended or repealed, or new By-laws may be adopted, by - 28 - the stockholders at any regular or special meeting of the stockholders at which a quorum is present, such supplement, amendment, repeal or adoption is approved by the affirmative vote of the holders of at least a majority of the voting power of all outstanding shares of stock of the Corporation entitled to vote generally in an election of directors. 12. OFFICES AND AGENT. (a) Registered Office and Agent. The registered office of the Corporation in the State of Delaware shall be 1209 Orange Street, Wilmington, Delaware 19801. The name of the registered agent is The Corporation Trust Company. Such registered agent has a business office identical with such registered office. (b) Other Offices. The Corporation may also have offices at other places, either within or outside the State of Delaware, as the Board of Directors may from time to time determine or as the business of the Corporation may require. I hereby certify that the foregoing is a true copy of the By-laws of The Hartford Financial Services Group, Inc. in full force and effect on this date. /s/ Brian S. Becker ______________________ Corporate Secretary Dated: February 20, 2003 - 29 - EX-10 4 exh10_13.txt THE HARTFORD FINANCIAL SERVICES GROUP THE HARTFORD FINANCIAL SERVICES GROUP, INC. 200,000 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE _____________________ THE HARTFORD RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS _____________________ 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. FEBRUARY, 2003 TABLE OF CONTENTS Page General Information............................................................2 The Hartford Restricted Stock Plan for Non-Employee Directors................................................3 Federal Tax Treatment.........................................................10 Administration of the Plan....................................................10 Resale Restrictions...........................................................11 Available Information.........................................................11 GENERAL INFORMATION The Hartford Financial Services Group, Inc. (the "Company") is offering up to 200,000 shares of its Common Stock, par value $.01 per share (the "Common Stock"), pursuant to the The Hartford Restricted Stock Plan For Non-Employee Directors (the "Plan"). Directors of the Company who are not employees of the Company or any of its subsidiaries are eligible to participate in the Plan. As more fully set forth in the Plan, a non-employee director's "annual retainer" (as defined in the Plan) will be paid in the form of annual automatic grants of shares of restricted Common Stock. The Plan is set forth below. - 2 - THE HARTFORD RESTRICTED STOCK PLAN FOR NON-EMPLOYEE DIRECTORS ARTICLE I -- PLAN ADMINISTRATION AND ELIGIBILITY 1.1 PURPOSE The purpose of The Hartford Financial Services Group, Inc. Restricted Stock Plan for Non-Employee Directors (the "Plan") is to attract and retain persons of ability as directors of The Hartford Financial Services Group, Inc. (the "Company") and to provide them with a closer identity with the interests of the Company's stockholders by paying the Annual Retainer in common stock of the Company subject to certain restrictions as described herein (the "Restricted Stock"). 1.2 ADMINISTRATION The Plan shall be administered by the Compensation and Personnel Committee of the Board of Directors (hereinafter referred to as the "Committee"). The Committee shall have the responsibility of interpreting the Plan and establishing and amending such rules and regulations necessary or appropriate for the administration of the Plan. All interpretations of the Plan or any Restricted Stock awards issued under it shall be final and binding upon all persons having an interest in the Plan. No member of the Committee shall be liable for any action or determination taken or made in good faith with respect to this Plan or any award granted hereunder. 1.3 ELIGIBILITY Directors of the Company who are not employees of the Company or any of its subsidiaries shall be eligible to participate in the Plan. 1.4 STOCK SUBJECT TO THE PLAN (a) The maximum number of shares which may be granted under the Plan shall be 200,000 shares of common stock, par value $.01 per share, of the Company (the "Stock"). - 3 - (b) If any Restricted Stock is forfeited by a Director in accordance with the provisions of Section 2.2(c), such shares of Restricted Stock shall be restored to the total number of shares available for grant pursuant to the Plan. (c) Upon the grant of a Restricted Stock award the Company may distribute newly issued shares or treasury shares, reacquired stock, stock purchased in the open market, or any combination of the foregoing. ARTICLE II -- RESTRICTED STOCK 2.1 RESTRICTED STOCK AWARDS Restricted Stock awards shall be made automatically on the date of the Annual Meeting of Stockholders, to each Director elected at the meeting or continuing in office following the meeting. The award shall equal the number of whole shares arrived at by dividing the Annual Retainer that is in effect for the 12 month period beginning with the date of the Annual Meeting (the "Service Year") by the Fair Market Value of the Company's common stock. Fractional shares shall be paid in cash. (a) "Annual Retainer" shall mean the amount that is payable to a Director for service on the Board of Directors during the Service Year. Annual Retainer shall not include fees paid for attendance at any Board or Committee meeting. (b) "Fair Market Value" shall mean the average of the high and low prices per share of the Company's common stock on the date of the Annual Meeting, as reported by the New York Stock Exchange Composite Tape. 2.2 TERMS AND CONDITIONS OF RESTRICTED STOCK AWARDS (a) Written Documentation -- Restricted Stock awards shall be evidenced by such written notice, agreement or other documentation as the Committee deems appropriate. (b) Shares held in Escrow -- The Restricted Stock subject to such award shall be registered in the name of the Director and held in escrow by the Committee until the restrictions on such shares lapse as described below. - 4 - (c) Restrictions -- Restricted Stock granted to a Director may not be sold, assigned, transferred, pledged or otherwise disposed of, except by will or the laws of descent and distribution, prior to the earliest of the following dates: (1) The fifth anniversary of the date of grant. (2) Retirement from the Board at age 72. (3) A "Change of Control" of the Company. A "Change of Control" shall be deemed to have occurred if: (i) a report on Schedule 13D shall be filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Securities and Exchange Act of 1934 (the "Act") disclosing that any Person (within the meaning of Section 13(d) of the Act), 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; (ii) any Person (within the meaning of Section 13(d) of the Act), 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 (as defined in Section 2.2(f) of this Plan) 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 entitled to vote in the election of directors of the surviving corporation 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 - 5 - (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 clause (iii). (4) Death of the Director. (5) Disability of the Director, as defined in The Hartford Investment and Savings Plan, as amended from time to time. (6) Resignation by the Director under cases of special circumstances and the Committee, in its sole discretion, consents to waive any remaining restrictions. (d) Dividends and Voting Rights -- The Director shall, subject to Section 2.2(c), possess all incidents of ownership of the shares of Restricted Stock including the right to receive dividends with respect to such shares and to vote such shares. (e) The Company shall deliver to the Director, or the beneficiary of such Director, if applicable, unrestricted certificates for all of the shares of Stock that were awarded to the Director as Restricted Stock (a) immediately following any lapse of restrictions on such shares pursuant to Section 2.2(c)(3) hereof, or (b) within 30 days following any lapse of restrictions under the remaining provisions of Section 2.2(c). (f) Special Definitions for Change of Control. For purposes of Section 2.2(c)(3), the following special definitions apply: (i) "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 ---- - 6 - 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 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. (ii) "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 (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. (g) 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. ARTICLE III -- GENERAL PROVISIONS 3.1 AUTHORITY Appropriate officers of the Company designated by the Committee are authorized to execute Restricted Stock agreements, and amendments thereto, in the name of the Company, as directed from time to time by the Committee. - 7 - 3.2 ADJUSTMENTS IN THE EVENT OF CHANGE IN COMMON STOCK OF THE COMPANY 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 number and kind of shares which thereafter may be granted under the Plan and the number of shares of Restricted Stock awarded pursuant to Section 2.1 with respect to which all restrictions have not lapsed, shall be appropriately adjusted consistent with such change in such manner as the Board in its discretion may deem equitable to prevent substantial dilution or enlargement of the rights granted to, or available for, Directors participating in the Plan. Any fractional shares resulting from such adjustments shall be eliminated. 3.3 RIGHTS OF DIRECTORS The Plan shall not be deemed to create any obligation on the part of the Board to nominate any Director for reelection by the Company's stockholders or to retain any Director at any particular rate of compensation. The Company shall not be obligated to issue Stock pursuant to an award of Restricted Stock for which the restrictions hereunder have lapsed if such issuance would constitute a violation of any applicable law. Except as provided herein, no Director shall have any rights as a stockholder with respect to any shares of Restricted Stock awarded to such Director. 3.4 BENEFICIARY A Director may file with the Committee a written designation of a beneficiary on such form as may be prescribed by the Committee and may, from time to time, amend or revoke such designation. In the event of the death of a Director, the Director's beneficiary shall have the right to receive the shares of Restricted Stock awarded pursuant to the Plan. If no designated beneficiary survives the Director, the executor or administrator of the Director's estate shall be deemed to be the Director's beneficiary. 3.5 LAWS AND REGULATIONS The Committee shall have the right to condition any issuance of shares to any Director hereunder on such Director's undertaking in writing to comply with such restrictions on the subsequent disposition of such shares as the Committee shall deem necessary or advisable as a result of any applicable law or regulation. The Committee may postpone the delivery of stock following the lapse of restrictions with respect to awards of Restricted Stock for such time as the Committee in its discretion may deem necessary, in order to permit the Company with - 8 - reasonable diligence (i) to effect or maintain registration of the Plan, or the shares issuable upon the lapse of certain restrictions respecting awards of Restricted Stock, under the Securities Act of 1933 or the securities laws of any applicable jurisdiction, or (ii) to determine that such shares and the Plan are exempt from such registration; the Company shall not be obligated by virtue of any Restricted Stock agreement or any provision of the Plan to recognize the lapse of certain restrictions respecting awards of Restricted Stock or issue shares in violation of said Act or of the law of the government having jurisdiction thereof. 3.6 AMENDMENT, SUSPENSION AND DISCONTINUANCE OF THE PLAN The Board may from time to time amend, suspend or discontinue the Plan, provided that the Board may not, without the approval of the holders of a majority of the outstanding shares entitled to vote, take any action which would cause the Plan to no longer comply with Rule 16b-3 under the Act, or any successor rule or other regulatory requirement. No amendment, suspension or discontinuance of the Plan shall impair a Director's right under a Restricted Stock award previously granted to the Director without the Director's consent. 3.7 GOVERNING LAW This Plan and all determinations made and actions taken pursuant hereto shall be governed by the laws of the State of Connecticut. 3.8 EFFECTIVE DATE AND DURATION OF THE PLAN This Plan shall be effective upon the Distribution Date, subject to the approval of the Plan by the stockholders of the Company, and shall terminate on December 31, 2005 (as defined in the Proxy Statement of ITT Corporation dated August 30, 1995) provided that grants of Restricted Stock made prior to the termination of the Plan may vest following such termination in accordance with their terms. - 9 - FEDERAL TAX TREATMENT Set forth below is a summary of the federal income tax consequences under the Internal Revenue Code of 1986, as amended (the "Code") of the grant and vesting of restricted stock awarded to a director of the Company ("Director") under the Plan. The following summary does not include any discussion of state, local or foreign income tax consequences or the effect of gift, estate or inheritance taxes, any of which may be significant to a particular Director eligible to receive an award. In addition, this summary does not apply to every specific transaction that may occur. Each Director eligible to receive an award should consult his or her tax advisor for precise advice pertaining to his or her particular circumstances. Under the Code, a Director normally will not realize taxable income and the Company will not be entitled to a deduction upon the grant of restricted stock. At the time the shares of restricted stock are no longer subject to a substantial risk of forfeiture (as defined in the Code) or become transferable, a Director will realize taxable ordinary income in an amount equal to the fair market value of such number of shares of Common Stock which have become nonforfeitable or transferable and the Company will be entitled to a deduction in the same amount, provided the Company complies with applicable tax withholding requirements. However, a Director may make an income recognition election under Section 83(b) of the Code (an "83(b) Election") and recognize taxable ordinary income in the year the shares of restricted stock are awarded in an amount equal to their fair market value at the time of the award, determined without regard to the restrictions. In that event, the Company will be entitled to a deduction in such year in the same amount, provided the Company complies with applicable tax withholding requirements, and any gain or loss realized by the employee upon the subsequent disposition of Common Stock will be capital gain or loss and will not result in any further deduction to the Company. Any dividends with respect to the shares of restricted stock that are paid or made available to a Director who has not made an 83(b) Election while the shares remain forfeitable are treated as additional compensation taxable as ordinary income to the Director and deductible by the Company when paid. If an 83(b) Election has been made with respect to the restricted stock, the dividends represent ordinary dividend income to the Director and are not deductible by the Company. If the Director makes an 83(b) Election and subsequently forfeits the shares of restricted stock, the Director is not entitled to a deduction as a consequence of such forfeiture, and the Company must include as ordinary income the amount it previously deducted in the year of grant with respect to such shares. ADMINISTRATION OF THE PLAN The Plan is not subject to the requirements of the Employee Retirement Income Security Act of 1974 ("ERISA"). The Compensation and Personnel Committee of the Board of Directors administers the Plan but does not act as a trustee or in any other fiduciary capacity with respect thereto. - 10 - RESALE RESTRICTIONS The Plan contains no restrictions on the resale of Common Stock after the restriction period ends. However, affiliates of the Company, which may include Directors 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 a Director 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. AVAILABLE INFORMATION The Company 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 Company's latest annual report filed pursuant to sections 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended (the "Exchange Act"); (b) All other reports filed by the Company pursuant to sections 13(a), 13(c), 14 and 15(d) of the Exchange Act since the end of the fiscal year covered by the annual report referred to in (a) above; and (c) The description of the Common Stock contained in a registration statement filed under the Exchange Act, and any amendment or report filed to update such description. In addition, the Company 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 - 11 - (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 Company'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 Company's annual report on Form 10-K for its latest fiscal year; or (iii) The latest prospectus filed pursuant to Rule 424(b) under the Securities Act that contains audited financial statements for the Company's latest fiscal year. Any statement contained in a document incorporated or deemed to be incorporated by reference in this Prospectus shall be deemed to be modified or superseded for purposes of this Prospectus to the extent that a statement contained in this Prospectus or in any other subsequently filed document which also is or is deemed to be incorporated by reference in this 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 this Prospectus. All requests for documents, as well as for other information concerning the Plan and its administrators, should be directed to Phillip Savage, The Hartford Financial Services Group, Inc., Hartford Plaza, Hartford, Connecticut 06115, telephone (203) 547-5000. - 12 - EX-10 5 exh10_14.txt THE HARTFORD FINANCIAL SERVICES GROUP 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 - 1 - 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 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) - 5 - 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 (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 - 6 - regulatory body to be an employee of a Participating Company or its affiliates for income or 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 - 7 - supplemented by Section 13(d)(3) of the Act; provided, however, that Person shall not 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, 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 Award of Options for more than 1,000,000 shares. - 8 - 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 - 10 - years 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. 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 - 11 - exercise thereof all or a portion of the excess of (A) the Fair Market Value of a specified 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 - 12 - and savings, (N) earnings before interest, taxes, depreciation and amortization ("EBITDA"), (O) pre-tax 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) - 18 - hereof. (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 - 19 - pursuant to grants of authority under the Plan shall be made or taken in the sole discretion 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, - 20 - conditions or restrictions on Stock or Awards, including the price payable upon the exercise 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 6 exh10_15.txt THE HARTFORD FINANCIAL SERVICES GROUP 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. EX-10 7 exh10_16.txt THE HARTFORD FINANCIAL SERVICES GROUP THE HARTFORD 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 any 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. REV. JANUARY, 2003 "BOARD OF DIRECTORS" means the Board of Directors of The Hartford Financial ------------------- Services Group, Inc. "CHANGE OF CONTROL" means: ----------------- (A) a report on Schedule 13D shall be filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Act disclosing that any Person, other than The Hartford or a subsidiary of The Hartford or any employee benefit plan sponsored by The Hartford or a subsidiary of The Hartford, is the Beneficial Owner directly or indirectly of twenty percent or more of the outstanding stock of The Hartford entitled to vote in the election of directors of The Hartford; (B) any Person, other than The Hartford or a subsidiary of The Hartford or any employee benefit plan sponsored by The Hartford or a subsidiary of The Hartford, shall purchase shares pursuant to a tender offer or exchange offer to acquire any stock of The Hartford (or securities convertible into stock) for cash, securities or any other consideration, provided that after consummation of the offer, the Person in question is the Beneficial Owner of fifteen percent or more of the outstanding stock of The Hartford entitled to vote in the election of directors of The Hartford (calculated as provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights to acquire stock); (C) the stockholders of The Hartford shall approve (1) any consolidation or merger in which The Hartford is not the continuing or surviving corporation or pursuant to which shares of stock of The Hartford entitled to vote in the election of directors of the Hartford would be converted into cash, securities or other property, other than a consolidation or merger of The Hartford in which holders of such stock of The Hartford immediately prior to the consolidation or merger have the same proportionate ownership of stock of the surviving corporation entitled to vote in the election of directors immediately after the consolidation or merger as immediately before, or (2) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of The Hartford; or (D) within any 12 month period, the persons who were directors of The Hartford immediately before the beginning of such period (the "Incumbent Directors of The Hartford") shall cease (for any reason other than death) to constitute at least a majority of the board of directors of The Hartford or the board of directors of any successor to The Hartford, provided that any director of The Hartford who was not a director of The Hartford at the beginning of such period shall be deemed to be an Incumbent Director of The Hartford if such director (1) was elected to the board of directors of The Hartford by, or on the recommendation of or with the approval of, at least two-thirds of the directors of The Hartford who then qualified as Incumbent Directors of The Hartford either actually or by prior operation of this clause (D), and (2) was not designated by a Person who has entered into an agreement with The Hartford to effect a transaction described in the immediately preceding clause (C) hereof. "COMMITTEE" means the Compensation and Personnel Committee of the Board of --------- Directors, or such other Committee as the Board may designate to administer the Plan pursuant to Article VII. "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, (C) the cash amount, if any, which may become payable as a sign-on bonus to a person expected to become a Key Employee, (D) the cash amount, if any, which may be contributed to the Plan by a Participating Company on behalf of a Key Employee in lieu of Excess Contributions under the Excess Savings Plan, and (E) 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. "EXCESS CONTRIBUTIONS" shall mean, collectively, Excess Floor Company ---------------------- Contributions and Excess Matching Company Contributions. "EXCESS FLOOR COMPANY CONTRIBUTION" shall have the meaning assigned by the ------------------------------------ Excess Savings Plan. "EXCESS MATCHING COMPANY CONTRIBUTION" shall have the meaning assigned by the -------------------------------------- Excess Savings Plan. "EXCESS SAVINGS PLAN" means The Hartford Excess Savings Plan IA, as may be --------------------- amended from time to time, and any successor Plan thereto. "INCENTIVE STOCK PLAN" means The Hartford 1995 Incentive Stock Plan, as may be --------------------- amended from time to time, and any successor Plan thereto. "INVESTMENT AND SAVINGS PLAN" means The Hartford Investment and Savings Plan, as --------------------------- may be amended from time to time, and any successor Plan thereto. "KEY EMPLOYEE" shall have the meaning assigned by the Incentive Stock Plan. ------------ "PARTICIPANT" means a Key Employee who properly elects to participate in the ----------- Plan pursuant to Article III. "PARTICIPATING COMPANY" shall have the meaning assigned by the Incentive Stock ---------------------- Plan. "PERSON" has the meaning ascribed to such term in Section 3(a)(9) of the Act, as ------ supplemented by Section 13(d)(3) of the Act; provided, however, that Person shall not include (A) The Hartford, any subsidiary of The Hartford or any Person controlled by The Hartford, (B) any trustee or other fiduciary holding securities under any employee benefit plan of The Hartford or of any subsidiary of The Hartford, or (C) a corporation owned, directly or indirectly, by the stockholders of The Hartford in substantially the same proportions as their respective ownership of securities of The Hartford. "PHANTOM FUND" means a mutual fund or other investment vehicle or measure or ------------- index of investment performance selected by the Committee to determine the hypothetical investment experience of Participant Accounts pursuant to Article IV. "PLAN" means this plan- The Hartford 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 close of business of the last business day of each month 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. If a Key Employee elects to defer a particular amount of Eligible Compensation under the Plan, and then terminates employment with all Participating Companies before the date such amount would have been payable to the Key Employee in the absence of the election, then the election shall be deemed null and void and without effect. 3.2 FORM OF ELECTION. The election form filed by a Participant pursuant to this ---------------- Article III shall (A) identify a portion of the Participant's Eligible Compensation that may become payable with respect to the Participant's services, (B) contain the Participant's election to defer the payment of such portion of such Eligible Compensation that is determinable for tax purposes in the following calendar year in accordance with the terms of the Plan, and (C) contain such other information as the Plan Administrator may require. 3.3 MAXIMUM AND MINIMUM AMOUNTS REQUIRED FOR PARTICIPATION. The Committee or the ------------------------------------------------------ Plan Administrator may designate a maximum and a minimum portion of a Key Employee's Eligible Compensation, in terms of a percentage or other amount thereof, as to which an election may be made hereunder. 3.4 NULLIFICATION OF ELECTION. Notwithstanding anything herein to the contrary, ------------------------- any election made by a Key Employee hereunder shall be deemed null and void to the extent that (A) the Eligible Compensation as to which the election applies is designated by the Committee, in its sole discretion, as not payable to such Key Employee, (B) such election applies to Eligible Compensation payable during the 12 month period during which the Key Employee ceases savings under the Investment and Savings Plan as a result of receiving a hardship withdrawal under that Plan, or (C) the Committee so determines in its sole discretion. 3.5 ESTABLISHMENT OF PARTICIPANT ACCOUNTS. Up to five Accounts (as elected by -------------------------------------- the Participant) 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 immediately preceding the date of such event, unless otherwise required by the Plan. The value of a Participant's Account shall be reported to the Participant from time to time as determined appropriate by the Plan Administrator. 3.6 OBTAINING OF LIFE INSURANCE POLICIES. As a condition of participation --------------------------------------- hereunder, the Committee may require that a Participant provide assistance in obtaining a life insurance policy on the life of such Participant, such policy to be solely owned by, and solely payable to, The Hartford (or such other entity as may be designated by the Committee). Such Participant may be required to (A) complete an application for life insurance, (B) furnish underwriting information (including but not limited to submitting to medical examinations by an insurance company approved examiner), (C) authorize the release of the Participant's medical history to an insurance company underwriter, and (D) provide such other information and take such other actions relating to such life insurance policy as may be required by the Plan Administrator. A Participant as to whom a life insurance policy is obtained hereunder shall have no right to or interest in such policy or the proceeds thereof. 3.7 TERMINATION OF PARTICIPATION. The participation of a Participant in the Plan ---------------------------- shall terminate on the earlier of (A) the date that all amounts credited to the Participant's Account have been distributed pursuant to the Plan, (B) the date of termination of the Plan, or (C) such other date as may be designated by the Committee. ARTICLE IV PHANTOM FUND INVESTMENT ALLOCATIONS 4.1 SELECTION OF PHANTOM FUNDS. The Committee shall select one or more Phantom -------------------------- Funds to which a Participant may elect pursuant to the Plan to allocate all or a portion of the amount then and thereafter credited to the Participant's Account. To the extent provided herein, such Phantom Funds shall be used to measure the hypothetical investment experience of the portion of a Participant's Account that the Participant properly elects to have allocated thereto. The Committee may change the selection of Phantom Funds from time to time in its sole discretion. The selection of any such Phantom Funds shall not require the Company to invest or earmark any of its assets in any specific manner. 4.2 INVESTMENT ALLOCATION ELECTION. To the extent permitted by the Plan -------------------------------- Administrator, a Participant may elect to have the amount then and thereafter credited to his or her Account allocated among one or more of the Phantom Funds. Such election shall be made by filing a properly completed election form (or such other authorization as the Plan Administrator may require) with the party and by the date designated by the Plan Administrator. With respect to Excess Contributions, a Participant shall be deemed to have elected to have such amounts allocated to the same Phantom Funds that the Participant elected for amounts distributable following the date his or her employment with all Participating Companies terminates. If the Participant has no such allocation election in place, then the Participant shall be deemed to have elected to have all Excess Contributions allocated to the Phantom Fund that the Plan Administrator determines generally to have the least risk of loss of principal. Any election or deemed election under this Section 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. Notwithstanding the foregoing, any request for a change in investment allocation with respect to Excess Contributions shall be subject to the same waiting periods and other similar rules as would have applied to such Excess Contributions under the Excess Savings Plan. 4.4 FAILURE TO MAKE PROPER ELECTION. In the event that a Participant does not -------------------------------- make a proper election pursuant to this Article IV, such Participant shall be deemed to have elected to have the entire amount (as to which no proper election is made) then and thereafter credited to the Participant's Account allocated to the Phantom Fund that the Plan Administrator determines generally to have the least risk of loss of principal. 4.5 LIMITATIONS ON INVESTMENT ALLOCATION. The Plan Administrator may (A) --------------------------------------- establish a minimum and/or a maximum portion of a Participant's Account, in terms of a percentage or other amount thereof, that a Participant may elect to allocate to a particular Phantom Fund hereunder, (B) preclude any Participant who is an executive officer of the Company from allocating any portion of his or her Account to a Phantom Fund with an investment experience determined primarily in relation to the investment performance of securities issued by the Company, and (C) establish such other limitations on investment allocations as the Plan Administrator may deem appropriate. 4.6 NO ACTUAL INVESTMENT. Notwithstanding anything herein to the contrary, no -------------------- amount of Eligible Compensation as to which an election is made hereunder, and no amount credited to a Participant's Account pursuant to the Plan, shall be set aside or invested in any actual fund on behalf of the Participant, provided, however, that nothing in the Plan shall be construed to preclude the Company from directly or indirectly making investments for its own account in any actual investment vehicle corresponding to the Phantom Funds (or otherwise) in order to assist the Company in meeting its obligations hereunder, or for any other reason whatsoever. No Participant or any other person or entity shall have by reason of the Plan any right to or in any such investment made by the Company. ARTICLE V CREDITING AND DEBITING OF PARTICIPANT ACCOUNTS 5.1 CREDITING OF ELIGIBLE COMPENSATION. Eligible Compensation as to which the ----------------------------------- Participant makes an election in accordance with the Plan shall be credited to the Participant's Account as of the Valuation Date coincident or next succeeding the date such Eligible Compensation would otherwise have been paid to, or contributed to the Excess Savings Plan on behalf of, 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 immediately preceding 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 shall be debited from the Participant's Account as of each monthly Valuation Date. 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 all or a portion of the amount credited to the Participant's Account distributed to him or her on a date and in a manner permitted by the Plan Administrator. With respect to Excess Contributions, a Participant shall be deemed to have elected to have such amounts distributed at the same time that the Participant elected with respect to amounts distributable following the date his or her employment with all Participating Companies terminates. If a Participant has no such distribution election in place, then the Participant shall be deemed to have elected to have Excess Contributions distributed as soon as practicable after the Valuation Date coincident or next succeeding the date his or her employment with all Participating Companies terminates. Distributions from a Participant's Account shall be made in accordance with the date and manner of distribution elected or deemed elected by the Participant hereunder, except to the extent that a different date and/or manner of distribution is required pursuant to the Plan or by the Plan Administrator. 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 the Valuation Date immediately preceding such distribution. In the case of a Participant who has reached age 55 or older at the time employment terminates, the Company shall distribute the amounts credited to such Participant's Account in accordance with the distribution elections in place at such time. Notwithstanding the foregoing, if such a Participant has an election in place to receive payment of amounts from any account during the time he or she is employed, all amounts remaining in such account shall be distributed to such Participant in a single lump sum cash payment as soon as practicable after the Valuation Date coincident with or next succeeding the date his or her employment terminates. Further, notwithstanding the foregoing, the Plan Administrator may establish a minimum Account balance required as a condition to honor an election to have any amount distributed in the form of installment payments. If such minimum balance is not met, the particular Account shall be 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 first installment otherwise would have been payable. 6.4 DISTRIBUTION IN THE EVENT OF A TERMINATION OF THE PLAN. In the event of a -------------------------------------------------------- termination of the Plan, the entire amount credited to a Participant's Account as of the Valuation Date coincident with or next succeeding such event shall be distributed to the Participant in a single lump sum cash payment as soon as practicable after such Valuation Date. 6.5 DISTRIBUTION TO FIDUCIARY. If the Plan Administrator determines that any ------------------------- person to whom any amount is otherwise distributable hereunder is unable to care for his or her affairs, such amount (unless a prior claim therefor shall have been made by a duly appointed guardian, committee or other legal representative) may be distributed to any person determined by the Plan Administrator to have fiduciary responsibility for such person otherwise entitled to such amount, in such manner and proportions as the Plan Administrator may deem appropriate. Any such distribution shall constitute a complete discharge of any obligation of the Company to such person under the Plan. 6.6 DISTRIBUTION IN THE EVENT OF DEATH. Notwithstanding anything herein to the ---------------------------------- contrary, in the event of a Participant's death, the entire amount credited to the Participant's Account as of the Valuation Date coincident with or next succeeding the date of the Participant's death shall be distributed in a single lump sum cash payment as soon as practicable after such Valuation Date to one or more beneficiaries, if any, properly designated by the Participant by the date and in the manner required by the Plan Administrator. If (A) no such designation is in effect at the time of the Participant's death, (B) no designated beneficiary survives the Participant, or (C) any beneficiary designation made by the Participant conflicts with applicable law, such amount shall be paid to the Participant's estate as soon as practicable after such Valuation Date. 6.7 DISTRIBUTION UPON THE OCCURRENCE OF A CHANGE OF CONTROL. ------------------------------------------------------- (A) DISTRIBUTION OF ACCOUNTS. Upon the occurrence of a Change of -------------------------- Control, all Participants shall be paid single lump sum cash payments equal to the entire amount credited 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). 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 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. 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. An annual charge to each Participant's Account of ------------------------ up to 0.25% of the total amount credited to such Account shall be charged and applied to satisfy expenses reasonably incurred in connection with the administration of the Plan (as determined in the sole discretion of the Plan Administrator). 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. EX-10 8 exh10_17.txt THE HARTFORD FINANCIAL SERVICES GROUP THE HARTFORD SENIOR EXECUTIVE SEVERANCE PAY PLAN This document describes your benefits under The Hartford Senior Executive Severance Pay Plan, and includes the text of the Plan and other important information. Rev. June, 2000 TABLE OF CONTENTS ----------------- TEXT OF THE HARTFORD SENIOR EXECUTIVE SEVERANCE PAY PLAN Page ---- 1. Purpose...............................................................3 2. Application of Plan...................................................3 3. Covered Employees ....................................................3 4. Severance Pay Upon Termination of Employment..........................4 5. Schedule of Severance Pay.............................................6 6. Notice or Pay in Lieu of Notice.......................................6 7. Form of Payment of Severance Pay......................................7 8. Employee Benefit Plan Coverage While Receiving Severance Pay..........7 9. Excluded Employee Compensation Plans, Programs, Arrangements and Perquisites.....................................................8 10. Divestiture, Closure, Relocations.....................................9 11. Disqualifying Conduct.................................................9 12. Release...............................................................9 13. Offset................................................................9 14. Administration of Plan...............................................10 15. Termination or Amendment.............................................10 16. Miscellaneous........................................................10 OTHER IMPORTANT INFORMATION 1. NOTICE...............................................................11 THE HARTFORD SENIOR EXECUTIVE SEVERANCE PAY PLAN 1. PURPOSE ------- The purpose of The Hartford 1997 Senior Executive Severance Pay Plan (the "Plan") is to assist in occupational transition by providing severance pay for senior executives covered by this Plan whose employment is terminated under conditions set forth in this Plan. 2. APPLICATION OF PLAN ------------------- This Plan is effective October 1, 1997. Any termination of termination of employment that has an Effective Date (as defined herein) while this Plan is in effect shall be governed exclusively by the terms of this Plan and by no other plan, policy, practice or arrangement, except where this Plan is expressly superseded by a Key Executive Employment Protection Agreement with the Company, or an individual written employment contract or other written agreement with the Company. To the extent that this Plan is expressly superseded by any of the foregoing agreements or contracts, no severance shall be payable hereunder, and the provisions of this Plan will otherwise be deemed null and void and without effect. 3. COVERED EMPLOYEES ----------------- You are a Covered Employee under this Plan if you are an "Employee" (as defined below) who (1) qualifies as an "Eligible Employee" (as defined below), (2) is paid on a salaried basis, and (3) is identified as a Tier Two executive. A person who is on an authorized leave of absence, paid or unpaid (including medical leave of absence), of not more than twenty-six (26) weeks who would otherwise qualify as a Covered Employee, but for being on leave of absence, will be considered a Covered Employee for purposes of this Plan. For purposes of the Plan, "Employee" means any person regularly employed by Hartford Fire Insurance Company or any of its designated subsidiaries or affiliates (collectively, the "Company"), but shall not include any person who performs services for the Company as an independent contractor or under any other non-employee classification, or who is classified by the Company as, or determined by the Company to be, an independent contractor. For purposes of the Plan, "Eligible Employee" means an Employee employed by the Company; provided, however, that except as the Board of Directors or the Committee may - 3 - otherwise provide on a basis uniformly applicable to all persons similarly situated, Eligible Employee shall not include any "Ineligible Person," which means all of the following: (1) A person who is paid on an hourly basis; or (2) A person who: (A) holds a position with the Company's "HARTEMP" Program, or (B) is hired to work for the Company through a temporary employment agency, or (C) is hired to a position with the Company with notice on his or her date of hire that the position will terminate on a certain date; or (3) A person who is a leased employee (within the meaning of Code Section 414(n)(2)) of the Company or is otherwise employed 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 the Company, or (4) A person who performs services for the Company as an independent contractor or under any other non-employee classification, or is classified by the Company as, or determined by the Company to be, an independent contractor, or who is classified by the Company as, or determined by the 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 the Company or its affiliates for income or 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 is otherwise 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 Plan Administrator, and if so designated, the participation of such person in the Plan shall be prospective only. 4. SEVERANCE PAY UPON TERMINATION OF EMPLOYMENT -------------------------------------------- If the Company terminates your employment and you sign a Release acceptable to the Company, you shall be provided severance pay in accordance with the terms of this Plan EXCEPT if you: ------ o are terminated for misconduct or other disciplinary action, which by way of example may include, but is not limited to, the following: serious violations of Company policies, violation of the Company Code of Corporate Conduct or other similar policy or undertaking of the Company; or any Company-initiated termination for cause or for actions that are immoral, unethical, inimical to the best interests of the Company, or illegal; o refuse a Similar Position (as defined herein) offered as alternative employment with the Company. For purposes of this Plan, "Similar Position" shall mean a position of the same base salary rates and same opportunity for incentive with similar duties, or having different duties which, in management's judgment, the - 4 - employee is able to perform and which is located within a 50-mile radius of the previous position's location; o terminate employment with the Company prior to the date selected by the Company as your last day of active employment ("Effective Date"); o are terminated while on a leave of absence (paid or unpaid) after 26 weeks of such leave; o are mandatorily retired on or after your Normal Retirement Date (as defined herein) where legally permitted, or are terminated with an Effective Date on or after your Normal Retirement Date. "Normal Retirement Date" shall mean the first of the month which coincides with or follows the employee's 65th birthday; o are terminated following acceptance or refusal of employment or continued employment with a purchaser in connection with any sale or divestiture described in Section 10 hereof; o are eligible for greater severance payments under the terms of a Key Executive Employment Protection Agreement with the Company, or an individual written employment contract or other written agreement with the Company. If you initiate termination of employment for any reason including resigning, retiring or failing to return to work immediately following the expiration of any leave of absence, no severance pay will be provided under this Plan. No severance pay will be provided under this Plan upon any termination of employment as a result of your death, or as a result of your Disability as defined in The Hartford Investment and Savings Plan, as may be amended from time to time (the "Savings Plan"). - 5 - 5. SCHEDULE OF SEVERANCE PAY ------------------------- Covered Employees will be provided severance pay in accordance with the following Schedule of Severance Pay which sets forth the months of Base Pay which are provided to a Covered Employee based upon the Covered Employee's Years of Service as of the Effective Date. Years of Service Months of Base Pay ---------------- ------------------ Less than 4 . . . . . . 12 4 . . . . . . 13 5 . . . . . . 14 6 . . . . . . 15 7 . . . . . . 16 8 . . . . . . 17 9 . . . . . . 18 10 . . . . . . 19 11 . . . . . . 20 12 . . . . . . 21 13 . . . . . . 22 14 . . . . . . 23 15 or more . . . . . . 24 The severance payment provided will be subject to applicable federal, state and local taxes, which will be withheld from such payment where required by applicable law as determined in the sole discretion of the Plan Administrator. "Base Pay" shall mean your annual base salary at the Effective Date divided by twelve (12) months. "Years of Service" shall mean the total number of completed years of employment measured from your Company service date to your Effective Date, rounded to the nearest whole year. Your Company service date is the date used to determine your eligibility for vesting under the applicable Company retirement plan in effect on the Effective Date. Notwithstanding the above Schedule of Severance Pay, in no event (i) shall months of Base Pay provided to you exceed the number of months remaining between the Effective Date and your Normal Retirement Date, or (ii) shall severance pay exceed the equivalent of twice your total annual compensation during the year immediately preceding the Effective Date. 6. NOTICE OR PAY IN LIEU OF NOTICE ------------------------------- - 6 - Except as provided in this Plan or under a Key Executive Employment Protection Agreement with the Company, or an individual written employment contract or other written agreement with the Company, you shall not be entitled to any notice of termination or pay in lieu thereof. At the sole discretion of the Plan Administrator or designee, notice may be provided. 7. FORM OF PAYMENT OF SEVERANCE PAY -------------------------------- Severance pay shall be paid in periodic payments according to the regular payroll schedule ("Periodic Payment"), provided that the Company reserves the right at any time to pay the remaining severance pay in a discounted lump sum. Any discounted lump sum paid under this Plan shall be equal to the present value of the remaining Periodic Payments of severance pay as determined by the Company using an interest rate equal to the prime rate at Citibank in effect on the date the Company notifies you that it is exercising its right to pay severance in the discounted lump sum. Periodic Payment of severance pay will commence or the discounted lump sum will be paid on the next day following the Effective Date, except that where the Company exercises its right to pay the discounted lump sum after the commencement of Periodic Payments, it will be paid promptly after the Company exercises such right. In the event of your death during the period you are receiving Periodic Payment of severance pay, the amount of severance pay remaining shall be paid, subject to applicable law, in a discounted lump sum payment to your spouse, if any, or to such other beneficiary or beneficiaries designated by you in writing, or if you are not married and failing such designation, to your estate. During the time period that you are receiving Periodic Payment of severance pay, or for which you receive severance pay by lump sum, you must continue to be available to render reasonable assistance to the Company, consistent with the level of your prior position with the Company, at times and locations that are mutually acceptable. In requesting such services, the Company will take into account any other commitments which you may have. After the Effective Date and normal wind up of your former duties, you will not be required to perform any regular services for the Company. In the event you secure employment other than with the Company while receiving severance pay, you must notify the Company. Upon such notification the Company generally will make a single discounted lump sum payment to you of all remaining severance pay. Periodic Payment of severance pay will cease if you are rehired by the Company. In the event you retire under the applicable Company retirement plan while receiving Periodic Payment, the Company will pay you any remaining severance pay in a single discounted lump sum payment. - 7 - 8. EMPLOYEE BENEFIT PLAN COVERAGE WHILE RECEIVING SEVERANCE PAY ------------------------------------------------------------ Except as otherwise provided herein, as long as you are receiving Periodic Payment, you will continue to be eligible for participation in Company employee benefit plans in effect as of the Effective Date, including without limitation, any non-qualified excess or supplemental benefit plans, in accordance with the applicable provisions of such plans. You will not be eligible to participate in any Company salary continuation, short-term or long-term disability plans, the Company business travel accident plan or any new employee benefit plan or any improvement to any existing employee benefit plan adopted by the Company after the Effective Date. If a lump sum payment of severance pay is made, eligibility to participate in all Company employee benefit plans ends. Deductions for continuing group life and medical/dental/health insurance and participation in the Savings Plan remain available while receiving Periodic Payment of the severance pay, subject to the maximum time periods as specified by the terms of the respective plans in effect as of the Effective Date. 9. EXCLUDED EMPLOYEE COMPENSATION PLANS, PROGRAMS, ARRANGEMENTS AND ---------------------------------------------------------------- PERQUISITES ----------- During the period you are receiving Periodic Payment of severance pay, you will not be eligible to accrue any vacation or participate in any (i) bonus program; (ii) special termination programs; (iii) tax or financial advisory services; (iv) new awards under any long-term incentive compensation plan or program of the Company; (v) new or revised executive compensation programs that may be introduced after the Effective Date; or (vi) any other executive compensation program, plan, arrangement, practice, policy or perquisites unless specifically authorized by the Company in writing. The period during which you are receiving Periodic Payment of severance pay shall not be counted as service for purposes of any Company long-term incentive compensation awards outstanding as of the Effective Date. Notwithstanding the preceding sentence, during such period you will continue to be eligible to vest in any outstanding unvested deferred restricted stock units (bonus swap), as well as any outstanding unvested stock option awards except (a) any options awarded to you on December 17, 1997 or July 19, ------ 2000, and (b) any other options that are designated under the terms of the award of such options as ineligible for continued crediting of service during Periodic Payment of severance pay. Also during such period, you will continue to be eligible to exercise any outstanding vested stock option awards, except to the extent that (I) such options first expire under the applicable plan or program, or (II) such options are designated under the terms of the award of such options as ineligible for continued exercise during Periodic Payment of severance pay. Any unvested restricted stock and unvested performance shares outstanding as of the Effective Date will be canceled as of the Effective Date, except to the extent otherwise provided in the applicable plan or program. - 8 - 10. DIVESTITURE. CLOSURE, RELOCATIONS --------------------------------- If the Company or a subsidiary or affiliate or division of the Company or a portion thereof, at which you are employed, is sold or divested, and if (i) you accept employment or continued employment with the purchaser, or (ii) refuse employment or continued employment with the purchaser on terms and conditions substantially comparable to those in effect immediately preceding the sale or divestiture, you shall not be provided severance pay hereunder or any related benefits described in Section 8 or Section 9 of this Plan. The provisions of this Section 10 apply to all sales and divestitures (whether accomplished as sales of assets, sales of corporate entities or any other method), other than any sale or divestiture that qualifies as a Change of Control under The Hartford 2000 Incentive Stock Plan (as may be amended from time to time). 11. DISQUALIFYING CONDUCT --------------------- If, during the period you are receiving Periodic Payment of severance pay, you (i) conduct yourself in a manner which is inimical to the best interests of the Company, or which adversely affects those interests; (ii) make statements, either oral or written, which are false or misleading or which disparage the Company; (iii) fail to comply with any Company Covenant Against Disclosure and Assignment of Rights to Intellectual Property or other similar policy or undertaking of the Company; (iv) without the Company's prior consent, induce any employees of the Company to leave their Company employment; or (v) fail to comply with applicable provisions of the Code of Conduct or other similar policy or undertaking of the Company, or any other applicable corporate policy of the Company, then the Company will have no further obligation to provide severance pay. 12. RELEASE ------- No severance pay will be provided under this Plan unless you execute and deliver to the Company a Release, satisfactory to the Company, in which you discharge and release the Company, its affiliates and the Company's directors, officers, employees and employee benefit plans from all claims (other than for benefits to which you are entitled under any Company employee benefit plan) arising out of your employment or termination of employment. 13. OFFSET ------ Any severance pay provided to you under this Plan shall be offset by reducing such amount by any severance pay, termination pay or similar pay or allowance which you receive or are entitled to receive (i) under any other Company plan, policy, practice, program or arrangement; (ii) pursuant to any Key Executive Employment Protection Agreement with the Company, or any individual written employment agreement or other written agreement - 9 - with the Company; or (iii) by virtue of any law, custom or practice excluding, however, any unemployment compensation which you may receive as a state unemployment award. Any severance pay provided to you under this Plan shall also be offset by reducing such severance pay by any severance pay, termination pay or similar pay or allowance you received as a result of any prior termination of employment with the Company. Any severance pay and any notice pay provided to you under this Plan shall be offset by reducing such severance pay and notice pay by any payments made to you by the Company pursuant to the Worker Adjustment and Retraining Notification Act ("WARN") and any similar federal, state or local law. Any severance pay provided to you under this Plan shall be offset by reducing such severance pay by any payment made to you under any Company or statutory disability plan, policy, practice, program or arrangement where any such payment is made for any period of time after the Effective Date. 14. ADMINISTRATION OF PLAN ---------------------- Responsibility for administration of this Plan rests with Hartford Fire Insurance Company's Group Senior Vice President, Human Resources (or other individual with similar responsibilities) or his designee ("Plan Administrator"). The Plan Administrator shall have the exclusive right to interpret this Plan, adopt any rules and regulations for carrying out this Plan as may be appropriate and decide any and all matters arising under this Plan, including, but not limited to, the right to determine appeals. Subject to applicable federal and state law, all interpretations and decisions by the Plan Administrator shall be final, conclusive and binding on all parties affected thereby. 15. TERMINATION OR AMENDMENT ------------------------ The Plan Administrator shall have the power to make amendments to the Plan that do not involve a material cost to the Company or are required by applicable law. Any other amendments to the Plan shall be made by the Board of Directors of Hartford Fire Insurance Company. The Company, through its Board of Directors, reserves the right, in its sole discretion, to terminate, suspend, amend or modify this Plan ("Plan Change") in whole or in part at any time without prior notice except that no such Plan Change, and no Plan amendment made by the Plan Administrator, may reduce or adversely affect severance pay for any employee whose employment terminates within two years of the effective date of such Plan Change or amendment, provided that such Executive was a Covered Employee under this Plan on the date of such Plan Change or amendment. - 10 - 16. MISCELLANEOUS ------------- o In cases where severance pay is provided under this Plan, pay in lieu of any unused vacation entitlement will be paid to you in a single lump sum payment after severance pay ceases. Such lump sum payment will not have the effect of extending your Company service for any purpose. o Benefits under this Plan are paid for entirely by the Company from its general assets. o The section headings contained in this Plan are included solely for convenience of reference and shall not in any way affect the meaning of any provision of this Plan. OTHER IMPORTANT INFORMATION - --------------------------- NOTICE ------ THIS PLAN IS NOT A CONTRACT OF EMPLOYMENT. IT DOES NOT GUARANTEE YOUR EMPLOYMENT FOR ANY SPECIFIED PERIOD AND DOES NOT LIMIT THE RIGHT OF THE COMPANY TO TERMINATE YOUR EMPLOYMENT AT ANY TIME FOR ANY REASON. EMPLOYMENT WITH THE COMPANY IS TERMINABLE AT WILL. ANY EMPLOYEE WHO IS NOT OBLIGATED TO CONTINUE HIS/HER EMPLOYMENT UNDER A FORMAL WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY RETAINS THE RIGHT TO TERMINATE THEIR EMPLOYMENT AT ANY TIME, WITH OR WITHOUT NOTICE, AND WITH OR WITHOUT CAUSE. LIKEWISE, THE COMPANY CAN TERMINATE THE EMPLOYMENT OF ANY EMPLOYEE AT ANY TIME, WITH OR WITHOUT NOTICE, AND WITH OR WITHOUT CAUSE, SUBJECT TO APPLICABLE LAW. NO SUPERVISOR OR MANAGER HAS ANY AUTHORITY TO ENTER INTO AN EMPLOYMENT AGREEMENT, WRITTEN OR VERBAL, OR TO MAKE ANY AGREEMENT OR REPRESENTATIONS CONTRARY TO THE FOREGOING, UNLESS IT IS AUTHORIZED IN WRITING BY THE CHAIRMAN OF THE COMPANY AND SUCH AGREEMENT IS IN WRITING. FURTHER NO COMPANY DOCUMENT, COMMUNICATION OR PUBLICATION SHOULD BE UNDERSTOOD AS, OR CONSTRUED AS, MAKING SUCH AN AGREEMENT OR EXTENDING SUCH A REPRESENTATION. - 11 - EX-10 9 exh10_18.txt THE HARTFORD FINANCIAL SERVICES GROUP - -------------------------------------------------------------------------------- THE HARTFORD EXECUTIVE SEVERANCE PAY PLAN I This document describes your benefits under The Hartford Executive Severance Pay Plan I and includes the text of the Plan and other important information. - -------------------------------------------------------------------------------- [GRAPHIC OMITTED] JUNE 27, 2000 THE HARTFORD EXECUTIVE SEVERANCE PAY PLAN I 1. PURPOSE. The purpose of The Hartford Executive Severance Pay Plan I (the ------- "PLAN") is to assist in occupational transition by providing severance pay for Tier 3 executives covered by this Plan (and such other individuals as may be specifically designated by the Plan Administrator) whose employment is terminated under conditions set forth in this Plan. 2. APPLICATION OF PLAN. This amended and restated Plan is effective June 27, -------------------- 2000. Any termination of employment that has an Effective Date (as defined herein) while this Plan is in effect shall be governed exclusively by the terms of this Plan and by no other plan, policy, practice or arrangement, except (A) where this Plan is expressly superseded by an individual written employment contract or other written agreement with the Company (as defined herein), or (B) where the Plan Administrator determines that the Plan in effect prior to this Plan shall apply to an executive involved in the performance discipline process on or before June 27, 2000. To the extent that this Plan is expressly superseded by any such contract or agreement, no severance shall be payable hereunder, and the provisions of this Plan will be deemed null and void and without effect. 3. COVERED EMPLOYEES. You are a Covered Employee under this Plan if you are an ------------------ "EMPLOYEE" (as defined below) who: (A) qualifies as an "ELIGIBLE EMPLOYEE" (as defined below), and (B) is identified as a Tier Three executive of the Company on the date selected by the Company (or Plan Administrator or designee) as your last day of active employment (the "EFFECTIVE DATE"). An Employee on an authorized leave of absence, paid or unpaid (including medical leave of absence) of not more than twenty-six (26) weeks who would otherwise qualify as a Covered Employee, but for being on leave of absence, will be considered a Covered Employee for purposes of this Plan. An Employee on a leave of absence due to Disability (as defined in The Hartford Investment and Savings Plan) of more than six months will be considered a Covered Employee for purposes of this Plan if he or she seeks employment with the Company immediately following the period of Disability. The "COMPANY" means, collectively, Hartford Fire Insurance Company and Hartford Life and Accident Insurance Company, and any of their designated subsidiaries or affiliates, and any successor of any of the foregoing by merger or purchase or otherwise. "EMPLOYEE" means any person regularly employed by the Company, but shall not include any person who performs services for the Company as an independent contractor or under any other non-employee classification, or who is classified by the Company as, or determined by the Company to be, an independent contractor. "ELIGIBLE EMPLOYEE" means an Employee employed by the Company; provided, however, that except as the Plan Administrator may otherwise provide on a basis uniformly applicable to all persons similarly situated, Eligible Employee shall not include any "INELIGIBLE PERSON," which means all of the following: (A) a person who: (i) is paid on an hourly basis, and (ii) does not actively work for the Company at least 20 hours per week on a scheduled basis; or (B) a person who: (i) is paid on a salaried basis, and (ii) does not actively work for the Company at least 30 hours per week on a scheduled basis; or (C) a person who: (i) holds a position with the Company's "HARTEMP" Program, or (ii) is hired to work for the - 2 - Company through a temporary employment agency, or (iii) is hired to a position with the Company with notice on his or her date of hire that the position will terminate on a certain date; or (D) a person who is a leased employee (within the meaning of Section 414(n)(2) of the Internal Revenue Code of 1986, as amended) of the Company or is otherwise employed 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 the Company, or (E) a person who performs services for the Company as an independent contractor or under any other non-employee classification, or is classified by the Company as, or determined by the Company to be, an independent contractor, or who is classified by the Company as, or determined by the 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 the Company or its affiliates for income or 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 is otherwise 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 Plan Administrator, and if so designated, the participation of such person in the Plan shall be prospective only. 4. SEVERANCE PAY UPON TERMINATION OF EMPLOYMENT. If the Company terminates your -------------------------------------------- employment, you shall be provided severance pay in accordance with the terms of this Plan EXCEPT if you: ------ o are terminated for misconduct or other disciplinary action, which by way of example may include, but is not limited to, the following: excessive absenteeism/tardiness; serious violations of Company work rules or policies, including but not limited to falsification of records, security violations, or violations of anti-harassment policies; violation of the Company Code of Corporate Conduct or other similar policy or undertaking of the Company; or any Company-initiated termination for cause or for actions that are immoral, unethical, insubordinate, inimical to the best interests of the Company, or illegal; o are terminated for poor performance, except as provided in Section 5(B); o refuse or accept a Comparable Position offered as alternative employment with the Company. For purposes of this Plan, "COMPARABLE POSITION" shall mean a position which carries with it the same base salary and the same range of total incentive compensation opportunity offered by the previous position held, and with the same or similar duties or with different duties which, in the judgment of the Plan Administrator or designee, the employee is able to perform, and which is located within a 50-mile radius of the previous position's location; provided that changes in employee benefits shall not be interpreted to constitute a non-Comparable Position if the position offered otherwise constitutes a Comparable Position; o terminate employment with the Company prior to the Effective Date (as defined in Section 3); o are terminated while on a non-disability or non-military leave of absence (paid or unpaid) after 26 weeks of such leave; - 3 - o are mandatorily retired on or after your Normal Retirement Date where legally permitted. "NORMAL RETIREMENT DATE" shall mean the first day of the month which coincides with or follows your 65th birthday; o accept or refuse a Comparable Position or are terminated following acceptance of a Comparable Position under circumstances described in Section 10 hereof; or o are eligible for greater severance payments under the terms of an individual written employment contract or other written agreement with the Company. If you initiate termination of employment for any reason including resigning, retiring or failing to return to work immediately following the expiration of any non-disability or non-military leave of absence, or if you fail to seek employment with the Company immediately following a leave of absence due to Disability of more than six months, or if you die, no severance pay will be provided under this Plan. 5. SCHEDULE OF SEVERANCE PAY. ------------------------- (A) SEVERANCE PAY FOR TERMINATIONS OTHER THAN WORK PERFORMANCE-BASED ------------------------------------------------------------------- TERMINATIONS ------------ If you are a Covered Employee and your employment is terminated by the Company (i) FOR REASONS OTHER THAN THOSE LISTED IN SECTION 4, and (ii) ------------------------------------------------- IN A SITUATION OTHER THAN ONE DESCRIBED IN SECTION 5(B) BELOW, you ---------------------------------------------------------------- shall be provided with severance pay, up to a maximum of 52 weeks, according to the following Schedule of Severance Pay, which sets forth the number of weeks of Weekly Base Pay (as defined below) that will be provided to you based on your Years of Service (as defined below) as of the Effective Date, subject to the provisions of Section 7 of this Plan. Such severance pay shall be paid at the time and in the form described in Section 7 of this Plan. YEARS OF SERVICE NUMBER OF WEEKS OF WEEKLY BASE PAY ---------------- ---------------------------------- - Less than 2 - 19 weeks, plus 2 weeks - 2 or more - 19 weeks, plus 1 week for each Year of Service Except as provided below, "WEEKLY BASE PAY" shall mean your annual base salary at the Effective Date, excluding variable pay such as bonuses, incentive awards, performance share awards and other premiums and allowances, divided by fifty-two (52) weeks. If on the Effective Date you are covered under a sales incentive plan approved by the Plan Administrator, "WEEKLY BASE PAY" shall mean your Weekly Base Pay as defined above, plus the average weekly incentive pay you received during the preceding 24 calendar months (or such lesser number of months you were covered under such a plan), not to exceed the maximum of the assigned salary range. "YEARS OF SERVICE" shall mean the total number of your completed full years of employment measured from your Company Service Date to your Effective Date. A "YEAR OF SERVICE" shall mean one completed full year of employment with the Company. Your "COMPANY SERVICE - 4 - DATE" is the date used to determine your eligibility for vesting under the applicable Company retirement plan in effect on the Effective Date (or if no such plan is in effect, such other date as may be designated as your Company Service Date in the sole discretion of the Plan Administrator or designee). (B) SEVERANCE PAY FOR WORK PERFORMANCE-BASED TERMINATIONS ----------------------------------------------------- Full severance will be paid, according to the Schedule of Severance Pay set forth in Section 5(A) of this Plan, for situations where you are terminated by the Company for performance reasons only if you have been ---- in your current position for no more than six months and the position you held immediately prior to your current position was eliminated. For situations other than the above, you may elect one of two options if you have been given a written probation notice because of poor work performance. Such probation notice may be a written warning, an action plan, a performance action plan, a final warning, a final written warning, a final probation notice or other similar document. Your two options are as follows: You may accept the probation and attempt to improve and maintain your work performance to the level that management finds acceptable or you may elect to waive this opportunity and receive a special separation arrangement. The special separation arrangement will allow you to avoid the probationary period, ending your active employment immediately; in exchange for a release, you will receive half of the severance shown in the Schedule of Severance Pay set forth in Section 5(A) of this Plan. Upon your request, your manager will give you a written special separation agreement to review and consider. The Plan Administrator or designee has full, sole discretion as to the content of the special separation arrangement. If you wish to request the special separation arrangement, the request must be made in writing and must be received by your manager no later than 28 days before the end of your final probation for poor work performance. For example, if you have been told you have 60 days to improve or be placed on final probation, your request for the special severance arrangement must be received by your manager no later than the second calendar day after you are placed on a final 30 day probation. If you do not elect the special separation arrangement and you do not successfully complete the probation, your employment will be terminated for poor work performance and you will not be eligible to receive any notice or severance pay under this Plan. 6. NOTICE OR PAY IN LIEU OF NOTICE. In addition to being eligible for severance ------------------------------- pay as provided above, at the Company's discretion, a Covered Employee will normally receive either four weeks notice and be required to perform such services as may be requested by the Company, or pay in lieu of notice equal to four weeks of Weekly Base Pay. Any notice period provided shall be considered active employment for the purpose of this Plan. A notice period of more or less than four weeks, and/or notice pay of more or less than four weeks, may be provided at the sole discretion of the Plan Administrator or designee. 7. FORM AND TIMING OF PAYMENT OF SEVERANCE PAY. Severance pay will be paid in -------------------------------------------- periodic payments according to your regular payroll schedule and at your semi-monthly pay rate and in accordance with the Company's semi-monthly pay cycle ("PERIODIC PAYMENT"), up to your final Periodic Payment. If the date for your final Periodic Payment falls in the middle of a semi-monthly pay cycle, you will be paid a pro-rated amount of such final Periodic Payment, based on the number of days in the particular cycle. - 5 - Notwithstanding the foregoing, the Company reserves the right at any time to pay the remaining severance pay in a single lump sum payment, to the extent determined appropriate in the sole discretion of the Plan Administrator or designee. Periodic Payment of severance pay will commence as soon as practicable after the Effective Date. Where the Company exercises its right to make a lump sum payment of severance pay after the commencement of Periodic Payment, such lump sum will be paid as soon as practicable after the Company exercises such right. - 6 - In the event of your death while you are receiving Periodic Payment of severance pay, the amount of severance pay remaining shall be paid, subject to applicable law, in a single lump sum payment to your spouse, if any, or to such other beneficiary or beneficiaries designated by you in writing, or if you are not married or failing such designation, to your estate. In the event you secure employment other than with the Company while receiving Periodic Payment, you must notify the Company. Upon such notification, the Company generally will make a single lump sum payment to you of all remaining severance pay. In the event you retire under the applicable Company retirement plan while receiving Periodic Payment, the Company will pay you any remaining severance pay in a single lump sum payment. Any severance payment provided hereunder will be subject to applicable federal, state and local taxes, which will be withheld from such payment where required by applicable law as determined in the sole discretion of the Plan Administrator or designee. In addition, any severance payment provided hereunder will be offset by reducing such payment by any outstanding amount that you owe to the Company for whatever reason. 8. EMPLOYEE BENEFIT PLAN COVERAGE WHILE RECEIVING SEVERANCE PAY. Except as ----------------------------------------------------------------- otherwise provided in this Plan, as long as you are receiving Periodic Payment of severance pay under this Plan, you will continue to be eligible for participation in Company employee benefit plans in effect on the Effective Date, in accordance with the applicable provisions of such plans. You will not be eligible to participate in any Company salary continuation, short-term or long-term disability plans, the Company business travel accident plan or any new employee benefit plan or any improvement to any existing employee benefit plan adopted by the Company after the Effective Date. If a lump sum payment of severance pay is made, eligibility to participate in all Company benefit plans ends. Deductions for benefit plans for which you remain eligible will continue while you are receiving Periodic Payment of severance pay, subject to the maximum time periods and other eligibility requirements as specified by the terms of the respective plans in effect as of the Effective Date. 9. EXCLUDED COMPENSATION PLANS, PROGRAMS, ARRANGEMENTS AND PERQUISITES. During -------------------------------------------------------------------- the period you are receiving Periodic Payment of severance pay, unless specifically authorized by the Company in writing, you will not be eligible to accrue any vacation or participate in any (A) bonus program; (B) service recognition program; (C) special termination program; (D) tax or financial advisory services; (E) new or revised compensation program that may be introduced after the Effective Date; or (F) other employee compensation program, plan, arrangement, practice, policy or perquisite. The period during which you are receiving Periodic Payment of severance pay shall not be counted as service for purposes of any Company long-term incentive compensation awards outstanding as of the Effective Date. Notwithstanding the preceding sentence, during such period you will continue to be eligible to vest in any outstanding unvested deferred restricted stock units (bonus swap), as well as any outstanding unvested stock option awards except (i) any options awarded to you on December ------ 17, 1997 or July 19, 2000, and (ii) any other options that are designated under the terms of the award of such options as ineligible for continued crediting of service during Periodic Payment of severance pay. Also during such period, you will continue to be eligible to exercise any outstanding vested stock option awards, except to the extent - 7 - that (a) such options first expire under the applicable plan or program, or (b) such options are designated - 8 - under the terms of the award of such options as ineligible for continued exercise during Periodic Payment of severance pay. Any unvested restricted stock and unvested performance shares outstanding as of the Effective Date will be canceled as of the Effective Date, except to the extent otherwise provided in the applicable plan or program. 10. DIVESTITURE, CLOSURE, RELOCATIONS. --------------------------------- If the Company or a subsidiary or affiliate or division of the Company or a portion thereof at which you are employed is sold or divested in a transaction that does not qualify as a Change of Control under Section 11 hereof, and you are not offered a Comparable Position (as defined in Section 4) either with the Company, the acquiror, or the divested unit, you are eligible for severance pay under Section 5(A) of this Plan (provided that you are not otherwise ineligible for severance pay for any of the reasons described in Section 4 of this Plan). Eligibility may be forfeited at the sole discretion of the Plan Administrator or designee if you voluntarily terminate employment prior to the Effective Date. Severance payments and related benefits will not be provided under this Plan if you continue employment with, or are hired on the Effective Date by, or refuse employment of a Comparable Position with, the Company, the acquiror or the divested unit. The provisions of this Section 10 shall apply to all sales and divestitures (whether accomplished as sales of assets, sales of corporate entities or any other method), unless such sale or divestiture qualifies as a Change of Control under Section 11 hereof, in which event only the provisions of Section 11 shall apply. If the entire Company or the portion of the Company at which you are employed is closed or relocated and you are not offered a Comparable Position by the Company, you will be provided severance pay under Section 5(A) of this Plan (provided that you are not otherwise ineligible for severance pay for any of the reasons described in Section 4 of this Plan). Eligibility may be forfeited at the sole discretion of the Plan Administrator or designee if you voluntarily terminate employment prior to the Effective Date. Severance payments and related benefits will not be provided if you are offered a Comparable Position with the Company and you accept or refuse the Comparable Position. 11. ADDITIONAL SEVERANCE PAY IN THE EVENT OF A CHANGE OF CONTROL ------------------------------------------------------------ (A) ADDITIONAL SEVERANCE PAY. In the event of a Change of Control (as ------------------------- defined below), a Covered Employee who within the three year period following such Change of Control either is involuntarily terminated by the Company for any reason other than in a Termination For Cause (as defined below), a termination due to death or a termination due to Disability (as defined in The Hartford Investment and Savings Plan), or voluntarily terminates employment with the Company for Good Reason (as defined below), shall be provided severance pay equal to the sum of: (i) the amount provided under the Schedule of Severance Pay set forth in Section 5(A), and (ii) the additional amounts provided for in this Section 11, subject to the limitations imposed by Section 11(D). - 9 - (B) ADDITIONAL WEEKS OF WEEKLY BASE PAY. Subject to Section 11(D), a ------------------------------------ Covered Employee referred to in Section 11(A) shall receive the following amount, based on his or her Years of Service as of the Effective Date, up to a combined maximum of 78 weeks of Weekly Base Pay: YEARS OF SERVICE ADDITIONAL WEEKS OF WEEKLY BASE PAY ---------------- ----------------------------------- - Less than 2 - 2 additional weeks - 2 or more - 1 additional week for each Year of Service (C) PRO RATA PORTION OF TARGET BONUS. Subject to Section 11(D), a ---------------------------------- Covered Employee referred to in Section 11(A) shall receive the Pro-Rata Portion of the Target Bonus, which shall be equal to the product of: (i) the "TARGET BONUS," which shall mean the annual bonus determined as a percentage of annual base salary based on the annual target bonus percentage established for Employee under the Executive Bonus Program or the Performance Share Program (or any similar or successor plan, policy or program) for the calendar year in which the Effective Date occurs, or if no such annual target bonus percentage is established, based on the highest actual bonus percentage awarded to the Employee under the applicable bonus plan, policy or program for the last three full calendar years prior to the Effective Date, multiplied by (ii) the "PRO RATA PORTION," which shall mean a fraction (the "SERVICE FRACTION"), the numerator of which is equal to the number of rounded months in such calendar year which have elapsed as of the Effective Date, and the denominator of which is 12; provided that if ------------- the Effective Date occurs in the last quarter of any calendar year, the Pro-Rata Portion of the Target Bonus shall mean the amount determined under the above formula or, if greater, the product of: (a) the annual bonus that would have been paid to the Employee based on actual performance for such calendar year, and (b) the Service Fraction. (D) REDUCTION OF SEVERANCE PAY TO REDUCED AMOUNT IN CERTAIN ----------------------------------------------------------------- CIRCUMSTANCES. ------------- (I) DETERMINATION OF EXISTENCE OF REDUCED AMOUNT. Notwithstanding anything herein to the contrary, in the event that Arthur Andersen or such other nationally recognized public accounting firm as designated by the Company (the "ACCOUNTING FIRM") shall determine that a Covered Employee's receipt of the Payments would subject such Covered Employee to tax under Section 4999 of the Code (as defined below), the Accounting Firm shall determine whether some amount of the aggregate Plan Payments meets the definition of Reduced Amount (defined below). (II) CONSEQUENCES OF DETERMINATION OF EXISTENCE OF REDUCED AMOUNT. If the Accounting Firm determines that there is a Reduced Amount as provided in the preceding paragraph, then the aggregate Plan Payments (as defined below) shall be reduced to such Reduced Amount. The Company shall promptly give the Covered Employee notice to that effect and a copy of the detailed calculation thereof, and the Covered Employee may then elect, in his or her sole discretion, which and how much of the aggregate Plan Payments shall be eliminated or reduced (as long as after such election the Present Value of the aggregate Plan Payments equals the Reduced Amount), and shall advise the - 10 - Company in writing of his or her election within ten days of receipt of such notice. If no such election is made by the Covered Employee within such ten-day period, the Company may elect which portion of such Plan Payments shall be eliminated or reduced (as long as after such election the Present Value of the aggregate Plan Payments equals the Reduced Amount) and shall notify the Covered Employee promptly of such election. All determinations made by the Accounting Firm under this Section shall be binding upon the Company and the Covered Employee and shall be made within 60 days of the applicable termination of the employment of the Covered Employee. As promptly as practicable following such determination, the Company shall pay to or distribute for the benefit of the Covered Employee such Plan Payments as are then due to the Covered Employee under the Plan and shall promptly pay to or distribute for the benefit of the Covered Employee in the future such Plan Payments as become due to the Covered Employee under this Plan. (III) CONSEQUENCES OF OVERPAYMENT OR UNDERPAYMENT OF AGGREGATE SEVERANCE. If as a result of the uncertainty in the application of Section 4999 of the Code at the time of the initial determination by the Accounting Firm under Section 11(D) (i) hereof, it is possible that amounts will have been paid or distributed by the Company to or for the benefit of the Covered Employee pursuant to the Plan which should not have been so paid or distributed ("Overpayment"), or that additional amounts which will have not been paid or distributed by the Company to or for the benefit of the Covered Employee pursuant to this Plan that could have been so paid or distributed ("UNDERPAYMENT"), in each case, consistent with the calculation of the Reduced Amount hereunder. In the event that the Accounting Firm, based upon the assertion of a deficiency by the Internal Revenue Service against either the Company or the Covered Employee which the Accounting Firm believes has a high probability of success determines that an Overpayment has been made, any such Overpayment paid or distributed by the Company to or for the benefit of the Covered Employee shall be treated for all purposes as a loan to the Covered Employee which the Covered Employee shall repay to the Company together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code; provided, however, that no such loan shall be deemed to have -------- been made and no amount shall be payable by the Covered Employee to the Company if and to the extent such deemed loan and payment would not either reduce the amount on which the Covered Employee is subject to tax under Section 1 and Section 4999 of the Code or generate a refund of such taxes. In the event that the Accounting Firm, based upon controlling precedent or substantial authority, determines that an Underpayment has occurred, any such Underpayment shall be promptly paid by the Company to or for the benefit of the Covered Employee together with interest at the applicable federal rate provided for in Section 7872(f)(2) of the Code. (IV) FEES AND EXPENSES OF ACCOUNTING FIRM. All fees and expenses of the Accounting Firm in implementing the provisions of this Section 11(D) shall be borne by the Company. (E) FORM AND TIMING OF SEVERANCE PAY. The additional weeks of Weekly --------------------------------- Base Pay provided for under Section 11(B) shall be paid in a single lump sum immediately following the date of the applicable involuntary termination. The Pro-Rata Portion of the Target Bonus provided for under Section 11(C) shall be paid as follows: (i) if the Effective Date occurs in the first, second or third - 11 - calendar quarter of any particular calendar year, then the Pro-Rata Portion of the Target Bonus shall be paid in a single lump sum no later than 10 days following the Effective Date; or (ii) if the Effective Date occurs in the fourth calendar quarter of any particular calendar year, then the Pro-Rata Portion of the Target Bonus shall be paid in a single lump sum no later than the same time as similar awards are paid to other executives participating in the plans or programs under which the awards are paid, but in no event later than March 31 of the calendar year immediately following the end of such fourth calendar quarter. The Tax Reimbursement Payment provided for under Section 11(D) shall be paid at the time specified in Section 11(D). (F) DEFINITIONS. For purposes of this Section 11, the following terms ----------- shall have the following meanings: "ACT" means the Securities Exchange Act of 1934, as amended. "BASE SALARY" means the amount a Covered Employee is entitled to receive from the Company as wages or salary on an annualized basis as consideration for the Covered Employee's services, including earned but deferred wages or salary, but excluding all bonus, overtime, and incentive compensation. "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 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. "CHANGE OF CONTROL" means the occurrence of any of the following events: (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 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; - 12 - (II) 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); - 13 - (III) the stockholders of The Hartford shall approve (a) 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 (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 Hartford; or (IV) 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 (a) 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 (iv), and (b) 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 (iii) hereof. "CODE" means the Internal Revenue Code of 1986, as amended. "GOOD REASON" means the occurrence of any of the following after the occurrence of a Change of Control: (i) a reduction in the Covered Employee's Base Salary below the Required Base Salary; (ii) a greater than 10% reduction in the level of the Total Compensation offered to the Covered Employee in comparison to the Total Compensation enjoyed by the Covered Employee immediately prior to the Change of Control; or (iii) the Company's requiring the Covered 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 Covered Employee's responsibilities. "NET AFTER-TAX RECEIPT" means the Present Value of a Payment net of all taxes imposed on the Covered Employee with respect thereto under Sections 1 and 4999 of the Code and under applicable state and local laws, determined by applying the highest marginal rate under Section 1 of the Code and under state and local laws which applied to the Covered Employee's taxable income for the immediately preceding taxable year, or such other rate(s) as the Covered Employee shall certify, in the sole discretion of the Covered Employee, as likely to apply to the Covered Employee in the relevant tax year(s). "PAYMENT" means any payment or distribution in the nature of compensation to or for the benefit - 14 - of the Covered Employee, whether paid or payable pursuant to this Plan or otherwise. "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 (i) The Hartford, any subsidiary of The Hartford or any other Person controlled by any of the foregoing, (ii) any trustee or other fiduciary holding securities under any employee benefit plan of The Hartford or of any subsidiary of The Hartford, or (iii) a corporation owned, directly or indirectly, by the stockholders of The Hartford in substantially the same proportion as their ownership of securities of The Hartford. "PLAN PAYMENT" means a Payment paid or payable pursuant to this Plan (disregarding Section 11(D)). "PRESENT VALUE" means such value as determined in accordance with Sections 280G(b)(2)(A)(ii) and 280G(d)(4) of Code. "REDUCED AMOUNT" means the smallest amount of Plan Payments that (i) has a Present Value that is less than the Present Value of all Plan Payments, and (ii) results in aggregate Net After-Tax Receipts for all Payments that are greater than the Net After-Tax Receipts for all Payments that would result if the aggregate Present Value of Plan Payments were any other amount that is less than the Present Value of all Plan Payments. "REQUIRED BASE SALARY" means with respect to any Covered Employee the higher of (i) the Covered Employee's Base Salary as in effect immediately prior to the Change of Control, or (ii) the Covered Employee's highest Base Salary in effect at any time thereafter. "TERMINATION FOR CAUSE" means, for purposes of this Section 11 only, the following: a termination of a Covered Employee's employment due to (i) the Covered Employee's conviction of a felony; (ii) an act or acts of extreme dishonesty or gross misconduct on the Covered Employee's part which result or are intended to result in material damage to the Company's business or reputation; or (iii) repeated material violations by the Covered Employee of his or her obligations to devote his or her full attention during normal business hours to the business and affairs of the Company and to use his or her best efforts to perform faithfully and efficiently the responsibilities assigned to such Covered Employee except for time away from work authorized by Company policy or state or federal law, which violations are demonstrably willful and deliberate on the Covered Employee's part and which result in material damage to the Company's business or reputation. "THE HARTFORD" means The Hartford Financial Services Group, Inc., or a successor by merger, purchase or otherwise. "TOTAL COMPENSATION" means the aggregate of a Covered Employee's Base Salary, Target Bonus (as defined in Section 11(C) hereof), and the value of any long-term incentive compensation award (including any option award) made to the Employee under any The Hartford 2000 Incentive Stock Plan (or any successor plan, policy or program), such value to be determined as of the date such award was made. - 15 - 12. REHIRING. If you are rehired by the Company while receiving Periodic Payment -------- of severance you will no longer be entitled to severance pay under this Plan; provided, however, that if you are rehired by the Company following a termination in connection with a Change of Control, you will not be required pursuant to the following paragraph to reimburse the Company as a condition to your rehire if you already have received a lump sum payment of severance pay. If a lump sum payment of severance pay was made to you, you will be required to reimburse the Company in an amount equal to the number of weeks of Weekly Base Pay provided to you under the Schedule of Severance Pay, less an amount calculated by multiplying such number of weeks of Weekly Base Pay by the number of weeks elapsing from the Effective Date to your rehire date. Such reimbursement must be made as a condition to your being rehired. 13. OFFSET. Any severance pay provided to you under this Plan shall be offset by ------ reducing such amount by any severance pay, termination pay or similar pay or allowance which you receive or are entitled to receive (A) under any other Company plan, policy, practice, program or arrangement; (B) pursuant to any individual written employment agreement or other written agreement with the Company; or (C) by virtue of any law, custom or practice excluding, however, any unemployment compensation which you may receive as a state unemployment award. Any severance pay provided to you under this Plan shall also be offset by reducing such amount by any severance pay, termination pay or similar pay or allowance you may have received as a result of any prior termination of employment with the Company unless, as of the Effective Date, you have been re-employed for a period exceeding one year, in which case you will be eligible to receive severance pay according to the above Schedule of Severance Pay to the extent permitted by this Plan. Any severance pay and any notice pay provided to you under this Plan shall be offset by reducing such severance pay and notice pay by any payments made to you by the Company pursuant to the Worker Adjustment and Retraining Notification Act ("WARN") and any similar federal, state or local law. Except as provided above with regard to WARN and similar laws, notice pay under this Plan shall not be subject to offset. Notwithstanding the foregoing, in the event of a Change of Control, the Company's obligation to make the severance payments and any other payments to you under this Plan upon any termination following a Change of Control and otherwise to perform its obligations hereunder upon any termination following a Change of Control shall not be affected by any set-off for monies owed to the Company, counterclaim, recoupment, defense or other claim, right or action which the Company may have against you or others and, in no event shall you be obligated to seek other employment or take any other action by way of mitigation of the amounts payable to you under any of the provisions of this Plan and such amounts shall not be reduced whether or not you obtain other employment. 14. ADMINISTRATION OF PLAN. Responsibility for administration of this Plan rests ---------------------- with Hartford Fire Insurance Company's Group Senior Vice President, Human Resources (or other person holding a position with similar responsibilities) or his or her designee (the "Plan Administrator"). The Plan Administrator shall have the exclusive right to interpret this Plan, adopt any rules and regulations for carrying out this Plan as may be appropriate and decide any and all matters arising under this Plan, including, but not limited to, the right to determine appeals. Subject to applicable federal and state law, - 16 - all interpretations and decisions by the Plan Administrator shall be final, conclusive and binding on all parties affected thereby. 15. TERMINATION OR AMENDMENT. The Plan Administrator shall have the power to ------------------------ make any amendments to the Plan that do not involve a material cost to the Company or are required by applicable law. Any other amendments to the Plan shall be made by the Board of Directors of Hartford Fire Insurance Company. Hartford Fire Insurance Company through the appropriate committee of its Board of Directors, reserves the right in its sole discretion to terminate, modify, amend or change this Plan ("PLAN CHANGE") at any time without prior notice and no consent of any person shall be required, except that (A) no such Plan Change, ----------- and no Plan amendment made by the Plan Administrator, may reduce or adversely affect severance pay for any employee who is already receiving severance pay under the Plan prior to such Plan Change or amendment, and (B) in the event of a Change of Control as defined in Section 11 above, no modification, amendment or other change shall be made to this Plan, and this Plan shall not be terminated, for a period of three years following the date of such Change of Control. 16. MISCELLANEOUS. ------------- o In cases where severance pay is provided under this Plan, pay in lieu of any unused vacation entitlement will be paid to you in a single lump sum payment by the time severance pay ceases. Such lump sum payment will not have the effect of extending your service with the Company for any purpose. o Benefits under this Plan are paid for by the Company entirely from its general assets. o The section headings contained in this Plan are included solely for convenience of reference and shall not in any way affect the meaning of any provision of this Plan. OTHER IMPORTANT INFORMATION - --------------------------- NOTICE. THIS PLAN IS NOT A CONTRACT OF EMPLOYMENT. IT DOES NOT GUARANTEE YOUR - ------ EMPLOYMENT FOR ANY SPECIFIED PERIOD AND DOES NOT LIMIT THE RIGHT OF THE COMPANY TO TERMINATE YOUR EMPLOYMENT AT ANY TIME FOR ANY REASON. EMPLOYMENT WITH THE COMPANY IS TERMINABLE AT WILL. ANY EMPLOYEE WHO IS NOT OBLIGATED TO CONTINUE EMPLOYMENT WITH THE COMPANY UNDER A FORMAL WRITTEN EMPLOYMENT AGREEMENT WITH THE COMPANY RETAINS THE RIGHT TO TERMINATE EMPLOYMENT AT ANY TIME, WITH OR WITHOUT NOTICE, AND WITH OR WITHOUT CAUSE. LIKEWISE, THE COMPANY CAN TERMINATE THE EMPLOYMENT OF ANY EMPLOYEE AT ANY TIME, WITH OR WITHOUT NOTICE, WITH OR WITHOUT CAUSE, SUBJECT TO APPLICABLE LAW. NO SUPERVISOR OR MANAGER HAS ANY AUTHORITY TO ENTER INTO AN EMPLOYMENT AGREEMENT, WRITTEN OR VERBAL, OR TO MAKE ANY AGREEMENT OR REPRESENTATIONS CONTRARY TO THE FOREGOING, UNLESS IT IS AUTHORIZED IN WRITING BY THE CHIEF EXECUTIVE OFFICER OR PRESIDENT OF THE COMPANY AND SUCH AGREEMENT IS IN WRITING. FURTHER NO COMPANY DOCUMENT, COMMUNICATION OR PUBLICATION SHOULD BE UNDERSTOOD AS, OR CONSTRUED AS, EXTENDING SUCH A REPRESENTATION. - 17 - EX-10 10 exh10_19.txt THE HARTFORD FINANCIAL SERVICES GROUP THE HARTFORD FINANCIAL SERVICES GROUP, INC. ________________________________________________________________________________ THE HARTFORD FINANCIAL SERVICES GROUP, INC. 2000 PLANCO NON-EMPLOYEE OPTION PLAN 450,000 SHARES OF COMMON STOCK, PAR VALUE $.01 PER SHARE ________________________________________________________________________________ FEBRUARY, 2003 Optplanplancofeb2003!.doc TABLE OF CONTENTS General Information ...........................................................2 The Hartford Financial Services Group, Inc. 2000 PLANCO Non-Employee Option Plan ..........................................3 GENERAL INFORMATION Pursuant to The Hartford Financial Services Group, Inc. 2000 PLANCO Non-Employee Option Plan (the "Plan"), the committee administering the Plan may award non-qualified stock options. 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. This prospectus does not cover resales of 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. THE HARTFORD FINANCIAL SERVICES GROUP, INC. 2000 PLANCO NON-EMPLOYEE OPTION PLAN 1. PURPOSE The purpose of The Hartford Financial Services Group, Inc. 2000 Non-Employee Option Plan is to motivate and reward superior performance on the part of Key Individuals who render services on behalf of The Hartford and its affiliates and to thereby attract and maintain relationships with Key Individuals of superior ability. In addition, the Plan is intended to further opportunities for stock ownership by such Key Individuals in order to increase their proprietary interest in the Company and, as a result, their interest in the success of the Company. Awards may be made, in the discretion of the Committee, to Key Individuals whose responsibilities and decisions directly affect the performance of any Participating Company and its subsidiaries. 2. DEFINITIONS When used herein, the following terms shall have the following meanings: "ACT" means the Securities Exchange Act of 1934, as amended. "OPTION AGREEMENT" means the written agreement evidencing each Option 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 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 Option recipient. "BOARD" means the Board of Directors of the Company. - 3 - "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 member thereof or such other committee as may be designated by the Board to administer the Plan. "COMPANY" means The Hartford Financial Services Group, Inc. and its successors and assigns. "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. "KEY INDIVIDUAL" means an individual who is an independent contractor serving on the wholesale sales force in a Required Relationship with a Participating Company who is not an Employee of any Participating Company and whose responsibilities and decisions, in the judgment of the Committee, directly affect the performance of the Company and its affiliates. "OPTION" means a non-qualified Stock option awarded under Section 5 of the Plan to purchase Stock of the Company. "PARTICIPATING COMPANY" means the Company or any subsidiary or other affiliate of the Company. "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 (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 The Hartford Financial Services Group, Inc. 2000 PLANCO Non-Employee Option Plan, as the same may be amended, administered or interpreted from time to time. "PLAN YEAR" means the calendar year. - 4 - "REQUIRED RELATIONSHIP" means a relationship involving an insurance agent who is an exclusive agent of a Participating Company, or who derives more than 50% of his or her annual income from a Participating Company. "STOCK" means the Common Stock ($.01 par value) of the Company. "THE HARTFORD" means The Hartford Financial Services Group, Inc. and its successors and assigns. 3. SHARES SUBJECT TO THE PLAN The aggregate number of shares of Stock which may be awarded under the Plan shall not exceed 450,000 shares of Stock, subject to adjustment as provided in Section 13. 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 shares purchased in the open market. For the purpose of computing the total number of shares of Stock available for Options under the Plan and in applying the limitation in the preceding paragraph, there shall be counted against the foregoing limitations the number of shares of Stock subject to issuance upon exercise or settlement of Options determined as at the dates on which such Options are granted. If any Options under the Plan are forfeited, terminated, expire unexercised, are settled in cash in lieu of Stock or are exchanged for other Options, the shares of Stock which were theretofore subject to such Options shall again be available for awards under the Plan to the extent of such forfeiture, termination, expiration, cash settlement or exchange of such Options. 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 OPTIONS AND OPTION AGREEMENTS (a) Subject to the provisions of the Plan, the Committee shall (i) determine and designate from time to time those Key Individuals or groups of Key Individuals to whom Options are to be granted; (ii) determine the amount or number of shares of Stock subject to each Option; (iii) determine the time or times when and the manner in which each Option shall be exercisable and the duration of the exercise period; and (iv) determine the terms and conditions of each Option. (b) Each Option granted under the Plan shall be evidenced by an Option Agreement. Such Option 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 (a) The exercise period for a non-qualified Stock option shall not exceed ten years from the date of grant. - 5 - (b) Unless otherwise determined by the Committee in its discretion, the Option price per share shall be not less than the Fair Market Value of one share of Stock on the date the Option is granted. (d) No part of any Option may be exercised until the Key Individual who has been granted the Option shall have remained in a Required Relationship with 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. (e) 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. (f) In case of a termination of a Key Individual's Required Relationship, the following provisions shall apply: (A) If a Key Individual who has been granted an Option shall die before such Option has expired, his or her Option may be exercised, to the extent that the Key Individual could have exercised such Option on the date of his or her death, by (i) the person or persons to whom the Key Individual's rights under the Option pass by will, or if no such person has such right, by his or her executors or administrators; or (ii) his or her Beneficiary designated pursuant to Section 10, at any time, or from time to time, in either case, within three (3) months after the date of the Key Individual's death, but not later than the expiration date of the Option specified in Section 5(b) above. (B) Except as provided in Section 9, if the Key Individual's Required Relationship is terminated for cause as determined by the Committee, all Options shall be canceled coincident with the effective date of the termination of the Required Relationship. (C) Except as provided in Section 9, if the Key Individual's Required Relationship terminates for any reason other than death or cause, he or she may exercise his or her Options, to the extent exercisable at the date of the termination of his or her Required Relationship, at any time, or from time to time, within three (3) months after the date of the termination of his or her Required Relationship, but not later than the expiration date specified in Section 5(b) above. Any Options not so exercisable shall be cancelled coincident with the effective date of the termination of the Required Relationship. (g) No Option 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 shall be exercisable only by the Key Individual to whom the Option is granted (or his or her estate or designated Beneficiary). - 6 - 8. CERTIFICATES FOR SHARES 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 and (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. (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) Each Key Individual who receives Stock in settlement of an Option 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 Individual awarded an Option shall have any right as a shareholder with respect to any shares covered by his or her Individual Option 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 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 of twenty percent or more of the outstanding stock of the Company entitled to vote in the election of directors of the Company; (ii) 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 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, directly or indirectly, 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); - 7 - (iii) the stockholders of the Company shall approve (A) any consolidation or merger of the Company 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 of the Company 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 of the Company 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 clause (iii). (b) Notwithstanding any provisions in this Plan to the contrary, upon the occurrence of a Change of Control: (i) Each Option 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 granted under the Plan on terms which are no less favorable to the optionee than those applicable to the Options immediately prior to the Change of Control. If the surviving or resulting corporation offers to assume or replace the Options, the optionee may elect to have his or her Options assumed or replaced, in whole or in part, or to surrender on the date the Change of Control occurs his or her Options, 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. - 8 - (iii) In the event the successor corporation does not offer to assume or replace the outstanding Options as described in Section 9(b)(ii) hereof, each Option 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 a Key Individual elects to have his or her Options assumed or replaced in accordance with clause (ii) above, and within the three (3) year period following the date of the Change of Control the following occurs: the Required Relationship of such Key Individual is involuntarily terminated other than in a Termination For Just Cause (as defined below), then such Key Individual's assumed or replaced Options 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, if earlier). Such assumed or replaced Options 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, 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. (v) The following definitions shall apply for purposes of this Section 9 only: ---- "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. "TERMINATION FOR JUST CAUSE" means a termination of the Required Relationship based on fraud, misappropriation or embezzlement on the part of the Key Individual which results in a final conviction of a felony. (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 Option granted under the Plan. 10. BENEFICIARY (a) Each Key Individual may file with the Company a written designation of one or more persons as the Beneficiary who shall be entitled to receive the Option, if any, payable under the Plan upon his or her death. A Key Individual may from time to time revoke or change his or her - 9 - 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 death of the Key Individual 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 the death of a Key Individual or if no designated Beneficiary survives the Key Individual or if such designation conflicts with law, the estate of the Key Individual shall be entitled to receive the Option, 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 Option, the Company may retain such Option, without liability for any interest thereon, until the Committee determines the rights thereto, or the Company may deliver such Option into any court of appropriate jurisdiction and such delivery shall be a complete discharge of the liability of the Company therefor. 11. ADMINISTRATION OF THE PLAN (a) 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 of the Committee and shall be final, conclusive and binding on all persons for all purposes. (b) 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. (c) The Committee's decisions and determinations under the Plan need not be uniform and may be made selectively among Key Individuals, whether or not such Key Individuals are similarly situated. (d) The Committee may, in its sole discretion, delegate such of its powers as it deems appropriate to the Committee Chairman, the chief executive officer or other members of senior management. (e) If a Change of Control has not occurred and if the Committee determines that a Key Individual 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 as has not yet become exercisable at the time of termination. 12. AMENDMENT, EXTENSION OR TERMINATION The Board or the Committee may, at any time, amend or terminate the Plan for any reason as determined in their sole discretion. - 10 - 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 of Stock, the Committee may make such adjustment in the Stock subject to purchase by an Option, or the terms, conditions or restrictions on Options, including the price payable upon the exercise of such Option and the number of shares subject to Option, as the Committee deems equitable. 14. MISCELLANEOUS (a) Except as provided in Section 9, nothing in this Plan or any Option granted hereunder shall confer upon any Key Individual any right to continue in a Required Relationship or any other relationship with any Participating Company or interfere in any way with the right of any Participating Company to terminate his or her Required Relationship or any other relationship at any time. No Option payable under the Plan shall be deemed salary or compensation or other amount payable to an Employee for the purpose of computing benefits under any employee benefit plan or other arrangement of any Participating Company for the benefit of its Employees. No Key Individual shall have any claim to an Option 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. (b) The Committee may cause to be made, as a condition precedent to the payment of any Option, or otherwise, appropriate arrangements with the Key Individual or his or her Beneficiary, for the withholding of any federal, state, local or foreign taxes determined applicable by the Committee in its sole discretion. (c) The Plan and the grant of Options 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. 15. EFFECTIVE DATE AND TERM OF PLAN The effective date of the Plan shall be July 20, 2000. No Option shall be granted under this Plan after the Plan's termination date. The Plan's termination date shall be July 20, 2010. The Plan will continue in effect for existing Options as long as any such Option is outstanding. - 11 - EX-10 11 exh10_27.txt THE HARTFORD FINANCIAL SERVICES GROUP EXECUTION COPY ================================================================================ SECOND AMENDED AND RESTATED FIVE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Dated as of February 26, 2003 among THE HARTFORD FINANCIAL SERVICES GROUP, INC., THE LENDERS NAMED HEREIN and JPMORGAN CHASE BANK and BANK OF AMERICA, N.A as Co-Administrative Agents and CITIBANK, N.A., WACHOVIA BANK, NATIONAL ASSOCIATION and FLEET NATIONAL BANK as Co-Syndication Agents ________________________________________ J.P. MORGAN SECURITIES INC. BANC OF AMERICA SECURITIES LLC as Co-Lead Arrangers and Co-Bookrunners ================================================================================ 6701-199 TABLE OF CONTENTS Article Section Page - ------- ------- ---- I DEFINITIONS 1.01. Defined Terms...............................................1 1.02. Terms Generally............................................15 II THE CREDITS 2.01. Commitments................................................15 2.02. Loans......................................................15 2.03. Competitive Bid Procedure..................................17 2.04. Standby and Local Currency Borrowing Procedure.............19 2.05. Conversion and Continuation of Standby Loans...............19 2.06. Fees.......................................................20 2.07. Repayment of Loans; Evidence of Debt.......................20 2.08. Interest on Loans..........................................21 2.09. Default Interest...........................................22 2.10. Alternate Rate of Interest.................................22 2.11. Termination and Reduction of Commitments...................22 2.12. Prepayment.................................................23 2.13. Reserve Requirements; Change in Circumstances..............23 2.14. Change in Legality.........................................24 2.15. Indemnity..................................................25 2.16. Pro Rata Treatment.........................................25 2.17. Sharing of Setoffs.........................................25 2.18. Payments...................................................26 2.19. Taxes......................................................26 2.20. Duty to Mitigate; Assignment of Commitments Under Certain Circumstances............................................28 2.21. Terms of Local Currency Facilities.........................29 2.22. Currency Fluctuations, etc.................................30 2.23. Increase in Total Commitment...............................31 III REPRESENTATIONS AND WARRANTIES 3.01. Organization; Powers.......................................33 3.02. Authorization..............................................33 3.03. Enforceability.............................................33 3.04. Governmental Approvals.....................................33 3.05. Financial Statements.......................................33 3.06. Litigation; Compliance with Laws...........................34 3.07. Federal Reserve Regulations................................34 3.08. Investment Company Act; Public Utility Holding Company Act.34 3.09. Use of Proceeds............................................34 3.10. Full Disclosure; No Material Misstatements.................34 3.11. Taxes......................................................35 3.12. Employee Pension Benefit Plans.............................35 Contents, p. 2 IV CONDITIONS OF LENDING 4.01. All Borrowings.............................................35 4.02. Second Amended and Restated Agreement Effective Date.......35 4.03. First Borrowing by Each Borrowing Subsidiary...............36 V COVENANTS 5.01. Existence..................................................36 5.02. Business and Properties....................................36 5.03. Financial Statements, Reports, etc.........................36 5.04. Insurance..................................................38 5.05. Obligations and Taxes......................................38 5.06. Litigation and Other Notices...............................38 5.07. Maintaining Records; Access to Properties and Inspections..38 5.08. Employee Benefits..........................................38 5.09. Use of Proceeds............................................38 5.10. Risk-Based Capital Ratio...................................38 5.11. Consolidations, Mergers, and Sales of Assets...............39 5.12. Limitations on Liens.......................................39 5.13. Limitations on Sale and Leaseback Transactions.............40 5.14. Consolidated Total Debt to Consolidated Total Capitalization...........................................40 5.15. Limitations on Dividends and Advances by Subsidiaries......41 5.16. Minimum Consolidated Statutory Surplus.....................41 VI EVENTS OF DEFAULT.................................................41 VII GUARANTEE.........................................................43 VIII THE ADMINISTRATIVE AGENT..........................................44 IX MISCELLANEOUS 9.01. Notices....................................................46 9.02. Survival of Agreement......................................47 9.03. Binding Effect.............................................47 9.04. Successors and Assigns.....................................47 9.05. Expenses; Indemnity........................................49 9.06. APPLICABLE LAW.............................................49 9.07. Waivers; Amendment.........................................49 9.08. Entire Agreement...........................................50 9.09. Severability...............................................50 9.10. Counterparts...............................................50 9.11. Headings...................................................50 9.12. Right of Setoff............................................50 9.13. Jurisdiction; Consent to Service of Process................50 9.14. Waiver of Jury Trial.......................................51 9.15. Addition of Borrowing Subsidiaries.........................51 9.16. Conversion of Currencies...................................51 9.17. Confidentiality............................................52 Contents, p. 3 EXHIBITS AND SCHEDULES Exhibit A-1 Form of Competitive Bid Request Exhibit A-2 Form of Notice of Competitive Bid Request Exhibit A-3 Form of Competitive Bid Exhibit A-4 Form of Competitive Bid Accept/Reject Exhibit A-5 Form of Standby Borrowing Request Exhibit B Form of Assignment and Acceptance Exhibit C Form of Opinion of Counsel for The Hartford Financial Services Group, Inc. Exhibit D Form of Borrowing Subsidiary Agreement Exhibit E Form of Local Currency Addendum Schedule 1.01 Statutory Surplus Subsidiaries Schedule 2.01 Commitments Schedule 3.06 Litigation and Compliance with Laws SECOND AMENDED AND RESTATED FIVE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT (as it may be amended, supplemented or otherwise modified, the "Agreement") dated as of February 26, 2003, among THE HARTFORD FINANCIAL SERVICES GROUP, INC., a Delaware corporation (the "Company"); each Borrowing Subsidiary party hereto; the lenders listed in Schedule 2.01 (together with their permitted assignees, the "Lenders"); and JPMORGAN CHASE BANK and BANK OF AMERICA, N.A., as co-administrative agents for the Lenders (in such capacity, the "Co-Administrative Agents", it being agreed that all references herein to the "Administrative Agent" shall be references to JPMorgan Chase Bank). On December 20, 1996, the Company, the Administrative Agent and certain of the Lenders entered into a Five-Year Competitive Advance and Revolving Credit Facility Agreement pursuant to which the lenders thereunder agreed to extend credit to the Borrowers. On June 20, 2001, the parties amended the Five-Year Competitive Advance and Revolving Credit Facility Agreement and restated it in its entirety (the "Existing Credit Agreement"). The parties hereto desire to further amend the Existing Credit Agreement and to restate it in its entirety giving effect to such amendment. Therefore, the parties hereto agree that the Existing Credit Agreement shall be amended and restated to read in its entirety as set forth herein. The Lenders have been requested to extend credit to the Borrowers (such term and each other capitalized term used but not otherwise defined herein having the meaning assigned to it in Article I) to enable them to borrow on a standby revolving credit basis on and after the date hereof and at any time and from time to time prior to the Maturity Date an aggregate principal amount not in excess of $1,000,000,000 at any time outstanding. The Lenders have also been requested to provide a procedure pursuant to which the Borrowers may invite the Lenders to bid on an uncommitted basis on short-term borrowings by the Borrowers. The proceeds of such borrowings are to be used for working capital and other general corporate purposes, including the repayment of maturing commercial paper. The Lenders are willing to extend credit on the terms and subject to the conditions herein set forth. Accordingly, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. "ABR Loan" shall mean any ABR Standby Loan. "ABR Standby Loan" shall mean any Standby Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Administrative Fees" shall have the meaning assigned to such term in Section 2.06(c). "Administrative Questionnaire" shall mean an Administrative Questionnaire in the form distributed to the Lenders by the Administrative Agent. 2 "Affiliate" shall mean, when used with respect to a specified person, another person that directly or indirectly controls or is controlled by or is under common control with the person specified. "Agents" shall mean the Co-Administrative Agents, including JPMorgan Chase Bank as Administrative Agent. "Agreement Currency" shall have the meaning assigned to such term in Section 9.16(b). "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as effective. "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as released on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so released for any day which is a Business Day, the arithmetic average (rounded upwards to the next 1/100th of 1%), as determined by the Administrative Agent, of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Second Amended and Restated Agreement Effective Date" shall mean the date on which the conditions set forth in Section 4.02 are satisfied. "Annual Statement" shall mean, with respect to the Restricted Subsidiaries, the Annual Statement of such Restricted Subsidiary required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law, including any exhibits, schedules, certificates or actuarial opinions filed or delivered therewith. "Applicable Insurance Regulatory Authority" shall mean, with respect to any Insurance Subsidiary, the insurance commission or similar Governmental Authority located in the state in which such Insurance Subsidiary is domiciled and any Federal insurance Governmental Authority. "Applicable Percentage" shall mean on any date, with respect to Eurocurrency Standby Loans, with respect to the Facility Fee or with respect to the Usage Fee, as the case may be, the applicable percentage set forth below under the caption "Eurocurrency Spread", "Facility Fee Percentage" or "Usage Fee Percentage", as the case may be, based upon the Ratings in effect on such date: 3
Eurocurrency Facility Fee Usage Fee ------------ ------------ --------- Category 1 Spread Percentage Percentage - ---------- ------ ---------- ---------- Aa3 or higher by Moody's .130% .070% .050% AA- or higher by S&P Category 2 - ---------- A2 by Moody's .170% .080% .050% A by S&P Category 3 - ---------- A3 by Moody's .250% .100% .100% A- by S&P Category 4 - ---------- Baa1 by Moody's .375% .125% .125% BBB+ by S&P Category 5 - ---------- Baa2 or lower or unrated .575% .175% .125% by Moody's BBB or lower or unrated by S&P
For purposes of the foregoing, (i) if either Moody's or S&P shall not have in effect a Rating (other than by reason of the circumstances referred to in the last sentence of this definition), then such Rating Agency shall be deemed to have established a Rating in Category 5; (ii) if the Ratings established or deemed to have been established by Moody's and S&P shall fall within different Categories, the Applicable Percentage shall be based on the lower of the two Ratings unless the Ratings differ by two or more Categories, in which case the Applicable Percentage will be based upon the Category one level above the Category corresponding to the lower Rating; and (iii) if the Ratings established or deemed to have been established by Moody's and S&P shall be changed (other than as a result of a change in the rating system of Moody's or S&P), such change shall be effective as of the date on which it is first announced by the applicable Rating Agency. Each change in the Applicable Percentage shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody's or S&P shall change, or if either such Rating Agency shall cease to be in the business of rating corporate debt obligations, the Company and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such Rating Agency and, pending the effectiveness of any such amendment, the Applicable Percentage shall be determined by reference to the Rating most recently in effect prior to such change or cessation. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee in the form of Exhibit B. "Augmenting Lender" shall have the meaning assigned to such term in Section 2.23(a). 4 "Available Commitment" shall mean, as to any Lender at any time, an amount equal to such Lender's Commitment at such time minus the aggregate of all such Lender's Local Currency Loans (Dollar Equivalent) outstanding at such time. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Board of Directors" shall mean the Board of Directors of a Borrower or any duly authorized committee thereof. "Borrowers" shall mean the Company and the Borrowing Subsidiaries. "Borrowing" shall mean a group of Loans of a single Type made by the Lenders (or, in the case of a Competitive Borrowing, by the Lender or Lenders whose Competitive Bids have been accepted pursuant to Section 2.03) on a single date and as to which a single Interest Period is in effect. "Borrowing Date" shall mean any date on which a Borrowing is made hereunder. "Borrowing Subsidiary" shall mean any Subsidiary which shall have executed and delivered to the Administrative Agent and each Lender a Borrowing Subsidiary Agreement. "Borrowing Subsidiary Agreement" shall mean an agreement, in the form of Exhibit D hereto, duly executed by the Company and a Subsidiary. "Business Day" shall mean any day (other than a day which is a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City; provided, however, that, when used in connection with a Eurocurrency Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in deposits in the applicable currency in the London interbank market, and, when used in connection with determining any date on which any amount is to be paid or made available in Local Currency, the term "Business Day" shall also exclude any day on which commercial banks and foreign exchange markets are not open for business in the principal financial center in the country of such Local Currency. "Calculation Date" shall mean the last Business Day of each calendar week. "Capitalized Lease-Back Obligation" shall mean with respect to any property or asset, at any date as of which the same is to be determined, the total net rental obligations of the Company or a Subsidiary under a lease of such property or asset, entered into as part of an arrangement to which the provisions of Section 5.13 are applicable (or would have been applicable had such Subsidiary been a Subsidiary at the time it entered into such lease), discounted to the date of computation at the rate of interest per annum implicit in the lease (determined in accordance with GAAP). The amount of the net rental obligation for any calendar year under any lease shall be the sum of the rental and other payments required to be paid in such calendar year by the lessee thereunder, not including, however, any amounts required to be paid by such lessee (whether or not therein designated as rental or additional rental) on account of maintenance and repairs, insurance, taxes, assessments, water rates and similar charges. A "Change in Control" shall be deemed to have occurred if (a) any person or group of persons shall have acquired beneficial ownership of more than 30% of the outstanding Voting Shares of the Company (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder) or (b) during any period of 12 consecutive months, commencing after the Effective Date, individuals who on the first day of such period were directors of the Company (together with any replacement 5 or additional directors who were nominated or elected by a majority of directors then in office) cease to constitute a majority of the Board of Directors of the Company. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Commitment" shall mean, with respect to each Lender, the commitment of such Lender hereunder as set forth as of the Closing Date in Schedule 2.01 under the heading "Commitment" or in an Assignment and Acceptance delivered by such Lender under Section 9.04 as such Lender's Commitment may be permanently terminated or reduced from time to time pursuant to Section 2.11 or pursuant to one or more assignments under Section 9.04. The Commitment of each Lender shall automatically and permanently terminate on the Maturity Date if not terminated earlier pursuant to the terms hereof. "Commitment Increase" shall have the meaning assigned to such term in Section 2.23(b). "Competitive Bid" shall mean an offer by a Lender to make a Competitive Loan pursuant to Section 2.03. "Competitive Bid Accept/Reject Letter" shall mean a notification made by a Borrower pursuant to Section 2.03(d) in the form of Exhibit A-4. "Competitive Bid Rate" shall mean, as to any Competitive Bid, (i) in the case of a Eurocurrency Loan, the Margin, and (ii) in the case of a Fixed Rate Loan, the fixed rate of interest offered by the Lender making such Competitive Bid. "Competitive Bid Request" shall mean a request made pursuant to Section 2.03(a) in the form of Exhibit A-1. "Competitive Borrowing" shall mean a Borrowing consisting of a Competitive Loan or concurrent Competitive Loans from the Lender or Lenders whose Competitive Bids for such Borrowing have been accepted under the bidding procedure described in Section 2.03. "Competitive Loan" shall mean a Loan made pursuant to the bidding procedure described in Section 2.03. Each Competitive Loan shall be in Dollars and shall be a Eurocurrency Competitive Loan or a Fixed Rate Loan. "Competitive Loan Exposure" shall mean, with respect to any Lender at any time, the sum of the aggregate principal amount of all outstanding Competitive Loans made by such Lender. "Consolidated Net Worth" shall mean, as at any date of determination, the consolidated stockholders' equity of the Company and its Subsidiaries, as determined on a consolidated basis in accordance with GAAP, plus minority interests in Subsidiaries, as determined in accordance with GAAP, plus the Equity Unit Amount, plus, but without duplication, Special Preferred Securities; provided that Consolidated Net Worth shall not include Special Preferred Securities to the extent that Special Preferred Securities are greater than 15% of Consolidated Total Capitalization. "Consolidated Net Tangible Assets" shall mean the total of all assets appearing on a consolidated balance sheet of the Company and its Restricted Subsidiaries, prepared in accordance with GAAP (and as of a date not more than 90 days prior to the date as of which Consolidated Net Tangible Assets are to be determined), less the sum of the following items as shown on said consolidated balance sheet: 6 (i) the book amount of all segregated intangible assets, including such items as good will, trademarks, trademark rights, trade names, trade name rights, copyrights, patents, patent rights and licenses and unamortized debt discount and expense less unamortized debt premium; (ii) all depreciation, valuation and other reserves; (iii) current liabilities; (iv) any minority interest in the shares of stock (other than Preferred Stock) and surplus of Restricted Subsidiaries of the Company; (v) the investment of the Company and its Restricted Subsidiaries in any Subsidiary of the Company that is not a Restricted Subsidiary; (vi) the total indebtedness of the Company and its Restricted Subsidiaries incurred in any manner to finance or recover the cost to the Company or any Restricted Subsidiary of any physical property, real or personal, which prior to or simultaneously with the creation of such indebtedness shall have been leased by the Company or a Restricted Subsidiary to the United States of America or a department or agency thereof at an aggregate rental, payable during that portion of the initial term of such lease (without giving effect to any options of renewal or extension) which shall be unexpired at the date of the creation of such indebtedness, sufficient (taken together with any amounts required to be paid by the lessee to the lessor upon any termination of such lease) to pay in full at the stated maturity date or dates thereof the principal of and the interest on such indebtedness; (vii) deferred income and deferred liabilities; and (viii) other items deductible under GAAP. "Consolidated Statutory Surplus" shall mean, with respect to the Insurance Subsidiaries, the amount or amounts set forth on line 32 of the Liabilities, Surplus and Other Funds Statement in the applicable Annual Statement or Statements or the applicable Quarterly Statement or Statements most recently delivered to the Administrative Agent and the Lenders pursuant to Section 5.03 or, if such statement shall be modified, the equivalent item on any applicable successor form (which amount shall be computed in a manner consistent with that used in preparing the financial statements as of and for the fiscal year ended December 31, 2001, referred to in Section 3.05). "Consolidated Total Capitalization" shall mean, as at any date of determination, the sum of Consolidated Total Debt and Consolidated Net Worth. "Consolidated Total Debt" shall mean, as at any date of determination, without duplication, (i) all Indebtedness of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP (but in any event including the Total Equity Unit Amount), plus (ii) preferred securities that are mandatorily redeemable, or redeemable at the option of the holder, within 10 years of such date of determination, plus (iii) Special Preferred Securities to the extent that Special Preferred Securities exceed 15% of Consolidated Total Capitalization, less (iv) the Equity Unit Amount. "Default" shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "Dollars" or "$" shall mean lawful money of the United States of America. 7 "Dollar Borrowing" shall mean a Borrowing comprised of Dollar Loans. "Dollar Equivalent" shall mean, on any date of determination, with respect to any amount in any Local Currency, the equivalent in Dollars of such amount, determined by the Administrative Agent using the Exchange Rate with respect to such Local Currency then in effect as determined pursuant to Section 2.22(a). "Dollar Facility Excess" shall have the meaning assigned to such term in Section 2.22(d). "Dollar Facility Overage" shall mean an amount equal to the excess of (a) the Total Commitment over (b) the aggregate amount of all Local Currency Facility Maximum Borrowing Amounts (determined, if applicable, after giving effect to any reduction therein made pursuant to Section 2.22(c)). "Dollar Loan" shall mean any Loan denominated in Dollars. "Dollar Standby Credit Excess" shall have the meaning assigned to such term in Section 2.22(c). "Dollar Standby Credit Overage" shall mean, with respect to any Lender, an amount equal to the excess, if any, of (a) such Lender's Commitment over (b) the aggregate Local Currency Lender Maximum Borrowing Amounts of such Lender with respect to all Local Currency Addenda to which such Lender or any of its Affiliates is a party. "Dollar Standby Extensions of Credit" shall mean, with respect to any Lender at any time, the aggregate principal amount of all Standby Loans made by such Lender then outstanding. "Effective Date" shall mean June 20, 2001, the date on which the conditions set forth in Section 4.02 of the Existing Credit Agreement were satisfied. "Equity Unit Amount" shall mean 75% of the aggregate principal amount of the notes included in any outstanding Equity Units. "Equity Units" shall mean the 6,600,000 6% Equity Units issued by the Company on September 13, 2002. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that, together with the Company, is treated as a single employer under Section 414(b) or (c) of the Code, or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" shall mean (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan; (b) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (d) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (e) the incurrence of any liability under Title IV of ERISA with respect to the termination of any Plan or the withdrawal or partial withdrawal of the Company or any of its ERISA Affiliates from any Plan or Multiemployer Plan; (f) the receipt by the Company or any ERISA Affiliate from the PBGC or 8 a plan administrator of any notice relating to the intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (g) the receipt by the Company or any ERISA Affiliate of any notice that Withdrawal Liability is being imposed or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; and (h) the occurrence of a "prohibited transaction" with respect to which the Company or any of its Subsidiaries is a "disqualified person" (within the meaning of Section 4975) of the Code, or with respect to which the Company or any such Subsidiary could otherwise be liable. "Eurocurrency Borrowing" shall mean a Borrowing comprised of Eurocurrency Loans. "Eurocurrency Competitive Loan" shall mean any Competitive Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Eurocurrency Loan" shall mean any Eurocurrency Competitive Loan, Eurocurrency Standby Loan or Eurocurrency Local Currency Loan. "Eurocurrency Local Currency Loan" shall mean any Local Currency Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Eurocurrency Standby Loan" shall mean any Standby Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning assigned to such term in Article VI. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Exchange Rate" shall mean, with respect to any Local Currency on a particular date, the rate at which such Local Currency may be exchanged into Dollars, as set forth on such date on the Reuters currency page more particularly described in the Local Currency Addendum for Loans to be made in such Local Currency. In the event that such rate does not appear on any Reuters currency page, the Exchange Rate with respect to such Local Currency shall be determined by reference to such other publicly available service for displaying exchange rates as may be agreed upon by the Administrative Agent and the Company or, in the absence of such agreement, such Exchange Rate shall instead be the Administrative Agent's spot rate of exchange in the London interbank market where its foreign currency exchange operations in respect of such Local Currency are then being conducted, at or about 10:00 A.M., local time, at such date for the purchase of Dollars with such Local Currency, for delivery two Business Days later; provided, however, that if at the time of any such determination, for any reason, no such spot rate is being quoted, the Administrative Agent may use any reasonable method it deems applicable to determine such rate, and such determination shall be conclusive absent manifest error. "Existing Credit Facility" shall mean the 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., each borrowing subsidiary party thereto, certain lenders and The Chase Manhattan Bank (now known as JPMorgan Chase Bank) and Bank of America, N.A., as co-administrative agents. "Facility Fee" shall have the meaning assigned to such term in Section 2.06(a). "Fair Value", when used with respect to property, shall mean the fair value as determined in good faith by the Board of Directors of the Company. "Fees" shall mean the Facility Fee, the Usage Fee and the Administrative Fees. 9 "Financial Officer" of any corporation shall mean the chief financial officer, principal accounting officer, treasurer, associate or assistant treasurer or director of treasury services of such corporation. "Fixed Rate Borrowing" shall mean a Borrowing comprised of Fixed Rate Loans. "Fixed Rate Loan" shall mean any Competitive Loan bearing interest at a fixed percentage rate per annum (the "Fixed Rate") (expressed in the form of a decimal to no more than four decimal places) specified by the Lender making such Loan in its Competitive Bid. "GAAP" shall mean generally accepted accounting principles in the United States, applied on a consistent basis. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Guaranteed Obligations" shall mean the principal of and interest on the Loans made to, and the due and punctual performance of all other obligations, monetary or otherwise of, the Borrowing Subsidiaries hereunder or under a Local Currency Addendum. "Hartford Life" shall mean Hartford Life, Inc., a Delaware corporation and wholly-owned Subsidiary. "Increase Effective Date" shall have the meaning assigned to such term in Section 2.23(b). "Increasing Lender" shall have the meaning assigned to such term in Section 2.23(a). "Incremental Facility Amount" shall mean, at any time, an amount equal to $500,000,000 minus the aggregate amount, if any, by which the Total Commitment shall have been increased prior to such time pursuant to Section 2.23. "Indebtedness" of any person shall mean all indebtedness representing money borrowed, all obligations of such person evidenced by notes, bonds, debentures or other similar instruments, or the deferred purchase price of property (other than trade accounts payable) or any capitalized lease obligation, which in any case is created, assumed, incurred or guaranteed in any manner by such corporation or for which such corporation is responsible or liable (whether by agreement to purchase indebtedness of, or to supply funds to or invest in, others or otherwise). "Information" shall have the meaning assigned to such term in Section 9.17. "Initial Loans" shall have the meaning assigned to such term in Section 2.23(b). "Insurance Subsidiaries" shall mean those Subsidiaries set forth on Schedule 1.01 hereto and any future Subsidiaries principally engaged in one or more of the property, casualty and life insurance businesses. "Interest Payment Date" shall mean (a) with respect to any Loan, the last day of each Interest Period applicable thereto; (b) with respect to a Eurocurrency Loan with an Interest Period of more than three months' duration or a Fixed Rate Loan with an Interest Period of more than 90 days' duration, each day that would have been an Interest Payment Date for such Loan had successive Interest Periods of three months' duration or 90 days' duration, as the case may be, been applicable to such Loan and, in addition, the date of any prepayment of each Loan or conversion of such Loan to a Loan of a different Type; and (c) with respect to any Local Currency Loan, such days as shall be specified in the applicable Local Currency Addendum. 10 "Interest Period" shall mean (a) as to any Eurocurrency Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the Borrower may elect; (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the earliest of (i) the next succeeding March 31, June 30, September 30 or December 31, (ii) the Maturity Date, and (iii) the date such Borrowing is converted to a Borrowing of a different Type in accordance with Section 2.05 or repaid or prepaid in accordance with Section 2.07 or Section 2.12; (c) as to any Fixed Rate Borrowing, the period commencing on the date of such Borrowing and ending on the date specified in the Competitive Bids in which the offers to make the Fixed Rate Loans comprising such Borrowing were extended, which shall not be earlier than seven days after the date of such Borrowing or later than 360 days after the date of such Borrowing; and (d) as to any Local Currency Borrowing, such periods as shall be specified in the applicable Local Currency Addendum; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of Eurocurrency Loans only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "Judgment Currency" shall have the meaning assigned to such term in Section 9.16(b). "Lender Affiliate" means, (a) with respect to any Lender, (i) an Affiliate of such Lender or (ii) any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Lender or an Affiliate of such Lender and (b) with respect to any Lender that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "LIBO Rate" shall mean, with respect to any Eurocurrency Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the rate at which dollar deposits or deposits in the applicable Local Currency approximately equal in principal amount to (i) in the case of a Standby Borrowing that is a Eurocurrency Borrowing, the Administrative Agent's portion of such Eurocurrency Borrowing; (ii) in the case of a Competitive Borrowing, a principal amount that would have been the Administrative Agent's portion of such Competitive Borrowing had such Competitive Borrowing been a Standby Borrowing; and (iii) in the case of a Local Currency Borrowing, such Borrowing, and for a maturity comparable to such Interest Period, are offered to the principal London offices of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien" shall mean, with respect to any property or asset, any mortgage, deed of trust, lien, pledge, security interest, charge or other encumbrance on, of or in such property or asset. "Loan" shall mean a Competitive Loan, a Local Currency Loan or a Standby Loan, whether made as a Eurocurrency Loan, an ABR Loan or a Fixed Rate Loan, as permitted hereby. "Loan Documents" shall mean this Agreement, the Borrowing Subsidiary 11 Agreements, the Local Currency Addenda and any promissory notes issued pursuant to Section 9.04(i). "Local Currency" shall mean any currency other than Dollars as to which an Exchange Rate may be calculated. "Local Currency Addendum" shall mean a local currency addendum between a Borrower and one or more Local Currency Lenders, substantially in the form of Exhibit E, and the documentation referred to therein, to the extent not inconsistent with this Agreement. "Local Currency Borrowing" shall mean a Borrowing comprised of Local Currency Loans. "Local Currency Credit Event" shall mean each Borrowing under a Local Currency Addendum. "Local Currency Equivalent" shall mean, on any date of determination, with respect to any amount in Dollars, the equivalent in the relevant Local Currency of such amount, determined by the Administrative Agent using the Exchange Rate with respect to such Local Currency then in effect as determined pursuant to Section 2.22(a). "Local Currency Facility Maximum Borrowing Amount" shall have the meaning assigned to such term in Section 2.21(b). "Local Currency Lender" shall mean any Lender (or any Affiliate, branch or agency thereof) party to a Local Currency Addendum. In the event any agency or Affiliate of a Lender shall be party to a Local Currency Addendum, such agency or Affiliate shall, to the extent of any commitment extended and any Loans made by it, have all the rights of such Lender hereunder; provided, that such Lender shall continue to the exclusion of such agency or Affiliate to have all the voting and consensual rights vested in it by the terms hereof. "Local Currency Lender Maximum Borrowing Amount" shall have the meaning assigned to such term in Section 2.21(b). "Local Currency Loan" shall mean any Loan, denominated in a currency other than Dollars, made to a Borrower pursuant to Section 2.01(b) and a Local Currency Addendum. "Local Currency Loans (Dollar Equivalent)" shall mean the Dollar Equivalent of the relevant Local Currency Loans. "Local Currency Standby Borrowing" shall mean any Standby Borrowing comprised of Local Currency Loans. "Margin" shall mean, as to any Eurocurrency Competitive Loan, the margin (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) to be added to or subtracted from the LIBO Rate in order to determine the interest rate applicable to such Loan, as specified in the Competitive Bid relating to such Loan. "Margin Regulations" shall mean Regulations T, U and X of the Board as from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Margin Stock" shall have the meaning given such term under Regulation U of the Board. "Material Adverse Effect" shall mean a materially adverse effect on the business, assets, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole. 12 "Maturity Date" shall mean June 20, 2006. "Moody's" shall mean Moody's Investors Service, Inc. or any of its successors. "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which the Company or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code Section 414) is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "NAIC" shall mean the National Association of Insurance Commissioners or any association or Governmental Authority succeeding to any or all of the functions of the National Association of Insurance Commissioners. "Non-Increasing Lender" shall have the meaning assigned to such term in Section 2.23(a). "Notice of Competitive Bid Request" shall mean a notification made pursuant to Section 2.03(a) in the form of Exhibit A-2. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Plan" shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 307 of ERISA, and in respect of which any Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Preferred Stock" shall mean any capital stock entitled by its terms to a preference (a) as to dividends or (b) upon a distribution of assets. "Pro Rata Percentage" of any Lender at any time shall mean the percentage of the Total Commitment represented by such Lender's Commitment. If the Commitments have terminated or expired, the Pro Rata Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. "Quarterly Statement" shall mean, with respect to any Restricted Subsidiary, the Quarterly Statement of such Restricted Subsidiary required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law, including any exhibits, schedules, certificates or actuarial opinions filed or delivered therewith. "Rating Agencies" shall mean Moody's and S&P. "Ratings" shall mean the ratings from time to time established by the Rating Agencies for senior, unsecured, non-credit-enhanced long-term debt of the Company. "Register" shall have the meaning given such term in Section 9.04(d). "Regulation D" shall mean Regulation D of the Board as from time to time in effect and all official rulings and interpretations thereunder or thereof. 13 "Reportable Event" shall mean any reportable event as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code Section 414). "Required Lenders" shall mean, at any time, Lenders having Commitments representing more than 50% of the Total Commitment or, for purposes of acceleration pursuant to clause (ii) of Article VI or following the termination of the Commitments, Lenders holding Loans representing more than 50% of the aggregate principal amount of the Loans outstanding. For purposes of determining the Required Lenders, any amounts denominated in a Local Currency shall be translated into Dollars at the Exchange Rates in effect on the Effective Date. "Reset Date" shall have the meaning assigned to such term in Section 2.22(a). "Responsible Officer" of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "Restricted Subsidiary" means (a) Hartford Life or (b) any other Subsidiary which is incorporated in any state of the United States or in the District of Columbia and which is a regulated insurance company principally engaged in one or more of the property, casualty and life insurance businesses and which has total assets representing 10% or more of the total assets of the Company and its consolidated Subsidiaries (including such Subsidiary), in each case as set forth on the most recent fiscal year-end balance sheets of such Subsidiary and the Company and its consolidated Subsidiaries, respectively, and computed in accordance with GAAP. Such Subsidiary must be designated a Restricted Subsidiary in a notice delivered by the Company and certified by a Responsible Officer to the Administrative Agent for distribution to the Lenders. In the event that the aggregate total assets of the Restricted Subsidiaries represent less than 80% of the total assets of the Company and its consolidated Subsidiaries, the Board of Directors of the Company, as evidenced by a resolution of such Board of Directors, shall promptly designate an additional Subsidiary or Subsidiaries as Restricted Subsidiaries in order that, after such designations, the aggregate total assets of the Restricted Subsidiaries represent at least 80% of the total assets of the Company and its consolidated Subsidiaries; provided that all Subsidiaries with total assets of 10% or more of the total assets of the Company and its consolidated Subsidiaries have previously been designated as Restricted Subsidiaries. "Risk-Based Capital" shall mean, with respect to the Insurance Subsidiaries at any time, the Company Action Level Risk-Based Capital (as defined by the NAIC at such time and as computed in accordance with SAP) of the Insurance Subsidiaries (determined and consolidated in accordance with SAP) at such time. "S&P" shall mean Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or any of its successors. "SAP" shall mean, with respect to any Insurance Subsidiary, the accounting principles and procedures prescribed or permitted by the Applicable Insurance Regulatory Authority applied on a basis consistent with those that are indicated in Section 1.02. "SEC" shall mean the Securities and Exchange Commission or any of its successors. "Special Preferred Securities" shall mean preferred securities that are mandatorily redeemable, or redeemable at the option of the holder, not sooner than ten years after issuance and issued by the Company and/or one or more Subsidiaries of the Company. "Standby Borrowing" shall mean a Borrowing consisting of simultaneous Standby 14 Loans from each of the Lenders. "Standby Borrowing Request" shall mean a request made pursuant to Section 2.04 in the form of Exhibit A-5. "Standby Credit Exposure" shall mean, with respect to any Lender at any time, the sum of the aggregate principal amount at such time of all outstanding Standby Loans of such Lender and the aggregate Dollar Equivalent of the principal amount of all outstanding Local Currency Loans of such Lender (and each agency, branch or Affiliate of such Lender acting as a Local Currency Lender). "Standby Loans" shall mean the revolving loans made pursuant to Section 2.04(a). Each Standby Loan shall be in Dollars and shall be a Eurocurrency Standby Loan or an ABR Loan. "Statement of Actuarial Opinion" shall mean, with respect to the Restricted Subsidiaries, the Statement of Actuarial Opinion required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law or, if such Applicable Insurance Regulatory Authority shall no longer require such a statement, information equivalent to that required to be included in the Statement of Actuarial Opinion that was filed immediately prior to the time such statement was no longer required. "subsidiary" shall mean, with respect to any person (the "parent"), any corporation, association or other business entity of which securities or other ownership interests representing more than 50% of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" shall mean a subsidiary of the Company. "Subsequent Borrowings" shall have the meaning assigned to such term in Section 2.23(b). "Total Adjusted Capital" shall mean, with respect to the Insurance Subsidiaries at any time, the Total Adjusted Capital (as defined by the NAIC at such time and as determined and consolidated in accordance with SAP) of the Insurance Subsidiaries (taken together) at such time. "Total Commitment" shall mean, at any time, the aggregate amount of Commitments of all the Lenders, as in effect at such time. "Total Equity Unit Amount" shall mean 100% of the aggregate principal amount of the notes included in any outstanding Equity Units. "Transactions" shall have the meaning assigned to such term in Section 3.02. "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined and the currency in which such Loan or the Loans comprising such Borrowing are denominated. For purposes hereof, "Rate" shall include the LIBO Rate, the Alternate Base Rate and the Fixed Rate, and currency shall include Dollars and any Local Currency permitted hereunder. "Usage Fee" shall have the meaning assigned to such term in Section 2.06(b). "Voting Shares" shall mean, as to shares of a particular corporation, outstanding shares of stock of any class of such corporation entitled to vote in the election of directors, excluding shares entitled so to vote only upon the happening of some contingency. 15 "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title VI of ERISA. SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP or, to the extent such terms apply to an Insurance Subsidiary, SAP, in each case as in effect from time to time; provided, however, that for purposes of determining compliance with any covenant set forth in Article V, such terms, as they may be modified or amended, shall be construed in accordance with GAAP or SAP, as applicable, as in effect on the date of this Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement applied on a basis consistent with the application used in preparing the Company's audited financial statements referred to in Section 3.05. All references herein to the "date hereof" or the "date of this Agreement" shall be construed as referring to June 20, 2001; provided that all obligations of the Borrowers accrued prior to the date of this Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement under the Existing Credit Agreement but not yet paid shall continue to be obligations of the Borrowers under this Agreement. ARTICLE II THE CREDITS SECTION 2.01. Commitments. (a) Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Standby Loans to the Borrowers, at any time and from time to time on and after the Effective Date and until the earlier of the Maturity Date and the termination of the Commitment of such Lender. (b) Subject to the terms and conditions and relying upon the representations and warranties set forth herein and in the applicable Local Currency Addendum, each Local Currency Lender agrees, severally and not jointly, to make Local Currency Loans to the Borrowers at any time and from time to time on and after the execution of the applicable Local Currency Addendum and until the earlier of the Maturity Date and the termination of the Commitment (or the commitment under such Local Currency Addendum) of such Local Currency Lender. (c) Notwithstanding anything to the contrary contained in this Agreement, in no event may Standby Loans or Local Currency Loans be borrowed under this Article II if, after giving effect thereto (and to any concurrent repayment or prepayment of Loans), (i) the sum of the aggregate Standby Credit Exposures and the aggregate Competitive Loan Exposures would exceed the Total Commitment then in effect; (ii) the Standby Credit Exposure of any Lender would exceed such Lender's Commitment; or (iii) the Dollar Equivalent of the aggregate principal amount of outstanding Local Currency Loans denominated in a specified Local Currency would exceed the applicable Local Currency Facility Maximum Borrowing Amount. Within the foregoing limits, the Borrowers may borrow, pay or prepay and reborrow Standby Loans and Local Currency Loans hereunder, on and after the Effective Date and prior to the Maturity Date, subject to the terms, conditions and limitations set forth herein. SECTION 2.02. Loans. (a) Each Standby Loan shall be made as part of a 16 Borrowing consisting of Standby Loans made by the Lenders ratably in accordance with their respective Available Commitments; provided, however, that the failure of any Lender to make any Standby Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Each Local Currency Loan shall be made as part of a Borrowing consisting of Local Currency Loans made by the Local Currency Lenders ratably in accordance with the applicable Local Currency Lender Maximum Borrowing Amounts; provided, however, that the failure of any Local Currency Lender to make any Local Currency Loan shall not in itself relieve any other Local Currency Lender of its obligation to lend hereunder (it being understood, however, that no Local Currency Lender shall be responsible for the failure of any other Local Currency Lender to make any Local Currency Loan required to be made by such other Local Currency Lender). Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.03. The Loans comprising any Borrowing shall be (i) in the case of Competitive Loans, in an aggregate principal amount which is an integral multiple of $1,000,000 and not less than $5,000,000; (ii) in the case of Standby Loans, in an aggregate principal amount which is an integral multiple of $5,000,000 and not less than $20,000,000 (or an aggregate principal amount equal to the remaining balance of the Available Commitments); and (iii) in the case of Local Currency Loans, in an aggregate principal amount which complies with the requirements set forth in the applicable Local Currency Addendum. All Standby Loans and Competitive Loans made pursuant to this Article II shall be denominated in Dollars. (b) Each Competitive Borrowing shall be comprised entirely of Eurocurrency Competitive Loans or Fixed Rate Loans, and each Standby Borrowing shall be comprised entirely of Eurocurrency Standby Loans or ABR Loans, as the Borrower may request pursuant to Section 2.03 or 2.04, as applicable. Each Lender may at its option make any Eurocurrency Loan by causing any domestic or foreign branch, agency or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time. For purposes of the foregoing, Loans having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Loans. (c) Subject to Section 2.05 and, in the case of any Local Currency Loan, to any alternative procedures set forth in the applicable Local Currency Addendum, each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to the Administrative Agent in New York, New York, not later than 12:00 noon, New York City time, and the Administrative Agent shall by 2:00 p.m., New York City time, credit the amounts so received to the account or accounts specified from time to time in one or more notices delivered by the Company to the Administrative Agent or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. Competitive Loans shall be made by the Lender or Lenders whose Competitive Bids therefor are accepted pursuant to Section 2.03 in the amounts so accepted. Standby Loans and Local Currency Loans shall be made by the Lenders and the Local Currency Lenders, as applicable, pro rata in accordance with Section 2.16. Unless the Administrative Agent shall have received notice from a Lender prior to the date (or, in the case of ABR Borrowings, on the date) of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with this paragraph (c) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount in the required currency. If and to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon in such currency, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and 17 (ii) in the case of such Lender, a rate determined by the Administrative Agent to represent its cost of overnight funds. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (d) Each Competitive Loan shall be a Eurocurrency Competitive Loan or a Fixed Rate Loan. Each Standby Loan shall be a Eurocurrency Standby Loan or an ABR Standby Loan. Each Local Currency Loan shall be a Eurocurrency Local Currency Loan or shall bear interest at a rate specified in the applicable Loan Currency Addendum. SECTION 2.03. Competitive Bid Procedure. (a) Subject to the terms and conditions set forth herein, from time to time on or after the Effective Date and until the earlier of the Maturity Date and the termination of the Commitments, the Borrower may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans; provided that the sum of the total Standby Credit Exposures plus the aggregate amount of the Competitive Loan Exposures at any time shall not exceed the Total Commitment. In order to request Competitive Bids, a Borrower (the "Applicable Borrower") shall hand deliver or telecopy to the Administrative Agent a duly completed Competitive Bid Request in the form of Exhibit A-1 hereto, to be received by the Administrative Agent (i) in the case of a Eurocurrency Competitive Loan, not later than 10:00 a.m., New York City time, four Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before a proposed Competitive Borrowing. No ABR Loan shall be requested in, or made pursuant to, a Competitive Bid Request. A Competitive Bid Request that does not conform substantially to the format of Exhibit A-1 may be rejected in the Administrative Agent's sole discretion, and the Administrative Agent shall promptly notify the Borrower of such rejection by telecopy. Each Competitive Bid Request shall refer to this Agreement and specify (x) whether the Borrowing then being requested is to be a Eurocurrency Borrowing or a Fixed Rate Borrowing, (y) the date of such Borrowing (which shall be a Business Day) and the aggregate principal amount thereof which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000, and (z) the Interest Period with respect thereto (which may not end after the Maturity Date). Promptly after its receipt of a Competitive Bid Request that is not rejected as aforesaid, the Administrative Agent shall telecopy to the Lenders a Notice of Competitive Bid Request inviting the Lenders to bid, on the terms and conditions of this Agreement, to make Competitive Loans. (b) Each Lender invited to bid may, in its sole discretion, make one or more Competitive Bids to the Applicable Borrower responsive to such Borrower's Competitive Bid Request. Each Competitive Bid by a Lender must be received by the Administrative Agent by telecopy, in the form of Exhibit A-3 hereto, (i) in the case of a Eurocurrency Competitive Loan, not later than 9:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the day of a proposed Competitive Borrowing. A Lender may submit multiple bids to the Administrative Agent. Competitive Bids that do not conform substantially to the format of Exhibit A-3 may be rejected by the Administrative Agent, and the Administrative Agent shall notify the Lender making such nonconforming bid of such rejection as soon as practicable. Each Competitive Bid shall refer to this Agreement and specify (x) the principal amount (which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested) of the Competitive Loan or Loans that the Lender is willing to make, (y) the Competitive Bid Rate or Rates at which the Lender is prepared to make the Competitive Loan or Loans, and (z) the Interest Period and the last day thereof. If any Lender invited to bid shall elect not to make a Competitive Bid, such Lender shall so notify the Administrative Agent by telecopy (I) in the case of Eurocurrency Competitive Loans, not later than 9:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing and (II) in the case of Fixed Rate Loans, not later than 9:30 a.m., New York City time, on the day of a proposed Competitive Borrowing; provided, however, that failure by any Lender to give such notice shall not cause such Lender to be obligated to make any 18 Competitive Loan as part of such Competitive Borrowing. A Competitive Bid submitted by a Lender pursuant to this paragraph (b) shall be irrevocable. (c) The Administrative Agent shall as promptly as practicable notify the Borrower, by telecopy, of all the Competitive Bids made, the Competitive Bid Rate and the principal amount of each Competitive Loan in respect of which a Competitive Bid was made and the identity of the Lender that made each bid. The Administrative Agent shall send a copy of all Competitive Bids to the Borrower for its records as soon as practicable after completion of the bidding process set forth in this Section 2.03. (d) The Borrower may in its sole and absolute discretion, subject only to the provisions of this paragraph (d), accept or reject any Competitive Bid referred to in paragraph (c) above. The Borrower shall notify the Administrative Agent by telephone, confirmed by telecopy in the form of a Competitive Bid Accept/Reject Letter, whether and to what extent it has decided to accept or reject any of or all the bids referred to in paragraph (c) above not more than one hour after it shall have been notified of such bids by the Administrative Agent pursuant to such paragraph (c); provided, however, that (i) the failure of the Borrower to give such notice shall be deemed to be a rejection of all the bids referred to in paragraph (c) above; (ii) the Borrower shall not accept a bid made at a particular Competitive Bid Rate if it has decided to reject a bid made at a lower Competitive Bid Rate; (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in the Competitive Bid Request; (iv) if the Borrower shall accept a bid or bids made at a particular Competitive Bid Rate but the amount of such bid or bids shall cause the total amount of bids to be accepted to exceed the amount specified in the Competitive Bid Request, then the Borrower shall accept a portion of such bid or bids in an amount equal to the amount specified in the Competitive Bid Request less the amount of all other Competitive Bids accepted with respect to such Competitive Bid Request, which acceptance, in the case of multiple bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such bid at such Competitive Bid Rate; and (v) except pursuant to clause (iv) above, no bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; provided further, however, that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner which shall be in the discretion of the Borrower. A notice given pursuant to this paragraph (d) shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate) by telecopy, and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Loan in respect of which its bid has been accepted. (f) No Competitive Borrowing shall be requested or made hereunder if after giving effect thereto any of the conditions set forth in paragraph (c) of Section 2.01 would not be met. (g) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such bid directly to the Applicable Borrower one quarter of an hour earlier than the latest time at which the other Lenders are required to submit their bids to the Administrative Agent pursuant to paragraph (b) above. (h) All notices required by this Section 2.03 shall be given in accordance with Section 9.01. 19 SECTION 2.04. Standby and Local Currency Borrowing Procedure. (a) In order to request a Standby Borrowing, a Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Standby Borrowing Request in the form of Exhibit A-5 (i) in the case of a Eurocurrency Standby Loan, not later than 10:30 a.m., New York City time (or, if the Standby Borrowing request is delivered or telecopied to the Administrative Agent in London, 9:30 a.m., London time), three Business Days before such Borrowing, and (ii) in the case of an ABR Borrowing, not later than 10:30 a.m., New York City time, on the day of such Borrowing. No Fixed Rate Loan shall be requested or made pursuant to a Standby Borrowing Request. Such notice shall be irrevocable and shall in each case specify (A) whether the Borrowing then being requested is to be a Eurocurrency Standby Loan or an ABR Borrowing; (B) the date of such Standby Borrowing (which shall be a Business Day) and the amount thereof; and (C) if such Borrowing is to be a Eurocurrency Standby Loan, the Interest Period with respect thereto, which shall not end after the Maturity Date. If no election as to the Type of Standby Borrowing is specified in any such notice, then the requested Standby Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurocurrency Standby Loan is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Notwithstanding any other provision of this Agreement to the contrary, no Standby Borrowing shall be requested if the Interest Period with respect thereto would end after the Maturity Date. The Administrative Agent shall promptly advise each of the Lenders of any notice given pursuant to this Section 2.04 and of each Lender's portion of the requested Borrowing. (b) In order to request a Local Currency Borrowing, a Borrower shall give the notice required under the applicable Local Currency Addendum and shall simultaneously deliver a copy of such notice to the Administrative Agent. SECTION 2.05. Conversion and Continuation of Standby Loans. Each Borrower shall have the right at any time upon prior irrevocable notice to the Administrative Agent (i) not later than 10:30 a.m., New York City time, on the day of the conversion, to convert all or any part of any Eurocurrency Standby Loan into an ABR Standby Loan and (ii) not later than 10:30 a.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Standby Loan into a Eurocurrency Standby Loan or to continue any Eurocurrency Standby Loan as a Eurocurrency Standby Loan for an additional Interest Period, subject in each case to the following: (a) if less than all the outstanding principal amount of any Standby Borrowing shall be converted or continued, the aggregate principal amount of the Standby Borrowing converted or continued shall be an integral multiple of $5,000,000 and not less than $20,000,000; (b) accrued interest on a Standby Borrowing (or portion thereof) being converted shall be paid by the Borrower at the time of conversion; (c) if any Eurocurrency Standby Loan is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.15; (d) any portion of a Standby Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurocurrency Standby Loan; (e) any portion of a Eurocurrency Standby Loan which cannot be continued as a Eurocurrency Standby Loan by reason of clause (d) above shall be automatically converted at the end of the Interest Period in effect for such Eurocurrency Standby Loan into an ABR Borrowing; (f) no Interest Period may be selected for any Eurocurrency Standby Borrowing that would end later than the Maturity Date; and 20 (g) at any time when there shall have occurred and be continuing any Default or Event of Default, no Borrowing may be converted into or continued as a Eurocurrency Standby Loan. Each notice pursuant to this Section 2.05 shall be irrevocable and shall refer to this Agreement and specify (i) the identity and amount of the Standby Borrowing to be converted or continued; (ii) whether such Standby Borrowing is to be converted to or continued as a Eurocurrency Standby Loan or an ABR Standby Loan; (iii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day); and (iv) if such Standby Borrowing is to be converted to or continued as a Eurocurrency Standby Loan, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurocurrency Standby Loan, the Borrower shall be deemed to have selected an Interest Period of one month's duration. If no notice shall have been given in accordance with this Section 2.05 to convert or continue any Standby Borrowing, such Standby Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be continued into a new Interest Period as an ABR Standby Loan. SECTION 2.06. Fees. (a) The Company agrees to pay to the Administrative Agent for the account of each Lender a facility fee (the "Facility Fee"), which shall accrue at the Applicable Percentage from time to time in effect on the daily amount of the Commitment of such Lender (whether used or unused) during the period from and including the date hereof to but excluding the date on which such Commitment terminates; provided that, if such Lender continues to have any Standby Credit Exposure after its Commitment terminates, then such Facility Fee shall continue to accrue on the daily amount of such Lender's Standby Credit Exposure from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Standby Credit Exposure. Accrued Facility Fees shall be payable in arrears on the last day of March, June, September and December of each year, commencing on the first such date to occur after the date hereof, and on the date on which the Commitments shall have terminated and the Lenders shall have no further Standby Credit Exposures. All Facility Fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) For any day on which the aggregate Dollar Equivalents of the outstanding principal amounts of Loans shall be greater than 50% of the Total Commitment (and for any day after the termination of all the Commitments on which Loans shall be outstanding), the Company shall pay to the Administrative Agent for the account of each Lender a usage fee (the "Usage Fee") at the Applicable Percentage from time to time in effect on the aggregate Dollar Equivalents of the outstanding principal amounts of each Lender's Loans on such day. Accrued and unpaid Usage Fees, if any, shall be payable on the last day of each March, June, September and December and on the date on which the Commitments shall have terminated and the Lenders shall have no Standby Credit Exposures. All Usage Fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (c) The Company agrees to pay each Agent, for its own account, the administrative and other fees separately agreed to by the Company and such Agent (the "Administrative Fees"). (d) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders, except that the Administrative Fees shall be paid pursuant to paragraph (c) above. Once paid, none of the Fees shall be refundable under any circumstances. SECTION 2.07. Repayment of Loans; Evidence of Debt. (a) Each Borrower hereby agrees that the outstanding principal balance of each Standby Loan or Local Currency Loan shall be payable on the Maturity Date (unless an earlier date is specified in the Local Currency 21 Addendum relating to such Local Currency Loan) and that the outstanding principal balance of each Competitive Loan shall be payable on the last day of the Interest Period applicable thereto. Each Loan shall bear interest on the outstanding principal balance thereof as set forth in Section 2.08. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Administrative Agent shall (i) maintain accounts in which it will record (A) the amount of each Loan made hereunder, the currency of each Loan, the Borrower of each Loan, the Type of each Loan made and the Interest Period applicable thereto; (B) the amount of any principal or interest due and payable or to become due and payable from each Borrower to each Lender hereunder; and (C) the amount of any sum received by the Administrative Agent hereunder from each Borrower and each Lender's share thereof and (ii) provide a summary to the Company in writing on a quarterly basis. (d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) of this Section 2.07 shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrowers to repay the Loans in accordance with their terms. SECTION 2.08. Interest on Loans. (a) Subject to the provisions of Section 2.09, the Loans comprising each Eurocurrency Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to (i) in the case of each Eurocurrency Standby Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Percentage from time to time in effect; (ii) in the case of each Eurocurrency Competitive Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Margin offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03; and (iii) in the case of each Eurocurrency Local Currency Loan, the LIBO Rate for the Interest Period in effect for such Loan plus any spread specified in the applicable Local Currency Addendum (or, if no such spread shall be specified, the Applicable Percentage from time to time in effect). (b) Subject to the provisions of Section 2.09, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, for periods during which the Alternate Base Rate is determined by reference to the Prime Rate and 360 days for other periods) at a rate per annum equal to the Alternate Base Rate. (c) Subject to the provisions of Section 2.09, each Fixed Rate Loan shall bear interest at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the fixed rate of interest offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03. (d) Subject to the provisions of Section 2.09, any Local Currency Loan that is not a Eurocurrency Loan shall bear interest at the rate or rates per annum set forth in the applicable Local Currency Addendum. (e) Interest on each Loan shall be payable on each Interest Payment Date applicable to such Loan except as otherwise provided in this Agreement or in an applicable Local Currency Addendum. The applicable LIBO Rate or Alternate Base Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative 22 Agent, and such determination shall be conclusive absent manifest error. SECTION 2.09. Default Interest. If a Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, whether by scheduled maturity, notice of prepayment, acceleration or otherwise, such Borrower shall on demand from time to time from the Administrative Agent pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed as provided in Section 2.08(b)) equal to the Alternate Base Rate plus 2% (or, in the case of Local Currency Loans, such other rate as may be specified in the applicable Local Currency Addendum). SECTION 2.10. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurocurrency Borrowing, the Administrative Agent shall have commercially reasonably determined (i) that deposits in the currency and principal amounts of the Eurocurrency Loans comprising such Borrowing are not generally available in the London market or (ii) that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give telecopy notice of such determination to the Company and applicable Borrower and the Lenders. In the event of any such determination under clauses (i) or (ii) above, until the Administrative Agent shall have advised the Company and the Lenders that the circumstances giving rise to such notice no longer exist, (x) any request by a Borrower for a Eurocurrency Competitive Loan pursuant to Section 2.03 shall be of no force and effect and shall be denied by the Administrative Agent, (y) any request by a Borrower for a Eurocurrency Standby Loan pursuant to Section 2.04(a) shall be deemed to be a request for an ABR Borrowing and (z) any request for a Eurocurrency Local Currency Loan pursuant to Section 2.04(b) and to a Local Currency Addendum shall be deemed to be a request for a Local Currency Loan bearing interest by reference to the rate specified in the applicable Local Currency Addendum (provided that if the requested Eurocurrency Local Currency Loan was to be made pursuant to a Local Currency Addendum in which no rate is specified such request shall be of no force and effect and shall be denied by the Administrative Agent). In the event the Required Lenders notify the Administrative Agent that the rates at which Dollar deposits are being offered will not adequately and fairly reflect the cost to such Lenders of making or maintaining Eurocurrency Loans in Dollars during such Interest Period, the Administrative Agent shall notify the applicable Borrower of such notice and until the Required Lenders shall have advised the Administrative Agent that the circumstances giving rise to such notice no longer exist, any request by such Borrower for a Eurocurrency Standby Loan shall be deemed a request for an ABR Borrowing. Each determination by the Administrative Agent hereunder shall be made in good faith and shall be conclusive absent manifest error. SECTION 2.11. Termination and Reduction of Commitments. (a) The Commitments shall be automatically terminated on the Maturity Date. (b) Upon at least three Business Days' prior irrevocable telecopy notice to the Administrative Agent, the Company may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Total Commitment; provided, however, that (i) each partial reduction of the Total Commitment shall be in an integral multiple of $10,000,000 and in a minimum principal amount of $50,000,000 and (ii) no such termination or reduction shall be made (A) which would reduce the Total Commitment to an amount less than the sum of the aggregate Standby Credit Exposures and the Competitive Loan Exposures or (B) which would reduce any Lender's Commitment to an amount that is less than such Lender's Standby Credit Exposure. (c) Each reduction in the Total Commitment hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrowers shall pay to the Administrative Agent for the account of the Lenders, on the date of each reduction or termination of the Total Commitment, the Facility Fees on the amount of the Commitments terminated accrued through the date of such termination or reduction. 23 SECTION 2.12. Prepayment. (a) Each Borrower shall have the right at any time and from time to time to prepay any Standby Borrowing or Local Currency Borrowing, as the case may be, in whole or in part, upon giving telecopy notice (or telephone notice promptly confirmed by telecopy) to the Administrative Agent: (i) before 10:00 a.m., New York City time, three Business Days prior to prepayment, in the case of Eurocurrency Standby Loans; (ii) before 10:00 a.m., New York City time, one Business Day prior to prepayment, in the case of ABR Standby Loans; and (iii) in the case of Local Currency Loans, by such time as shall be specified in the applicable Local Currency Addendum; provided, however, that each partial prepayment shall be in an amount which is (x) in the case of any Standby Borrowing, an integral multiple of $10,000,000 and not less than $50,000,000, and (ii) in the case of any Local Currency Borrowing, an amount in which prepayments are permitted to be made under the applicable Local Currency Addendum. No prepayment may be made in respect of any Competitive Borrowing. (b) On the date of any termination or reduction of the Commitments pursuant to Section 2.11, the Borrowers shall pay or prepay so much of the Standby Borrowings as shall be necessary in order that the sum of the Competitive Loan Exposures and Standby Credit Exposures will not exceed the Total Commitment, after giving effect to such termination or reduction. (c) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the applicable Borrower to prepay such Borrowing (or portion thereof) by the amount stated therein on the date stated therein. All prepayments under this Section 2.12 shall be subject to Section 2.15 but otherwise without premium or penalty. All prepayments under this Section 2.12 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.13. Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall result in the imposition, modification or applicability of any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by any Lender, or shall result in the imposition on (i) any Lender or the London interbank market of any other condition affecting this Agreement; (ii) such Lender's Commitment; or (iii) any Eurocurrency Loan or Fixed Rate Loan made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurocurrency Loan or Fixed Rate Loan or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise) by an amount reasonably deemed by such Lender to be material, then such additional amount or amounts as will compensate such Lender for such additional costs or reduction will be paid by the Borrowers to such Lender upon demand. Notwithstanding the foregoing, no Lender shall be entitled to request compensation under this paragraph with respect to any Competitive Loan if the change giving rise to such request was applicable to such Lender at the time of submission of the Competitive Bid pursuant to which such Competitive Loan was made. (b) If any Lender shall have determined that the adoption of any law, rule, regulation or guideline arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date hereof of any other law, rule, regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on (i) such Lender's capital or on the capital of such Lender's holding company, if 24 any, as a consequence of this Agreement; (ii) such Lender's Commitment; or (iii) the Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender's holding company could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount reasonably deemed by such Lender to be material, then from time to time such additional amount or amounts as will compensate such Lender for such reduction will be paid by the Borrowers to such Lender. (c) A certificate of any Lender setting forth such amount or amounts as shall be necessary to compensate such Lender or its holding company, as applicable, as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Company and shall be conclusive absent manifest error. The Borrowers shall pay such Lender the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same. (d) Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's right to demand compensation with respect to such period or any other period; provided, however, that no Lender shall be entitled to compensation under this Section 2.13 for any costs incurred or reductions suffered with respect to any date unless it shall have notified the Company that it will demand compensation for such costs or reductions under paragraph (c) above not more than 90 days after the later of (i) such date and (ii) the date on which it shall have become aware of such costs or reductions. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition which shall have occurred or been imposed. SECTION 2.14. Change in Legality. (a) Notwithstanding any other provision herein, if any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender or any of its Affiliates which shall be party to a Local Currency Addendum to make or maintain any Eurocurrency Loan or Local Currency Loan or to give effect to its obligations as contemplated hereby with respect to any Eurocurrency Loan or Local Currency Loan, or shall limit the convertibility into Dollars of any Local Currency (or make such conversion commercially impracticable), then, by written notice to the Company and to the Administrative Agent, such Lender may: (i) declare that Eurocurrency Loans or Loans in any affected Local Currency will not thereafter be made by such Lender hereunder, whereupon such Lender shall not submit a Competitive Bid in response to a request for a Eurocurrency Competitive Loan, any request for a Eurocurrency Standby Loan shall, as to such Lender only, be deemed a request for an ABR Loan, and any request for a Local Currency Borrowing in such Local Currency shall be disregarded, unless such declaration shall be subsequently withdrawn; and (ii) require that all outstanding Eurocurrency Loans in Dollars made by it be converted to ABR Loans and that all outstanding Local Currency Loans made by it in the affected Local Currency be promptly prepaid, in which event all such Eurocurrency Loans in Dollars shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below and all such Local Currency Loans shall be promptly prepaid. In the event any Lender shall exercise its rights under subparagraph (i) or (ii) above with respect to Eurocurrency Loans in Dollars, all payments and prepayments of principal which would otherwise have been applied to repay the Eurocurrency Loans that would have been made by such Lender or the converted Eurocurrency Loans, of such Lender shall instead be applied to repay the ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurocurrency 25 Loans. (b) For purposes of this Section 2.14, a notice by any Lender shall be effective as to each Eurocurrency Loan or Local Currency Loan, if lawful, on the last day of the Interest Period currently applicable to such Eurocurrency Loan or Local Currency Loan; in all other cases such notice shall be effective on the date of receipt. SECTION 2.15. Indemnity. The Borrowers shall indemnify each Lender against any out-of-pocket loss or expense which such Lender sustains or incurs as a consequence of (a) any failure to borrow or to refinance, convert or continue any Loan hereunder after irrevocable notice of such borrowing, refinancing, conversion or continuation has been given pursuant to Section 2.03, 2.04 or 2.05 or pursuant to any Local Currency Addendum; (b) any payment, prepayment or conversion, or assignment required under Section 2.20, of a Eurocurrency Loan required by any other provision of this Agreement or otherwise made or deemed made on a date other than the last day of the Interest Period, if any, applicable thereto; (c) any default in payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise); or (d) the occurrence of any Event of Default, including, in each such case, any loss or reasonable expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Loan or any part thereof as a Eurocurrency Loan or Local Currency Loan. Such loss or reasonable expense shall include an amount equal to the excess, if any, as reasonably determined by such Lender, of (i) its cost of obtaining the funds for the Loan being paid, prepaid, refinanced or not borrowed (assumed to be the LIBO Rate applicable thereto) for the period from the date of such payment, prepayment, refinancing or failure to borrow or refinance to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow or refinance the Interest Period for such Loan which would have commenced on the date of such failure) over (ii) the amount of interest (as reasonably determined by such Lender) that would be realized by such Lender in reemploying the funds so paid, prepaid or not borrowed or refinanced for such period or Interest Period, as the case may be. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section shall be delivered to such Borrower and shall be conclusive absent manifest error. SECTION 2.16. Pro Rata Treatment. Except as required under Sections 2.14 and 2.20, each payment or prepayment of principal of any Standby Borrowing, each payment of interest on the Standby Loans, each payment of the Facility Fees, each payment of the Usage Fees, each reduction of the Commitments and each refinancing or conversion of any Standby Borrowing with a Standby Borrowing of any Type, shall be allocated pro rata among the Lenders in accordance with their respective Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Standby Loans). Each payment of principal of any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective principal amounts of their outstanding Competitive Loans comprising such Borrowing. Each payment of interest on any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective amounts of accrued and unpaid interest on their outstanding Competitive Loans comprising such Borrowing. For purposes of determining the Available Commitments of the Lenders at any time, each outstanding Competitive Borrowing shall be deemed to have utilized the Commitments of the Lenders (including those Lenders which shall not have made Loans as part of such Competitive Borrowing) pro rata in accordance with such respective Commitments. Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing to the next higher or lower whole Dollar amount. SECTION 2.17. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, or in 26 lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Standby Loan or Loans as a result of which the unpaid principal portion of its Standby Loans shall be proportionately less than the unpaid principal portion of the Standby Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Standby Loans of such other Lender, so that the aggregate unpaid principal amount of the Standby Loans and participations in the Standby Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Standby Loans then outstanding as the principal amount of its Standby Loans prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Standby Loans outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that, if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.17 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. Any Lender holding a participation in a Standby Loan deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing to such Lender by reason thereof as fully as if such Lender had made a Standby Loan in the amount of such participation. SECTION 2.18. Payments. (a) The Borrowers shall make each payment (including principal of or interest on any Borrowing and any Fees or other amounts) hereunder from an account in the United States not later than 12:00 noon, local time at the place of payment, on the date when due, without setoff or counterclaim, in immediately available funds to the Administrative Agent at its offices at 270 Park Avenue, New York, New York (or, in the case of Local Currency Loans, such other time and place as shall be specified in the applicable Local Currency Addendum). Each such payment (other than principal of and interest on Local Currency Loans which shall be made in the Local Currency of such Local Currency Loan) shall be made in Dollars. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.19. Taxes. (a) Any and all payments to the Lenders hereunder shall be made, in accordance with Section 2.18, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) income taxes imposed on the income of the Administrative Agent or any Lender (or any transferee or assignee thereof, including a participation holder (any such entity a "Transferee")) and (ii) franchise taxes imposed on the income, assets or net worth of the Administrative Agent, or any Lender (or Transferee), in each case by the jurisdiction under the laws of which the Administrative Agent or such Lender (or Transferee) is organized or doing business (other than as a result of entering into this Agreement, performing any obligations hereunder, receiving any payments hereunder or enforcing any rights hereunder), or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, collectively or individually, "Taxes"). If any Borrower shall be required to deduct any Taxes from or in respect of any sum payable hereunder to any Lender (or any Transferee) or the Administrative Agent, (i) the sum payable shall be increased by the amount (an "additional amount") necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.19) such Lender (or Transferee) or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made; (ii) such Borrower shall make such deductions; and (iii) such Borrower shall pay the full amount deducted to the relevant Governmental Authority in 27 accordance with applicable law. (b) In addition, the Borrowers shall pay to the relevant Governmental Authority in accordance with applicable law any current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document ("Other Taxes"). (c) The Borrowers shall indemnify each Lender (or Transferee), and the Administrative Agent for the full amount of Taxes and Other Taxes paid by such Lender (or Transferee) or the Administrative Agent, as the case may be, and any liability (including penalties, interest and expenses (including reasonable attorneys' fees and expenses)) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability prepared by a Lender (or Transferee) or the Administrative Agent on its behalf, absent manifest error, shall be final, conclusive and binding for all purposes. Such indemnification shall be made within 30 days after the date any Lender (or Transferee) or the Administrative Agent, as the case may be, makes written demand therefor, which written demand shall be made within 60 days of the date such Lender (or Transferee) or the Administrative Agent receives written demand for payment of such Taxes or Other Taxes from the relevant Governmental Authority. (d) If a Lender (or Transferee) or the Administrative Agent shall become aware that it is entitled to claim a refund from a Governmental Authority in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrowers, or with respect to which the Borrowers have paid additional amounts, pursuant to this Section 2.19, it shall promptly notify the Borrowers of the availability of such refund claim and shall, within 30 days after receipt of a request by the Borrowers, make a claim to such Governmental Authority for such refund at the Borrowers' expense. If a Lender (or Transferee) or the Administrative Agent receives a refund (including pursuant to a claim for refund made pursuant to the preceding sentence) in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrowers or with respect to which the Borrowers have paid additional amounts pursuant to this Section 2.19, it shall within 30 days from the date of such receipt pay over such refund to the Borrowers (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrowers under this Section 2.19 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of such Lender (or Transferee) or the Administrative Agent and without interest (other than interest paid by the relevant Governmental Authority with respect to such refund); provided, however, that the Borrowers, upon the request of such Lender (or Transferee) or the Administrative Agent, agree to repay the amount paid over to the Borrowers (plus penalties, interest or other charges) to such Lender (or Transferee) or the Administrative Agent in the event such Lender (or Transferee) or the Administrative Agent is required to repay such refund to such Governmental Authority. (e) As soon as practicable after the date of any payment of Taxes or Other Taxes by the Borrowers to the relevant Governmental Authority, the Borrowers will deliver to the Administrative Agent, at its address referred to in Section 9.01, the original or a certified copy of a receipt issued by such Governmental Authority evidencing payment thereof. (f) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.19 shall survive the payment in full of the principal of and interest on all Loans made hereunder. (g) Each Lender (or Transferee) that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (a "Non-U.S. Lender") shall deliver to the Company and the Administrative Agent two copies of either United States Internal Revenue Service Form W-8BEN or Form W-8ECI, or, in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code 28 with respect to payments of "portfolio interest", a Form W-8BEN, or any subsequent versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8BEN, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10 percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Company and is not a controlled foreign corporation related to the Company (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. Federal withholding tax on payments by the Company under this Agreement. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of a Transferee that is a participation holder, on or before the date such participation holder becomes a Transferee hereunder) and on or before the date, if any, such Non-U.S. Lender changes its applicable lending office by designating a different lending office (a "New Lending Office"). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Notwithstanding any other provision of this Section 2.19(g), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.19(g) that such Non-U.S. Lender is not legally able to deliver. (h) The Borrowers shall not be required to indemnify any Non-U.S. Lender, or to pay any additional amounts to any Non-U.S. Lender, in respect of United States Federal withholding tax pursuant to paragraph (a) or (c) above to the extent that (i) the obligation to withhold amounts with respect to United States Federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Transferee that is a participation holder, on the date such participation holder became a Transferee hereunder) or, with respect to payments to a New Lending Office, the date such Non-U.S. Lender designated such New Lending Office with respect to a Loan; provided, however, that this clause (i) shall not apply to any Transferee or New Lending Office that becomes a Transferee or New Lending Office as a result of an assignment, participation, transfer or designation made at the request of the Company; and provided further, however, that this clause (i) shall not apply to the extent the indemnity payment or additional amounts any Transferee, or Lender (or Transferee) through a New Lending Office, would be entitled to receive (without regard to this clause (i)) do not exceed the indemnity payment or additional amounts that the person making the assignment, participation or transfer to such Transferee, or Lender (or Transferee) making the designation of such New Lending Office, would have been entitled to receive in the absence of such assignment, participation, transfer or designation or (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender to comply with the provisions of paragraph (g) above. (i) Any Lender (or Transferee) claiming any indemnity payment or additional amounts payable pursuant to this Section 2.19 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document reasonably requested in writing by the Company or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such indemnity payment or additional amounts that may thereafter accrue and would not, in the determination of such Lender (or Transferee), be otherwise disadvantageous to such Lender (or Transferee). (j) Nothing contained in this Section 2.19 shall require any Lender (or Transferee) or the Administrative Agent to make available any of its tax returns (or any other information that it deems to be confidential or proprietary). SECTION 2.20. Duty to Mitigate; Assignment of Commitments Under Certain Circumstances. (a) Any Lender (or Transferee) claiming any additional amounts payable pursuant to Section 2.13 or Section 2.19 or exercising its rights under Section 2.14 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Company or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts which may thereafter accrue or avoid the circumstances giving rise to such exercise and would not, in the determination of such Lender (or Transferee), be otherwise 29 disadvantageous to such Lender (or Transferee). (b) In the event that any Lender shall have delivered a notice or certificate pursuant to Section 2.13 or 2.14, or the Company shall be required to make additional payments to any Lender under Section 2.19, the Company shall have the right, at its own expense, upon notice to such Lender and the Administrative Agent, to require such Lender to transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 9.04) all interests, rights and obligations contained hereunder to another financial institution which shall assume such obligations; provided that (i) no such assignment shall conflict with any law, rule or regulation or order of any Governmental Authority and (ii) the assignee or the Company, as the case may be, shall pay to the affected Lender in immediately available funds on the date of such assignment the principal of and interest accrued to the date of payment on the Loans made by it hereunder and all other amounts accrued for its account or owed to it hereunder. SECTION 2.21. Terms of Local Currency Facilities. (a) The Company may in its discretion from time to time elect to borrow, or elect that one or more Borrowing Subsidiaries may borrow, Local Currency Loans on a revolving basis from any one or more Local Currency Lenders, with the consent of each such Local Currency Lender in its sole discretion, by delivering a Local Currency Addendum to the Administrative Agent and the applicable Local Currency Lenders (through the Administrative Agent), executed by the Company, each such Borrowing Subsidiary and each such Local Currency Lender; provided, however, that on the effective date of such election, and after giving effect thereto, (i) an Exchange Rate with respect to each Local Currency covered by such Local Currency Addendum shall be determinable by reference to the Reuters currency pages (or comparable publicly available screen); (ii) no Default or Event of Default shall have occurred and be continuing; and (iii) the aggregate amount of all Local Currency Facility Maximum Borrowing Amounts under all Local Currency Addenda at the time in effect shall not exceed $350,000,000. Each Borrower and, by agreeing to any Local Currency Addendum, each relevant Local Currency Lender, acknowledges and agrees that each reference in this Agreement to any Lender shall, to the extent applicable, be deemed to be a reference to such Local Currency Lender, subject to the second sentence of the definition of such term. (b) Each Local Currency Addendum shall set forth (i) the maximum amount (expressed in Dollars and without duplication) available to be borrowed from all Local Currency Lenders under such Local Currency Addendum (as the same may be reduced from time to time pursuant to Section 2.22(c) or (d), a "Local Currency Facility Maximum Borrowing Amount") and (ii) with respect to each Local Currency Lender party to such Local Currency Addendum, the maximum amount (expressed in Dollars and without duplication) available to be borrowed from such Local Currency Lender thereunder (as the same may be reduced from time to time pursuant to Section 2.22(c) or (d), a "Local Currency Lender Maximum Borrowing Amount"). In no event shall the aggregate of all Local Currency Lender Maximum Borrowing Amounts in respect of any Local Currency Lender at any time exceed such Lender's Commitment. Except as provided in Section 2.21(c), the making of Local Currency Loans by a Local Currency Lender under a Local Currency Addendum shall under no circumstances reduce the amount available to be borrowed from such Lender under any other Local Currency Addendum to which such Lender is a party. (c) Except as otherwise required by applicable law, in no event shall the Local Currency Lenders have the right to accelerate the Local Currency Loans outstanding under any Local Currency Addendum, or to terminate their commitments (if any) thereunder to make Local Currency Loans prior to the stated termination date in respect thereof, except that such Local Currency Lenders shall, in each case, have such rights upon an acceleration of the Loans and a termination of the Commitments pursuant to Article VI, respectively. No Local Currency Loan may be made if (i) an Exchange Rate with respect to such Local Currency cannot be determined; (ii) a Default or an Event of Default shall have occurred and be continuing or would result therefrom; or (iii) after giving effect thereto, (A) the sum of the aggregate principal amount of the Dollar Loans (other than Competitive Loans) and Local Currency Loans (Dollar Equivalent) of any Lender (and the Affiliates of such Lender that are Local Currency Lenders) then outstanding 30 would exceed such Lender's Commitment, (B) the Dollar Equivalent of the aggregate principal amount of outstanding Local Currency Loans denominated in a specified Local Currency would exceed the applicable Local Currency Facility Maximum Borrowing Amount, or (C) the sum of the aggregate Standby Credit Exposures and the aggregate Competitive Loan Exposures would exceed the Total Commitment. (d) The applicable Borrower and the applicable Local Currency Lenders, or, if so specified in the relevant Local Currency Addendum, an agent acting on their behalf, shall furnish to the Administrative Agent, promptly following the making, payment or prepayment of each Local Currency Loan, and at any other time at the request of the Administrative Agent, a statement setting forth the outstanding Local Currency Loans made under such Local Currency Addendum. (e) The applicable Borrower shall furnish to the Administrative Agent copies of any amendment, supplement or other modification to the terms of any Local Currency Addendum promptly after the effectiveness thereof. (f) The Company may terminate any Local Currency Addendum, if there are not any Loans outstanding thereunder, in its sole discretion (or, if there are Loans outstanding thereunder, with the consent of each Local Currency Lender party thereto), by written notice to the Administrative Agent, which notice shall be executed by the Company, each relevant Borrowing Subsidiary and, if their consent is required, each such Local Currency Lender. Once notice of such termination is received by the Administrative Agent, such Local Currency Addendum and the loans and other obligations outstanding thereunder shall immediately cease to be subject to the terms of this Agreement. SECTION 2.22. Currency Fluctuations, etc. (a) Not later than 1:00 p.m., New York City time, on each Calculation Date, the Administrative Agent shall (i) determine the Exchange Rate as of such Calculation Date with respect to each Local Currency covered by a Local Currency Addendum and (ii) give notice thereof to the Lenders, the Company and the relevant Borrowing Subsidiaries. The Exchange Rates so determined shall become effective on the first Business Day immediately following the relevant Calculation Date (a "Reset Date") and shall remain effective until the next succeeding Reset Date. (b) Not later than 5:00 p.m., New York City time, on each Reset Date and each Borrowing Date, the Administrative Agent shall (i) determine the Dollar Equivalent of the Local Currency Loans then outstanding (after giving effect to any Local Currency Loans to be made or repaid on such date) and (ii) notify the Lenders, the Company and the relevant Borrowing Subsidiaries of the results of such determination. (c) If, on any Reset Date or any Borrowing Date (after giving effect to (i) any Loans to be made or repaid on such date and (ii) any amendment, supplement or other modification to any Local Currency Addendum effective on such date of which the Administrative Agent has received notice), the aggregate outstanding Dollar Standby Extensions of Credit of any Lender exceeds the Dollar Standby Credit Overage of such Lender (the amount of such excess being called the "Dollar Standby Credit Excess"), then such Lender's Local Currency Lender Maximum Borrowing Amount under each Local Currency Addendum to which such Lender is a party shall be reduced on such date by an amount equal to the product of such Dollar Standby Credit Excess times a fraction the numerator of which shall equal the Local Currency Lender Maximum Borrowing Amount under such Local Currency Addendum and the denominator of which shall equal the aggregate of the Local Currency Lender Maximum Borrowing Amounts of such Lender. After giving effect to any such reduction in Local Currency Lender Maximum Borrowing Amounts, the Local Currency Facility Maximum Borrowing Amount with respect to each Local Currency Addendum shall in turn be reduced to an amount equal to the aggregate of the Local Currency Lender Maximum Borrowing Amounts of all Lenders party to such Local Currency Addendum. Reductions in Local Currency Facility Maximum Borrowing Amounts and Local Currency Lender Maximum Borrowing Amounts pursuant to this Section 2.22(c) shall be effective 31 until the amount thereof shall be recalculated by the Administrative Agent on the next succeeding Reset Date or Borrowing Date, and shall not be deemed to reduce the stated amount of any commitment of any Local Currency Lender in respect of any Local Currency Addendum. (d) If, on any Reset Date or Borrowing Date (after giving effect to (i) any Loans to be made or repaid on such date, (ii) any amendment, supplement or other modification to any Local Currency Addendum effective on such date of which the Administrative Agent has received notice and (iii) any reduction in the Local Currency Facility Maximum Borrowing Amounts pursuant to Section 2.22(c) effective on such date), the sum of (A) the aggregate outstanding Dollar Standby Extensions of Credit of all the Lenders and (B) the aggregate Competitive Loan Exposures exceed the Dollar Facility Overage (the amount of such excess being called the "Dollar Facility Excess"), then the Local Currency Facility Maximum Borrowing Amount under each Local Currency Addendum shall be reduced on such date by an amount equal to the product of such Dollar Facility Excess times a fraction the numerator of which shall equal the Local Currency Facility Maximum Borrowing Amount under such Local Currency Addendum and the denominator of which shall equal the aggregate of the Local Currency Facility Maximum Borrowing Amounts with respect to all Local Currency Addenda. Each such reduction in the Local Currency Facility Maximum Borrowing Amount under a Local Currency Addendum shall in turn reduce the respective Local Currency Lender Maximum Borrowing Amounts of each Local Currency Lender party to such Local Currency Addendum, pro rata on the basis of the respective Local Currency Lender Maximum Borrowing Amounts of such Local Currency Lenders immediately prior to such reduction. Reductions in Local Currency Facility Maximum Borrowing Amounts and Local Currency Lender Maximum Borrowing Amounts pursuant to this Section 2.22(d) shall be effective until the amount thereof shall be recalculated by the Administrative Agent on the next succeeding Reset Date or Borrowing Date, and shall not be deemed to reduce the stated amount of any commitment of any Local Currency Lender in respect of any Local Currency Addendum. (e) If, on any Reset Date, the Dollar Equivalent of the Local Currency Loans outstanding under a Local Currency Addendum exceeds 105% of the Local Currency Facility Maximum Borrowing Amount with respect thereto (after giving effect to any reductions therein effected pursuant to Section 2.22(c) or (d) on such date), then the relevant Borrower shall, within three Business Days after notice thereof from the Administrative Agent, (i) increase the Local Currency Facility Maximum Borrowing Amount with respect to such Local Currency Facility in accordance with Section 2.21(e) and/or (ii) prepay Local Currency Loans, in either case in an aggregate amount such that, after giving effect thereto, (x) the Dollar Equivalent of all such Local Currency Loans shall be equal to or less than such Local Currency Facility Maximum Borrowing Amount and (y) the Dollar Equivalent of the Local Currency Loans of each relevant Local Currency Lender shall be equal to or less than such Local Currency Lender's Local Currency Lender Maximum Borrowing Amount with respect to such Local Currency Addendum. (f) If, on any Reset Date, the Standby Credit Exposure of any Lender exceeds 105% of such Lender's Commitment, then, within three Business Days after notice thereof from the Administrative Agent, the Company shall prepay and/or cause the relevant Borrowing Subsidiaries to prepay the Loans in accordance with this Agreement, in an aggregate amount such that, after giving effect thereto, the Standby Credit Exposure of such Lender shall be equal to or less than such Lender's Standby Credit Commitment. (g) The Administrative Agent shall promptly notify the relevant Lenders of the amount of any reductions in Local Currency Facility Maximum Borrowing Amounts or Local Currency Lender Maximum Borrowing Amounts required pursuant to this Section 2.22. SECTION 2.23. Increase in Total Commitment. (a) The Company may from time to time, by written notice to the Administrative Agent (which shall deliver a copy thereof to each Lender), request that the Total Commitment be increased by an amount not to exceed the Incremental Facility Amount at such time. Such notice shall set forth the amount of the requested increase in the Total Commitment (which shall be an integral multiple of $10,000,000) and the 32 date on which such increase is requested to become effective (which shall not be less than 10 Business Days or more than 60 days after the date of such notice), and shall offer to each Lender the opportunity to increase its Commitment by its Pro Rata Percentage of the proposed increased amount. Each Lender shall, by notice to the Company and the Administrative Agent given not more than 10 days after the date on which the Administrative Agent shall have delivered the Company's notice, either agree to increase its Commitment by all or a portion of the offered amount (each Lender so agreeing being an "Increasing Lender") or decline to increase its Commitment (and any Lender that does not deliver such notice within such period of 10 days shall be deemed to have declined to increase its Commitment) (each Lender so declining or being deemed to have declined being a "Non-Increasing Lender"). In the event that, on the 10th day after the Administrative Agent shall have delivered the Company's notice, the Lenders shall have agreed pursuant to the preceding sentence to increase their Commitments by an aggregate amount less than the increase in the Total Commitment requested by the Company, the Company may arrange for one or more banks or other financial institutions (any such bank or other financial institution referred to in this clause (a) being called an "Augmenting Lender"), which may include any Lender, to extend Commitments or increase their existing Commitments in an aggregate amount equal to the unsubscribed amount; provided that each Augmenting Lender, if not already a Lender hereunder, shall be subject to the approval of the Administrative Agent and the Company and each Augmenting Lender shall execute all such documentation as the Administrative Agent shall specify to evidence its Commitment and/or its status as a Lender hereunder. Any increase in the Total Commitment may be made in an amount which is less than the increase requested by the Company if the Company is unable to arrange for, or chooses not to arrange for, Augmenting Lenders. (b) On the effective date (the "Increase Effective Date") of any increase in the Total Commitment pursuant to this Section 2.23 (the "Commitment Increase"), (i) the aggregate principal amount of the Standby Loans outstanding (the "Initial Loans") immediately prior to giving effect to the Commitment Increase on the Increase Effective Date shall be deemed to be paid; (ii) each Increasing Lender and each Augmenting Lender that shall have been a Lender prior to the Commitment Increase shall pay to the Administrative Agent in same day funds an amount equal to the difference between (A) the product of (1) such Lender's Pro Rata Percentage (calculated after giving effect to the Commitment Increase) multiplied by (2) the amount of the Subsequent Borrowings (as hereinafter defined) and (B) the product of (1) such Lender's Pro Rata Percentage (calculated without giving effect to the Commitment Increase) multiplied by (2) the amount of the Initial Loans; (iii) each Augmenting Lender that shall not have been a Lender prior to the Commitment Increase shall pay to the Administrative Agent in same day funds an amount equal to the product of (1) such Augmenting Lender's Pro Rata Percentage (calculated after giving effect to the Commitment Increase) multiplied by (2) the amount of the Subsequent Borrowings; (iv) after the Administrative Agent receives the funds specified in clauses (ii) and (iii) above, the Administrative Agent shall pay to each Non-Increasing Lender the portion of such funds that is equal to the difference between (A) the product of (1) such Non-Increasing Lender's Pro Rata Percentage (calculated without giving effect to the Commitment Increase) multiplied by (2) the amount of the Initial Loans, and (B) the product of (1) such Non-Increasing Lender's Pro Rata Percentage (calculated after giving effect to the Commitment Increase) multiplied by (2) the amount of the Subsequent Borrowings; (v) after the effectiveness of the Commitment Increase, the Company shall be deemed to have made new Borrowings (the "Subsequent Borrowings") in an aggregate principal amount equal to the aggregate principal amount of the Initial Loans and of the Types and for the Interest Periods specified in a borrowing request delivered in accordance with Section 2.04; (vi) each Non-Increasing Lender, each Increasing Lender and each Augmenting Lender shall be deemed to hold its Pro Rata Percentage of each Subsequent Borrowing (each calculated after giving effect to the Commitment Increase); and (vii) the Company shall pay each Increasing Lender and each Non-Increasing Lender any and all accrued but unpaid interest on the Initial Loans. The deemed payments made pursuant to clause (i) above in respect of each Eurocurrency Loan shall be subject to indemnification by the Company pursuant to the provisions of Section 2.15 if the Increase Effective Date occurs other than on the last day of the Interest Period relating thereto. 33 (c) Notwithstanding the foregoing, no increase in the Total Commitment (or in the Commitment of any Lender) or addition of a new Lender shall become effective under this Section 2.23 unless, (i) on the Increase Effective Date, the conditions set forth in paragraphs (b) and (c) of Section 4.01 shall be satisfied and the Administrative Agent shall have received a certificate to that effect dated such date and executed by a Financial Officer of the Company; (ii) no reduction of the Total Commitment shall have occurred prior to the Increase Effective Date; and (iii) the Administrative Agent shall have received (with sufficient copies for each of the Lenders) documents consistent with those delivered on the Effective Date under clauses (a) and (b) of Section 4.02 of the Existing Credit Agreement as to the corporate power and authority of the Company to borrow hereunder after giving effect to such increase. ARTICLE III REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants to each of the Lenders that: SECTION 3.01. Organization; Powers. Each Borrower and each of the Restricted Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted; (c) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a Material Adverse Effect; and (d) in the case of each Borrower, has the corporate power and authority to execute, deliver and perform its obligations under the Loan Documents and to borrow hereunder and thereunder. SECTION 3.02. Authorization. The execution, delivery and performance by the Borrowers of this Agreement and any promissory notes issued pursuant to Section 9.04(i) and each Local Currency Addendum (and by the Borrowing Subsidiaries of each Borrowing Subsidiary Agreement) and the Borrowings hereunder (collectively, the "Transactions") (a) have been duly authorized by all requisite corporate action and (b) will not (i) violate (A) any provision of any law, statute, rule or regulation (including the Margin Regulations) or of the certificate of incorporation or other constitutive documents or by-laws of the Borrowers; (B) any order of any Governmental Authority; or (C) any provision of any indenture, agreement or other instrument to which any Borrower is a party or by which it or any of its property is or may be bound, (ii) be in conflict with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or (iii) result in the creation or imposition of any lien upon any property or assets of any Borrower. SECTION 3.03. Enforceability. This Agreement and each Loan Document to which a Borrower is a party constitutes a legal, valid and binding obligation of each such Borrower enforceable in accordance with its terms. SECTION 3.04. Governmental Approvals. No action, consent or approval of, registration or filing with or other action by any Governmental Authority, other than those which have been taken, given or made, as the case may be, is or will be required with respect to any Borrower in connection with the Transactions. SECTION 3.05. Financial Statements. (a) The Company has heretofore furnished to the Administrative Agent and the Lenders copies of its consolidated balance sheet and statements of income, cash flow and stockholders' equity as of and for the year ended December 31, 2001 and the nine months ended September 30, 2002. Such financial statements present fairly, in all material respects, the consolidated financial condition and the results of operations of the Company and the Subsidiaries as of such dates and for such periods in accordance with GAAP or SAP, as requested. 34 (b) As of the date of this Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement, there has been no material adverse change in the consolidated financial condition of the Company and the Subsidiaries taken as a whole from the financial condition reported in the financial statements referenced in paragraph (a) of this Section 3.05. SECTION 3.06. Litigation; Compliance with Laws. (a) Subject to Schedule 3.06, there are no actions, proceedings or investigations filed or (to the knowledge of the Borrowers) threatened against any Borrower or any Subsidiary in any court or before any Governmental Authority or arbitration board or tribunal which question the validity or legality of this Agreement, the Transactions or any action taken or to be taken pursuant to this Agreement and no order or judgment has been issued or entered restraining or enjoining any Borrower or any Subsidiary from the execution, delivery or performance of this Agreement nor is there any other action, proceeding or investigation filed or (to the knowledge of any Borrower or any Subsidiary) threatened against any Borrower or any Subsidiary in any court or before any Governmental Authority or arbitration board or tribunal which would be reasonably likely to result in a Material Adverse Effect or materially restrict the ability of any Borrower to comply with its obligations under the Loan Documents. (b) Neither any Borrower nor any Subsidiary is in violation of any law, rule or regulation (including any law, rule or regulation relating to the protection of the environment or to employee health or safety), or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default would be reasonably likely to result in a Material Adverse Effect. (c) No exchange control law or regulation materially restricts any Borrower from complying with its obligations in respect of any Loan or otherwise under this Agreement or any Local Currency Addendum. SECTION 3.07. Federal Reserve Regulations. (a) Neither any Borrower nor any Subsidiary that will receive proceeds of the Loans hereunder is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (b) No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry Margin Stock or to refund indebtedness originally incurred for such purpose, or for any other purpose which entails a violation of, or which is inconsistent with, the provisions of the Margin Regulations. SECTION 3.08. Investment Company Act; Public Utility Holding Company Act. No Borrower is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 (the "1940 Act") or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. While certain subsidiaries of Hartford Life Insurance Company are "investment companies" as defined in the 1940 Act, the transactions contemplated by this Agreement will not violate or require any approval under such Act or any regulations promulgated pursuant thereto. SECTION 3.09. Use of Proceeds. All proceeds of the Loans shall be used for the purposes referred to in the recitals to this Agreement. SECTION 3.10. Full Disclosure; No Material Misstatements . No report, financial statement, other written information or other information transmitted orally during a formal presentation, furnished by or on behalf of any Borrower to the Administrative Agent or any Lender pursuant to this Agreement or in connection with the arrangement, syndication and closing of the credit facilities established hereby, contains or will contain any material misstatement of fact or omits or will omit to state any material fact necessary to make the statements therein, in the light 35 of the circumstances under which they were or will be made, not misleading. SECTION 3.11. Taxes. Each Borrower and each of the Restricted Subsidiaries have filed or caused to be filed all Federal, state and local tax returns which are required to be filed by them, and have paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by any of them, other than any taxes or assessments the validity of which is being contested in good faith by appropriate proceedings, and with respect to which appropriate accounting reserves have to the extent required by GAAP or SAP, as applicable, been set aside. SECTION 3.12. Employee Pension Benefit Plans. The present aggregate value of accumulated benefit obligations of all unfunded and underfunded pension plans of the Company and its Subsidiaries (based on those assumptions used for disclosure in corporate financial statements in accordance with GAAP or SAP, as applicable) did not, as of December 31, 2001, exceed by more than $397,000,000 the value of the assets of all such plans. In these cases the Company has recorded book reserves to meet the obligations. ARTICLE IV CONDITIONS OF LENDING SECTION 4.01. All Borrowings. The obligations of the Lenders to make Loans hereunder are subject to the satisfaction of the following conditions: (a) On the date of each Borrowing, the Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03 or Section 2.04, as applicable. (b) On the date of each Borrowing, the representations and warranties set forth in Article III hereof (other than the representation and warranty set forth in Section 3.05(b)) shall be true and correct in all material respects on and as of the date of such Borrowing with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. (c) At the time of and immediately after such Borrowing no Event of Default or Default shall have occurred and be continuing. Each Borrowing shall be deemed to constitute a representation and warranty by each Borrower on the date of such Borrowing as to the matters specified in paragraphs (b) and (c) of this Section 4.01. SECTION 4.02. Second Amended and Restated Agreement Effective Date. The effectiveness of this Agreement shall be subject to the satisfaction of the following conditions: (a) The Administrative Agent shall have received a favorable written opinion of Brian Becker, Esq., dated the Second Amended and Restated Agreement Effective Date and addressed to the Lenders, to the effect set forth in Exhibit C hereto. (b) The Administrative Agent shall have received (i) a certificate of the Secretary or an Assistant Secretary of the Company dated the Second Amended and Restated Effective Date and certifying (A) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of the Company authorizing the execution, delivery and performance of this Agreement and any other documents related to this Agreement and the Borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect and (B) as to the incumbency and specimen signature of each officer executing this Agreement or any other document delivered in connection herewith on behalf of the Company and (ii) a certificate 36 of another officer of the Company as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (i) above. (c) The Administrative Agent shall have received from the Company and the Required Lenders either (i) a counterpart of this Agreement signed on behalf of each such party or (ii) written evidence satisfactory to the Administrative Agent (which may include telecopy transmission of a signed signature page of this Agreement) that each such party has signed a counterpart of this Agreement.. SECTION 4.03. First Borrowing by Each Borrowing Subsidiary. On or prior to the first date on which Loans are made to any Borrowing Subsidiary: (a) The Lenders shall have received the favorable written opinion of counsel with respect to such Borrowing Subsidiary, addressed to the Lenders, to the effect set forth in Exhibit C hereto. (b) Each Lender shall have received a copy of the Borrowing Subsidiary Agreement executed by such Borrowing Subsidiary. ARTICLE V COVENANTS A. Affirmative Covenants. Each Borrower covenants and agrees with each Lender and the Administrative Agent that so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any Fees or any other amounts payable hereunder shall be unpaid, unless the Required Lenders shall otherwise consent in writing, it will, and will cause each of the Subsidiaries to: SECTION 5.01. Existence. Do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights and franchises, except as expressly permitted under Section 5.11; provided, however, that nothing in this Section shall prevent the abandonment or termination of the existence, rights or franchises of any Restricted Subsidiary or any rights or franchises of any Borrower if such abandonment or termination is in the best interests of the Borrowers and is not disadvantageous in any material respect to the Lenders. SECTION 5.02. Business and Properties. In the case of the Borrowers and the Restricted Subsidiaries, comply in all material respects with all applicable laws, rules, regulations and orders of any Governmental Authority (including any of the foregoing relating to the protection of the environment or to employee health and safety), whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of its business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times. SECTION 5.03. Financial Statements, Reports, etc. In the case of the Company, furnish to the Administrative Agent for distribution to each Lender: (a) within 120 days after the end of each fiscal year, its consolidated balance sheet and the related consolidated statements of income and cash flows showing its consolidated financial condition as of the close of such fiscal year and the consolidated results of its operations during such year, all audited by Deloitte & Touche LLP or other independent certified public accountants of recognized national standing selected by the Company and 37 accompanied by an opinion of such accountants to the effect that such consolidated financial statements fairly present its financial condition and results of operations on a consolidated basis in accordance with GAAP or SAP, as applicable (it being agreed that the requirements of this paragraph may be satisfied by the delivery pursuant to paragraph (e) below of an annual report on Form 10-K containing the foregoing); (b) within 90 days after the end of each of the first three fiscal quarters of each fiscal year, its consolidated balance sheet and related consolidated statements of income and cash flows showing its consolidated financial condition as of the close of such fiscal quarter and the consolidated results of its operations during such fiscal quarter and the then elapsed portion of the fiscal year, all certified by one of its Financial Officers as fairly presenting its financial condition and results of operations on a consolidated basis in accordance with GAAP or SAP, as applicable, subject to normal year-end audit adjustments (it being agreed that the requirements of this paragraph may be satisfied by the delivery pursuant to paragraph (e) below of a quarterly report on Form 10-Q containing the foregoing); (c) concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of a Financial Officer certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto; (d) as soon as available and in any event within 90 days after the end of each fiscal year, (i) the Statement of Actuarial Opinion of each of the Restricted Subsidiaries for such fiscal year and as filed with the Applicable Insurance Regulatory Authority and (ii) the Annual Statement of each of the Restricted Subsidiaries for such fiscal year and as filed with the Applicable Insurance Regulatory Authority, together with, in the case of the statements delivered pursuant to clause (ii) above, a certificate of a Financial Officer to the effect that such statements present fairly the statutory assets, liabilities, capital and surplus, results of operations and cash flows of such Insurance Subsidiary in accordance with SAP; (e) promptly after the same become publicly available, copies of all reports on forms 10-K, 10-Q and 8-K filed by it with the SEC, or any Governmental Authority succeeding to any of or all the functions of the SEC, or, in the case of the Company, copies of all reports distributed to its shareholders, as the case may be; (f) promptly, from time to time, such other information as any Lender shall reasonably request through the Administrative Agent; and (g) concurrently with any delivery of financial statements under paragraph (a) or (b) above, calculations of the financial tests referred to in Sections 5.10, 5.14 and 5.16. Information required to be delivered pursuant to this Section 5.03 shall be deemed to have been (i) delivered to the Lenders on the date on which the Company provides written notice to the Administrative Agent that such information has been posted on the Company's website on the Internet at http://www.thehartford.com or is available on the website of the SEC at http://www.sec.gov (to the extent such information has been posted or is available as described in such notice), or (ii) distributed to each Lender on the date on which the Administrative Agent shall have posted such information on an IntraLinks or similar site to which the Lenders have been granted access; provided that the Company shall deliver paper copies of such information to any Lender that requests such delivery within 5 Business Days after such request. Information required to be delivered pursuant to this Section 5.03 may also be delivered by electronic communications pursuant to procedures approved by the Administrative Agent. 38 SECTION 5.04. Insurance. In the case of the Borrowers and each Restricted Subsidiary, keep its insurable properties adequately insured at all times by financially sound and reputable insurers, and maintain such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies similarly situated and in the same or similar businesses (it being understood that the Borrowers and the Restricted Subsidiaries may self-insure to the extent customary with companies similarly situated and in the same or similar businesses). SECTION 5.05. Obligations and Taxes. In the case of the Company and each Restricted Subsidiary, pay and discharge promptly when due all taxes, assessments and governmental charges imposed upon it or upon its income or profits or in respect of its property, as well as all other material liabilities, in each case before the same shall become delinquent or in default and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings and adequate reserves with respect thereto shall, to the extent required by GAAP or SAP, as applicable, have been set aside. SECTION 5.06. Litigation and Other Notices. Give the Administrative Agent prompt written notice of the following: (a) the filing or commencement of, or any written threat or written notice of intention of any person to file or commence, any action, suit or proceeding which could reasonably be expected to result in a Material Adverse Effect; provided that if such information is included in material delivered or deemed to have been delivered pursuant to Section 5.03 and specific reference to such information is made in a notice to the Administrative Agent at the time such material is delivered, notice shall be deemed to have been given on the date on which the Company delivers or is deemed to have delivered such material and provides such specific notice. (b) any Event of Default or Default, specifying the nature and extent thereof and the action (if any) which is proposed to be taken with respect thereto; and (c) any change in any of the Ratings. SECTION 5.07. Maintaining Records; Access to Properties and Inspections. Maintain financial records in accordance with GAAP or SAP, as applicable, and, upon reasonable notice, at all reasonable times, permit any authorized representative designated by the Administrative Agent to visit and inspect the properties of the Company and of any Restricted Subsidiary and to discuss the affairs, finances and condition of the Company and the Restricted Subsidiaries with a Financial Officer of the Company and such other officers as the Company shall deem appropriate. SECTION 5.08. Employee Benefits. (a) Comply in all material respects with the applicable provisions of ERISA and the Code and (b) furnish to the Administrative Agent and each Lender as soon as possible after, and in any event within 30 days after any Responsible Officer of any Borrower or any ERISA Affiliate knows that, any ERISA Event has occurred that, alone or together with any other ERISA Event known to have occurred, could reasonably be expected to result in liability of such Borrower in an aggregate amount exceeding $15,000,000 in any year, a statement of a Financial Officer of the Borrower setting forth details as to such ERISA Event and the action, if any, that such Borrower proposes to take with respect thereto. SECTION 5.09. Use of Proceeds. Use the proceeds of the Loans only for the purposes set forth in the preamble to this Agreement. SECTION 5.10. Risk-Based Capital Ratio. Maintain the ratio of Total Adjusted Capital to Risk-Based Capital (after covariance) at the end of each fiscal year of the Restricted Subsidiaries at a level equal to or greater than 1.25 to 1.00. 39 B. Negative Covenants. Each Borrower covenants and agrees with each Lender and the Administrative Agent that so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any Fees or any other amounts payable hereunder shall be unpaid, unless the Required Lenders shall otherwise consent in writing, it will not, and will not cause or permit any of the Subsidiaries to: SECTION 5.11. Consolidations, Mergers, and Sales of Assets. In the case of the Company and the Restricted Subsidiaries, consolidate or merge with or into any other person or sell, lease or transfer all or substantially all of its property and assets, or agree to do any of the foregoing, unless (a) no Default or Event of Default has occurred and is continuing or would have occurred immediately after giving effect thereto and (b) in the case of a consolidation or merger or transfer of assets involving the Company and in which the Company is not the surviving corporation or sells, leases or transfers all or substantially all of its property and assets, the surviving corporation or person purchasing, leasing or receiving such property and assets is organized in the United States of America or a state thereof and agrees to be bound by the terms and provisions applicable to the Company hereunder. SECTION 5.12. Limitations on Liens. Create, incur, assume or permit to exist any Lien on any property or assets (including the capital stock of any Subsidiary) now owned or hereafter acquired by it, or sell or transfer or create any Lien on any income or revenues or rights in respect thereof; provided, however, that this covenant shall not apply to any of the following: (a) any Lien on any property or asset hereafter acquired, constructed or improved by the Company or any Subsidiary which is created or assumed to secure or provide for the payment of any part of the purchase price of such property or asset or the cost of such construction or improvement, or any mortgage, pledge or other lien on any Lien on any property or asset existing at the time of acquisition thereof; provided, however, that such Lien shall not extend to any other property owned by the Company or any Subsidiary; (b) any Lien existing upon any property or asset of a company which is merged with or into or is consolidated into, or substantially all the assets or shares of capital stock of which are acquired by, the Company or a Subsidiary, at the time of such merger, consolidation or acquisition; provided that such Lien does not extend to any other property or asset, other than improvements to the property or asset subject to such Lien; (c) any pledge or deposit to secure payment of workers' compensation or insurance premiums, or in connection with tenders, bids, contracts (other than contracts for the payment of money) or leases; (d) any pledge of, or other Lien upon, any assets as security for the payment of any tax, assessment or other similar charge by any Governmental Authority or public body, or as security required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or right; (e) any Lien necessary to secure a stay of any legal or equitable process in a proceeding to enforce a liability or obligation contested in good faith by the Company or a Subsidiary or required in connection with the institution by the Company or a Subsidiary of any legal or equitable proceeding to enforce a right or to obtain a remedy claimed in good faith by the Company or a Subsidiary, or required in connection with any order or decree in any such proceeding or in connection with any contest of any tax or other governmental charge; or the making of any deposit with or the giving of any form of security to any governmental agency or any body created or approved by law or governmental regulation in order to entitle the Company or a Subsidiary to maintain self-insurance or to participate in any fund in connection with workers' compensation, unemployment insurance, old age pensions or other social security or to share in any provisions or other benefits provided for companies participating in any such arrangement 40 or for liability on insurance of credits or other risks; (f) any mechanics', carriers', workmen's, repairmen's, or other like Liens, if arising in the ordinary course of business, in respect of obligations which are not overdue or liability for which is being contested in good faith by appropriate proceedings; (g) any Lien on property in favor of the United States of America, or of any agency, department or other instrumentality thereof, to secure partial, progress or advance payments pursuant to the provisions of any contract; (h) any Lien securing indebtedness of a Subsidiary to the Company or a Subsidiary; provided that in the case of any sale or other disposition of such indebtedness by the Company or such Subsidiary, such sale or other disposition shall be deemed to constitute the creation of another Lien not permitted by this clause (h); (i) any Lien affecting property of the Company or any Subsidiary securing indebtedness of the United States of America or a State thereof (or any instrumentality or agency of either thereof) issued in connection with a pollution control or abatement program required in the opinion of the Company to meet environmental criteria with respect to operations of the Company or any Subsidiary and the proceeds of which indebtedness have financed the cost of acquisition of such program; (j) the renewal, extension, replacement or refunding of any mortgage, pledge, lien, deposit, charge or other encumbrance permitted by the foregoing provisions of this covenant upon the same property theretofore subject thereto, or the renewal, extension, replacement or refunding of the amount secured thereby; provided that in each case such amount outstanding at that time shall not be increased; or (k) any other Lien; provided that immediately after the creation or assumption of such Lien, the total of (x) the aggregate principal amount of Indebtedness of the Company and all Subsidiaries (not including Indebtedness permitted under clauses (a) through (j) above) secured by all Liens created or assumed under the provisions of this clause (k), plus (y) the aggregate amount of Capitalized Lease-Back Obligations of the Company and Subsidiaries under the entire unexpired terms of all leases entered into in connection with sale and lease-back transactions which would have been precluded by the provisions of Section 5.13 but for the satisfaction of the condition set forth in clause (b) thereof, shall not exceed an amount equal to 10% of the Consolidated Net Tangible Assets of the Company and its consolidated Subsidiaries. SECTION 5.13. Limitations on Sale and Leaseback Transactions. Enter into any arrangement with any person providing for the leasing by the Company or any Restricted Subsidiary of any property or asset (except for temporary leases for a term of not more than three years and except for leases between the Company and a Restricted Subsidiary or between Restricted Subsidiaries), which property has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such person more than 120 days after the acquisition thereof or the completion of construction and commencement of full operation thereof, unless either (a) the Company shall apply an amount equal to the greater of the Fair Value of such property or the net proceeds of such sale, within 120 days of the effective date of any such arrangement, to the retirement (other than any mandatory retirement or by way of payment at maturity) of Indebtedness or to the acquisition, construction, development or improvement of properties, facilities or equipment used for operating purposes or (b) at the time of entering into such arrangement, such property or asset could have been subjected to a Lien securing Indebtedness of the Company or a Restricted Subsidiary in a principal amount equal to the Capitalized Lease-Back Obligations with respect to such property or asset under paragraph (k) of Section 5.12. SECTION 5.14. Consolidated Total Debt to Consolidated Total Capitalization. 41 Permit the ratio of (a) Consolidated Total Debt to (b) Consolidated Total Capitalization to be greater than 0.40 to 1. SECTION 5.15. Limitations on Dividends and Advances by Subsidiaries. Enter into any covenant or agreement restricting the ability of any Subsidiary to pay dividends on or make other distributions in respect of its capital stock, to make loans or advances to the Company or any Subsidiary or to pay any Indebtedness owed to the Company or any Subsidiary. SECTION 5.16. Minimum Consolidated Statutory Surplus. Permit Consolidated Statutory Surplus at the end of any fiscal quarter to be less than $4,100,000,000. ARTICLE VI EVENTS OF DEFAULT In case of the happening of any of the following events (each an "Event of Default"): (a) any representation or warranty made or deemed made under this Agreement, or any written information or other information transmitted orally during a formal presentation, furnished by any Borrower or any Subsidiary to the Administrative Agent or the Lenders pursuant to this Agreement or in connection with the arrangement, syndication or closing of the facilities established hereby, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan or any Fee or any other amount (other than an amount referred to in paragraph (b) above) due hereunder, when and as the same shall become due and payable, and such default shall continue unremedied for a period of ten days; (d) default shall be made in the due observance or performance of any covenant, condition or agreement contained in Section 5.01, 5.10, 5.11, 5.12, 5.13, 5.14, 5.15 or 5.16 or in any Local Currency Addendum and, in the case of any default under Section 5.12, such default shall continue for 30 days; (e) default shall be made in the due observance or performance of any covenant, condition or agreement contained herein or in any other Loan Document (other than those specified in clauses (b), (c) or (d) above) and such default shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent or any Lender to the Company; (f) the Company or any Subsidiary shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $50,000,000, when and as the same shall become due and payable, or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf (with or without the giving of notice, the lapse of time or both) to cause, such Indebtedness to become due prior to its stated maturity; 42 (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Company, any Borrowing Subsidiary or any Restricted Subsidiary, or of a substantial part of the property or assets of the Company, any Borrowing Subsidiary or any Restricted Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company, any Borrowing Subsidiary or any Restricted Subsidiary or for a substantial part of the property or assets of the Company, any Borrowing Subsidiary or any Restricted Subsidiary, or (iii) the winding up or liquidation of the Company, any Borrowing Subsidiary or any Restricted Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; or any Governmental Authority having jurisdiction over the Company, any Borrowing Subsidiary or any Restricted Subsidiary shall issue any order or commence any proceeding for the conservation or administration of the Company, any Borrowing Subsidiary or any Restricted Subsidiary or shall take any similar action; (h) the Company, any Borrowing Subsidiary or any Restricted Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company, any Borrowing Subsidiary or any Restricted Subsidiary or for a substantial part of the property or assets of the Company, any Borrowing Subsidiary or any Restricted Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due, or (vii) take any action for the purpose of effecting any of the foregoing; (i) one or more final judgments shall be entered by any court against the Company or any of the Subsidiaries for the payment of money in an aggregate amount in excess of $50,000,000, and such judgment or judgments shall not have been paid, discharged or stayed for a period of 60 days, or a warrant of attachment or execution or similar process shall have been issued or levied against property of the Company or any of the Subsidiaries to enforce any such judgment or judgments; (j) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other such ERISA Events, could reasonably be expected to result in a Material Adverse Effect; or (k) a Change in Control shall occur; then, and in every such event (other than an event with respect to the Company or any Restricted Subsidiary described in paragraph (g) or (h) above), and at any time thereafter during the continuance of such event, the Administrative Agent, at the request of the Required Lenders, shall, by notice to the Company, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived anything contained herein to the contrary notwithstanding; and, in the case of any event with respect to the Company or any Restricted Subsidiary described in paragraph (g) or (h) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued 43 interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived anything contained herein to the contrary notwithstanding. ARTICLE VII GUARANTEE The Company unconditionally and irrevocably guarantees the due and punctual payment and performance, when and as due, whether at maturity, by acceleration, upon one or more dates set for prepayment or otherwise, of the Guaranteed Obligations. The Company further agrees that the Guaranteed Obligations may be extended or renewed, in whole or in part, without notice or further assent from it and that it will remain bound upon its guarantee notwithstanding any extension or renewal of any Guaranteed Obligations. The Company waives presentment to, demand of payment from and protest to the Borrowing Subsidiaries of any of the Guaranteed Obligations, and also waives notice of acceptance of its guarantee and notice of protest for nonpayment. The obligations of the Company hereunder shall not be affected by (a) the failure of any Lender to assert any claim or demand or to enforce any right or remedy against the Borrowing Subsidiaries under the provisions of this Agreement or otherwise; (b) any rescission, waiver, amendment or modification of any of the terms or provisions of this Agreement, any guarantee or any other agreement; (c) any law, regulation or order of any jurisdiction, or any other event, affecting any term of any Guaranteed Obligation or any Lender's rights with respect thereto; or (d) the failure of any Lender to exercise any right or remedy against any other guarantor of the Guaranteed Obligations. The Company hereby agrees that any payments in respect of the Guaranteed Obligations pursuant to this Article VII will be paid to the Administrative Agent without setoff or counterclaim in Dollars (in the case of Guaranteed Obligations arising under this Agreement) or, at the option of the relevant Local Currency Lender(s), in Dollars or in the relevant Local Currency (in the case of Guaranteed Obligations arising under any Local Currency Facility), at (a) the office of the Administrative Agent specified in Section 2.18(a) (in the case of Guaranteed Obligations arising under this Agreement) or (b) at the office specified for payments under the relevant Local Currency Addendum or such other office as shall have been specified by the relevant Local Currency Lender(s) in each case to the extent permitted by applicable law (in the case of Guaranteed Obligations arising under any Local Currency Addendum). The Company further agrees that its guarantee constitutes a guarantee of payment when due and not of collection, and waives any right to require that any resort be had by the Administrative Agent or any Lender to any security, if any, held for payment of the Guaranteed Obligations or to any balance of any deposit account or credit on its books, in favor of the Borrowing Subsidiaries or any other person. The obligations of the Company hereunder shall not be subject to any reduction, limitation, impairment or termination for any reason, including any claim of waiver, release, surrender, alteration or compromise, and shall not be subject to any defense or setoff, counterclaim, recoupment or termination whatsoever by reason of the invalidity, illegality or unenforceability of the Guaranteed Obligations or otherwise. Without limiting the generality of the foregoing, the obligations of the Company hereunder shall not be discharged or impaired or otherwise affected by the failure of the Administrative Agent or any Lender to assert any claim or demand or to enforce any remedy under this Agreement, any guarantee or any other agreement, by any waiver or modification of any provision thereof, by any default, failure or delay, wilful or otherwise, in the performance of the Guaranteed Obligations, or by any other act or omission which may or might in any manner or to any extent vary the risk of the Company or otherwise operate as a discharge of the Company as a matter of law or equity. 44 To the extent permitted by applicable law, the Company waives any defense based on or arising out of any defense available to the Borrowing Subsidiaries, including any defense based on or arising out of any disability of the Borrowing Subsidiaries, or the unenforceability of the Guaranteed Obligations or any part thereof from any cause, or the cessation from any cause of the liability of the Borrowing Subsidiaries, other than final payment in full of the Guaranteed Obligations. The Administrative Agent and the Lenders may, at their election, foreclose on any security held by one or more of them by one or more judicial or non-judicial sales, or exercise any other right or remedy available to them against the Borrowing Subsidiaries, or any security without affecting or impairing in any way the liability of the Company hereunder except to the extent the Guaranteed Obligations have been fully and finally paid. The Company waives any defense arising out of any such election even though such election operates to impair or to extinguish any right of reimbursement or subrogation or other right or remedy of the Company against the Borrowing Subsidiaries or any security. The Company further agrees that its guarantee shall continue to be effective or be reinstated, as the case may be, if at any time payment, or any part thereof, of principal of or interest on any Guaranteed Obligation is rescinded or must otherwise be restored by any Lender upon the bankruptcy or reorganization of any Borrowing Subsidiary or otherwise. In furtherance of the foregoing and not in limitation of any other right which the Administrative Agent or any Lender may have at law or in equity against the Company by virtue hereof, upon the failure of any Borrowing Subsidiary to pay any Guaranteed Obligation when and as the same shall become due, whether at maturity, by acceleration, after notice of prepayment or otherwise, the Company hereby promises to and will, upon receipt of written demand by the Administrative Agent or any Lender, forthwith pay or cause to be paid to the Administrative Agent or such Lender in cash the amount of such unpaid Guaranteed Obligation. Until the termination of this Agreement and the commitments hereunder, and the repayment in full of all amounts due under this Agreement, the Company hereby irrevocably waives and releases any and all rights of subrogation, indemnification, reimbursement and similar rights which it may have against or in respect of the Borrowing Subsidiaries at any time relating to the Guaranteed Obligations, including all rights that would result in its being deemed a "creditor" of the Borrowing Subsidiaries under the United States Code as now in effect or hereafter amended, or any comparable provision of any successor statute. ARTICLE VIII THE ADMINISTRATIVE AGENT In order to expedite the transactions contemplated by this Agreement, JPMorgan Chase Bank is hereby appointed to act as Administrative Agent on behalf of the Lenders. Each of the Lenders hereby irrevocably authorizes the Administrative Agent to take such actions on behalf of such Lender and to exercise such powers as are specifically delegated to the Administrative Agent by the terms and provisions hereof, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Loans and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) to give notice on behalf of each of the Lenders to the Borrowers of any Event of Default of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by the Borrowers pursuant to this Agreement as received by the Administrative Agent. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its or his or 45 her own gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by the Borrowers of any of the terms, conditions, covenants or agreements contained in this Agreement. The Administrative Agent shall not be responsible to the Lenders for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement or other instruments or agreements. The Administrative Agent may deem and treat the Lender which makes any Loan as the holder of the indebtedness resulting therefrom for all purposes hereof until it shall have received notice from such Lender, given as provided herein, of the transfer thereof. The Administrative Agent shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders. The Administrative Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall have any responsibility to the Borrowers on account of the failure of or delay in performance or breach by any Lender of any of its obligations hereunder or to any Lender on account of the failure of or delay in performance or breach by any other Lender or the Borrowers of any of their respective obligations hereunder or in connection herewith. The Administrative Agent may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by notifying the Lenders and the Company. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent acceptable to the Company. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in the United States, having a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 9.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. With respect to the Loans made by it hereunder, the Administrative Agent in its individual capacity and not as Administrative Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not the Administrative Agent, and may accept deposits from, lend money to and generally engage in any kind of business with the Borrowers or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent. Each Lender agrees (i) to reimburse the Administrative Agent, on demand, in the amount of its pro rata share (based on its Commitment hereunder or, if the Commitments shall have been terminated, the amount of its outstanding Loans) of any expenses incurred for the benefit of the Lenders by such Agent, including counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, which shall not have been reimbursed by the 46 Borrowers and (ii) to indemnify and hold harmless the Administrative Agent and any of its directors, officers, employees or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against it in its capacity as Administrative Agent in any way relating to or arising out of this Agreement or any action taken or omitted by it under this Agreement to the extent the same shall not have been reimbursed by the Borrowers; provided that no Lender shall be liable to the Administrative Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or wilful misconduct of the Administrative Agent or any of its directors, officers, employees or agents. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any related agreement or any document furnished hereunder or thereunder. Each party to this Agreement acknowledges and agrees that neither Bank of America, N.A., in its capacity as Co-Administrative Agent, nor any co-syndication agent will have duties or responsibilities for the administration of this Agreement or the Borrowings hereunder. ARTICLE IX MISCELLANEOUS SECTION 9.01. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telecopy, as follows: (a) if to any Borrower, to The Hartford Financial Services Group, Inc., Hartford Plaza, Hartford, CT 06115, Attention of Mr. John Giamalis (Telecopy No. 860-547- 2878); with a copy to Mr. Brian Becker, The Hartford Financial Services Group, Inc., Hartford Plaza, Hartford CT 06115 (Telecopy No. 860-547-6959); (b) if to the Administrative Agent, to JPMorgan Chase Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Laura Rebecca, (Telecopy No. 212-552-7490), with a copy to JPMorgan Chase Bank, 270 Park Avenue, 4th Floor, New York, New York 10017, Attention of Heather Lindstrom, Re: The Hartford Financial Services Group, Inc. (Telecopy No. 212- 270-6637); and (c) if to a Lender, to it at its address (or telecopy number) set forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender became a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy to such party as provided in this Section or in accordance with the latest unrevoked direction from such party given in accordance with this Section. 47 SECTION 9.02. Survival of Agreement. All covenants, agreements, representations and warranties made by the Borrowers herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement is outstanding and unpaid, or the Commitments have not been terminated. SECTION 9.03. Binding Effect. This Agreement shall become effective on the Second Amended and Restated Effective Date when it shall have been executed by the Company and the Administrative Agent and when the Administrative Agent shall have received copies hereof (telecopied or otherwise) which, when taken together, bear the signature of each Required Lender, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrowers shall not have the right to assign any rights hereunder or any interest herein without the prior consent of all the Lenders. SECTION 9.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of any party that are contained in this Agreement shall bind and inure to the benefit of its successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided, however, that (i) except in the case of an assignment to a Lender or a Lender Affiliate, the Company and the Administrative Agent must give their prior written consent (except when there exists a Default or an Event of Default) to such assignment (which consent shall not be unreasonably withheld); (ii) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, and a processing and recordation fee of $3,500; (iii) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; and (iv) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 and the amount of the Commitment of such Lender remaining after such assignment shall not be less than $5,000,000 or shall be zero. Upon acceptance and recording pursuant to paragraph (e) of this Section, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto (but shall continue to be entitled to the benefits of Sections 2.13, 2.15, 2.19 and 9.05, as well as to any Fees accrued for its account hereunder and not yet paid)). Notwithstanding the foregoing, any Lender assigning its rights and obligations under this Agreement may retain any Competitive Loans made by it outstanding at such time, and in such case shall retain its rights hereunder in respect of any Loans so retained until such Loans have been repaid in full in accordance with this Agreement. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim; (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or 48 in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto or the financial condition of the Borrowers or the performance or observance by the Borrowers of any obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.03 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and the principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive in the absence of manifest error and the Borrowers, the Administrative Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by each party hereto, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee together with an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and the written consent of the Company to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance and (ii) record the information contained therein in the Register. (f) Each Lender may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged; (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (iii) each participating bank or other entity shall be entitled to the benefit of the cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if it were the selling Lender (and limited to the amount that could have been claimed by the selling Lender had it continued to hold the interest of such participating bank or other entity), except that all claims made pursuant to such Sections shall be made through such selling Lender; and (iv) the Borrowers, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such selling Lender in connection with such Lender's rights and obligations under this Agreement. (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant any information relating to the Borrowers furnished to such Lender; provided that, prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of any such information. 49 (h) The Borrowers shall not assign or delegate any rights and duties hereunder without the prior written consent of all Lenders. (i) Any Lender may at any time pledge all or any portion of its rights under this Agreement to a Federal Reserve Bank; provided that no such pledge shall release any Lender from its obligations hereunder or substitute any such Bank for such Lender as a party hereto. In order to facilitate such an assignment to a Federal Reserve Bank, each Borrower shall, at the request of the assigning Lender, duly execute and deliver to the assigning Lender a promissory note or notes evidencing the Loans made to such Borrower by the assigning Lender hereunder. SECTION 9.05. Expenses; Indemnity. (a) The Borrowers agree to pay all reasonable out-of-pocket expenses incurred by each Agent in connection with the syndication of the credit facility provided for herein, the preparation, execution, delivery and administration of this Agreement or in connection with any amendments, modifications or waivers of the provisions hereof, or incurred by either Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement or in connection with the Loans made hereunder or under any Local Currency Addendum, including the reasonable fees and disbursements of counsel for each Agent or, in the case of enforcement costs and documentary taxes, the Lenders. (b) The Borrowers agree to indemnify the Administrative Agent, each Lender, each of their Affiliates and the directors, officers, employees and agents of the foregoing (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees and expenses, incurred by or asserted against any Indemnitee arising out of (i) the consummation of the transactions contemplated by this Agreement; (ii) the use of the proceeds of the Loans; or (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a final judgment of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) The provisions of this Section shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the invalidity or unenforceability of any term or provision of this Agreement or any investigation made by or on behalf of either Agent or any Lender. All amounts due under this Section shall be payable on written demand therefor. SECTION 9.06. APPLICABLE LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 9.07. Waivers; Amendment. (a) No failure or delay of the Administrative Agent or any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only in the specific instance and for the purpose for which given. No notice or demand on any Borrower or any Subsidiary in any case shall entitle such party to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or 50 modified except pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan or any Fee or other amount due hereunder or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, without the prior written consent of each Lender affected thereby; (ii) increase the Commitment, decrease the Facility Fee or other amount owing to, or decrease the Usage Fee of any Lender without the prior written consent of such Lender; (iii) limit or release the guarantee set forth in Article VII; or (iv) amend or modify the provisions of Section 2.16 or Section 9.04(h), the provisions of this Section or the definition of the "Required Lenders", without the prior written consent of each Lender; provided further, however, that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. Each Lender shall be bound by any waiver, amendment or modification authorized by this Section and any consent by any Lender pursuant to this Section shall bind any assignee of its rights and interests hereunder. SECTION 9.08. Entire Agreement. This Agreement and the agreements referred to in Section 2.06 constitute the entire contract among the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. SECTION 9.09. Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 9.10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 9.03. SECTION 9.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 9.12. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or obligations of the Company and any Borrowing Subsidiary now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. Each Lender agrees promptly to notify the Company and the Administrative Agent after such setoff and application made by such Lender, but the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. SECTION 9.13. Jurisdiction; Consent to Service of Process. (a) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York County, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement, any Local Currency Addendum, or for 51 recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Subject to the foregoing and to paragraph (b) below, nothing in this Agreement shall affect any right that any party hereto may otherwise have to bring any action or proceeding relating to this Agreement, any Local Currency Addendum against any other party hereto in the courts of any jurisdiction. (b) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or thereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement or any Local Currency Addendum in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 9.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 9.14. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT. Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it and other parties hereto have been induced to enter into this Agreement by, among other things, the mutual waivers and certification in this Section. SECTION 9.15. Addition of Borrowing Subsidiaries. Each Borrowing Subsidiary which shall deliver to the Administrative Agent a Borrowing Subsidiary Agreement executed by such Subsidiary and the Company shall, upon such delivery and without further act, become a party hereto and a Borrower hereunder with the same effect as if it had been an original party to this Agreement. SECTION 9.16. Conversion of Currencies. (a) If, for the purpose of obtaining judgment in any court, it is necessary to convert a sum owing hereunder in one currency into another currency, each party hereto agrees, to the fullest extent that it may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures in the relevant jurisdiction the first currency could be purchased with such other currency on the Business Day immediately preceding the day on which final judgment is given. (b) The obligations of the Borrowers in respect of any sum due to any party hereto or any holder of the obligations owing hereunder (the "Applicable Creditor") shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than the currency in which such sum is stated to be due hereunder (the "Agreement Currency"), be discharged only to the extent that, on the Business Day following receipt by the Applicable Creditor of any sum adjudged to be so due in the Judgment Currency, the Applicable Creditor may in accordance with normal banking procedures in the relevant jurisdiction purchase the Agreement Currency with the Judgment Currency; if the amount of the Agreement Currency so purchased is less than the sum originally due to the Applicable Creditor in the Agreement Currency, the Borrowers agree, as a separate obligation and notwithstanding any such judgment, to indemnify the Applicable Creditor against such loss. The obligations of the Borrowers contained in this Section 9.16 shall survive the termination of this Agreement and the payment of all other amounts owing hereunder. 52 SECTION 9.17. Confidentiality. Each of the Agents and the Lenders, on behalf of itself and its Affiliates and agents, agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates involved in the preparation and execution of this Agreement and the transactions contemplated thereby, and to such Lender's and such Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); (b) to the extent requested by any regulatory or self-regulatory authority; (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process (it being understood the applicable Agent or Lender shall notify the Company, to the extent permitted by law, of such required disclosure within a reasonably practicable time after such Agent or Lender gains knowledge of the required disclosure); (d) to any other party to this Agreement; (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder; (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or participant in, or any prospective assignee of or participant in, any of its rights or obligations under this Agreement; (g) with the consent of the Company; or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to either Agent or any Lender on a nonconfidential basis from a source other than any Borrower (it being understood if disclosure of such Information violates any third-party confidentiality agreement with any Borrower or any Subsidiary and the representative of the Agent or Lender involved has actual knowledge of such third-party confidentiality agreement and was involved in the preparation and execution of this Agreement or the transactions contemplated thereby, such disclosure shall not be permitted). For the purposes of this Section, "Information" means all confidential information received from a Borrower relating to any Borrower or any Subsidiary or any Borrower's or any Subsidiary's business other than any such information that is "structure" or "tax aspects" of the transactions contemplated by this Agreement, as such terms are used in Code sections 6011, 6111 or 6112, and the regulations promulgated thereunder; provided that, in the case of information received from a Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such person has exercised the same degree of care to maintain the confidentiality of such Information as such person would accord to its own confidential information. For the avoidance of doubt, the Borrowers, the Agent and the Lenders agree that the Borrowers, the Agent and the Lenders (and each of their Affiliates, their directors, officers, agents, attorneys, employees and representatives) are permitted to disclose to any and all Persons, without limitation of any kind, the "structure" and "tax aspects" of the transactions contemplated by this Agreement, as such terms are used in Code sections 6011, 6111 or 6112, and the regulations promulgated thereunder, and all materials of any kind (including opinions or other tax analyses) that are provided to the Agent and the Lenders related to such structure and tax aspects. The preceding sentence and clause in the definition of "Information" above are set forth herein solely to come within certain "safe harbor" provisions set forth in certain temporary regulations promulgated under Code sections 6011, 6111 and 6112. 53 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE HARTFORD FINANCIAL SERVICES GROUP, INC., as Borrower, by /s/ John N. Giamalis ------------------------------------------ Name: John N. Giamalis Title: Senior Vice President and Treasurer JPMORGAN CHASE BANK, individually and as Co- Administrative Agent, by /s/ Heather Lindstrom ------------------------------------------ Name: Heather A. Lindstrom Title: Vice President BANK OF AMERICA, N.A., individually and as Co- Administrative Agent, by /s/ Leslie Nannen ------------------------------------------ Name: Leslie Nannen Title: Vice President 54 CITIBANK, N.A., individually and as Co- Syndication Agent, by /s/ Maria Hackley ------------------------------------------ Name: Maria Hackley Title: Managing Director 55 WACHOVIA BANK, NATIONAL ASSOCIATION (formerly known as First Union National Bank), individually and as Co-Syndication Agent, by: /s/ Kimberly Shaffer ------------------------------------------ Name: Kimberly Shaffer Title: Director SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. SECOND AMENDED AND RESTATED FIVE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF FEBRUARY 26, 2003. LENDER: The Bank of New York ------------------------------ by: /s/ Gary Overton ------------------------------ Name: Gary Overton Title: Vice President SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. SECOND AMENDED AND RESTATED FIVE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF FEBRUARY 26, 2003. LENDER: State Street Bank and Trust Company ------------------------------------- by: /s/ Edward M. Anderson ------------------------------ Name: Edward M. Anderson Title: Vice President SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. SECOND AMENDED AND RESTATED FIVE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF FEBRUARY 26, 2003. LENDER: Sun Trust Bank ------------------------------------- by: /s/ Todd Sheets ------------------------------ Name: Todd Sheets Title: AVP SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. SECOND AMENDED AND RESTATED FIVE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF FEBRUARY 26, 2003. LENDER: U.S. Bank National Association ------------------------------------- by: /s/ Debra K. Adams ------------------------------ Name: Debra K. Adams Title: Vice President SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. SECOND AMENDED AND RESTATED FIVE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF FEBRUARY 26, 2003. LENDER: Wells Fargo Bank, National Association --------------------------------------- by: /s/ Robert C. Meyer ------------------------------ Name: Robert C. Meyer Title: Vice President by: /s/ Beth C. McGinnis ------------------------------ Name: Beth C. McGinnis Title: Vice President SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. SECOND AMENDED AND RESTATED FIVE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF FEBRUARY 26, 2003. LENDER: Mellon Bank ------------------------------ by: /s/ Carrie Burnham ------------------------------ Name: Carrie Burnham Title: Assistant Vice President SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. SECOND AMENDED AND RESTATED FIVE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF FEBRUARY 26, 2003. LENDER: UBS AG, Cayman Islands Branch ------------------------------ by: /s/ Patricia O'Kicki ------------------------------ Name: Patricia O'Kicki Title: Banking Product Services, US by: /s/ Luke Goldsworthy ------------------------------ Name: Luke Goldsworthy Title: Banking Products Services, US EXHIBIT A-1 FORM OF COMPETITIVE BID REQUEST JPMorgan Chase Bank, as Administrative Agent for the Lenders referred to below, 270 Park Avenue New York, NY 10017 Attention: [ ] Dear Ladies and Gentlemen: The undersigned, ________________________ (the "Borrower"), refers to the Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement dated as of February 26, 2003 (as it may be amended, modified, extended or restated from time to time, the "5- Year Agreement"), among The Hartford Financial Services Group, Inc., the Borrowing Subsidiaries parties thereto, the Lenders parties thereto, and JPMorgan Chase Bank and Bank of America, N.A., as Co-Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the 5-Year Agreement. The Borrower hereby gives you notice pursuant to Section 2.03(a) of the 5-Year Agreement that it requests a Competitive Borrowing under the 5-Year Agreement, and in that connection sets forth below the terms on which such Competitive Borrowing is requested to be made: (A) Date of Competitive Borrowing (which is a Business Day) ____________ (B) Principal amount of Competitive Borrowing 1/ ____________ - (C) Interest rate basis 2/ ____________ - (D) Interest Period and the last day thereof 3/ ____________ - - -------- 1/ Not less than $5,000,000 (and in integral multiples of $1,000,000) or - greater than the Total Commitment then available. 2/ Eurocurrency Competitive Loan or Fixed Rate Loan. - 3/ Which shall be subject to the definition of "Interest Period" and end - not later than the Maturity Date. Upon acceptance of any or all of the Loans offered by the Lenders in response to this request, the Borrower shall be deemed to have represented and warranted that the conditions to lending specified in Section 4.01(b) and (c) of the 5-Year Agreement have been satisfied. Very truly yours, [NAME OF BORROWER], by____________________________ Name: Title: [Financial Officer] Upon acceptance of any or all of the Loans offered by the Lenders in response to this request, the Borrower shall be deemed to have represented and warranted that the conditions to lending specified in Section 4.01(b) and (c) of the 5-Year Agreement have been satisfied. Very truly yours, [NAME OF BORROWER], by____________________________ Name: Title: [Financial Officer] EXHIBIT A-2 FORM OF NOTICE OF COMPETITIVE BID REQUEST [Name of Lender] [Address] [Date] Attention: [ ] Dear Ladies and Gentlemen: Reference is made to the Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement dated as of February 26, 2003 (as it may be amended, modified, extended or restated from time to time, the "5-Year Agreement"), among The Hartford Financial Services Group, Inc., the Borrowing Subsidiaries parties thereto, the Lenders parties thereto, and JPMorgan Chase Bank and Bank of America, N.A., as Co-Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the 5-Year Agreement. [__________] (the "Borrower") made a Competitive Bid Request on _______, pursuant to Section 2.03(a) of the 5-Year Agreement, and in that connection you are invited to submit a Competitive Bid by [Date]/[Time]. 1/ Your Competitive Bid must comply with Section 2.03(b) of the 5-Year Agreement and the terms set forth below on which the Competitive Bid Request was made: (A) Date of Competitive Borrowing ____________ (B) Principal amount of Competitive Borrowing ____________ (C) Interest rate basis ____________ (D) Interest Period and the last day thereof ____________ Very truly yours, JPMORGAN CHASE BANK, as Administrative Agent, by____________________________ Name: Title: - -------- 1/ The Competitive Bid must be received by the Administrative Agent (i) in - the case of Eurocurrency Competitive Loans, not later than 9:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing, and (ii) in the case of Fixed Rate Loans, not later than 9:30 a.m., New York City time, on the day of a proposed Competitive Borrowing. EXHIBIT A-3 FORM OF COMPETITIVE BID JPMorgan Chase Bank, as Administrative Agent for the Lenders referred to below, 270 Park Avenue New York, N.Y. 10017 [Date] Attention: [ ] Dear Ladies and Gentlemen: The undersigned, [Name of Lender], refers to the Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement dated as of February 26, 2003 (as it may be amended, modified, extended or restated from time to time, the "5-Year Agreement"), among The Hartford Financial Services Group, Inc., the Borrowing Subsidiaries parties thereto, the Lenders parties thereto, and JPMorgan Chase Bank and Bank of America, N.A., as Co-Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the 5-Year Agreement. The undersigned hereby makes a Competitive Bid pursuant to Section 2.03(b) of the 5-Year Agreement, in response to the Competitive Bid Request made by [__________] (the "Borrower") on _______, 200[ ], and in that connection sets forth below the terms on which such Competitive Bid is made: (A) Principal Amount 1/ ____________ - (B) Competitive Bid Rate 2/ ____________ - (C) Interest Period and last day thereof ____________ The undersigned hereby confirms that it is prepared, subject to the conditions set forth in the 5- Year Agreement, to extend credit to the Borrower upon acceptance by the Borrower of this bid in accordance with Section 2.03(d) of the 5-Year Agreement. Very truly yours, [NAME OF LENDER], by_______________________________ Name: Title: - -------- 1/ Not less than $5,000,000 or greater than the requested Competitive - Borrowing and in integral multiples of $1,000,000. Multiple bids will be accepted by the Administrative Agent. 2/ i.e., LIBO Rate + or - %, in the case of Eurocurrency Competitive Loans - or %, in the case of Fixed Rate Loans. EXHIBIT A-4 FORM OF COMPETITIVE BID ACCEPT/REJECT LETTER [Date] JPMorgan Chase Bank, as Administrative Agent for the Lenders referred to below 270 Park Avenue New York, N.Y. 10017 Attention: [ ] Dear Ladies and Gentlemen: The undersigned, ________________________ (the "Borrower"), refers to the Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement dated as of February 26, 2003 (as it may be amended, modified, extended or restated from time to time, the "5-Year Agreement"), among The Hartford Financial Services Group, Inc., the Borrowing Subsidiaries parties thereto, the Lenders parties thereto, and JPMorgan Chase Bank and Bank of America, N.A., as Co- Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the 5-Year Agreement. In accordance with Section 2.03(c) of the 5-Year Agreement, we have received a summary of bids in connection with our Competitive Bid Request dated _______, and in accordance with Section 2.03(d) of the 5-Year Agreement, we hereby accept the following bids for maturity on [date]: Principal Amount Fixed Rate/Margin Lender - ---------------- ----------------- ------ $ [%]/[+/-. %] $ We hereby reject the following bids: Principal Amount Fixed Rate/Margin Lender - ---------------- ----------------- ------ $ [%]/[+/-. %] $ The $_________ should be deposited in JPMorgan Chase Bank account number [ ] on [date]. Very truly yours, [NAME OF BORROWER], by_______________________ Name: Title: EXHIBIT A-5 FORM OF STANDBY BORROWING REQUEST JPMorgan Chase Bank, as Administrative Agent for the Lenders referred to below, 270 Park Avenue New York, N.Y. 10017 [Date] Attention: [ ] Dear Ladies and Gentlemen: The undersigned, _______________________ (the "Borrower"), refers to the Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement dated as of February 26, 2003 (as it may be amended, modified, extended or restated from time to time, the "5-Year Agreement"), among The Hartford Financial Services Group, Inc., the Borrowing Subsidiaries parties thereto, the Lenders parties thereto, and JPMorgan Chase Bank and Bank of America, N.A., as Co- Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the 5-Year Agreement. The Borrower hereby gives you notice pursuant to Section 2.04 of the 5-Year Agreement that it requests a Standby Borrowing under the 5-Year Agreement, and in that connection sets forth below the terms on which such Standby Borrowing is requested to be made: (A) Date of Standby Borrowing (which is a Business Day) ____________ (B) Principal amount of Standby Borrowing 1/ ____________ - (C) Interest rate basis 2/ ____________ - (D) Interest Period and the last day thereof 3/ ____________ - Upon acceptance of any or all of the Loans made by the Lenders in response to this request, the Borrower shall be deemed to have represented and warranted that the conditions to lending specified in Section 4.01(b) and (c) of the 5-Year Agreement have been satisfied. Very truly yours, [NAME OF BORROWER], by____________________________ Name: Title: [Financial Officer] - -------- 1/ Not less than $20,000,000 (and in integral multiples of $5,000,000) or - greater than the Total Commitment then available. 2/ Eurocurrency Standby Loan or ABR Loan. - 3/ Which shall be subject to the definition of "Interest Period" and end - not later than the Maturity Date. EXHIBIT B [FORM OF] ASSIGNMENT AND ACCEPTANCE Dated:__________, ____ Reference is made to the Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement dated as of February 26, 2003 (as it may be amended, modified, extended or restated from time to time, the "5-Year Agreement"), among The Hartford Financial Services Group, Inc., the Borrowing Subsidiaries parties thereto, the Lenders parties thereto, and JPMorgan Chase Bank and Bank of America, N.A., as Co-Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Terms defined in the 3-Year Agreement are used herein with the same meanings. 1. The Assignor hereby sells and assigns, without recourse, to the Assignee, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Effective Date set forth below, the interests set forth below (the "Assigned Interest") in the Assignor's rights and obligations under the 5-Year Agreement, including, without limitation, the interests set forth below in the Commitment of the Assignor on the Effective Date and the Competitive Loans and Standby Loans owing to the Assignor which are outstanding on the Effective Date. Each of the Assignor and the Assignee hereby makes and agrees to be bound by all the representations, warranties and agreements set forth in Section 9.04(c) of the 5-Year Agreement, a copy of which has been received by each such party. From and after the Effective Date, (i) the Assignee shall be a party to and be bound by the provisions of the 5-Year Agreement and, to the extent of the interests assigned by this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent of the interests assigned by this Assignment and Acceptance, relinquish its rights and be released from its obligations under the 5-Year Agreement. 2. This Assignment and Acceptance is being delivered to the Administrative Agent together with (i) if the Assignee is organized under the laws of a jurisdiction outside the United States, the forms specified in Section 2.19(g) of the 5-Year Agreement, duly completed and executed by such Assignee, (ii) if the Assignee is not already a Lender under the 5-Year Agreement, an Administrative Questionnaire in the form distributed to such Assignee by the Administrative Agent and (iii) a processing and recordation fee of $3,500. 3. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. Date of Assignment: Legal Name of Assignor: Legal Name of Assignee: Assignee's Address for Notices: 2 Effective Date of Assignment (may not be fewer than 5 Business Days after the Date of Assignment):
Percentage Assigned of Facility/Commitment (set forth, to at least 8 decimals, as a percentage of the Facility Principal Amount Assigned (and and the aggregate identifying information as to Commitments Facility individual Competitive Loans) of all Lenders thereunder) - -------- ----------------------------- -------------------------- Commitment Assigned: $____________ ___________ % Standby Loans: $____________ ___________ % Competitive Loans: $____________ ___________ %
The terms set forth and on the reverse side Accepted: hereof are hereby agreed to: THE HARTFORD FINANCIAL SERVICES GROUP, INC., ________________________________, by: ___________________________ as Assignor, Name: Title: by: ____________________________ Name: Title: ________________________________, as Assignee, by: ____________________________ Name: Title: EXHIBIT C [FORM OF] OPINION OF COUNSEL FOR THE HARTFORD FINANCIAL SERVICES GROUP, INC. Brian S. Becker Senior Vice President, Director of Corporate Law And Corporate Secretary Law Department Telephone 860 547 3338 Facsimile 860 547 6959 February 26, 2003 To The Lenders Listed on Schedule A Attached Hereto (the "Lenders") Ladies and Gentlemen: This opinion is being rendered to you pursuant to Section 4.02(a) of the Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement (the "Agreement") among The Hartford Financial Services Group, Inc., a Delaware corporation (the "Company"), the Borrowing Subsidiaries parties thereto, the Lenders parties thereto, and JPMorgan Chase Bank and Bank of America, N.A., as Co-Administrative Agents for the Lenders. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Agreement. In connection with this opinion, as Senior Vice President of the Company, I or lawyers in the Company's legal staff working under my supervision, have (i) investigated such questions of law, (ii) examined such corporate documents and records of the Company, certificates of public officials and other documents, and (iii) received such information from officers and representatives of the Company as I have deemed necessary for the purpose of this opinion. I have made no independent investigation as to the information contained in such documents, records and certificates, but I have no reason to believe that such information is other than as reflected therein. In rendering this opinion, I have assumed (i) the authenticity of all documents submitted to me as originals, (ii) the conformity to original documents of all documents submitted to me as copies and (iii) the genuineness of all signatures. 2 Based upon the foregoing and subject to the qualifications set forth herein, I am of the opinion that: 1. The Company (i) is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, (ii) has all requisite corporate power and authority to own its property and assets and to carry on its business as now conducted, (iii) is qualified to do business in every jurisdiction within the United States where such qualification is required, except where the failure to so qualify would not result in a Material Adverse Effect on the Company, and (iv) has all requisite corporate power and authority to execute, deliver and perform its obligations under the Agreement and to borrow funds thereunder. 2. The execution, delivery and performance by the Company of the Agreement and the borrowings of the Company thereunder (collectively, the "Transactions") (i) have been duly authorized by all requisite corporate action and (ii) will not (a) (1) violate any provision of law, statute, rule or regulation (including without limitation, the Margin Regulations), or of the certificate of incorporation or other constitutive documents or by-laws of the Company, (2) violate any order of any governmental authority, or (3) to my knowledge, violate any provision of any indenture, agreement or other instrument to which the Company is a party or by which the Company or its property is or may be bound, (b) to my knowledge, be in conflict with, result in a breach of or constitute (along or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument or (c) to my knowledge, except as allowed under the Agreement, result in the creation or imposition of any lien upon any property or assets of the Company. 3. The Agreement has been duly executed and delivered by the Company and constitutes a valid and binding obligation of the Company enforceable against the Company in accordance with its terms, subject to bankruptcy, reorganization, insolvency, moratorium or other similar laws of general application relating to or affecting creditors' rights generally and general principles of equity (whenever applied by a court of law or equity). 4. No action, consent or approval of, registration or filing with, any other action by, any government authority is or will be required in connection with the Transactions, except such as have been made or obtained and are in full force and effect. 5. Neither the Company nor any of its subsidiaries is (a) except as set forth in the next sentence, an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 (the "1940 Act") or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. While certain subsidiaries of the Company are "investment companies" as defined in the 1940 Act, the transactions contemplated by this Agreement will not violate or require any approval under such Act or any regulations promulgated pursuant thereto. The opinions expressed above are limited to questions arising under the laws of the State of Connecticut, the General Corporation Law of the State of Delaware and the Federal laws of the United States of America. With your approval, with respect to my opinion in paragraph 3 above, I have assumed that the laws of the State of New York are identical to those of the State of Connecticut. 3 Also with your approval, I have relied as to certain matters on information obtained from public officials, officers of the Company and other sources believed by me to be responsible and I have assumed that the Agreement has been duly authorized, executed and delivered by each of the Lenders and by JPMorgan Chase Bank and Bank of America, N.A. in their capacities as Co-Administrative Agents of the Lenders. This opinion is rendered in my capacity as an officer of the Company, and is solely for your benefit and may not be quoted or relied upon by, nor may copies be delivered to, any other person, nor used for any other purpose, without my prior written consent in each instance. Very truly yours, Brian S. Becker EXHIBIT D BORROWING SUBSIDIARY AGREEMENT dated as of [ ], [ ], among THE HARTFORD FINANCIAL SERVICES GROUP, INC., a Delaware corporation (the "Borrower"), [Name of Subsidiary], a [ ] corporation ("the Subsidiary"), and JPMORGAN CHASE BANK and BANK OF AMERICA, N.A., as co-administrative agents (in such capacity, the "Co-Administrative Agents", it being agreed that all references herein to the "Administrative Agent" shall be references to JPMorgan Chase Bank) for the lenders (the "Lenders") party to the Second Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement dated as of February 26, 2003, as amended (the "Agreement"), among the Borrower, each Borrowing Subsidiary party thereto, the Co-Administrative Agents and the Lenders. Under the Agreement, the Lenders have agreed, upon the terms and subject to the conditions therein set forth, to make competitive advance and revolving credit loans to the Borrower and to Subsidiaries (as defined in the Agreement) of the Borrower which execute and deliver to the Administrative Agent Borrowing Subsidiary Agreements in the form of this Borrowing Subsidiary Agreement. The Borrower represents that the Subsidiary is a subsidiary (as so defined) of the Borrower and that the guarantee of the Borrower contained in Article VII of the Agreement applies to the obligations of the Subsidiary. In consideration of being permitted to borrow under the Agreement upon the terms and subject to the conditions set forth therein, the Subsidiary agrees that from and after the date of this Borrowing Subsidiary Agreement it is, and will be liable for the observance and performance of all the obligations of, a Borrowing Subsidiary under the Agreement, as the same may be amended from time to time, to the same extent as if it had been one of the original parties to the Agreement. IN WITNESS WHEREOF, the Borrower and the Subsidiary have caused this Borrowing Subsidiary Agreement to be duly executed by their authorized officers as of the date first appearing above. THE HARTFORD FINANCIAL SERVICES GROUP, INC., by ______________________________ Name: Title: [NAME OF SUBSIDIARY], by ______________________________ Name: Title: Accepted as of the date first appearing above: JPMORGAN CHASE BANK, as Administrative Agent, by ______________________ Name: Title: EXHIBIT E [FORM OF] LOCAL CURRENCY ADDENDUM To: JPMorgan Chase Bank, as Administrative Agent From: The Hartford Financial Services Group, Inc. i. This Local Currency Addendum is being delivered to you pursuant to Section 2.21(b) of the Second Amended and Restated Five-Year Competitive Bid and Revolving Credit Facility, dated as of February 26, 2003 (as the same may be amended, supplemented or otherwise modified from time to time, the "Credit Agreement"), among The Hartford Financial Services Group, Inc. (the "Borrower"), the Borrowing Subsidiaries parties thereto, the Lenders parties thereto, and JPMorgan Chase Bank and Bank of America, N.A., as Co-Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Terms defined in the Credit Agreement and used herein shall have the meanings given to them in the Credit Agreement. ii. The effective date (the "Effective Date") of this Local Currency Addendum will be [ ]. LOCAL CURRENC(Y)(IES): LOCAL CURRENCY FACILITY MAXIMUM BORROWING AMOUNT: $ LOCAL CURRENCY Local Currency Lender LENDERS: Name of Lender Maximum Borrowing Amount -------------- ------------------------ $ LIST OF DOCUMENTATION GOVERNING LOCAL CURRENCY FACILITY (THE "DOCUMENTATION"): 4/ - iii. The Borrower hereby represents and warrants that (i) as of the Effective Date, an Exchange Rate with respect to each Local Currency is determinable by reference to the Reuters currency pages (or comparable publicly available screen), (ii) the Documentation complies in all respects with the requirements of Section 2.21 of the Credit Agreement and (iii)___________ - -------- 4/ Copies of the Documentation must accompany the Local Currency Addendum, - together with, if applicable, an English translation thereof (provided, that the Company may instead furnish a summary term sheet in English so long as an English translation of the Documentation is furnished to the Administrative Agent or its counsel within 90 days after the date of delivery of the Local Currency Addendum). 2 of__________ 5/ contains an express acknowledgement that such Local Currency Loan shall be subject to the provisions of Sections 2.21 and 2.22 of the Credit Agreement. THE HARTFORD FINANCIAL SERVICES GROUP, INC. By ______________________________ Name: Title: Accepted and Acknowledged: JPMORGAN CHASE BANK, as Administrative Agent By_______________________________ Name: Title: - ----------- 5/ Provide citation to relevant provision from the Documentation. - EX-10 12 exh10_28.txt THE HARTFORD FINANCIAL SERVICES GROUP EXECUTION COPY ================================================================================ THREE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT Dated as of December 31, 2002 among THE HARTFORD FINANCIAL SERVICES GROUP, INC., HARTFORD LIFE, INC., THE LENDERS NAMED HEREIN and JPMORGAN CHASE BANK and CITIBANK, N.A as Co-Administrative Agents and BANK OF AMERICA, N.A., DEUTSCHE BANK AG, NEW YORK BRANCH and UBS AG, STAMFORD BRANCH as Co-Syndication Agents ____________________________________ J.P. MORGAN SECURITIES INC. SALOMON SMITH BARNEY INC. as Co-Lead Arrangers and Co-Bookrunners ================================================================================ 6701-199 TABLE OF CONTENTS Article Section Page - ------- ------- ---- I DEFINITIONS 1.01. Defined Terms................................................1 1.02. Terms Generally.............................................13 II THE CREDITS 2.01. Commitments.................................................13 2.02. Loans.......................................................13 2.03. Competitive Bid Procedure...................................14 2.04. Standby Borrowing Procedure.................................16 2.05. Conversion and Continuation of Standby Loans................17 2.06. Fees........................................................17 2.07. Repayment of Loans; Evidence of Debt........................18 2.08. Interest on Loans...........................................18 2.09. Default Interest............................................19 2.10. Alternate Rate of Interest..................................19 2.11. Termination and Reduction of Commitments....................19 2.12. Prepayment..................................................20 2.13. Reserve Requirements; Change in Circumstances...............20 2.14. Change in Legality..........................................21 2.15. Indemnity...................................................22 2.16. Pro Rata Treatment..........................................22 2.17. Sharing of Setoffs..........................................22 2.18. Payments....................................................23 2.19. Taxes.......................................................23 2.20. Duty to Mitigate; Assignment of Commitments Under Certain Circumstances.............................................25 2.21. Increase in Total Commitment................................26 III REPRESENTATIONS AND WARRANTIES 3.01. Organization; Powers........................................27 3.02. Authorization...............................................27 3.03. Enforceability..............................................28 3.04. Governmental Approvals......................................28 3.05. Financial Statements........................................28 3.06. Litigation; Compliance with Laws............................28 3.07. Federal Reserve Regulations.................................28 3.08. Investment Company Act; Public Utility Holding Company Act..29 3.09. Use of Proceeds.............................................29 3.10. Full Disclosure; No Material Misstatements..................29 3.11. Taxes.......................................................29 3.12. Employee Pension Benefit Plans..............................29 Contents, p. 2 IV CONDITIONS OF LENDING 4.01. All Borrowings..............................................29 4.02. Effective Date..............................................30 V COVENANTS 5.01. Existence...................................................31 5.02. Business and Properties.....................................31 5.03. Financial Statements, Reports, etc..........................31 5.04. Insurance...................................................32 5.05. Obligations and Taxes.......................................32 5.06. Litigation and Other Notices................................32 5.07. Maintaining Records; Access to Properties and Inspections.33 5.08. Employee Benefits...........................................33 5.09. Use of Proceeds.............................................33 5.10. Risk-Based Capital Ratio....................................33 5.11. Consolidations, Mergers, and Sales of Assets................33 5.12. Limitations on Liens........................................33 5.13. Limitations on Sale and Leaseback Transactions..............35 5.14. Consolidated Total Debt to Consolidated Total Capitalization............................................35 5.15. Limitations on Dividends and Advances by Subsidiaries.......35 5.16. Minimum Consolidated Statutory Surplus and Statutory Surplus and Asset Valuation Reserve...............................35 VI EVENTS OF DEFAULT.................................................35 VII THE ADMINISTRATIVE AGENT..........................................37 VIII MISCELLANEOUS 8.01. Notices.....................................................39 8.02. Survival of Agreement.......................................40 8.03. Binding Effect..............................................40 8.04. Successors and Assigns......................................40 8.05. Expenses; Indemnity.........................................42 8.06. Applicable Law..............................................42 8.07. Waivers; Amendment..........................................42 8.08. Entire Agreement............................................43 8.09. Severability................................................43 8.10. Counterparts................................................43 8.11. Headings....................................................43 8.12. Right of Setoff.............................................43 8.13. Jurisdiction; Consent to Service of Process.................44 8.14. Waiver of Jury Trial........................................44 8.15. Conversion of Currencies....................................44 8.16. Confidentiality.............................................45 Contents, p. 3 EXHIBITS AND SCHEDULES Exhibit A-1 Form of Competitive Bid Request Exhibit A-2 Form of Notice of Competitive Bid Request Exhibit A-3 Form of Competitive Bid Exhibit A-4 Form of Competitive Bid Accept/Reject Exhibit A-5 Form of Standby Borrowing Request Exhibit B Form of Assignment and Acceptance Exhibit C Form of Opinion of Counsel for The Hartford Financial Services Group, Inc. and Hartford Life, Inc. Schedule 1.01 Statutory Surplus Subsidiaries Schedule 2.01 Commitments Schedule 3.06 Litigation and Compliance with Laws THREE-YEAR COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT (as it may be amended, supplemented or otherwise modified, the "Agreement") dated as of December 31, 2002, among THE HARTFORD FINANCIAL SERVICES GROUP, INC., a Delaware corporation (the "Company"); HARTFORD LIFE, INC., a Delaware corporation and a subsidiary of the Company ("Hartford Life" and, together with the Company, the "Borrowers"); the lenders listed in Schedule 2.01 (together with their permitted assignees, the "Lenders"); and JPMORGAN CHASE BANK and CITIBANK, N.A., as co-administrative agents for the Lenders (in such capacity, the "Co-Administrative Agents", it being agreed that all references herein to the "Administrative Agent" shall be references to JPMorgan Chase Bank). The Lenders have been requested to extend credit to the Borrowers to enable them to borrow on a standby revolving credit basis on and after the date hereof and at any time and from time to time prior to the Maturity Date (such term and each other capitalized term used but not otherwise defined herein having the meaning assigned to it in Article I) an aggregate principal amount not in excess of $490,000,000 at any time outstanding. The Lenders have also been requested to provide a procedure pursuant to which the Borrowers may invite the Lenders to bid on an uncommitted basis on short-term borrowings by the Borrowers. The proceeds of such borrowings are to be used for working capital and other general corporate purposes, including the repayment of maturing commercial paper. The Lenders are willing to extend credit on the terms and subject to the conditions herein set forth. Accordingly, the parties hereto agree as follows: ARTICLE I DEFINITIONS SECTION 1.01. Defined Terms. As used in this Agreement, the following terms shall have the meanings specified below: "ABR Borrowing" shall mean a Borrowing comprised of ABR Loans. "ABR Loan" shall mean any ABR Standby Loan. "ABR Standby Loan" shall mean any Standby Loan bearing interest at a rate determined by reference to the Alternate Base Rate in accordance with the provisions of Article II. "Administrative Fees" shall have the meaning assigned to such term in Section 2.06(b). "Administrative Questionnaire" shall mean an Administrative Questionnaire in the form distributed to the Lenders by the Administrative Agent. "Affiliate" shall mean, when used with respect to a specified person, another person that directly or indirectly controls or is controlled by or is under common control with the person specified. 2 "Agents" shall mean the Co-Administrative Agents, including JPMorgan Chase Bank as Administrative Agent. "Agreement Currency" shall have the meaning assigned to such term in Section 8.15(b). "Alternate Base Rate" shall mean, for any day, a rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the greater of (a) the Prime Rate in effect on such day and (b) the Federal Funds Effective Rate in effect on such day plus 1/2 of 1%. For purposes hereof, "Prime Rate" shall mean the rate of interest per annum publicly announced from time to time by the Administrative Agent as its prime rate in effect at its principal office in New York City; each change in the Prime Rate shall be effective on the date such change is publicly announced as effective. "Federal Funds Effective Rate" shall mean, for any day, the weighted average of the rates on overnight Federal funds transactions with members of the Federal Reserve System arranged by Federal funds brokers, as released on the next succeeding Business Day by the Federal Reserve Bank of New York, or, if such rate is not so released for any day which is a Business Day, the arithmetic average (rounded upwards to the next 1/100th of 1%), as determined by the Administrative Agent, of the quotations for the day of such transactions received by the Administrative Agent from three Federal funds brokers of recognized standing selected by it. If for any reason the Administrative Agent shall have determined (which determination shall be conclusive absent manifest error) that it is unable to ascertain the Federal Funds Effective Rate for any reason, including the inability or failure of the Administrative Agent to obtain sufficient quotations in accordance with the terms thereof, the Alternate Base Rate shall be determined without regard to clause (b) of the first sentence of this definition until the circumstances giving rise to such inability no longer exist. Any change in the Alternate Base Rate due to a change in the Prime Rate or the Federal Funds Effective Rate shall be effective on the effective date of such change in the Prime Rate or the Federal Funds Effective Rate, respectively. "Annual Statement" shall mean, with respect to the Restricted Subsidiaries, the Annual Statement of such Restricted Subsidiary required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law, including any exhibits, schedules, certificates or actuarial opinions filed or delivered therewith. "Applicable Insurance Regulatory Authority" shall mean, with respect to any Insurance Subsidiary, the insurance commission or similar Governmental Authority located in the state in which such Insurance Subsidiary is domiciled and any Federal insurance Governmental Authority. "Applicable Percentage" shall mean on any date, (a) with respect to the Facility Fee, the applicable percentage set forth below under the caption "Facility Fee Percentage" based upon the Ratings of the Company in effect on such date, or (b) with respect to Eurocurrency Standby Loans, the applicable percentage set forth below under the caption "Eurocurrency Spread A" based upon the Ratings of the applicable Borrower in effect on such date; provided, that on any date on which the aggregate outstanding principal amount of the Loans shall be greater than 50% of the Total Commitment (and for any day after the termination of all the Commitments on which Loans shall be outstanding), the Applicable Percentage with respect to Eurocurrency Standby Loans shall be the applicable percentage set forth below under the caption "Eurocurrency Spread B" based upon the Ratings of the applicable Borrower in effect on such date: 3
Eurocurrency Eurocurrency Facility Fee ------------ ------------ ------------ Category 1 Spread A Spread B Percentage - ---------- -------- -------- ---------- Aa3 or higher by Moody's .170% .220% .080% AA- or higher by S&P Category 2 - ---------- A2 by Moody's .210% .310% .090% A by S&P Category 3 - ---------- A3 by Moody's .300% .400% .100% A- by S&P Category 4 - ---------- Baa1 by Moody's .500% .625% .125% BBB+ by S&P Category 5 - ---------- Baa2 or lower or unrated .700% .825% .175% by Moody's BBB or lower or unrated by S&P
For purposes of the foregoing, (i) if either Moody's or S&P shall not have in effect a Rating (other than by reason of the circumstances referred to in the last sentence of this definition), then such Rating Agency shall be deemed to have established a Rating in Category 5; (ii) if the Ratings established or deemed to have been established by Moody's and S&P shall fall within different Categories, the Applicable Percentage shall be based on the lower of the two Ratings unless the Ratings differ by two or more Categories, in which case the Applicable Percentage will be based upon the Category one level above the Category corresponding to the lower Rating; and (iii) if the Ratings established or deemed to have been established by Moody's and S&P shall be changed (other than as a result of a change in the rating system of Moody's or S&P), such change shall be effective as of the date on which it is first announced by the applicable Rating Agency. Each change in the Applicable Percentage shall apply during the period commencing on the effective date of such change and ending on the date immediately preceding the effective date of the next such change. If the rating system of Moody's or S&P shall change, or if either such Rating Agency shall cease to be in the business of rating corporate debt obligations, the Company and the Lenders shall negotiate in good faith to amend this definition to reflect such changed rating system or the unavailability of ratings from such Rating Agency and, pending the effectiveness of any such amendment, the Applicable Percentage shall be determined by reference to the Rating most recently in effect prior to such change or cessation. "Assignment and Acceptance" shall mean an assignment and acceptance entered into by a Lender and an assignee in the form of Exhibit B. "Augmenting Lender" shall have the meaning assigned to such term in Section 2.21(a). 4 "Available Commitment" shall mean, as to any Lender at any time, an amount equal to such Lender's Commitment at such time minus the aggregate of all such Lender's Loans outstanding at such time. "Board" shall mean the Board of Governors of the Federal Reserve System of the United States. "Board of Directors" shall mean the Board of Directors of a Borrower or any duly authorized committee thereof. "Borrowing" shall mean a group of Loans of a single Type made by the Lenders (or, in the case of a Competitive Borrowing, by the Lender or Lenders whose Competitive Bids have been accepted pursuant to Section 2.03) on a single date and as to which a single Interest Period is in effect. "Business Day" shall mean any day (other than a day which is a Saturday, Sunday or legal holiday in the State of New York) on which banks are open for business in New York City; provided, however, that, when used in connection with a Eurocurrency Loan, the term "Business Day" shall also exclude any day on which banks are not open for dealings in deposits in Dollars in the London interbank market. "Capitalized Lease-Back Obligation" shall mean with respect to any property or asset, at any date as of which the same is to be determined, the total net rental obligations of the Company or a Subsidiary under a lease of such property or asset, entered into as part of an arrangement to which the provisions of Section 5.13 are applicable (or would have been applicable had such Subsidiary been a Subsidiary at the time it entered into such lease), discounted to the date of computation at the rate of interest per annum implicit in the lease (determined in accordance with GAAP). The amount of the net rental obligation for any calendar year under any lease shall be the sum of the rental and other payments required to be paid in such calendar year by the lessee thereunder, not including, however, any amounts required to be paid by such lessee (whether or not therein designated as rental or additional rental) on account of maintenance and repairs, insurance, taxes, assessments, water rates and similar charges. A "Change in Control" shall be deemed to have occurred if (a) any person or group of persons shall have acquired beneficial ownership of more than 30% of the outstanding Voting Shares of the Company (within the meaning of Section 13(d) or 14(d) of the Securities Exchange Act of 1934, as amended, and the applicable rules and regulations thereunder) or (b) during any period of 12 consecutive months, commencing after the Effective Date, individuals who on the first day of such period were directors of the Company (together with any replacement or additional directors who were nominated or elected by a majority of directors then in office) cease to constitute a majority of the Board of Directors of the Company or (c) Hartford Life shall cease to be a wholly-owned Subsidiary. "Code" shall mean the Internal Revenue Code of 1986, as the same may be amended from time to time. "Commitment" shall mean, with respect to each Lender, the commitment of such Lender hereunder as set forth as of the Closing Date in Schedule 2.01 under the heading "Commitment" or in an Assignment and Acceptance delivered by such Lender under Section 8.04 as such Lender's Commitment may be permanently terminated or reduced from time to time pursuant to Section 2.11 or pursuant to one or more assignments under Section 8.04. The Commitment of each Lender shall automatically and permanently terminate on the Maturity Date if not terminated earlier pursuant to the terms hereof. "Commitment Increase" shall have the meaning assigned to such term in Section 2.21(b). 5 "Competitive Bid" shall mean an offer by a Lender to make a Competitive Loan pursuant to Section 2.03. "Competitive Bid Accept/Reject Letter" shall mean a notification made by a Borrower pursuant to Section 2.03(d) in the form of Exhibit A-4. "Competitive Bid Rate" shall mean, as to any Competitive Bid, (i) in the case of a Eurocurrency Loan, the Margin, and (ii) in the case of a Fixed Rate Loan, the fixed rate of interest offered by the Lender making such Competitive Bid. "Competitive Bid Request" shall mean a request made pursuant to Section 2.03(a) in the form of Exhibit A-1. "Competitive Borrowing" shall mean a Borrowing consisting of a Competitive Loan or concurrent Competitive Loans from the Lender or Lenders whose Competitive Bids for such Borrowing have been accepted under the bidding procedure described in Section 2.03. "Competitive Loan" shall mean a Loan made pursuant to the bidding procedure described in Section 2.03. Each Competitive Loan shall be in Dollars and shall be a Eurocurrency Competitive Loan or a Fixed Rate Loan. "Competitive Loan Exposure" shall mean, with respect to any Lender at any time, the sum of the aggregate principal amount of all outstanding Competitive Loans made by such Lender. "Consolidated Net Worth" shall mean, as at any date of determination, the consolidated stockholders' equity of the Company and its Subsidiaries, as determined on a consolidated basis in accordance with GAAP, plus minority interests in Subsidiaries, as determined in accordance with GAAP, plus the Equity Unit Amount, plus, but without duplication, Special Preferred Securities; provided that Consolidated Net Worth shall not include Special Preferred Securities to the extent that Special Preferred Securities are greater than 15% of Consolidated Total Capitalization. "Consolidated Net Tangible Assets" shall mean the total of all assets appearing on a consolidated balance sheet of the Company and its Restricted Subsidiaries, prepared in accordance with GAAP (and as of a date not more than 90 days prior to the date as of which Consolidated Net Tangible Assets are to be determined), less the sum of the following items as shown on said consolidated balance sheet: (i) the book amount of all segregated intangible assets, including such items as good will, trademarks, trademark rights, trade names, trade name rights, copyrights, patents, patent rights and licenses and unamortized debt discount and expense less unamortized debt premium; (ii) all depreciation, valuation and other reserves; (iii) current liabilities; (iv) any minority interest in the shares of stock (other than Preferred Stock) and surplus of Restricted Subsidiaries of the Company; (v) the investment of the Company and its Restricted Subsidiaries in any Subsidiary of the Company that is not a Restricted Subsidiary; (vi) the total indebtedness of the Company and its Restricted Subsidiaries incurred in any manner to finance or recover the cost to the Company or any Restricted 6 Subsidiary of any physical property, real or personal, which prior to or simultaneously with the creation of such indebtedness shall have been leased by the Company or a Restricted Subsidiary to the United States of America or a department or agency thereof at an aggregate rental, payable during that portion of the initial term of such lease (without giving effect to any options of renewal or extension) which shall be unexpired at the date of the creation of such indebtedness, sufficient (taken together with any amounts required to be paid by the lessee to the lessor upon any termination of such lease) to pay in full at the stated maturity date or dates thereof the principal of and the interest on such indebtedness; (vii) deferred income and deferred liabilities; and (viii) other items deductible under GAAP. "Consolidated Statutory Surplus" shall mean, with respect to the Insurance Subsidiaries, the amount or amounts set forth on line 32 of the Liabilities, Surplus and Other Funds Statement in the applicable Annual Statement or Statements or the applicable Quarterly Statement or Statements most recently delivered to the Administrative Agent and the Lenders pursuant to Section 5.03 or, if such statement shall be modified, the equivalent item on any applicable successor form (which amount shall be computed in a manner consistent with that used in preparing the financial statements as of and for the fiscal year ended December 31, 2001, referred to in Section 3.05). "Consolidated Total Capitalization" shall mean, as at any date of determination, the sum of Consolidated Total Debt and Consolidated Net Worth. "Consolidated Total Debt" shall mean, as at any date of determination, without duplication, (i) all Indebtedness of the Company and its Subsidiaries determined on a consolidated basis in accordance with GAAP (but in any event including the Total Equity Unit Amount), plus (ii) preferred securities that are mandatorily redeemable, or redeemable at the option of the holder, within 10 years of such date of determination, plus (iii) Special Preferred Securities to the extent that Special Preferred Securities exceed 15% of Consolidated Total Capitalization, less (iv) the Equity Unit Amount. "Default" shall mean any event or condition which upon notice, lapse of time or both would constitute an Event of Default. "Dollars" or "$" shall mean lawful money of the United States of America. "Effective Date" shall mean the date on which the conditions set forth in Section 4.02 are satisfied. "Equity Unit Amount" shall mean 75% of the aggregate principal amount of the notes included in any outstanding Equity Units. "Equity Units" shall mean the 6,600,000 6% Equity Units issued by the Company on September 13, 2002. "ERISA" shall mean the Employee Retirement Income Security Act of 1974, as the same may be amended from time to time. 7 "ERISA Affiliate" shall mean any trade or business (whether or not incorporated) that, together with the Company, is treated as a single employer under Section 414(b) or (c) of the Code, or, solely for purposes of Section 302 of ERISA and Section 412 of the Code, is treated as a single employer under Section 414 of the Code. "ERISA Event" shall mean (a) any "reportable event", as defined in Section 4043 of ERISA or the regulations issued thereunder, with respect to a Plan; (b) the adoption of any amendment to a Plan that would require the provision of security pursuant to Section 401(a)(29) of the Code or Section 307 of ERISA; (c) the existence with respect to any Plan of an "accumulated funding deficiency" (as defined in Section 412 of the Code or Section 302 of ERISA), whether or not waived; (d) the filing pursuant to Section 412(d) of the Code or Section 303(d) of ERISA of an application for a waiver of the minimum funding standard with respect to any Plan; (e) the incurrence of any liability under Title IV of ERISA with respect to the termination of any Plan or the withdrawal or partial withdrawal of the Company or any of its ERISA Affiliates from any Plan or Multiemployer Plan; (f) the receipt by the Company or any ERISA Affiliate from the PBGC or a plan administrator of any notice relating to the intention to terminate any Plan or Plans or to appoint a trustee to administer any Plan; (g) the receipt by the Company or any ERISA Affiliate of any notice that Withdrawal Liability is being imposed or a determination that a Multiemployer Plan is, or is expected to be, insolvent or in reorganization, within the meaning of Title IV of ERISA; and (h) the occurrence of a "prohibited transaction" with respect to which the Company or any of its Subsidiaries is a "disqualified person" (within the meaning of Section 4975) of the Code, or with respect to which the Company or any such Subsidiary could otherwise be liable. "Eurocurrency Borrowing" shall mean a Borrowing comprised of Eurocurrency Loans. "Eurocurrency Competitive Loan" shall mean any Competitive Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Eurocurrency Loan" shall mean any Eurocurrency Competitive Loan or Eurocurrency Standby Loan. "Eurocurrency Standby Loan" shall mean any Standby Loan bearing interest at a rate determined by reference to the LIBO Rate in accordance with the provisions of Article II. "Event of Default" shall have the meaning assigned to such term in Article VI. "Exchange Act" shall mean the Securities Exchange Act of 1934, as amended. "Existing Credit Agreement" shall mean the Amended and Restated Credit Agreement dated as of February 9, 1998, among the Hartford Life, certain lenders and Citibank, N.A., as swing line bank and administrative agent. "Facility Fee" shall have the meaning assigned to such term in Section 2.06(a). "Fair Value", when used with respect to property, shall mean the fair value as determined in good faith by the Board of Directors of the Company. "Fees" shall mean the Facility Fee and the Administrative Fees. "Financial Officer" of any corporation shall mean the chief financial officer, principal accounting officer, treasurer, associate or assistant treasurer or director of treasury services of such corporation. 8 "Fixed Rate Borrowing" shall mean a Borrowing comprised of Fixed Rate Loans. "Fixed Rate Loan" shall mean any Competitive Loan bearing interest at a fixed percentage rate per annum (the "Fixed Rate") (expressed in the form of a decimal to no more than four decimal places) specified by the Lender making such Loan in its Competitive Bid. "GAAP" shall mean generally accepted accounting principles in the United States, applied on a consistent basis. "Governmental Authority" shall mean any Federal, state, local or foreign court or governmental agency, authority, instrumentality or regulatory body. "Hartford Life Statutory Surplus and Asset Valuation Reserve" shall mean, with respect to Hartford Life and its insurance subsidiaries at any time, the sum of the respective amounts set forth on lines 24.1 and 38 of the Liabilities, Surplus and Other Funds Statement in the Annual Statement or the Quarterly Statement of each of Hartford Life and its insurance subsidiaries (which amount shall be computed in a manner consistent with that used in preparing the financial statements as of and for the fiscal year ended December 31, 2001, referred to in Section 3.05). "Increase Effective Date" shall have the meaning assigned to such term in Section 2.21(b). "Increasing Lender" shall have the meaning assigned to such term in Section 2.21(a). "Incremental Facility Amount" shall mean, at any time, an amount equal to $125,000,000 minus the aggregate amount, if any, by which the Total Commitment shall have been increased prior to such time pursuant to Section 2.21. "Indebtedness" of any person shall mean all indebtedness representing money borrowed, all obligations of such person evidenced by notes, bonds, debentures or other similar instruments, or the deferred purchase price of property (other than trade accounts payable) or any capitalized lease obligation, which in any case is created, assumed, incurred or guaranteed in any manner by such corporation or for which such corporation is responsible or liable (whether by agreement to purchase indebtedness of, or to supply funds to or invest in, others or otherwise). "Information" shall have the meaning assigned to such term in Section 8.16. "Initial Loans" shall have the meaning assigned to such term in Section 2.21(b). "Insurance Subsidiaries" shall mean those Subsidiaries set forth on Schedule 1.01 hereto and any future Subsidiaries principally engaged in one or more of the property, casualty and life insurance businesses. "Interest Payment Date" shall mean (a) with respect to any Loan, the last day of each Interest Period applicable thereto and (b) with respect to a Eurocurrency Loan with an Interest Period of more than three months' duration or a Fixed Rate Loan with an Interest Period of more than 90 days' duration, each day that would have been an Interest Payment Date for such Loan had successive Interest Periods of three months' duration or 90 days' duration, as the case may be, been applicable to such Loan and, in addition, the date of any prepayment of each Loan or conversion of such Loan to a Loan of a different Type. 9 "Interest Period" shall mean (a) as to any Eurocurrency Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the numerically corresponding day (or, if there is no numerically corresponding day, on the last day) in the calendar month that is 1, 2, 3 or 6 months thereafter, as the Borrower may elect; (b) as to any ABR Borrowing, the period commencing on the date of such Borrowing or on the last day of the immediately preceding Interest Period applicable to such Borrowing, as the case may be, and ending on the earliest of (i) the next succeeding March 31, June 30, September 30 or December 31, (ii) the Maturity Date, and (iii) the date such Borrowing is converted to a Borrowing of a different Type in accordance with Section 2.05 or repaid or prepaid in accordance with Section 2.07 or Section 2.12; and (c) as to any Fixed Rate Borrowing, the period commencing on the date of such Borrowing and ending on the date specified in the Competitive Bids in which the offers to make the Fixed Rate Loans comprising such Borrowing were extended, which shall not be earlier than seven days after the date of such Borrowing or later than 360 days after the date of such Borrowing; provided, however, that if any Interest Period would end on a day other than a Business Day, such Interest Period shall be extended to the next succeeding Business Day unless, in the case of Eurocurrency Loans only, such next succeeding Business Day would fall in the next calendar month, in which case such Interest Period shall end on the next preceding Business Day. Interest shall accrue from and including the first day of an Interest Period to but excluding the last day of such Interest Period. "Judgment Currency" shall have the meaning assigned to such term in Section 8.15(b). "Lender Affiliate" means, (a) with respect to any Lender, (i) an Affiliate of such Lender or (ii) any entity (whether a corporation, partnership, trust or otherwise) that is engaged in making, purchasing, holding or otherwise investing in bank loans and similar extensions of credit in the ordinary course of its business and is administered or managed by a Lender or an Affiliate of such Lender and (b) with respect to any Lender that is a fund which invests in bank loans and similar extensions of credit, any other fund that invests in bank loans and similar extensions of credit and is managed by the same investment advisor as such Lender or by an Affiliate of such investment advisor. "LIBO Rate" shall mean, with respect to any Eurocurrency Borrowing for any Interest Period, an interest rate per annum (rounded upwards, if necessary, to the next 1/16 of 1%) equal to the rate at which Dollar deposits approximately equal in principal amount to (i) in the case of a Standby Borrowing that is a Eurocurrency Borrowing, the Administrative Agent's portion of such Eurocurrency Borrowing and (ii) in the case of a Competitive Borrowing, a principal amount that would have been the Administrative Agent's portion of such Competitive Borrowing had such Competitive Borrowing been a Standby Borrowing, and for a maturity comparable to such Interest Period, are offered to the principal London offices of the Administrative Agent in immediately available funds in the London interbank market at approximately 11:00 a.m., London time, two Business Days prior to the commencement of such Interest Period. "Lien" shall mean, with respect to any property or asset, any mortgage, deed of trust, lien, pledge, security interest, charge or other encumbrance on, of or in such property or asset. "Loan" shall mean a Competitive Loan or a Standby Loan, whether made as a Eurocurrency Loan, an ABR Loan or a Fixed Rate Loan, as permitted hereby. "Loan Documents" shall mean this Agreement and any promissory notes issued pursuant to Section 8.04(i). 10 "Margin" shall mean, as to any Eurocurrency Competitive Loan, the margin (expressed as a percentage rate per annum in the form of a decimal to no more than four decimal places) to be added to or subtracted from the LIBO Rate in order to determine the interest rate applicable to such Loan, as specified in the Competitive Bid relating to such Loan. "Margin Regulations" shall mean Regulations T, U and X of the Board as from time to time in effect, and all official rulings and interpretations thereunder or thereof. "Margin Stock" shall have the meaning given such term under Regulation U of the Board. "Material Adverse Effect" shall mean a materially adverse effect on the business, assets, operations or condition, financial or otherwise, of the Company and its Subsidiaries taken as a whole. "Maturity Date" shall mean December 31, 2005. "Moody's" shall mean Moody's Investors Service, Inc. or any of its successors. "Multiemployer Plan" shall mean a multiemployer plan as defined in Section 4001(a)(3) of ERISA to which the Company or any ERISA Affiliate (other than one considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code Section 414) is making or accruing an obligation to make contributions, or has within any of the preceding five plan years made or accrued an obligation to make contributions. "NAIC" shall mean the National Association of Insurance Commissioners or any association or Governmental Authority succeeding to any or all of the functions of the National Association of Insurance Commissioners. "Non-Increasing Lender" shall have the meaning assigned to such term in Section 2.21(a). "Notice of Competitive Bid Request" shall mean a notification made pursuant to Section 2.03(a) in the form of Exhibit A-2. "PBGC" shall mean the Pension Benefit Guaranty Corporation referred to and defined in ERISA. "person" shall mean any natural person, corporation, business trust, joint venture, association, company, partnership or government, or any agency or political subdivision thereof. "Plan" shall mean any employee pension benefit plan (other than a Multiemployer Plan) subject to the provisions of Title IV of ERISA or Section 412 of the Code or Section 307 of ERISA, and in respect of which either Borrower or any ERISA Affiliate is (or, if such plan were terminated, would under Section 4069 of ERISA be deemed to be) an "employer" as defined in Section 3(5) of ERISA. "Preferred Stock" shall mean any capital stock entitled by its terms to a preference (a) as to dividends or (b) upon a distribution of assets. "Pro Rata Percentage" of any Lender at any time shall mean the percentage of the Total Commitment represented by such Lender's Commitment. If the Commitments have terminated or expired, the Pro Rata Percentages shall be determined based upon the Commitments most recently in effect, giving effect to any assignments. 11 "Quarterly Statement" shall mean, with respect to any Restricted Subsidiary, the Quarterly Statement of such Restricted Subsidiary required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law, including any exhibits, schedules, certificates or actuarial opinions filed or delivered therewith. "Rating Agencies" shall mean Moody's and S&P. "Ratings" of either Borrower shall mean the ratings from time to time established by the Rating Agencies for senior, unsecured, non-credit-enhanced long-term debt of such Borrower. "Register" shall have the meaning given such term in Section 8.04(d). "Reportable Event" shall mean any reportable event as defined in Section 4043 of ERISA or the regulations issued thereunder with respect to a Plan (other than a Plan maintained by an ERISA Affiliate that is considered an ERISA Affiliate only pursuant to subsection (m) or (o) of Code Section 414). "Required Lenders" shall mean, at any time, Lenders having Commitments representing more than 50% of the Total Commitment or, for purposes of acceleration pursuant to clause (ii) of Article VI or following the termination of the Commitments, Lenders holding Loans representing more than 50% of the aggregate principal amount of the Loans outstanding. "Responsible Officer" of any corporation shall mean any executive officer or Financial Officer of such corporation and any other officer or similar official thereof responsible for the administration of the obligations of such corporation in respect of this Agreement. "Restricted Subsidiary" means (a) Hartford Life and (b) any other Subsidiary which is incorporated in any state of the United States or in the District of Columbia and which is a regulated insurance company principally engaged in one or more of the property, casualty and life insurance businesses and which has total assets representing 10% or more of the total assets of the Company and its consolidated Subsidiaries (including such Subsidiary), in each case as set forth on the most recent fiscal year-end balance sheets of such Subsidiary and the Company and its consolidated Subsidiaries, respectively, and computed in accordance with GAAP. Such Subsidiary must be designated a Restricted Subsidiary in a notice delivered by the Company and certified by a Responsible Officer to the Administrative Agent for distribution to the Lenders. In the event that the aggregate total assets of the Restricted Subsidiaries represent less than 80% of the total assets of the Company and its consolidated Subsidiaries, the Board of Directors of the Company, as evidenced by a resolution of such Board of Directors, shall promptly designate an additional Subsidiary or Subsidiaries as Restricted Subsidiaries in order that, after such designations, the aggregate total assets of the Restricted Subsidiaries represent at least 80% of the total assets of the Company and its consolidated Subsidiaries; provided that all Subsidiaries with total assets of 10% or more of the total assets of the Company and its consolidated Subsidiaries have previously been designated as Restricted Subsidiaries. "Risk-Based Capital" shall mean, with respect to the Insurance Subsidiaries at any time, the Company Action Level Risk-Based Capital (as defined by the NAIC at such time and as computed in accordance with SAP) of the Insurance Subsidiaries (determined and consolidated in accordance with SAP) at such time. "S&P" shall mean Standard and Poor's Ratings Services, a division of The McGraw-Hill Companies, Inc. or any of its successors. "SAP" shall mean, with respect to any Insurance Subsidiary, the accounting principles and procedures prescribed or permitted by the Applicable Insurance Regulatory Authority applied on a basis consistent with those that are indicated in Section 1.02. 12 "SEC" shall mean the Securities and Exchange Commission or any of its successors. "Special Preferred Securities" shall mean preferred securities that are mandatorily redeemable, or redeemable at the option of the holder, not sooner than ten years after issuance and issued by the Company and/or one or more Subsidiaries of the Company. "Standby Borrowing" shall mean a Borrowing consisting of simultaneous Standby Loans from each of the Lenders. "Standby Borrowing Request" shall mean a request made pursuant to Section 2.04 in the form of Exhibit A-5. "Standby Credit Exposure" shall mean, with respect to any Lender at any time, the aggregate principal amount at such time of all outstanding Standby Loans of such Lender. "Standby Loans" shall mean the revolving loans made pursuant to Section 2.04(a). Each Standby Loan shall be in Dollars and shall be a Eurocurrency Standby Loan or an ABR Loan. "Statement of Actuarial Opinion" shall mean, with respect to the Restricted Subsidiaries, the Statement of Actuarial Opinion required to be filed with the Applicable Insurance Regulatory Authority in accordance with state law or, if such Applicable Insurance Regulatory Authority shall no longer require such a statement, information equivalent to that required to be included in the Statement of Actuarial Opinion that was filed immediately prior to the time such statement was no longer required. "subsidiary" shall mean, with respect to any person (the "parent"), any corporation, association or other business entity of which securities or other ownership interests representing more than 50% of the ordinary voting power are, at the time as of which any determination is being made, owned or controlled by the parent or one or more subsidiaries of the parent or by the parent and one or more subsidiaries of the parent. "Subsidiary" shall mean a subsidiary of the Company. "Subsequent Borrowings" shall have the meaning assigned to such term in Section 2.21(b). "Total Adjusted Capital" shall mean, with respect to the Insurance Subsidiaries at any time, the Total Adjusted Capital (as defined by the NAIC at such time and as determined and consolidated in accordance with SAP) of the Insurance Subsidiaries (taken together) at such time. "Total Commitment" shall mean, at any time, the aggregate amount of Commitments of all the Lenders, as in effect at such time. "Total Equity Unit Amount" shall mean 100% of the aggregate principal amount of the notes included in any outstanding Equity Units. "Transactions" shall have the meaning assigned to such term in Section 3.02. "Type", when used in respect of any Loan or Borrowing, shall refer to the Rate by reference to which interest on such Loan or on the Loans comprising such Borrowing is determined. For purposes hereof, "Rate" shall include the LIBO Rate, the Alternate Base Rate and the Fixed Rate. 13 "Voting Shares" shall mean, as to shares of a particular corporation, outstanding shares of stock of any class of such corporation entitled to vote in the election of directors, excluding shares entitled so to vote only upon the happening of some contingency. "Withdrawal Liability" shall mean liability to a Multiemployer Plan as a result of a complete or partial withdrawal from such Multiemployer Plan, as such terms are defined in Part I of Subtitle E of Title VI of ERISA. SECTION 1.02. Terms Generally. The definitions in Section 1.01 shall apply equally to both the singular and plural forms of the terms defined. Whenever the context may require, any pronoun shall include the corresponding masculine, feminine and neuter forms. The words "include", "includes" and "including" shall be deemed to be followed by the phrase "without limitation". All references herein to Articles, Sections, Exhibits and Schedules shall be deemed references to Articles and Sections of, and Exhibits and Schedules to, this Agreement unless the context shall otherwise require. Except as otherwise expressly provided herein, all terms of an accounting or financial nature shall be construed in accordance with GAAP or, to the extent such terms apply to an Insurance Subsidiary, SAP, in each case as in effect from time to time; provided, however, that for purposes of determining compliance with any covenant set forth in Article V, such terms shall be construed in accordance with GAAP or SAP, as applicable, as in effect on the date hereof applied on a basis consistent with the application used in preparing the Company's audited financial statements referred to in Section 3.05. ARTICLE II THE CREDITS SECTION 2.01. Commitments. (a) Subject to the terms and conditions and relying upon the representations and warranties herein set forth, each Lender agrees, severally and not jointly, to make Standby Loans to the Borrowers, at any time and from time to time on and after the Effective Date and until the earlier of the Maturity Date and the termination of the Commitment of such Lender. (b) Notwithstanding anything to the contrary contained in this Agreement, in no event may Standby Loans be borrowed under this Article II if, after giving effect thereto (and to any concurrent repayment or prepayment of Loans), (i) the sum of the aggregate Standby Credit Exposures and the aggregate Competitive Loan Exposures would exceed the Total Commitment then in effect; (ii) the Standby Credit Exposure of any Lender would exceed such Lender's Commitment; or (iii) the portion of the aggregate Standby Credit Exposures and the aggregate Competitive Loan Exposures attributable to borrowings by Hartford Life would exceed $250,000,000. Within the foregoing limits, the Borrowers may borrow, pay or prepay and reborrow Standby Loans hereunder, on and after the Effective Date and prior to the Maturity Date, subject to the terms, conditions and limitations set forth herein. SECTION 2.02. Loans. (a) Each Standby Loan shall be made as part of a Borrowing consisting of Standby Loans made by the Lenders ratably in accordance with their respective Available Commitments; provided, however, that the failure of any Lender to make any Standby Loan shall not in itself relieve any other Lender of its obligation to lend hereunder (it being understood, however, that no Lender shall be responsible for the failure of any other Lender to make any Loan required to be made by such other Lender). Each Competitive Loan shall be made in accordance with the procedures set forth in Section 2.03. The Loans comprising any Borrowing shall be (i) in the case of Competitive Loans, in an aggregate principal amount which is an integral multiple of $1,000,000 and not less than $5,000,000 and (ii) in the case of Standby Loans, in an aggregate principal amount which is an integral multiple of $5,000,000 and 14 not less than $20,000,000 (or an aggregate principal amount equal to the remaining balance of the Available Commitments). All Standby Loans and Competitive Loans made pursuant to this Article II shall be denominated in Dollars. (b) Each Competitive Borrowing shall be comprised entirely of Eurocurrency Competitive Loans or Fixed Rate Loans, and each Standby Borrowing shall be comprised entirely of Eurocurrency Standby Loans or ABR Loans, as the Borrower may request pursuant to Section 2.03 or 2.04, as applicable. Each Lender may at its option make any Eurocurrency Loan by causing any domestic or foreign branch, agency or Affiliate of such Lender to make such Loan; provided that any exercise of such option shall not affect the obligation of the Borrower to repay such Loan in accordance with the terms of this Agreement. Borrowings of more than one Type may be outstanding at the same time. For purposes of the foregoing, Loans having different Interest Periods, regardless of whether they commence on the same date, shall be considered separate Loans. (c) Subject to Section 2.05, each Lender shall make each Loan to be made by it hereunder on the proposed date thereof by wire transfer of immediately available funds to the Administrative Agent in New York, New York, not later than 12:00 noon, New York City time, and the Administrative Agent shall by 2:00 p.m., New York City time, credit the amounts so received to the account or accounts specified from time to time in one or more notices delivered by the Company to the Administrative Agent or, if a Borrowing shall not occur on such date because any condition precedent herein specified shall not have been met, return the amounts so received to the respective Lenders. Competitive Loans shall be made by the Lender or Lenders whose Competitive Bids therefor are accepted pursuant to Section 2.03 in the amounts so accepted. Standby Loans shall be made by the Lenders pro rata in accordance with Section 2.16. Unless the Administrative Agent shall have received notice from a Lender prior to the date (or, in the case of ABR Borrowings, on the date) of any Borrowing that such Lender will not make available to the Administrative Agent such Lender's portion of such Borrowing, the Administrative Agent may assume that such Lender has made such portion available to the Administrative Agent on the date of such Borrowing in accordance with this paragraph (c) and the Administrative Agent may, in reliance upon such assumption, make available to the Borrower on such date a corresponding amount. If and to the extent that such Lender shall not have made such portion available to the Administrative Agent, such Lender and the Borrower severally agree to repay to the Administrative Agent forthwith on demand such corresponding amount together with interest thereon, for each day from the date such amount is made available to the Borrower until the date such amount is repaid to the Administrative Agent at (i) in the case of the Borrower, the interest rate applicable at the time to the Loans comprising such Borrowing and (ii) in the case of such Lender, a rate determined by the Administrative Agent to represent its cost of overnight funds. If such Lender shall repay to the Administrative Agent such corresponding amount, such amount shall constitute such Lender's Loan as part of such Borrowing for purposes of this Agreement. (d) Each Competitive Loan shall be a Eurocurrency Competitive Loan or a Fixed Rate Loan. Each Standby Loan shall be a Eurocurrency Standby Loan or an ABR Standby Loan. SECTION 2.03. Competitive Bid Procedure. (a) Subject to the terms and conditions set forth herein, from time to time on or after the Effective Date and until the earlier of the Maturity Date and the termination of the Commitments, each Borrower may request Competitive Bids and may (but shall not have any obligation to) accept Competitive Bids and borrow Competitive Loans; provided that the sum of the total Standby Credit Exposures plus the aggregate amount of the Competitive Loan Exposures at any time shall not exceed the Total Commitment and the portion of the aggregate Standby Credit Exposures and the aggregate Competitive Loan Exposures attributable to borrowings by Hartford Life shall not exceed $250,000,000. In order to request Competitive Bids, a Borrower (the "Applicable Borrower") shall hand deliver or telecopy to the Administrative Agent a duly completed Competitive Bid 15 Request in the form of Exhibit A-1 hereto, to be received by the Administrative Agent (i) in the case of a Eurocurrency Competitive Loan, not later than 10:00 a.m., New York City time, four Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 10:00 a.m., New York City time, one Business Day before a proposed Competitive Borrowing. No ABR Loan shall be requested in, or made pursuant to, a Competitive Bid Request. A Competitive Bid Request that does not conform substantially to the format of Exhibit A-1 may be rejected in the Administrative Agent's sole discretion, and the Administrative Agent shall promptly notify the Borrower of such rejection by telecopy. Each Competitive Bid Request shall refer to this Agreement and specify (x) whether the Borrowing then being requested is to be a Eurocurrency Borrowing or a Fixed Rate Borrowing; (y) the date of such Borrowing (which shall be a Business Day) and the aggregate principal amount thereof which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000; and (z) the Interest Period with respect thereto (which may not end after the Maturity Date). Promptly after its receipt of a Competitive Bid Request that is not rejected as aforesaid, the Administrative Agent shall telecopy to the Lenders a Notice of Competitive Bid Request inviting the Lenders to bid, on the terms and conditions of this Agreement, to make Competitive Loans. (b) Each Lender invited to bid may, in its sole discretion, make one or more Competitive Bids to the Applicable Borrower responsive to such Borrower's Competitive Bid Request. Each Competitive Bid by a Lender must be received by the Administrative Agent by telecopy, in the form of Exhibit A-3 hereto, (i) in the case of a Eurocurrency Competitive Loan, not later than 9:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing and (ii) in the case of a Fixed Rate Borrowing, not later than 9:30 a.m., New York City time, on the day of a proposed Competitive Borrowing. A Lender may submit multiple bids to the Administrative Agent. Competitive Bids that do not conform substantially to the format of Exhibit A-3 may be rejected by the Administrative Agent, and the Administrative Agent shall notify the Lender making such nonconforming bid of such rejection as soon as practicable. Each Competitive Bid shall refer to this Agreement and specify (x) the principal amount (which shall be in a minimum principal amount of $5,000,000 and in an integral multiple of $1,000,000 and which may equal the entire principal amount of the Competitive Borrowing requested) of the Competitive Loan or Loans that the Lender is willing to make; (y) the Competitive Bid Rate or Rates at which the Lender is prepared to make the Competitive Loan or Loans; and (z) the Interest Period and the last day thereof. If any Lender invited to bid shall elect not to make a Competitive Bid, such Lender shall so notify the Administrative Agent by telecopy (I) in the case of Eurocurrency Competitive Loans, not later than 9:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing and (II) in the case of Fixed Rate Loans, not later than 9:30 a.m., New York City time, on the day of a proposed Competitive Borrowing; provided, however, that failure by any Lender to give such notice shall not cause such Lender to be obligated to make any Competitive Loan as part of such Competitive Borrowing. A Competitive Bid submitted by a Lender pursuant to this paragraph (b) shall be irrevocable. (c) The Administrative Agent shall as promptly as practicable notify the Borrower, by telecopy, of all the Competitive Bids made, the Competitive Bid Rate and the principal amount of each Competitive Loan in respect of which a Competitive Bid was made and the identity of the Lender that made each bid. The Administrative Agent shall send a copy of all Competitive Bids to the Borrower for its records as soon as practicable after completion of the bidding process set forth in this Section 2.03. (d) The Borrower may in its sole and absolute discretion, subject only to the provisions of this paragraph (d), accept or reject any Competitive Bid referred to in paragraph (c) above. The Borrower shall notify the Administrative Agent by telephone, confirmed by telecopy in the form of a Competitive Bid Accept/Reject Letter, whether and to what extent it has decided to accept or reject any of or all the bids referred to in paragraph (c) above not more than one hour after it shall have been notified of such bids by the Administrative Agent pursuant to such paragraph (c); provided, however, that (i) the failure of the Borrower to give such notice shall be deemed to be a rejection of all the bids referred to in paragraph (c) above; (ii) the Borrower shall 16 not accept a bid made at a particular Competitive Bid Rate if it has decided to reject a bid made at a lower Competitive Bid Rate; (iii) the aggregate amount of the Competitive Bids accepted by the Borrower shall not exceed the principal amount specified in the Competitive Bid Request; (iv) if the Borrower shall accept a bid or bids made at a particular Competitive Bid Rate but the amount of such bid or bids shall cause the total amount of bids to be accepted to exceed the amount specified in the Competitive Bid Request, then the Borrower shall accept a portion of such bid or bids in an amount equal to the amount specified in the Competitive Bid Request less the amount of all other Competitive Bids accepted with respect to such Competitive Bid Request, which acceptance, in the case of multiple bids at such Competitive Bid Rate, shall be made pro rata in accordance with the amount of each such bid at such Competitive Bid Rate; and (v) except pursuant to clause (iv) above, no bid shall be accepted for a Competitive Loan unless such Competitive Loan is in a minimum principal amount of $5,000,000 and an integral multiple of $1,000,000; provided further, however, that if a Competitive Loan must be in an amount less than $5,000,000 because of the provisions of clause (iv) above, such Competitive Loan may be for a minimum of $1,000,000 or any integral multiple thereof, and in calculating the pro rata allocation of acceptances of portions of multiple bids at a particular Competitive Bid Rate pursuant to clause (iv) the amounts shall be rounded to integral multiples of $1,000,000 in a manner which shall be in the discretion of the Borrower. A notice given pursuant to this paragraph (d) shall be irrevocable. (e) The Administrative Agent shall promptly notify each bidding Lender whether or not its Competitive Bid has been accepted (and if so, in what amount and at what Competitive Bid Rate) by telecopy, and each successful bidder will thereupon become bound, subject to the other applicable conditions hereof, to make the Competitive Loan in respect of which its bid has been accepted. (f) No Competitive Borrowing shall be requested or made hereunder if after giving effect thereto any of the conditions set forth in paragraph (b) of Section 2.01 would not be met. (g) If the Administrative Agent shall elect to submit a Competitive Bid in its capacity as a Lender, it shall submit such bid directly to the Applicable Borrower one quarter of an hour earlier than the latest time at which the other Lenders are required to submit their bids to the Administrative Agent pursuant to paragraph (b) above. (h) All notices required by this Section 2.03 shall be given in accordance with Section 8.01. SECTION 2.04. Standby Borrowing Procedure. In order to request a Standby Borrowing, a Borrower shall hand deliver or telecopy to the Administrative Agent a duly completed Standby Borrowing Request in the form of Exhibit A-5 (a) in the case of a Eurocurrency Standby Loan, not later than 10:30 a.m., New York City time (or, if the Standby Borrowing request is delivered or telecopied to the Administrative Agent in London, 9:30 a.m., London time), three Business Days before such Borrowing and (b) in the case of an ABR Borrowing, not later than 10:30 a.m., New York City time, on the day of such Borrowing. No Fixed Rate Loan shall be requested or made pursuant to a Standby Borrowing Request. Such notice shall be irrevocable and shall in each case specify (i) whether the Borrowing then being requested is to be a Eurocurrency Standby Loan or an ABR Borrowing; (ii) the date of such Standby Borrowing (which shall be a Business Day) and the amount thereof; and (iii) if such Borrowing is to be a Eurocurrency Standby Loan, the Interest Period with respect thereto, which shall not end after the Maturity Date. If no election as to the Type of Standby Borrowing is specified in any such notice, then the requested Standby Borrowing shall be an ABR Borrowing. If no Interest Period with respect to any Eurocurrency Standby Loan is specified in any such notice, then the Borrower shall be deemed to have selected an Interest Period of one month's duration. Notwithstanding any other provision of this Agreement to the contrary, no Standby Borrowing shall be requested if the Interest Period with respect thereto would end after the 17 Maturity Date. The Administrative Agent shall promptly advise each of the Lenders of any notice given pursuant to this Section 2.04 and of each Lender's portion of the requested Borrowing. SECTION 2.05. Conversion and Continuation of Standby Loans. Each Borrower shall have the right at any time upon prior irrevocable notice to the Administrative Agent (i) not later than 10:30 a.m., New York City time, on the day of the conversion, to convert all or any part of any Eurocurrency Standby Loan into an ABR Standby Loan and (ii) not later than 10:30 a.m., New York City time, three Business Days prior to conversion or continuation, to convert any ABR Standby Loan into a Eurocurrency Standby Loan or to continue any Eurocurrency Standby Loan as a Eurocurrency Standby Loan for an additional Interest Period, subject in each case to the following: (a) if less than all the outstanding principal amount of any Standby Borrowing shall be converted or continued, the aggregate principal amount of the Standby Borrowing converted or continued shall be an integral multiple of $5,000,000 and not less than $20,000,000; (b) accrued interest on a Standby Borrowing (or portion thereof) being converted shall be paid by the Borrower at the time of conversion; (c) if any Eurocurrency Standby Loan is converted at a time other than the end of the Interest Period applicable thereto, the Borrower shall pay, upon demand, any amounts due to the Lenders pursuant to Section 2.15; (d) any portion of a Standby Borrowing maturing or required to be repaid in less than one month may not be converted into or continued as a Eurocurrency Standby Loan; (e) any portion of a Eurocurrency Standby Loan which cannot be continued as a Eurocurrency Standby Loan by reason of clause (d) above shall be automatically converted at the end of the Interest Period in effect for such Eurocurrency Standby Loan into an ABR Borrowing; (f) no Interest Period may be selected for any Eurocurrency Standby Borrowing that would end later than the Maturity Date; and (g) at any time when there shall have occurred and be continuing any Default or Event of Default, no Borrowing may be converted into or continued as a Eurocurrency Standby Loan. Each notice pursuant to this Section 2.05 shall be irrevocable and shall refer to this Agreement and specify (i) the identity and amount of the Standby Borrowing to be converted or continued; (ii) whether such Standby Borrowing is to be converted to or continued as a Eurocurrency Standby Loan or an ABR Standby Loan; (iii) if such notice requests a conversion, the date of such conversion (which shall be a Business Day); and (iv) if such Standby Borrowing is to be converted to or continued as a Eurocurrency Standby Loan, the Interest Period with respect thereto. If no Interest Period is specified in any such notice with respect to any conversion to or continuation as a Eurocurrency Standby Loan, the Borrower shall be deemed to have selected an Interest Period of one month's duration. If no notice shall have been given in accordance with this Section 2.05 to convert or continue any Standby Borrowing, such Standby Borrowing shall, at the end of the Interest Period applicable thereto (unless repaid pursuant to the terms hereof), automatically be continued into a new Interest Period as an ABR Standby Loan. SECTION 2.06. Fees. (a) The Company agrees to pay to the Administrative Agent for the account of each Lender a facility fee (the "Facility Fee"), which shall accrue at the Applicable Percentage from time to time in effect on the daily amount of the Commitment of 18 such Lender (whether used or unused) during the period from and including the date hereof to but excluding the date on which such Commitment terminates; provided that, if such Lender continues to have any Standby Credit Exposure after its Commitment terminates, then such Facility Fee shall continue to accrue on the daily amount of such Lender's Standby Credit Exposure from and including the date on which its Commitment terminates to but excluding the date on which such Lender ceases to have any Standby Credit Exposure. Accrued Facility Fees shall be payable in arrears on the last day of March, June, September and December of each year, commencing on the first such date to occur after the date hereof, and on the date on which the Commitments shall have terminated and the Lenders shall have no further Standby Credit Exposures. All Facility Fees shall be computed on the basis of a year of 360 days and shall be payable for the actual number of days elapsed (including the first day but excluding the last day). (b) The Company agrees to pay each Agent, for its own account, the administrative and other fees separately agreed to by the Company and such Agent (the "Administrative Fees"). (c) All Fees shall be paid on the dates due, in immediately available funds, to the Administrative Agent for distribution, if and as appropriate, among the Lenders, except that the Administrative Fees shall be paid pursuant to paragraph (b) above. Once paid, none of the Fees shall be refundable under any circumstances. SECTION 2.07. Repayment of Loans; Evidence of Debt. (a) Each Borrower hereby agrees that the outstanding principal balance of each Standby Loan shall be payable on the Maturity Date and that the outstanding principal balance of each Competitive Loan shall be payable on the last day of the Interest Period applicable thereto. Each Loan shall bear interest on the outstanding principal balance thereof as set forth in Section 2.08. (b) Each Lender shall maintain in accordance with its usual practice an account or accounts evidencing the indebtedness to such Lender resulting from each Loan made by such Lender from time to time, including the amounts of principal and interest payable and paid to such Lender from time to time under this Agreement. (c) The Administrative Agent shall (i) maintain accounts in which it will record (A) the amount of each Loan made hereunder, the Borrower of each Loan, the Type of each Loan made and the Interest Period applicable thereto; (B) the amount of any principal or interest due and payable or to become due and payable from each Borrower to each Lender hereunder; and (C) the amount of any sum received by the Administrative Agent hereunder from each Borrower and each Lender's share thereof and (ii) provide a summary to the Company in writing on a quarterly basis. (d) The entries made in the accounts maintained pursuant to paragraphs (b) and (c) of this Section 2.07 shall, to the extent permitted by applicable law, be prima facie evidence of the existence and amounts of the obligations therein recorded; provided, however, that the failure of any Lender or the Administrative Agent to maintain such accounts or any error therein shall not in any manner affect the obligations of the Borrowers to repay the Loans in accordance with their terms. SECTION 2.08. Interest on Loans. (a) Subject to the provisions of Section 2.09, the Loans comprising each Eurocurrency Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 360 days) at a rate per annum equal to (i) in the case of each Eurocurrency Standby Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Applicable Percentage from time to time in effect and (ii) in the case of each Eurocurrency Competitive Loan, the LIBO Rate for the Interest Period in effect for such Borrowing plus the Margin offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03. 19 (b) Subject to the provisions of Section 2.09, the Loans comprising each ABR Borrowing shall bear interest (computed on the basis of the actual number of days elapsed over a year of 365 or 366 days, as the case may be, for periods during which the Alternate Base Rate is determined by reference to the Prime Rate and 360 days for other periods) at a rate per annum equal to the Alternate Base Rate. (c) Subject to the provisions of Section 2.09, each Fixed Rate Loan shall bear interest at a rate per annum (computed on the basis of the actual number of days elapsed over a year of 360 days) equal to the fixed rate of interest offered by the Lender making such Loan and accepted by the Borrower pursuant to Section 2.03. (d) Interest on each Loan shall be payable on each Interest Payment Date applicable to such Loan except as otherwise provided in this Agreement. The applicable LIBO Rate or Alternate Base Rate for each Interest Period or day within an Interest Period, as the case may be, shall be determined by the Administrative Agent, and such determination shall be conclusive absent manifest error. SECTION 2.09. Default Interest. If a Borrower shall default in the payment of the principal of or interest on any Loan or any other amount becoming due hereunder, whether by scheduled maturity, notice of prepayment, acceleration or otherwise, such Borrower shall on demand from time to time from the Administrative Agent pay interest, to the extent permitted by law, on such defaulted amount up to (but not including) the date of actual payment (after as well as before judgment) at a rate per annum (computed as provided in Section 2.08(b)) equal to the Alternate Base Rate plus 2%. SECTION 2.10. Alternate Rate of Interest. In the event, and on each occasion, that on the day two Business Days prior to the commencement of any Interest Period for a Eurocurrency Borrowing, the Administrative Agent shall have commercially reasonably determined (i) that deposits in the principal amounts of the Eurocurrency Loans comprising such Borrowing are not generally available in the London market or (ii) that reasonable means do not exist for ascertaining the LIBO Rate, the Administrative Agent shall, as soon as practicable thereafter, give telecopy notice of such determination to the Company and applicable Borrower and the Lenders. In the event of any such determination under clauses (i) or (ii) above, until the Administrative Agent shall have advised the Company and the Lenders that the circumstances giving rise to such notice no longer exist, (x) any request by a Borrower for a Eurocurrency Competitive Loan pursuant to Section 2.03 shall be of no force and effect and shall be denied by the Administrative Agent and (y) any request by a Borrower for a Eurocurrency Standby Loan pursuant to Section 2.04(a) shall be deemed to be a request for an ABR Borrowing. In the event the Required Lenders notify the Administrative Agent that the rates at which Dollar deposits are being offered will not adequately and fairly reflect the cost to such Lenders of making or maintaining Eurocurrency Loans in Dollars during such Interest Period, the Administrative Agent shall notify the applicable Borrower of such notice and until the Required Lenders shall have advised the Administrative Agent that the circumstances giving rise to such notice no longer exist, any request by such Borrower for a Eurocurrency Standby Loan shall be deemed a request for an ABR Borrowing. Each determination by the Administrative Agent hereunder shall be made in good faith and shall be conclusive absent manifest error. SECTION 2.11. Termination and Reduction of Commitments. (a) The Commitments shall be automatically terminated on the Maturity Date; provided, however, that if the Effective Date does not occur on or before January 6, 2003, the Commitments shall terminate on such date. (b) Upon at least three Business Days' prior irrevocable telecopy notice to the Administrative Agent, the Company may at any time in whole permanently terminate, or from time to time in part permanently reduce, the Total Commitment; provided, however, that each 20 partial reduction of the Total Commitment shall be in an integral multiple of $10,000,000 and in a minimum principal amount of $50,000,000. (c) Each reduction in the Total Commitment hereunder shall be made ratably among the Lenders in accordance with their respective Commitments. The Borrowers shall pay to the Administrative Agent for the account of the Lenders, on the date of each reduction or termination of the Total Commitment, the Facility Fees on the amount of the Commitments terminated accrued through the date of such termination or reduction. SECTION 2.12. Prepayment. (a) Each Borrower shall have the right at any time and from time to time to prepay any Standby Borrowing, in whole or in part, upon giving telecopy notice (or telephone notice promptly confirmed by telecopy) to the Administrative Agent: (i) before 10:00 a.m., New York City time, three Business Days prior to prepayment, in the case of Eurocurrency Standby Loans and (ii) before 10:00 a.m., New York City time, one Business Day prior to prepayment, in the case of ABR Standby Loans; provided, however, that each partial prepayment shall be in an amount which is, in the case of any Standby Borrowing, an integral multiple of $10,000,000 and not less than $50,000,000. No prepayment may be made in respect of any Competitive Borrowing. (b) On the date of any termination or reduction of the Commitments pursuant to Section 2.11, the Borrowers shall pay or prepay so much of the Standby Borrowings as shall be necessary in order that the sum of the Competitive Loan Exposures and Standby Credit Exposures will not exceed the Total Commitment, after giving effect to such termination or reduction. (c) Each notice of prepayment shall specify the prepayment date and the principal amount of each Borrowing (or portion thereof) to be prepaid, shall be irrevocable and shall commit the applicable Borrower to prepay such Borrowing (or portion thereof) by the amount stated therein on the date stated therein. All prepayments under this Section 2.12 shall be subject to Section 2.15 but otherwise without premium or penalty. All prepayments under this Section 2.12 shall be accompanied by accrued interest on the principal amount being prepaid to the date of payment. SECTION 2.13. Reserve Requirements; Change in Circumstances. (a) Notwithstanding any other provision herein, if after the date of this Agreement any change in applicable law or regulation or in the interpretation or administration thereof by any Governmental Authority charged with the interpretation or administration thereof (whether or not having the force of law) shall result in the imposition, modification or applicability of any reserve, special deposit or similar requirement against assets of, deposits with or for the account of or credit extended by any Lender, or shall result in the imposition on (i) any Lender or the London interbank market of any other condition affecting this Agreement; (ii) such Lender's Commitment; or (iii) any Eurocurrency Loan or Fixed Rate Loan made by such Lender, and the result of any of the foregoing shall be to increase the cost to such Lender of making or maintaining any Eurocurrency Loan or Fixed Rate Loan or to reduce the amount of any sum received or receivable by such Lender hereunder (whether of principal, interest or otherwise) by an amount reasonably deemed by such Lender to be material, then such additional amount or amounts as will compensate such Lender for such additional costs or reduction will be paid by the Borrowers to such Lender upon demand. Notwithstanding the foregoing, no Lender shall be entitled to request compensation under this paragraph with respect to any Competitive Loan if the change giving rise to such request was applicable to such Lender at the time of submission of the Competitive Bid pursuant to which such Competitive Loan was made. (b) If any Lender shall have determined that the adoption of any law, rule, regulation or guideline arising out of the July 1988 report of the Basle Committee on Banking Regulations and Supervisory Practices entitled "International Convergence of Capital Measurement and Capital Standards", or the adoption after the date hereof of any other law, rule, 21 regulation or guideline regarding capital adequacy, or any change in any of the foregoing or in the interpretation or administration of any of the foregoing by any Governmental Authority, central bank or comparable agency charged with the interpretation or administration thereof, or compliance by any Lender (or any lending office of such Lender) or any Lender's holding company with any request or directive regarding capital adequacy (whether or not having the force of law) of any such authority, central bank or comparable agency, has or would have the effect of reducing the rate of return on (i) such Lender's capital or on the capital of such Lender's holding company, if any, as a consequence of this Agreement; (ii) such Lender's Commitment; or (iii) the Loans made by such Lender pursuant hereto to a level below that which such Lender or such Lender's holding company could have achieved but for such adoption, change or compliance (taking into consideration such Lender's policies and the policies of such Lender's holding company with respect to capital adequacy) by an amount reasonably deemed by such Lender to be material, then from time to time such additional amount or amounts as will compensate such Lender for such reduction will be paid by the Borrowers to such Lender. (c) A certificate of any Lender setting forth such amount or amounts as shall be necessary to compensate such Lender or its holding company, as applicable, as specified in paragraph (a) or (b) above, as the case may be, shall be delivered to the Company and shall be conclusive absent manifest error. The Borrowers shall pay such Lender the amount shown as due on any such certificate delivered by it within 10 days after its receipt of the same. (d) Failure on the part of any Lender to demand compensation for any increased costs or reduction in amounts received or receivable or reduction in return on capital with respect to any period shall not constitute a waiver of such Lender's right to demand compensation with respect to such period or any other period; provided, however, that no Lender shall be entitled to compensation under this Section 2.13 for any costs incurred or reductions suffered with respect to any date unless it shall have notified the Company that it will demand compensation for such costs or reductions under paragraph (c) above not more than 90 days after the later of (i) such date and (ii) the date on which it shall have become aware of such costs or reductions. The protection of this Section shall be available to each Lender regardless of any possible contention of the invalidity or inapplicability of the law, rule, regulation, guideline or other change or condition which shall have occurred or been imposed. SECTION 2.14. Change in Legality. (a) Notwithstanding any other provision herein, if any change in any law or regulation or in the interpretation thereof by any Governmental Authority charged with the administration or interpretation thereof shall make it unlawful for any Lender to make or maintain any Eurocurrency Loan or to give effect to its obligations as contemplated hereby with respect to any Eurocurrency Loan, then, by written notice to the Company and to the Administrative Agent, such Lender may: (i) declare that Eurocurrency Loans will not thereafter be made by such Lender hereunder, whereupon such Lender shall not submit a Competitive Bid in response to a request for a Eurocurrency Competitive Loan, any request for a Eurocurrency Standby Loan shall, as to such Lender only, be deemed a request for an ABR Loan, unless such declaration shall be subsequently withdrawn and (ii) require that all outstanding Eurocurrency Loans in Dollars made by it be converted to ABR Loans, in which event all such Eurocurrency Loans in Dollars shall be automatically converted to ABR Loans as of the effective date of such notice as provided in paragraph (b) below. In the event any Lender shall exercise its rights under subparagraph (i) or (ii) above with respect to Eurocurrency Loans in Dollars, all payments and prepayments of principal which would otherwise have been applied to repay the Eurocurrency Loans that would have been made by such Lender or the converted Eurocurrency Loans, of such Lender shall instead be applied to repay the 22 ABR Loans made by such Lender in lieu of, or resulting from the conversion of, such Eurocurrency Loans. (b) For purposes of this Section 2.14, a notice by any Lender shall be effective as to each Eurocurrency Loan, if lawful, on the last day of the Interest Period currently applicable to such Eurocurrency Loan; in all other cases such notice shall be effective on the date of receipt. SECTION 2.15. Indemnity. The Borrowers shall indemnify each Lender against any out-of-pocket loss or expense which such Lender sustains or incurs as a consequence of (a) any failure to borrow or to refinance, convert or continue any Loan hereunder after irrevocable notice of such borrowing, refinancing, conversion or continuation has been given pursuant to Section 2.03, 2.04 or 2.05; (b) any payment, prepayment or conversion, or assignment required under Section 2.20, of a Eurocurrency Loan required by any other provision of this Agreement or otherwise made or deemed made on a date other than the last day of the Interest Period, if any, applicable thereto; (c) any default in payment or prepayment of the principal amount of any Loan or any part thereof or interest accrued thereon, as and when due and payable (at the due date thereof, whether by scheduled maturity, acceleration, irrevocable notice of prepayment or otherwise); or (d) the occurrence of any Event of Default, including, in each such case, any loss or reasonable expense sustained or incurred or to be sustained or incurred in liquidating or employing deposits from third parties acquired to effect or maintain such Loan or any part thereof as a Eurocurrency Loan. Such loss or reasonable expense shall include an amount equal to the excess, if any, as reasonably determined by such Lender, of (i) its cost of obtaining the funds for the Loan being paid, prepaid, refinanced or not borrowed (assumed to be the LIBO Rate applicable thereto) for the period from the date of such payment, prepayment, refinancing or failure to borrow or refinance to the last day of the Interest Period for such Loan (or, in the case of a failure to borrow or refinance the Interest Period for such Loan which would have commenced on the date of such failure) over (ii) the amount of interest (as reasonably determined by such Lender) that would be realized by such Lender in reemploying the funds so paid, prepaid or not borrowed or refinanced for such period or Interest Period, as the case may be. A certificate of any Lender setting forth any amount or amounts which such Lender is entitled to receive pursuant to this Section shall be delivered to such Borrower and shall be conclusive absent manifest error. SECTION 2.16. Pro Rata Treatment. Except as required under Sections 2.14 and 2.20, each payment or prepayment of principal of any Standby Borrowing, each payment of interest on the Standby Loans, each payment of the Facility Fees, each reduction of the Commitments and each refinancing or conversion of any Standby Borrowing with a Standby Borrowing of any Type, shall be allocated pro rata among the Lenders in accordance with their respective Commitments (or, if such Commitments shall have expired or been terminated, in accordance with the respective principal amounts of their outstanding Standby Loans). Each payment of principal of any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective principal amounts of their outstanding Competitive Loans comprising such Borrowing. Each payment of interest on any Competitive Borrowing shall be allocated pro rata among the Lenders participating in such Borrowing in accordance with the respective amounts of accrued and unpaid interest on their outstanding Competitive Loans comprising such Borrowing. For purposes of determining the Available Commitments of the Lenders at any time, each outstanding Competitive Borrowing shall be deemed to have utilized the Commitments of the Lenders (including those Lenders which shall not have made Loans as part of such Competitive Borrowing) pro rata in accordance with such respective Commitments. Each Lender agrees that in computing such Lender's portion of any Borrowing to be made hereunder, the Administrative Agent may, in its discretion, round each Lender's percentage of such Borrowing to the next higher or lower whole Dollar amount. SECTION 2.17. Sharing of Setoffs. Each Lender agrees that if it shall, through the exercise of a right of banker's lien, setoff or counterclaim, or pursuant to a secured claim under Section 506 of Title 11 of the United States Code or other security or interest arising from, 23 or in lieu of, such secured claim, received by such Lender under any applicable bankruptcy, insolvency or other similar law or otherwise, or by any other means, obtain payment (voluntary or involuntary) in respect of any Standby Loan or Loans as a result of which the unpaid principal portion of its Standby Loans shall be proportionately less than the unpaid principal portion of the Standby Loans of any other Lender, it shall be deemed simultaneously to have purchased from such other Lender at face value, and shall promptly pay to such other Lender the purchase price for, a participation in the Standby Loans of such other Lender, so that the aggregate unpaid principal amount of the Standby Loans and participations in the Standby Loans held by each Lender shall be in the same proportion to the aggregate unpaid principal amount of all Standby Loans then outstanding as the principal amount of its Standby Loans prior to such exercise of banker's lien, setoff or counterclaim or other event was to the principal amount of all Standby Loans outstanding prior to such exercise of banker's lien, setoff or counterclaim or other event; provided, however, that, if any such purchase or purchases or adjustments shall be made pursuant to this Section 2.17 and the payment giving rise thereto shall thereafter be recovered, such purchase or purchases or adjustments shall be rescinded to the extent of such recovery and the purchase price or prices or adjustment restored without interest. Any Lender holding a participation in a Standby Loan deemed to have been so purchased may exercise any and all rights of banker's lien, setoff or counterclaim with respect to any and all moneys owing to such Lender by reason thereof as fully as if such Lender had made a Standby Loan in the amount of such participation. SECTION 2.18. Payments. (a) The Borrowers shall make each payment (including principal of or interest on any Borrowing and any Fees or other amounts) hereunder from an account in the United States not later than 12:00 noon, local time at the place of payment, on the date when due, without setoff or counterclaim, in immediately available funds to the Administrative Agent at its offices at 270 Park Avenue, New York, New York. Each such payment shall be made in Dollars. (b) Whenever any payment (including principal of or interest on any Borrowing or any Fees or other amounts) hereunder shall become due, or otherwise would occur, on a day that is not a Business Day, such payment may be made on the next succeeding Business Day, and such extension of time shall in such case be included in the computation of interest or Fees, if applicable. SECTION 2.19. Taxes. (a) Any and all payments to the Lenders hereunder shall be made, in accordance with Section 2.18, free and clear of and without deduction for any and all current or future taxes, levies, imposts, deductions, charges or withholdings, and all liabilities with respect thereto, excluding (i) income taxes imposed on the income of the Administrative Agent or any Lender (or any transferee or assignee thereof, including a participation holder (any such entity a "Transferee")) and (ii) franchise taxes imposed on the income, assets or net worth of the Administrative Agent, or any Lender (or Transferee), in each case by the jurisdiction under the laws of which the Administrative Agent or such Lender (or Transferee) is organized or doing business (other than as a result of entering into this Agreement, performing any obligations hereunder, receiving any payments hereunder or enforcing any rights hereunder), or any political subdivision thereof (all such nonexcluded taxes, levies, imposts, deductions, charges, withholdings and liabilities, collectively or individually, "Taxes"). If either Borrower shall be required to deduct any Taxes from or in respect of any sum payable hereunder to any Lender (or any Transferee) or the Administrative Agent, (i) the sum payable shall be increased by the amount (an "additional amount") necessary so that after making all required deductions (including deductions applicable to additional sums payable under this Section 2.19) such Lender (or Transferee) or the Administrative Agent (as the case may be) shall receive an amount equal to the sum it would have received had no such deductions been made; (ii) such Borrower shall make such deductions; and (iii) such Borrower shall pay the full amount deducted to the relevant Governmental Authority in accordance with applicable law. 24 (b) In addition, the Borrowers shall pay to the relevant Governmental Authority in accordance with applicable law any current or future stamp or documentary taxes or any other excise or property taxes, charges or similar levies that arise from any payment made hereunder or from the execution, delivery or registration of, or otherwise with respect to, this Agreement or any other Loan Document ("Other Taxes"). (c) The Borrowers shall indemnify each Lender (or Transferee), and the Administrative Agent for the full amount of Taxes and Other Taxes paid by such Lender (or Transferee) or the Administrative Agent, as the case may be, and any liability (including penalties, interest and expenses (including reasonable attorneys' fees and expenses)) arising therefrom or with respect thereto, whether or not such Taxes or Other Taxes were correctly or legally asserted by the relevant Governmental Authority. A certificate as to the amount of such payment or liability prepared by a Lender (or Transferee) or the Administrative Agent on its behalf, absent manifest error, shall be final, conclusive and binding for all purposes. Such indemnification shall be made within 30 days after the date any Lender (or Transferee) or the Administrative Agent, as the case may be, makes written demand therefor, which written demand shall be made within 60 days of the date such Lender (or Transferee) or the Administrative Agent receives written demand for payment of such Taxes or Other Taxes from the relevant Governmental Authority. (d) If a Lender (or Transferee) or the Administrative Agent shall become aware that it is entitled to claim a refund from a Governmental Authority in respect of Taxes or Other Taxes as to which it has been indemnified by the Borrowers, or with respect to which the Borrowers have paid additional amounts, pursuant to this Section 2.19, it shall promptly notify the Borrowers of the availability of such refund claim and shall, within 30 days after receipt of a request by the Borrowers, make a claim to such Governmental Authority for such refund at the Borrowers' expense. If a Lender (or Transferee) or the Administrative Agent receives a refund (including pursuant to a claim for refund made pursuant to the preceding sentence) in respect of any Taxes or Other Taxes as to which it has been indemnified by the Borrowers or with respect to which the Borrowers have paid additional amounts pursuant to this Section 2.19, it shall within 30 days from the date of such receipt pay over such refund to the Borrowers (but only to the extent of indemnity payments made, or additional amounts paid, by the Borrowers under this Section 2.19 with respect to the Taxes or Other Taxes giving rise to such refund), net of all out-of-pocket expenses of such Lender (or Transferee) or the Administrative Agent and without interest (other than interest paid by the relevant Governmental Authority with respect to such refund); provided, however, that the Borrowers, upon the request of such Lender (or Transferee) or the Administrative Agent, agree to repay the amount paid over to the Borrowers (plus penalties, interest or other charges) to such Lender (or Transferee) or the Administrative Agent in the event such Lender (or Transferee) or the Administrative Agent is required to repay such refund to such Governmental Authority. (e) As soon as practicable after the date of any payment of Taxes or Other Taxes by the Borrowers to the relevant Governmental Authority, the Borrowers will deliver to the Administrative Agent, at its address referred to in Section 8.01, the original or a certified copy of a receipt issued by such Governmental Authority evidencing payment thereof. (f) Without prejudice to the survival of any other agreement contained herein, the agreements and obligations contained in this Section 2.19 shall survive the payment in full of the principal of and interest on all Loans made hereunder. (g) Each Lender (or Transferee) that is organized under the laws of a jurisdiction other than the United States, any State thereof or the District of Columbia (a "Non-U.S. Lender") shall deliver to the Company and the Administrative Agent two copies of either United States Internal Revenue Service Form W-8BEN or Form W-8ECI, or, in the case of a Non-U.S. Lender claiming exemption from U.S. Federal withholding tax under Section 871(h) or 881(c) of the Code with respect to payments of "portfolio interest", a Form W-8BEN, or any subsequent 25 versions thereof or successors thereto (and, if such Non-U.S. Lender delivers a Form W-8BEN, a certificate representing that such Non-U.S. Lender is not a bank for purposes of Section 881(c) of the Code, is not a 10 percent shareholder (within the meaning of Section 871(h)(3)(B) of the Code) of the Company and is not a controlled foreign corporation related to the Company (within the meaning of Section 864(d)(4) of the Code)), properly completed and duly executed by such Non-U.S. Lender claiming complete exemption from, or reduced rate of, U.S. Federal withholding tax on payments by the Company under this Agreement. Such forms shall be delivered by each Non-U.S. Lender on or before the date it becomes a party to this Agreement (or, in the case of a Transferee that is a participation holder, on or before the date such participation holder becomes a Transferee hereunder) and on or before the date, if any, such Non-U.S. Lender changes its applicable lending office by designating a different lending office (a "New Lending Office"). In addition, each Non-U.S. Lender shall deliver such forms promptly upon the obsolescence or invalidity of any form previously delivered by such Non-U.S. Lender. Notwithstanding any other provision of this Section 2.19(g), a Non-U.S. Lender shall not be required to deliver any form pursuant to this Section 2.19(g) that such Non-U.S. Lender is not legally able to deliver. (h) The Borrowers shall not be required to indemnify any Non-U.S. Lender, or to pay any additional amounts to any Non-U.S. Lender, in respect of United States Federal withholding tax pursuant to paragraph (a) or (c) above to the extent that (i) the obligation to withhold amounts with respect to United States Federal withholding tax existed on the date such Non-U.S. Lender became a party to this Agreement (or, in the case of a Transferee that is a participation holder, on the date such participation holder became a Transferee hereunder) or, with respect to payments to a New Lending Office, the date such Non-U.S. Lender designated such New Lending Office with respect to a Loan; provided, however, that this clause (i) shall not apply to any Transferee or New Lending Office that becomes a Transferee or New Lending Office as a result of an assignment, participation, transfer or designation made at the request of the Company; and provided further, however, that this clause (i) shall not apply to the extent the indemnity payment or additional amounts any Transferee, or Lender (or Transferee) through a New Lending Office, would be entitled to receive (without regard to this clause (i)) do not exceed the indemnity payment or additional amounts that the person making the assignment, participation or transfer to such Transferee, or Lender (or Transferee) making the designation of such New Lending Office, would have been entitled to receive in the absence of such assignment, participation, transfer or designation or (ii) the obligation to pay such additional amounts would not have arisen but for a failure by such Non-U.S. Lender to comply with the provisions of paragraph (g) above. (i) Any Lender (or Transferee) claiming any indemnity payment or additional amounts payable pursuant to this Section 2.19 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document reasonably requested in writing by the Company or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such indemnity payment or additional amounts that may thereafter accrue and would not, in the determination of such Lender (or Transferee), be otherwise disadvantageous to such Lender (or Transferee). (j) Nothing contained in this Section 2.19 shall require any Lender (or Transferee) or the Administrative Agent to make available any of its tax returns (or any other information that it deems to be confidential or proprietary). SECTION 2.20. Duty to Mitigate; Assignment of Commitments Under Certain Circumstances. (a) Any Lender (or Transferee) claiming any additional amounts payable pursuant to Section 2.13 or Section 2.19 or exercising its rights under Section 2.14 shall use reasonable efforts (consistent with legal and regulatory restrictions) to file any certificate or document requested by the Company or to change the jurisdiction of its applicable lending office if the making of such a filing or change would avoid the need for or reduce the amount of any such additional amounts which may thereafter accrue or avoid the circumstances giving rise to 26 such exercise and would not, in the determination of such Lender (or Transferee), be otherwise disadvantageous to such Lender (or Transferee). (b) In the event that any Lender shall have delivered a notice or certificate pursuant to Section 2.13 or 2.14, or the Company shall be required to make additional payments to any Lender under Section 2.19, the Company shall have the right, at its own expense, upon notice to such Lender and the Administrative Agent, to require such Lender to transfer and assign without recourse (in accordance with and subject to the restrictions contained in Section 8.04) all interests, rights and obligations contained hereunder to another financial institution which shall assume such obligations; provided that (i) no such assignment shall conflict with any law, rule or regulation or order of any Governmental Authority and (ii) the assignee or the Company, as the case may be, shall pay to the affected Lender in immediately available funds on the date of such assignment the principal of and interest accrued to the date of payment on the Loans made by it hereunder and all other amounts accrued for its account or owed to it hereunder. SECTION 2.21. Increase in Total Commitment. (a) The Company may from time to time, by written notice to the Administrative Agent (which shall deliver a copy thereof to each Lender), request that the Total Commitment be increased by an amount not to exceed the Incremental Facility Amount at such time. Such notice shall set forth the amount of the requested increase in the Total Commitment (which shall be an integral multiple of $10,000,000) and the date on which such increase is requested to become effective (which shall not be less than 10 Business Days or more than 60 days after the date of such notice), and shall offer to each Lender the opportunity to increase its Commitment by its Pro Rata Percentage of the proposed increased amount. Each Lender shall, by notice to the Company and the Administrative Agent given not more than 10 days after the date on which the Administrative Agent shall have delivered the Company's notice, either agree to increase its Commitment by all or a portion of the offered amount (each Lender so agreeing being an "Increasing Lender") or decline to increase its Commitment (and any Lender that does not deliver such notice within such period of 10 days shall be deemed to have declined to increase its Commitment) (each Lender so declining or being deemed to have declined being a "Non-Increasing Lender"). In the event that, on the 10th day after the Administrative Agent shall have delivered the Company's notice, the Lenders shall have agreed pursuant to the preceding sentence to increase their Commitments by an aggregate amount less than the increase in the Total Commitment requested by the Company, the Company may arrange for one or more banks or other financial institutions (any such bank or other financial institution referred to in this clause (a) being called an "Augmenting Lender"), which may include any Lender, to extend Commitments or increase their existing Commitments in an aggregate amount equal to the unsubscribed amount; provided that each Augmenting Lender, if not already a Lender hereunder, shall be subject to the approval of the Administrative Agent and the Company and each Augmenting Lender shall execute all such documentation as the Administrative Agent shall specify to evidence its Commitment and/or its status as a Lender hereunder. Any increase in the Total Commitment may be made in an amount which is less than the increase requested by the Company if the Company is unable to arrange for, or chooses not to arrange for, Augmenting Lenders. (b) On the effective date (the "Increase Effective Date") of any increase in the Total Commitment pursuant to this Section 2.21 (the "Commitment Increase"), (i) the aggregate principal amount of the Standby Loans outstanding (the "Initial Loans") immediately prior to giving effect to the Commitment Increase on the Increase Effective Date shall be deemed to be paid; (ii) each Increasing Lender and each Augmenting Lender that shall have been a Lender prior to the Commitment Increase shall pay to the Administrative Agent in same day funds an amount equal to the difference between (A) the product of (1) such Lender's Pro Rata Percentage (calculated after giving effect to the Commitment Increase) multiplied by (2) the amount of the Subsequent Borrowings (as hereinafter defined) and (B) the product of (1) such Lender's Pro Rata Percentage (calculated without giving effect to the Commitment Increase) multiplied by (2) the amount of the Initial Loans; (iii) each Augmenting Lender that shall not have been a Lender prior to the Commitment Increase shall pay to the Administrative Agent in same day funds an amount 27 equal to the product of (1) such Augmenting Lender's Pro Rata Percentage (calculated after giving effect to the Commitment Increase) multiplied by (2) the amount of the Subsequent Borrowings; (iv) after the Administrative Agent receives the funds specified in clauses (ii) and (iii) above, the Administrative Agent shall pay to each Non-Increasing Lender the portion of such funds that is equal to the difference between (A) the product of (1) such Non-Increasing Lender's Pro Rata Percentage (calculated without giving effect to the Commitment Increase) multiplied by (2) the amount of the Initial Loans and (B) the product of (1) such Non-Increasing Lender's Pro Rata Percentage (calculated after giving effect to the Commitment Increase) multiplied by (2) the amount of the Subsequent Borrowings; (v) after the effectiveness of the Commitment Increase, the Company shall be deemed to have made new Borrowings (the "Subsequent Borrowings") in an aggregate principal amount equal to the aggregate principal amount of the Initial Loans and of the Types and for the Interest Periods specified in a borrowing request delivered in accordance with Section 2.04; (vi) each Non-Increasing Lender, each Increasing Lender and each Augmenting Lender shall be deemed to hold its Pro Rata Percentage of each Subsequent Borrowing (each calculated after giving effect to the Commitment Increase); and (vii) the Company shall pay each Increasing Lender and each Non-Increasing Lender any and all accrued but unpaid interest on the Initial Loans. The deemed payments made pursuant to clause (i) above in respect of each Eurocurrency Loan shall be subject to indemnification by the Company pursuant to the provisions of Section 2.15 if the Increase Effective Date occurs other than on the last day of the Interest Period relating thereto. (c) Notwithstanding the foregoing, no increase in the Total Commitment (or in the Commitment of any Lender) or addition of a new Lender shall become effective under this Section 2.21 unless, (i) on the Increase Effective Date, the conditions set forth in paragraphs (b) and (c) of Section 4.01 shall be satisfied and the Administrative Agent shall have received a certificate to that effect dated such date and executed by a Financial Officer of the Company; (ii) no reduction of the Total Commitment shall have occurred prior to the Increase Effective Date; and (iii) the Administrative Agent shall have received (with sufficient copies for each of the Lenders) documents consistent with those delivered on the Effective Date under clauses (a) and (b) of Section 4.02 as to the corporate power and authority of the Company to borrow hereunder after giving effect to such increase. ARTICLE III REPRESENTATIONS AND WARRANTIES Each Borrower represents and warrants to each of the Lenders that: SECTION 3.01. Organization; Powers. Each Borrower and each of the Restricted Subsidiaries (a) is a corporation duly organized, validly existing and in good standing under the laws of the jurisdiction of its organization; (b) has all requisite power and authority to own its property and assets and to carry on its business as now conducted and as proposed to be conducted; (c) is qualified to do business in every jurisdiction where such qualification is required, except where the failure so to qualify would not result in a Material Adverse Effect; and (d) in the case of each Borrower, has the corporate power and authority to execute, deliver and perform its obligations under the Loan Documents and to borrow hereunder and thereunder. SECTION 3.02. Authorization. The execution, delivery and performance by the Borrowers of this Agreement and the promissory notes, if any, issued pursuant to Section 8.04(i) and the Borrowings hereunder (collectively, the "Transactions") (a) have been duly authorized by all requisite corporate action and (b) will not (i) violate (A) any provision of any law, statute, rule or regulation (including the Margin Regulations) or of the certificate of incorporation or other constitutive documents or by-laws of the Borrowers; (B) any order of any Governmental Authority; or (C) any provision of any indenture, agreement or other instrument to which either Borrower is a party or by which it or any of its property is or may be bound, (ii) be in conflict 28 with, result in a breach of or constitute (alone or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument, or (iii) result in the creation or imposition of any lien upon any property or assets of either Borrower. SECTION 3.03. Enforceability. This Agreement and each Loan Document to which a Borrower is a party constitutes a legal, valid and binding obligation of each such Borrower enforceable in accordance with its terms. SECTION 3.04. Governmental Approvals. No action, consent or approval of, registration or filing with or other action by any Governmental Authority, other than those which have been taken, given or made, as the case may be, is or will be required with respect to either Borrower in connection with the Transactions. SECTION 3.05. Financial Statements. (a) The Company has heretofore furnished to the Administrative Agent and the Lenders copies of its consolidated balance sheet and statements of income, cash flow and stockholders' equity as of and for the year ended December 31, 2001 and the nine months ended September 30, 2002. Such financial statements present fairly, in all material respects, the consolidated financial condition and the results of operations of the Company and the Subsidiaries as of such dates and for such periods in accordance with GAAP or SAP, as requested. (b) As of the date hereof, there has been no material adverse change in the consolidated financial condition of the Company and the Subsidiaries taken as a whole from the financial condition reported in the financial statements referenced in paragraph (a) of this Section 3.05. SECTION 3.06. Litigation; Compliance with Laws. (a) Subject to Schedule 3.06, there are no actions, proceedings or investigations filed or (to the knowledge of the Borrowers) threatened against either Borrower or any Subsidiary in any court or before any Governmental Authority or arbitration board or tribunal which question the validity or legality of this Agreement, the Transactions or any action taken or to be taken pursuant to this Agreement and no order or judgment has been issued or entered restraining or enjoining either Borrower or any Subsidiary from the execution, delivery or performance of this Agreement nor is there any other action, proceeding or investigation filed or (to the knowledge of either Borrower or any Subsidiary) threatened against either Borrower or any Subsidiary in any court or before any Governmental Authority or arbitration board or tribunal which would be reasonably likely to result in a Material Adverse Effect or materially restrict the ability of either Borrower to comply with its obligations under the Loan Documents. (b) Neither Borrower nor any Subsidiary is in violation of any law, rule or regulation (including any law, rule or regulation relating to the protection of the environment or to employee health or safety), or in default with respect to any judgment, writ, injunction or decree of any Governmental Authority, where such violation or default would be reasonably likely to result in a Material Adverse Effect. (c) No exchange control law or regulation materially restricts either Borrower from complying with its obligations in respect of any Loan or otherwise under this Agreement. SECTION 3.07. Federal Reserve Regulations. (a) Neither Borrower nor any Subsidiary that will receive proceeds of the Loans hereunder is engaged principally, or as one of its important activities, in the business of extending credit for the purpose of purchasing or carrying Margin Stock. (b) No part of the proceeds of any Loan will be used, whether directly or indirectly, and whether immediately, incidentally or ultimately, to purchase or carry Margin Stock or to refund indebtedness originally incurred for such purpose, or for any other purpose 29 which entails a violation of, or which is inconsistent with, the provisions of the Margin Regulations. SECTION 3.08. Investment Company Act; Public Utility Holding Company Act. No Borrower is (a) an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 (the "1940 Act") or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. While certain subsidiaries of Hartford Life Insurance Company are "investment companies" as defined in the 1940 Act, the transactions contemplated by this Agreement will not violate or require any approval under such Act or any regulations promulgated pursuant thereto. SECTION 3.09. Use of Proceeds. All proceeds of the Loans shall be used for the purposes referred to in the recitals to this Agreement. SECTION 3.10. Full Disclosure; No Material Misstatements . No report, financial statement, other written information or other information transmitted orally during a formal presentation, furnished by or on behalf of either Borrower to the Administrative Agent or any Lender pursuant to this Agreement or in connection with the arrangement, syndication and closing of the credit facilities established hereby, contains or will contain any material misstatement of fact or omits or will omit to state any material fact necessary to make the statements therein, in the light of the circumstances under which they were or will be made, not misleading. SECTION 3.11. Taxes. Each Borrower and each of the Restricted Subsidiaries have filed or caused to be filed all Federal, state and local tax returns which are required to be filed by them, and have paid or caused to be paid all taxes shown to be due and payable on such returns or on any assessments received by any of them, other than any taxes or assessments the validity of which is being contested in good faith by appropriate proceedings, and with respect to which appropriate accounting reserves have to the extent required by GAAP or SAP, as applicable, been set aside. SECTION 3.12. Employee Pension Benefit Plans. The present aggregate value of accumulated benefit obligations of all unfunded and underfunded pension plans of the Company and its Subsidiaries (based on those assumptions used for disclosure in corporate financial statements in accordance with GAAP or SAP, as applicable) did not, as of December 31, 2001, exceed by more than $397,000,000 the value of the assets of all such plans. In these cases the Company has recorded book reserves to meet the obligations. ARTICLE IV CONDITIONS OF LENDING The obligations of the Lenders to make Loans hereunder are subject to the satisfaction of the following conditions: SECTION 4.01. All Borrowings. On the date of each Borrowing: (a) The Administrative Agent shall have received a notice of such Borrowing as required by Section 2.03 or Section 2.04, as applicable. (b) The representations and warranties set forth in Article III hereof (other than the representation and warranty set forth in Section 3.05(b)) shall be true and correct in all material respects on and as of the date of such Borrowing with the same effect as though made on and as of such date, except to the extent such representations and warranties expressly relate to an earlier date. 30 (c) At the time of and immediately after such Borrowing no Event of Default or Default shall have occurred and be continuing. Each Borrowing shall be deemed to constitute a representation and warranty by each Borrower on the date of such Borrowing as to the matters specified in paragraphs (b) and (c) of this Section 4.01. SECTION 4.02. Effective Date. On the Effective Date: (a) The Administrative Agent shall have received a favorable written opinion of Brian Becker, Esq., dated the Effective Date and addressed to the Lenders, to the effect set forth in Exhibit C hereto. (b) The Administrative Agent shall have received (i) a copy of the certificate of incorporation, including all amendments thereto, of each Borrower, certified as of a recent date by the Secretary of State of such Borrower's state of incorporation, and a certificate as to the good standing of such Borrower as of a recent date from such Secretary of State; (ii) a certificate of the Secretary or an Assistant Secretary of each Borrower dated the Effective Date and certifying (A) that attached thereto is a true and complete copy of the by-laws of such Borrower as in effect on the Effective Date and at all times since a date prior to the date of the resolutions described in clause (B) below, (B) that attached thereto is a true and complete copy of resolutions duly adopted by the Board of Directors of such Borrower authorizing the execution, delivery and performance of this Agreement and any other documents related to this Agreement and the Borrowings hereunder, and that such resolutions have not been modified, rescinded or amended and are in full force and effect, (C) that the certificate of incorporation referred to in clause (i) above has not been amended since the date of the last amendment thereto shown on the certificate of good standing furnished pursuant to such clause (i), and (D) as to the incumbency and specimen signature of each officer executing this Agreement or any other document delivered in connection herewith on behalf of such Borrower; and (iii) a certificate of another officer of such Borrower as to the incumbency and specimen signature of the Secretary or Assistant Secretary executing the certificate pursuant to (ii) above. (c) The Administrative Agent shall have received certificates, dated the Effective Date and signed by a Financial Officer of each Borrower, confirming compliance with the conditions precedent set forth in paragraphs (b) and (c) of Section 4.01. (d) All loans and other amounts outstanding or accrued for the accounts of the lenders under the Existing Credit Agreement (whether or not due at the time) shall have been paid in full and Hartford Life shall deliver to Citibank, N.A., in its capacity as administrative agent under the Existing Credit Agreement, a notice terminating the commitments thereunder. (e) The Agents and Lenders shall have received all fees due and payable on or prior to the Effective Date required to be paid by the Borrowers in connection with this Agreement. ARTICLE V COVENANTS A. Affirmative Covenants. Each Borrower covenants and agrees with each Lender and the Administrative Agent that so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any Fees or any other amounts payable hereunder shall be unpaid, unless the Required Lenders shall otherwise consent in writing, it will, and will cause each of the Subsidiaries to: 31 SECTION 5.01. Existence. Do or cause to be done all things necessary to preserve and keep in full force and effect its corporate existence, rights and franchises, except as expressly permitted under Section 5.11; provided, however, that nothing in this Section shall prevent the abandonment or termination of the existence, rights or franchises of any Restricted Subsidiary or any rights or franchises of either Borrower if such abandonment or termination is in the best interests of the Borrowers and is not disadvantageous in any material respect to the Lenders. SECTION 5.02. Business and Properties. In the case of the Borrowers and the Restricted Subsidiaries, comply in all material respects with all applicable laws, rules, regulations and orders of any Governmental Authority (including any of the foregoing relating to the protection of the environment or to employee health and safety), whether now in effect or hereafter enacted; and at all times maintain and preserve all property material to the conduct of its business and keep such property in good repair, working order and condition and from time to time make, or cause to be made, all needful and proper repairs, renewals, additions, improvements and replacements thereto necessary in order that the business carried on in connection therewith may be properly conducted at all times. SECTION 5.03. Financial Statements, Reports, etc. In the case of each Borrower, furnish to the Administrative Agent for distribution to each Lender: (a) within 120 days after the end of each fiscal year, its consolidated balance sheet and the related consolidated statements of income and cash flows showing its consolidated financial condition as of the close of such fiscal year and the consolidated results of its operations during such year, all audited by Deloitte & Touche LLP or other independent certified public accountants of recognized national standing selected by the Company and accompanied by an opinion of such accountants to the effect that such consolidated financial statements fairly present its financial condition and results of operations on a consolidated basis in accordance with GAAP or SAP, as applicable (it being agreed that the requirements of this paragraph may be satisfied by the delivery pursuant to paragraph (e) below of an annual report on Form 10-K containing the foregoing); (b) within 90 days after the end of each of the first three fiscal quarters of each fiscal year, its consolidated balance sheet and related consolidated statements of income and cash flows showing its consolidated financial condition as of the close of such fiscal quarter and the consolidated results of its operations during such fiscal quarter and the then elapsed portion of the fiscal year, all certified by one of its Financial Officers as fairly presenting its financial condition and results of operations on a consolidated basis in accordance with GAAP or SAP, as applicable, subject to normal year-end audit adjustments (it being agreed that the requirements of this paragraph may be satisfied by the delivery pursuant to paragraph (e) below of a quarterly report on Form 10-Q containing the foregoing); (c) concurrently with any delivery of financial statements under paragraph (a) or (b) above, a certificate of a Financial Officer certifying that no Event of Default or Default has occurred or, if such an Event of Default or Default has occurred, specifying the nature and extent thereof and any corrective action taken or proposed to be taken with respect thereto; (d) as soon as available and in any event within 90 days after the end of each fiscal year, (i) the Statement of Actuarial Opinion of each of the Restricted Subsidiaries for such fiscal year and as filed with the Applicable Insurance Regulatory Authority and (ii) the Annual Statement of each of the Restricted Subsidiaries for such fiscal year and as filed with the Applicable Insurance Regulatory Authority, together with, in the case of the statements delivered pursuant to clause (ii) above, a certificate of a Financial Officer 32 to the effect that such statements present fairly the statutory assets, liabilities, capital and surplus, results of operations and cash flows of such Insurance Subsidiary in accordance with SAP; (e) promptly after the same become publicly available, copies of all reports on forms 10-K, 10-Q and 8-K filed by it with the SEC, or any Governmental Authority succeeding to any of or all the functions of the SEC, or, in the case of the Company, copies of all reports distributed to its shareholders, as the case may be; (f) promptly, from time to time, such other information as any Lender shall reasonably request through the Administrative Agent; and (g) concurrently with any delivery of financial statements under paragraph (a) or (b) above, calculations of the financial tests referred to in Sections 5.10, 5.14 and 5.16. Information required to be delivered pursuant to this Section 5.03 shall be deemed to have been (i) delivered to the Lenders on the date on which the Company provides written notice to the Administrative Agent that such information has been posted on the Company's website on the Internet at http://www.thehartford.com or is available on the website of the SEC at http://www.sec.gov (to the extent such information has been posted or is available as described in such notice), or (ii) distributed to each Lender on the date on which the Administrative Agent shall have posted such information on an IntraLinks or similar site to which the Lenders have been granted access; provided that the Company shall deliver paper copies of such information to any Lender that requests such delivery within 5 Business Days after such request. Information required to be delivered pursuant to this Section 5.03 may also be delivered by electronic communications pursuant to procedures approved by the Administrative Agent. SECTION 5.04. Insurance. In the case of the Borrowers and each Restricted Subsidiary, keep its insurable properties adequately insured at all times by financially sound and reputable insurers, and maintain such other insurance, to such extent and against such risks, including fire and other risks insured against by extended coverage, as is customary with companies similarly situated and in the same or similar businesses (it being understood that the Borrowers and the Restricted Subsidiaries may self-insure to the extent customary with companies similarly situated and in the same or similar businesses). SECTION 5.05. Obligations and Taxes. In the case of the Company and each Restricted Subsidiary, pay and discharge promptly when due all taxes, assessments and governmental charges imposed upon it or upon its income or profits or in respect of its property, as well as all other material liabilities, in each case before the same shall become delinquent or in default and before penalties accrue thereon, unless and to the extent that the same are being contested in good faith by appropriate proceedings and adequate reserves with respect thereto shall, to the extent required by GAAP or SAP, as applicable, have been set aside. SECTION 5.06. Litigation and Other Notices. Give the Administrative Agent prompt written notice of the following: (a) the filing or commencement of, or any written threat or written notice of intention of any person to file or commence, any action, suit or proceeding which could reasonably be expected to result in a Material Adverse Effect; provided that if such information is included in material delivered or deemed to have been delivered pursuant to Section 5.03 and specific reference to such information is made in a notice to the Administrative Agent at the time such material is delivered, notice shall be deemed to have been given on the date on which the Company delivers or is deemed to have delivered such material and provides such specific notice. 33 (b) any Event of Default or Default, specifying the nature and extent thereof and the action (if any) which is proposed to be taken with respect thereto; and (c) any change in any of the Ratings of either Borrower. SECTION 5.07. Maintaining Records; Access to Properties and Inspections. Maintain financial records in accordance with GAAP or SAP, as applicable, and, upon reasonable notice, at all reasonable times, permit any authorized representative designated by the Administrative Agent to visit and inspect the properties of the Company and of any Restricted Subsidiary and to discuss the affairs, finances and condition of the Company and the Restricted Subsidiaries with a Financial Officer of the Company and such other officers as the Company shall deem appropriate. SECTION 5.08. Employee Benefits. (a) Comply in all material respects with the applicable provisions of ERISA and the Code and (b) furnish to the Administrative Agent and each Lender as soon as possible after, and in any event within 30 days after any Responsible Officer of either Borrower or any ERISA Affiliate knows that, any ERISA Event has occurred that, alone or together with any other ERISA Event known to have occurred, could reasonably be expected to result in liability of such Borrower in an aggregate amount exceeding $15,000,000 in any year, a statement of a Financial Officer of the Borrower setting forth details as to such ERISA Event and the action, if any, that such Borrower proposes to take with respect thereto. SECTION 5.09. Use of Proceeds. Use the proceeds of the Loans only for the purposes set forth in the preamble to this Agreement. SECTION 5.10. Risk-Based Capital Ratio. Maintain the ratio of Total Adjusted Capital to Risk-Based Capital (after covariance) at the end of each fiscal year of the Restricted Subsidiaries at a level equal to or greater than 1.25 to 1.00. B. Negative Covenants. Each Borrower covenants and agrees with each Lender and the Administrative Agent that so long as this Agreement shall remain in effect or the principal of or interest on any Loan, any Fees or any other amounts payable hereunder shall be unpaid, unless the Required Lenders shall otherwise consent in writing, it will not, and will not cause or permit any of the Subsidiaries to: SECTION 5.11. Consolidations, Mergers, and Sales of Assets. In the case of the Company and the Restricted Subsidiaries, consolidate or merge with or into any other person or sell, lease or transfer all or substantially all of its property and assets, or agree to do any of the foregoing, unless (a) no Default or Event of Default has occurred and is continuing or would have occurred immediately after giving effect thereto and (b) in the case of a consolidation or merger or transfer of assets involving the Company and in which the Company is not the surviving corporation or sells, leases or transfers all or substantially all of its property and assets, the surviving corporation or person purchasing, leasing or receiving such property and assets is organized in the United States of America or a state thereof and agrees to be bound by the terms and provisions applicable to the Company hereunder. SECTION 5.12. Limitations on Liens. Create, incur, assume or permit to exist any Lien on any property or assets (including the capital stock of any Subsidiary) now owned or hereafter acquired by it, or sell or transfer or create any Lien on any income or revenues or rights in respect thereof; provided, however, that this covenant shall not apply to any of the following: (a) any Lien on any property or asset hereafter acquired, constructed or improved by the Company or any Subsidiary which is created or assumed to secure or provide for the payment of any part of the purchase price of such property or asset or the cost of such construction or improvement, or any mortgage, pledge or other lien on any Lien on any 34 property or asset existing at the time of acquisition thereof; provided, however, that such Lien shall not extend to any other property owned by the Company or any Subsidiary; (b) any Lien existing upon any property or asset of a company which is merged with or into or is consolidated into, or substantially all the assets or shares of capital stock of which are acquired by, the Company or a Subsidiary, at the time of such merger, consolidation or acquisition; provided that such Lien does not extend to any other property or asset, other than improvements to the property or asset subject to such Lien; (c) any pledge or deposit to secure payment of workers' compensation or insurance premiums, or in connection with tenders, bids, contracts (other than contracts for the payment of money) or leases; (d) any pledge of, or other Lien upon, any assets as security for the payment of any tax, assessment or other similar charge by any Governmental Authority or public body, or as security required by law or governmental regulation as a condition to the transaction of any business or the exercise of any privilege or right; (e) any Lien necessary to secure a stay of any legal or equitable process in a proceeding to enforce a liability or obligation contested in good faith by the Company or a Subsidiary or required in connection with the institution by the Company or a Subsidiary of any legal or equitable proceeding to enforce a right or to obtain a remedy claimed in good faith by the Company or a Subsidiary, or required in connection with any order or decree in any such proceeding or in connection with any contest of any tax or other governmental charge; or the making of any deposit with or the giving of any form of security to any governmental agency or any body created or approved by law or governmental regulation in order to entitle the Company or a Subsidiary to maintain self- insurance or to participate in any fund in connection with workers' compensation, unemployment insurance, old age pensions or other social security or to share in any provisions or other benefits provided for companies participating in any such arrangement or for liability on insurance of credits or other risks; (f) any mechanics', carriers', workmen's, repairmen's, or other like Liens, if arising in the ordinary course of business, in respect of obligations which are not overdue or liability for which is being contested in good faith by appropriate proceedings; (g) any Lien on property in favor of the United States of America, or of any agency, department or other instrumentality thereof, to secure partial, progress or advance payments pursuant to the provisions of any contract; (h) any Lien securing indebtedness of a Subsidiary to the Company or a Subsidiary; provided that in the case of any sale or other disposition of such indebtedness by the Company or such Subsidiary, such sale or other disposition shall be deemed to constitute the creation of another Lien not permitted by this clause (h); (i) any Lien affecting property of the Company or any Subsidiary securing indebtedness of the United States of America or a State thereof (or any instrumentality or agency of either thereof) issued in connection with a pollution control or abatement program required in the opinion of the Company to meet environmental criteria with respect to operations of the Company or any Subsidiary and the proceeds of which indebtedness have financed the cost of acquisition of such program; (j) the renewal, extension, replacement or refunding of any mortgage, pledge, lien, deposit, charge or other encumbrance permitted by the foregoing provisions of this covenant upon the same property theretofore subject thereto, or the renewal, extension, 35 replacement or refunding of the amount secured thereby; provided that in each case such amount outstanding at that time shall not be increased; or (k) any other Lien; provided that immediately after the creation or assumption of such Lien, the total of (x) the aggregate principal amount of Indebtedness of the Company and all Subsidiaries (not including Indebtedness permitted under clauses (a) through (j) above) secured by all Liens created or assumed under the provisions of this clause (k), plus (y) the aggregate amount of Capitalized Lease-Back Obligations of the Company and Subsidiaries under the entire unexpired terms of all leases entered into in connection with sale and lease-back transactions which would have been precluded by the provisions of Section 5.13 but for the satisfaction of the condition set forth in clause (b) thereof, shall not exceed an amount equal to 10% of the Consolidated Net Tangible Assets of the Company and its consolidated Subsidiaries. SECTION 5.13. Limitations on Sale and Leaseback Transactions. Enter into any arrangement with any person providing for the leasing by the Company or any Restricted Subsidiary of any property or asset (except for temporary leases for a term of not more than three years and except for leases between the Company and a Restricted Subsidiary or between Restricted Subsidiaries), which property has been or is to be sold or transferred by the Company or such Restricted Subsidiary to such person more than 120 days after the acquisition thereof or the completion of construction and commencement of full operation thereof, unless either (a) the Company shall apply an amount equal to the greater of the Fair Value of such property or the net proceeds of such sale, within 120 days of the effective date of any such arrangement, to the retirement (other than any mandatory retirement or by way of payment at maturity) of Indebtedness or to the acquisition, construction, development or improvement of properties, facilities or equipment used for operating purposes or (b) at the time of entering into such arrangement, such property or asset could have been subjected to a Lien securing Indebtedness of the Company or a Restricted Subsidiary in a principal amount equal to the Capitalized Lease-Back Obligations with respect to such property or asset under paragraph (k) of Section 5.12. SECTION 5.14. Consolidated Total Debt to Consolidated Total Capitalization. Permit the ratio of (a) Consolidated Total Debt to (b) Consolidated Total Capitalization to be greater than 0.40 to 1. SECTION 5.15. Limitations on Dividends and Advances by Subsidiaries. Enter into any covenant or agreement restricting the ability of any Subsidiary to pay dividends on or make other distributions in respect of its capital stock, to make loans or advances to the Company or any Subsidiary or to pay any Indebtedness owed to the Company or any Subsidiary. SECTION 5.16. Minimum Consolidated Statutory Surplus and Statutory Surplus and Asset Valuation Reserve. Permit Consolidated Statutory Surplus at the end of any fiscal quarter to be less than $4,100,000,000, or permit Hartford Life Statutory Surplus and Asset Valuation Reserve at the end of any fiscal quarter to be less than $2,000,000,000. ARTICLE VI EVENTS OF DEFAULT In case of the happening of any of the following events (each an "Event of Default"): (a) any representation or warranty made or deemed made under this Agreement, or any written information or other information transmitted orally during a formal presentation, furnished by the Borrowers or their subsidiaries to the Administrative Agent or the Lenders pursuant to this Agreement or in connection with the arrangement, 36 syndication or closing of the facilities established hereby, shall prove to have been false or misleading in any material respect when so made, deemed made or furnished; (b) default shall be made in the payment of any principal of any Loan when and as the same shall become due and payable, whether at the due date thereof or at a date fixed for prepayment thereof or by acceleration thereof or otherwise; (c) default shall be made in the payment of any interest on any Loan or any Fee or any other amount (other than an amount referred to in paragraph (b) above) due hereunder, when and as the same shall become due and payable, and such default shall continue unremedied for a period of ten days; (d) default shall be made in the due observance or performance of any covenant, condition or agreement contained in Section 5.01, 5.10, 5.11, 5.12, 5.13, 5.14, 5.15 or 5.16 and, in the case of any default under Section 5.12, such default shall continue for 30 days; (e) default shall be made in the due observance or performance of any covenant, condition or agreement contained herein or in any other Loan Document (other than those specified in clauses (b), (c) or (d) above) and such default shall continue unremedied for a period of 30 days after notice thereof from the Administrative Agent or any Lender to the Company; (f) the Company or any Subsidiary shall (i) fail to pay any principal or interest, regardless of amount, due in respect of any Indebtedness in a principal amount in excess of $50,000,000, when and as the same shall become due and payable or (ii) fail to observe or perform any other term, covenant, condition or agreement contained in any agreement or instrument evidencing or governing any such Indebtedness if the effect of any failure referred to in this clause (ii) is to cause, or to permit the holder or holders of such Indebtedness or a trustee on its or their behalf (with or without the giving of notice, the lapse of time or both) to cause, such Indebtedness to become due prior to its stated maturity; (g) an involuntary proceeding shall be commenced or an involuntary petition shall be filed in a court of competent jurisdiction seeking (i) relief in respect of the Company or any Restricted Subsidiary, or of a substantial part of the property or assets of the Company or or any Restricted Subsidiary, under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Restricted Subsidiary or for a substantial part of the property or assets of the Company or any Restricted Subsidiary, or (iii) the winding up or liquidation of the Company or any Restricted Subsidiary; and such proceeding or petition shall continue undismissed for 60 days or an order or decree approving or ordering any of the foregoing shall be entered; or any Governmental Authority having jurisdiction over the Company or any Restricted Subsidiary shall issue any order or commence any proceeding for the conservation or administration of the Company or any Restricted Subsidiary or shall take any similar action; (h) the Company or any Restricted Subsidiary shall (i) voluntarily commence any proceeding or file any petition seeking relief under Title 11 of the United States Code, as now constituted or hereafter amended, or any other Federal or state bankruptcy, insolvency, receivership or similar law, (ii) consent to the institution of, or fail to contest in a timely and appropriate manner, any proceeding or the filing of any petition described in (g) above, (iii) apply for or consent to the appointment of a receiver, trustee, custodian, sequestrator, conservator or similar official for the Company or any Restricted Subsidiary 37 or for a substantial part of the property or assets of the Company or any Restricted Subsidiary, (iv) file an answer admitting the material allegations of a petition filed against it in any such proceeding, (v) make a general assignment for the benefit of creditors, (vi) become unable, admit in writing its inability or fail generally to pay its debts as they become due, or (vii) take any action for the purpose of effecting any of the foregoing; (i) one or more final judgments shall be entered by any court against the Company or any of the Subsidiaries for the payment of money in an aggregate amount in excess of $50,000,000, and such judgment or judgments shall not have been paid, discharged or stayed for a period of 60 days, or a warrant of attachment or execution or similar process shall have been issued or levied against property of the Company or any of the Subsidiaries to enforce any such judgment or judgments; (j) an ERISA Event shall have occurred that, in the opinion of the Required Lenders, when taken together with all other such ERISA Events, could reasonably be expected to result in a Material Adverse Effect; or (k) a Change in Control shall occur; then, and in every such event (other than an event with respect to the Company or any Restricted Subsidiary described in paragraph (g) or (h) above), and at any time thereafter during the continuance of such event, the Administrative Agent, at the request of the Required Lenders, shall, by notice to the Company, take either or both of the following actions, at the same or different times: (i) terminate forthwith the Commitments and (ii) declare the Loans then outstanding to be forthwith due and payable in whole or in part, whereupon the principal of the Loans so declared to be due and payable, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived anything contained herein to the contrary notwithstanding; and, in the case of any event with respect to the Company or any Restricted Subsidiary described in paragraph (g) or (h) above, the Commitments shall automatically terminate and the principal of the Loans then outstanding, together with accrued interest thereon and any unpaid accrued Fees and all other liabilities of the Borrowers accrued hereunder shall automatically become due and payable, without presentment, demand, protest or any other notice of any kind, all of which are hereby expressly waived anything contained herein to the contrary notwithstanding. ARTICLE VII THE ADMINISTRATIVE AGENT In order to expedite the transactions contemplated by this Agreement, JPMorgan Chase Bank is hereby appointed to act as Administrative Agent on behalf of the Lenders. Each of the Lenders hereby irrevocably authorizes the Administrative Agent to take such actions on behalf of such Lender and to exercise such powers as are specifically delegated to the Administrative Agent by the terms and provisions hereof, together with such actions and powers as are reasonably incidental thereto. The Administrative Agent is hereby expressly authorized by the Lenders, without hereby limiting any implied authority, (a) to receive on behalf of the Lenders all payments of principal of and interest on the Loans and all other amounts due to the Lenders hereunder, and promptly to distribute to each Lender its proper share of each payment so received; (b) to give notice on behalf of each of the Lenders to the Borrowers of any Event of Default of which the Administrative Agent has actual knowledge acquired in connection with its agency hereunder; and (c) to distribute to each Lender copies of all notices, financial statements and other materials delivered by the Borrowers pursuant to this Agreement as received by the Administrative Agent. 38 Neither the Administrative Agent nor any of its directors, officers, employees or agents shall be liable as such for any action taken or omitted by any of them except for its or his or her own gross negligence or willful misconduct as determined by a final judgment of a court of competent jurisdiction, or be responsible for any statement, warranty or representation herein or the contents of any document delivered in connection herewith, or be required to ascertain or to make any inquiry concerning the performance or observance by the Borrowers of any of the terms, conditions, covenants or agreements contained in this Agreement. The Administrative Agent shall not be responsible to the Lenders for the due execution, genuineness, validity, enforceability or effectiveness of this Agreement or other instruments or agreements. The Administrative Agent may deem and treat the Lender which makes any Loan as the holder of the indebtedness resulting therefrom for all purposes hereof until it shall have received notice from such Lender, given as provided herein, of the transfer thereof. The Administrative Agent shall in all cases be fully protected in acting, or refraining from acting, in accordance with written instructions signed by the Required Lenders and, except as otherwise specifically provided herein, such instructions and any action or inaction pursuant thereto shall be binding on all the Lenders. The Administrative Agent shall, in the absence of knowledge to the contrary, be entitled to rely on any instrument or document believed by it in good faith to be genuine and correct and to have been signed or sent by the proper person or persons. Neither the Administrative Agent nor any of its directors, officers, employees or agents shall have any responsibility to the Borrowers on account of the failure of or delay in performance or breach by any Lender of any of its obligations hereunder or to any Lender on account of the failure of or delay in performance or breach by any other Lender or the Borrowers of any of their respective obligations hereunder or in connection herewith. The Administrative Agent may execute any and all duties hereunder by or through agents or employees and shall be entitled to rely upon the advice of legal counsel selected by it with respect to all matters arising hereunder and shall not be liable for any action taken or suffered in good faith by it in accordance with the advice of such counsel. The Lenders hereby acknowledge that the Administrative Agent shall be under no duty to take any discretionary action permitted to be taken by it pursuant to the provisions of this Agreement unless it shall be requested in writing to do so by the Required Lenders. Subject to the appointment and acceptance of a successor Administrative Agent as provided below, the Administrative Agent may resign at any time by notifying the Lenders and the Company. Upon any such resignation, the Required Lenders shall have the right to appoint a successor Administrative Agent acceptable to the Company. If no successor shall have been so appointed by the Required Lenders and shall have accepted such appointment within 30 days after the retiring Administrative Agent gives notice of its resignation, then the retiring Administrative Agent may, on behalf of the Lenders, appoint a successor Administrative Agent which shall be a bank with an office in the United States, having a combined capital and surplus of at least $500,000,000 or an Affiliate of any such bank. Upon the acceptance of any appointment as Administrative Agent hereunder by a successor bank, such successor shall succeed to and become vested with all the rights, powers, privileges and duties of the retiring Administrative Agent and the retiring Administrative Agent shall be discharged from its duties and obligations hereunder. After the Administrative Agent's resignation hereunder, the provisions of this Article and Section 8.05 shall continue in effect for its benefit in respect of any actions taken or omitted to be taken by it while it was acting as Administrative Agent. With respect to the Loans made by it hereunder, the Administrative Agent in its individual capacity and not as Administrative Agent shall have the same rights and powers as any other Lender and may exercise the same as though it were not the Administrative Agent, and may accept deposits from, lend money to and generally engage in any kind of business with the Borrowers or any Subsidiary or other Affiliate thereof as if it were not the Administrative Agent. Each Lender agrees (i) to reimburse the Administrative Agent, on demand, in the amount of its pro rata share (based on its Commitment hereunder or, if the Commitments shall 39 have been terminated, the amount of its outstanding Loans) of any expenses incurred for the benefit of the Lenders by such Agent, including counsel fees and compensation of agents and employees paid for services rendered on behalf of the Lenders, which shall not have been reimbursed by the Borrowers and (ii) to indemnify and hold harmless the Administrative Agent and any of its directors, officers, employees or agents, on demand, in the amount of such pro rata share, from and against any and all liabilities, taxes, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements of any kind or nature whatsoever which may be imposed on, incurred by or asserted against it in its capacity as Administrative Agent in any way relating to or arising out of this Agreement or any action taken or omitted by it under this Agreement to the extent the same shall not have been reimbursed by the Borrowers; provided that no Lender shall be liable to the Administrative Agent for any portion of such liabilities, obligations, losses, damages, penalties, actions, judgments, suits, costs, expenses or disbursements resulting from the gross negligence or wilful misconduct of the Administrative Agent or any of its directors, officers, employees or agents. Each Lender acknowledges that it has, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it has deemed appropriate, made its own credit analysis and decision to enter into this Agreement. Each Lender also acknowledges that it will, independently and without reliance upon the Administrative Agent or any other Lender and based on such documents and information as it shall from time to time deem appropriate, continue to make its own decisions in taking or not taking action under or based upon this Agreement or any related agreement or any document furnished hereunder or thereunder. Each party to this Agreement acknowledges and agrees that neither Citibank, N.A., in its capacity as Co-Administrative Agent, nor any co-syndication agent will have duties or responsibilities for the administration of this Agreement or the Borrowings hereunder. ARTICLE VIII MISCELLANEOUS SECTION 8.01. Notices. Notices and other communications provided for herein shall be in writing and shall be delivered by hand or overnight courier service, mailed or sent by telecopy, as follows: (a) if to either Borrower, to The Hartford Financial Services Group, Inc., Hartford Plaza, Hartford, CT 06115, Attention of Mr. John Giamalis (Telecopy No. 860-547-2878); with a copy to Mr. Brian Becker, The Hartford Financial Services Group, Inc., Hartford Plaza, Hartford CT 06115 (Telecopy No. 860-547-6959); (b) if to the Administrative Agent, to JPMorgan Chase Bank, Loan and Agency Services Group, One Chase Manhattan Plaza, 8th Floor, New York, New York 10081, Attention of Laura Rebecca, (Telecopy No. 212-552-7490), with a copy to JPMorgan Chase Bank, 270 Park Avenue, 4th Floor, New York, New York 10017, Attention of Heather Lindstrom, Re: The Hartford Financial Services Group, Inc. (Telecopy No. 212- 270-6637); and (c) if to a Lender, to it at its address (or telecopy number) set forth in Schedule 2.01 or in the Assignment and Acceptance pursuant to which such Lender became a party hereto. All notices and other communications given to any party hereto in accordance with the provisions of this Agreement shall be deemed to have been given on the date of receipt if delivered by hand or overnight courier service or sent by telecopy to such party as provided in this Section or in 40 accordance with the latest unrevoked direction from such party given in accordance with this Section. SECTION 8.02. Survival of Agreement. All covenants, agreements, representations and warranties made by the Borrowers herein and in the certificates or other instruments prepared or delivered in connection with or pursuant to this Agreement shall be considered to have been relied upon by the Lenders and shall survive the making by the Lenders of the Loans regardless of any investigation made by the Lenders or on their behalf, and shall continue in full force and effect as long as the principal of or any accrued interest on any Loan or any Fee or any other amount payable under this Agreement is outstanding and unpaid, or the Commitments have not been terminated. SECTION 8.03. Binding Effect. This Agreement shall become effective on the Effective Date when it shall have been executed by each Borrower and the Administrative Agent and when the Administrative Agent shall have received copies hereof (telecopied or otherwise) which, when taken together, bear the signature of each Lender, and thereafter shall be binding upon and inure to the benefit of the parties hereto and their respective successors and assigns, except that the Borrowers shall not have the right to assign any rights hereunder or any interest herein without the prior consent of all the Lenders. SECTION 8.04. Successors and Assigns. (a) Whenever in this Agreement any of the parties hereto is referred to, such reference shall be deemed to include the successors and assigns of such party; and all covenants, promises and agreements by or on behalf of any party that are contained in this Agreement shall bind and inure to the benefit of its successors and assigns. (b) Each Lender may assign to one or more assignees all or a portion of its interests, rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans at the time owing to it); provided, however, that (i) except in the case of an assignment to a Lender or a Lender Affiliate, the Company and the Administrative Agent must give their prior written consent (except when there exists a Default or an Event of Default) to such assignment (which consent shall not be unreasonably withheld); (ii) the parties to each such assignment shall execute and deliver to the Administrative Agent an Assignment and Acceptance, and a processing and recordation fee of $3,500; (iii) the assignee, if it shall not be a Lender, shall deliver to the Administrative Agent an Administrative Questionnaire; and (iv) the amount of the Commitment of the assigning Lender subject to each such assignment (determined as of the date the Assignment and Acceptance with respect to such assignment is delivered to the Administrative Agent) shall not be less than $5,000,000 and the amount of the Commitment of such Lender remaining after such assignment shall not be less than $5,000,000 or shall be zero. Upon acceptance and recording pursuant to paragraph (e) of this Section, from and after the effective date specified in each Assignment and Acceptance, which effective date shall be at least five Business Days after the execution thereof, (A) the assignee thereunder shall be a party hereto and, to the extent of the interest assigned by such Assignment and Acceptance, have the rights and obligations of a Lender under this Agreement and (B) the assigning Lender thereunder shall, to the extent of the interest assigned by such Assignment and Acceptance, be released from its obligations under this Agreement (and, in the case of an Assignment and Acceptance covering all or the remaining portion of an assigning Lender's rights and obligations under this Agreement, such Lender shall cease to be a party hereto (but shall continue to be entitled to the benefits of Sections 2.13, 2.15, 2.19 and 8.05, as well as to any Fees accrued for its account hereunder and not yet paid)). Notwithstanding the foregoing, any Lender assigning its rights and obligations under this Agreement may retain any Competitive Loans made by it outstanding at such time, and in such case shall retain its rights hereunder in respect of any Loans so retained until such Loans have been repaid in full in accordance with this Agreement. (c) By executing and delivering an Assignment and Acceptance, the assigning Lender thereunder and the assignee thereunder shall be deemed to confirm to and agree with each 41 other and the other parties hereto as follows: (i) such assigning Lender warrants that it is the legal and beneficial owner of the interest being assigned thereby free and clear of any adverse claim; (ii) except as set forth in (i) above, such assigning Lender makes no representation or warranty and assumes no responsibility with respect to any statements, warranties or representations made in or in connection with this Agreement, or the execution, legality, validity, enforceability, genuineness, sufficiency or value of this Agreement or any other instrument or document furnished pursuant hereto or the financial condition of the Borrowers or the performance or observance by the Borrowers of any obligations under this Agreement or any other instrument or document furnished pursuant hereto; (iii) such assignee represents and warrants that it is legally authorized to enter into such Assignment and Acceptance; (iv) such assignee confirms that it has received a copy of this Agreement, together with copies of the most recent financial statements delivered pursuant to Section 5.03 and such other documents and information as it has deemed appropriate to make its own credit analysis and decision to enter into such Assignment and Acceptance; (v) such assignee will independently and without reliance upon the Administrative Agent, such assigning Lender or any other Lender and based on such documents and information as it shall deem appropriate at the time, continue to make its own credit decisions in taking or not taking action under this Agreement; (vi) such assignee appoints and authorizes the Administrative Agent to take such action as agent on its behalf and to exercise such powers under this Agreement as are delegated to the Administrative Agent by the terms hereof, together with such powers as are reasonably incidental thereto; and (vii) such assignee agrees that it will perform in accordance with their terms all the obligations which by the terms of this Agreement are required to be performed by it as a Lender. (d) The Administrative Agent shall maintain at one of its offices in The City of New York a copy of each Assignment and Acceptance delivered to it and a register for the recordation of the names and addresses of the Lenders, and the Commitment of, and the principal amount of the Loans owing to, each Lender pursuant to the terms hereof from time to time (the "Register"). The entries in the Register shall be conclusive in the absence of manifest error and the Borrowers, the Administrative Agent and the Lenders may treat each person whose name is recorded in the Register pursuant to the terms hereof as a Lender hereunder for all purposes of this Agreement. The Register shall be available for inspection by each party hereto, at any reasonable time and from time to time upon reasonable prior notice. (e) Upon its receipt of a duly completed Assignment and Acceptance executed by an assigning Lender and an assignee together with an Administrative Questionnaire completed in respect of the assignee (unless the assignee shall already be a Lender hereunder), the processing and recordation fee referred to in paragraph (b) above and the written consent of the Company to such assignment, the Administrative Agent shall (i) accept such Assignment and Acceptance and (ii) record the information contained therein in the Register. (f) Each Lender may sell participations to one or more banks or other entities in all or a portion of its rights and obligations under this Agreement (including all or a portion of its Commitment and the Loans owing to it); provided, however, that (i) such Lender's obligations under this Agreement shall remain unchanged; (ii) such Lender shall remain solely responsible to the other parties hereto for the performance of such obligations; (iii) each participating bank or other entity shall be entitled to the benefit of the cost protection provisions contained in Sections 2.13, 2.15 and 2.19 to the same extent as if it were the selling Lender (and limited to the amount that could have been claimed by the selling Lender had it continued to hold the interest of such participating bank or other entity), except that all claims made pursuant to such Sections shall be made through such selling Lender; and (iv) the Borrowers, the Administrative Agent and the other Lenders shall continue to deal solely and directly with such selling Lender in connection with such Lender's rights and obligations under this Agreement. (g) Any Lender or participant may, in connection with any assignment or participation or proposed assignment or participation pursuant to this Section, disclose to the assignee or participant or proposed assignee or participant any information relating to the 42 Borrowers furnished to such Lender; provided that, prior to any such disclosure, each such assignee or participant or proposed assignee or participant shall execute an agreement whereby such assignee or participant shall agree (subject to customary exceptions) to preserve the confidentiality of any such information. (h) The Borrowers shall not assign or delegate any rights and duties hereunder without the prior written consent of all Lenders. (i) Any Lender may at any time pledge all or any portion of its rights under this Agreement to a Federal Reserve Bank; provided that no such pledge shall release any Lender from its obligations hereunder or substitute any such Bank for such Lender as a party hereto. In order to facilitate such an assignment to a Federal Reserve Bank, each Borrower shall, at the request of the assigning Lender, duly execute and deliver to the assigning Lender a promissory note or notes evidencing the Loans made to such Borrower by the assigning Lender hereunder. SECTION 8.05. Expenses; Indemnity. (a) The Borrowers agree to pay all reasonable out-of-pocket expenses incurred by each Agent in connection with the syndication of the credit facility provided for herein, the preparation, execution, delivery and administration of this Agreement or in connection with any amendments, modifications or waivers of the provisions hereof, or incurred by either Agent or any Lender in connection with the enforcement or protection of their rights in connection with this Agreement or in connection with the Loans made hereunder, including the reasonable fees and disbursements of counsel for each Agent or, in the case of enforcement costs and documentary taxes, the Lenders. (b) The Borrowers agree to indemnify the Administrative Agent, each Lender, each of their Affiliates and the directors, officers, employees and agents of the foregoing (each such person being called an "Indemnitee") against, and to hold each Indemnitee harmless from, any and all losses, claims, damages, liabilities and related expenses, including reasonable counsel fees and expenses, incurred by or asserted against any Indemnitee arising out of (i) the consummation of the transactions contemplated by this Agreement; (ii) the use of the proceeds of the Loans; or (iii) any claim, litigation, investigation or proceeding relating to any of the foregoing, whether or not any Indemnitee is a party thereto; provided that such indemnity shall not, as to any Indemnitee, be available to the extent that such losses, claims, damages, liabilities or related expenses are determined by a final judgment of a court of competent jurisdiction to have resulted from the gross negligence or willful misconduct of such Indemnitee. (c) The provisions of this Section shall remain operative and in full force and effect regardless of the expiration of the term of this Agreement, the consummation of the transactions contemplated hereby, the repayment of any of the Loans, the invalidity or unenforceability of any term or provision of this Agreement or any investigation made by or on behalf of either Agent or any Lender. All amounts due under this Section shall be payable on written demand therefor. SECTION 8.06. APPLICABLE LAW. THIS AGREEMENT SHALL BE CONSTRUED IN ACCORDANCE WITH AND GOVERNED BY THE LAWS OF THE STATE OF NEW YORK. SECTION 8.07. Waivers; Amendment. (a) No failure or delay of the Administrative Agent or any Lender in exercising any power or right hereunder shall operate as a waiver thereof, nor shall any single or partial exercise of any such right or power, or any abandonment or discontinuance of steps to enforce such a right or power, preclude any other or further exercise thereof or the exercise of any other right or power. The rights and remedies of the Administrative Agent and the Lenders hereunder are cumulative and are not exclusive of any rights or remedies which they would otherwise have. No waiver of any provision of this Agreement or consent to any departure therefrom shall in any event be effective unless the same shall be permitted by paragraph (b) below, and then such waiver or consent shall be effective only 43 in the specific instance and for the purpose for which given. No notice or demand on either Borrower or any Subsidiary in any case shall entitle such party to any other or further notice or demand in similar or other circumstances. (b) Neither this Agreement nor any provision hereof may be waived, amended or modified except pursuant to an agreement or agreements in writing entered into by the Borrowers and the Required Lenders; provided, however, that no such agreement shall (i) decrease the principal amount of, or extend the maturity of or any scheduled principal payment date or date for the payment of any interest on any Loan or any Fee or other amount due hereunder or waive or excuse any such payment or any part thereof, or decrease the rate of interest on any Loan, without the prior written consent of each Lender affected thereby; (ii) increase the Commitment or decrease the Facility Fee of or other amount owing to any Lender without the prior written consent of such Lender; or (iii) amend or modify the provisions of Section 2.16 or Section 8.04(h), the provisions of this Section or the definition of the "Required Lenders", without the prior written consent of each Lender; provided further, however, that no such agreement shall amend, modify or otherwise affect the rights or duties of the Administrative Agent hereunder without the prior written consent of the Administrative Agent. Each Lender shall be bound by any waiver, amendment or modification authorized by this Section and any consent by any Lender pursuant to this Section shall bind any assignee of its rights and interests hereunder. SECTION 8.08. Entire Agreement. This Agreement and the agreements referred to in Section 2.06 constitute the entire contract among the parties relative to the subject matter hereof. Any previous agreement among the parties with respect to the subject matter hereof is superseded by this Agreement. Nothing in this Agreement, expressed or implied, is intended to confer upon any party other than the parties hereto any rights, remedies, obligations or liabilities under or by reason of this Agreement. SECTION 8.09. Severability. In the event any one or more of the provisions contained in this Agreement should be held invalid, illegal or unenforceable in any respect, the validity, legality and enforceability of the remaining provisions contained herein shall not in any way be affected or impaired thereby. The parties shall endeavor in good-faith negotiations to replace the invalid, illegal or unenforceable provisions with valid provisions the economic effect of which comes as close as possible to that of the invalid, illegal or unenforceable provisions. SECTION 8.10. Counterparts. This Agreement may be executed in two or more counterparts, each of which shall constitute an original but all of which when taken together shall constitute but one contract, and shall become effective as provided in Section 8.03. SECTION 8.11. Headings. Article and Section headings and the Table of Contents used herein are for convenience of reference only, are not part of this Agreement and are not to affect the construction of, or to be taken into consideration in interpreting, this Agreement. SECTION 8.12. Right of Setoff. If an Event of Default shall have occurred and be continuing, each Lender is hereby authorized at any time and from time to time, to the fullest extent permitted by law, to set off and apply any and all deposits (general or special, time or demand, provisional or final) at any time held and other indebtedness at any time owing by such Lender to or for the credit or obligations of either Borrower now or hereafter existing under this Agreement held by such Lender, irrespective of whether or not such Lender shall have made any demand under this Agreement and although such obligations may be unmatured. Each Lender agrees promptly to notify the Company and the Administrative Agent after such setoff and application made by such Lender, but the failure to give such notice shall not affect the validity of such setoff and application. The rights of each Lender under this Section are in addition to other rights and remedies (including other rights of setoff) which such Lender may have. 44 SECTION 8.13. Jurisdiction; Consent to Service of Process. (a) Each Borrower hereby irrevocably and unconditionally submits, for itself and its property, to the nonexclusive jurisdiction of any New York State court or Federal court of the United States of America sitting in New York County, and any appellate court from any thereof, in any action or proceeding arising out of or relating to this Agreement or for recognition or enforcement of any judgment, and each of the parties hereto hereby irrevocably and unconditionally agrees that all claims in respect of any such action or proceeding may be heard and determined in such New York State or, to the extent permitted by law, in such Federal court. Each of the parties hereto agrees that a final judgment in any such action or proceeding shall be conclusive and may be enforced in other jurisdictions by suit on the judgment or in any other manner provided by law. Subject to the foregoing and to paragraph (b) below, nothing in this Agreement shall affect any right that any party hereto may otherwise have to bring any action or proceeding relating to this Agreement against any other party hereto in the courts of any jurisdiction. (b) Each Borrower hereby irrevocably and unconditionally waives, to the fullest extent it may legally and effectively do so, any objection which it may now or thereafter have to the laying of venue of any suit, action or proceeding arising out of or relating to this Agreement in any New York State or Federal court. Each of the parties hereto hereby irrevocably waives, to the fullest extent permitted by law, the defense of an inconvenient forum to the maintenance of such action or proceeding in any such court. (c) Each party to this Agreement irrevocably consents to service of process in the manner provided for notices in Section 8.01. Nothing in this Agreement will affect the right of any party to this Agreement to serve process in any other manner permitted by law. SECTION 8.14. Waiver of Jury Trial. EACH PARTY HERETO HEREBY WAIVES, TO THE FULLEST EXTENT PERMITTED BY APPLICABLE LAW, ANY RIGHT IT MAY HAVE TO A TRIAL BY JURY IN RESPECT OF ANY LITIGATION DIRECTLY OR INDIRECTLY ARISING OUT OF, UNDER OR IN CONNECTION WITH THIS AGREEMENT. Each party hereto (a) certifies that no representative, agent or attorney of any other party has represented, expressly or otherwise, that such other party would not, in the event of litigation, seek to enforce the foregoing waiver and (b) acknowledges that it and other parties hereto have been induced to enter into this Agreement by, among other things, the mutual waivers and certification in this Section. SECTION 8.15. Conversion of Currencies. (a) If, for the purpose of obtaining judgment in any court, it is necessary to convert a sum owing hereunder in one currency into another currency, each party hereto agrees, to the fullest extent that it may effectively do so, that the rate of exchange used shall be that at which in accordance with normal banking procedures in the relevant jurisdiction the first currency could be purchased with such other currency on the Business Day immediately preceding the day on which final judgment is given. (b) The obligations of the Borrowers in respect of any sum due to any party hereto or any holder of the obligations owing hereunder (the "Applicable Creditor") shall, notwithstanding any judgment in a currency (the "Judgment Currency") other than the currency in which such sum is stated to be due hereunder (the "Agreement Currency"), be discharged only to the extent that, on the Business Day following receipt by the Applicable Creditor of any sum adjudged to be so due in the Judgment Currency, the Applicable Creditor may in accordance with normal banking procedures in the relevant jurisdiction purchase the Agreement Currency with the Judgment Currency; if the amount of the Agreement Currency so purchased is less than the sum originally due to the Applicable Creditor in the Agreement Currency, the Borrowers agree, as a separate obligation and notwithstanding any such judgment, to indemnify the Applicable Creditor against such loss. The obligations of the Borrowers contained in this Section 8.15 shall survive the termination of this Agreement and the payment of all other amounts owing hereunder. 45 SECTION 8.16. Confidentiality. Each of the Agents and the Lenders, on behalf of itself and its Affiliates and agents, agrees to maintain the confidentiality of the Information (as defined below), except that Information may be disclosed (a) to its Affiliates involved in the preparation and execution of this Agreement and the transactions contemplated thereby, and to such Lender's and such Affiliates' directors, officers, employees and agents, including accountants, legal counsel and other advisors (it being understood that the persons to whom such disclosure is made will be informed of the confidential nature of such Information and instructed to keep such Information confidential); (b) to the extent requested by any regulatory or self-regulatory authority; (c) to the extent required by applicable laws or regulations or by any subpoena or similar legal process (it being understood the applicable Agent or Lender shall notify the Company, to the extent permitted by law, of such required disclosure within a reasonably practicable time after such Agent or Lender gains knowledge of the required disclosure); (d) to any other party to this Agreement; (e) in connection with the exercise of any remedies hereunder or any suit, action or proceeding relating to this Agreement or the enforcement of rights hereunder; (f) subject to an agreement containing provisions substantially the same as those of this Section, to any assignee of or participant in, or any prospective assignee of or participant in, any of its rights or obligations under this Agreement; (g) with the consent of the Company; or (h) to the extent such Information (i) becomes publicly available other than as a result of a breach of this Section or (ii) becomes available to either Agent or any Lender on a nonconfidential basis from a source other than either Borrower (it being understood if disclosure of such Information violates any third-party confidentiality agreement with the Borrowers or their Subsidiaries and the representative of the Agent or Lender involved has actual knowledge of such third-party confidentiality agreement and was involved in the preparation and execution of this Agreement or the transactions contemplated thereby, such disclosure shall not be permitted). For the purposes of this Section, "Information" means all confidential information received from either Borrower relating to the Borrowers or any of their Subsidiaries or the Borrowers' or any of their Subsidiaries' businesses; provided that, in the case of information received from either Borrower after the date hereof, such information is clearly identified at the time of delivery as confidential. Any person required to maintain the confidentiality of Information as provided in this Section shall be considered to have complied with its obligation to do so if such person has exercised the same degree of care to maintain the confidentiality of such Information as such person would accord to its own confidential information. 46 IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be duly executed by their respective authorized officers as of the day and year first above written. THE HARTFORD FINANCIAL SERVICES GROUP, INC., as Borrower, by /s/ John N. Giamalis ------------------------------------------ Name: John N. Giamalis Title: Senior Vice President and Treasurer HARTFORD LIFE, INC., as Borrower, by /s/ David T. Foy ------------------------------------------ Name: David T. Foy Title: Senior Vice President and Treasurer JPMORGAN CHASE BANK, individually and as Co-Administrative Agent, by /s/ Heather Lindstrom ------------------------------------------ Name: Heather A. Lindstrom Title: Vice President CITIBANK, N.A., individually and as Co- Administrative Agent, by Michael A. Taylor ------------------------------------------ Name: Michael A. Taylor Title: VP 47 BANK OF AMERICA, N.A., individually and as Co-Syndication Agent, by /s/ Leslie Nannen ------------------------------------------ Name: Leslie Nannen Title: Vice President 48 DEUTSCHE BANK AG, NEW YORK BRANCH, individually and as Co-Syndication Agent, by /s/ Ruth Leung ------------------------------------------ Name: Ruth Leung Title: Director by /s/ Clinton Johnson ------------------------------------------ Name: Clinton Johnson Title: Managing Director 49 UBS AG, STAMFORD BRANCH, individually and as Co-Syndication Agent, by /s/ Luke Goldsworthy ------------------------------------------ Name: Luke Goldsworthy Title: Associate Director Banking Products Services, US by /s/ Susan Brunner ------------------------------------------ Name: Susan Brunner Title: Associate Director Banking Products Services, US 50 SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. AND HARTFORD LIFE, INC. COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF DECEMBER 31, 2002. LENDER: Fleet National Bank ------------------------------ by: /s/ George J. Urban ------------------------------ Name: George J. Urban Title: Portfolio Manager SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. AND HARTFORD LIFE, INC. COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF DECEMBER 31, 2002. LENDER: Mellon Bank, N.A. ------------------------------ by: /s/ Carrie Burnham ------------------------------ Name: Carrie Burnhun Title: Assistant Vice President SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. AND HARTFORD LIFE, INC. COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF DECEMBER 31, 2002. LENDER: Morgan Stanley Bank ------------------------------ by: /s/ Jaap L. Tonckens ------------------------------ Name: Jaap L. Tonckens Title: Vice President SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. AND HARTFORD LIFE, INC. COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF DECEMBER 31, 2002. LENDER: State Street Bank and Trust Company ------------------------------------- by: /s/ Edward M. Anderson ------------------------------ Name: Edward M. Anderson Title: Vice President SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. AND HARTFORD LIFE, INC. COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF DECEMBER 31, 2002. LENDER: U.S. Bank National Association ------------------------------------- by: /s/ Elliot Jaffee ------------------------------ Name: Elliot Jaffee Title: Senior Vice President SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. AND HARTFORD LIFE, INC. COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF DECEMBER 31, 2002. LENDER: Wachovia Bank, National Association ------------------------------------- by: /s/ Kimberly Shaffer ------------------------------ Name: Kimberly Shaffer Title: Director SIGNATURE PAGE TO THE HARTFORD FINANCIAL SERVICES GROUP, INC. AND HARTFORD LIFE, INC. COMPETITIVE ADVANCE AND REVOLVING CREDIT FACILITY AGREEMENT, DATED AS OF DECEMBER 31, 2002. LENDER: Wells Fargo Bank, National Association --------------------------------------- by: /s/ Robert C. Meyer ------------------------------ Name: Robert C. Meyer Title: Vice President by: /s/ Beth C. McGinntis ------------------------------ Name: Beth C. McGinntis Title: Vice President EXHIBIT A-1 FORM OF COMPETITIVE BID REQUEST JPMorgan Chase Bank, as Administrative Agent for the Lenders referred to below, 270 Park Avenue New York, NY 10017 Attention: [ ] Dear Ladies and Gentlemen: The undersigned, ________________________ (the "Borrower"), refers to the Three-Year Competitive Advance and Revolving Credit Facility Agreement dated as of December 31, 2002 (as it may be amended, modified, extended or restated from time to time, the "3-Year Agreement"), among The Hartford Financial Services Group, Inc., Hartford Life, Inc., the Lenders parties thereto, and JPMorgan Chase Bank and Citibank, N.A., as Co-Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the 3-Year Agreement. The Borrower hereby gives you notice pursuant to Section 2.03(a) of the 3-Year Agreement that it requests a Competitive Borrowing under the 3-Year Agreement, and in that connection sets forth below the terms on which such Competitive Borrowing is requested to be made: (A) Date of Competitive Borrowing (which is a Business Day) ___________ (B) Principal amount of Competitive Borrowing 1/ ___________ - (C) Interest rate basis 2/ ___________ - (D) Interest Period and the last day thereof 3/ ___________ - - -------- 1/ Not less than $5,000,000 (and in integral multiples of $1,000,000) or - greater than the Total Commitment then available. 2/ Eurocurrency Competitive Loan or Fixed Rate Loan. - 3/ Which shall be subject to the definition of "Interest Period" and end - not later than the Maturity Date. Upon acceptance of any or all of the Loans offered by the Lenders in response to this request, the Borrower shall be deemed to have represented and warranted that the conditions to lending specified in Section 4.01(b) and (c) of the 3-Year Agreement have been satisfied. Very truly yours, [NAME OF BORROWER], by___________________________ Name: Title: [Financial Officer] EXHIBIT A-2 FORM OF NOTICE OF COMPETITIVE BID REQUEST [Name of Lender] [Address] [Date] Attention: [ ] Dear Ladies and Gentlemen: Reference is made to the Three-Year Competitive Advance and Revolving Credit Facility Agreement dated as of December 31, 2002 (as it may be amended, modified, extended or restated from time to time, the "3-Year Agreement"), among The Hartford Financial Services Group, Inc., Hartford Life, Inc., the Lenders parties thereto, and JPMorgan Chase Bank and Citibank, N.A., as Co- Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the 3-Year Agreement. [__________] (the "Borrower") made a Competitive Bid Request on _______, pursuant to Section 2.03(a) of the 3-Year Agreement, and in that connection you are invited to submit a Competitive Bid by [Date]/[Time]. 1/ Your Competitive Bid must comply with Section 2.03(b) - of the 3-Year Agreement and the terms set forth below on which the Competitive Bid Request was made: (A) Date of Competitive Borrowing ___________ (B) Principal amount of Competitive Borrowing ___________ (C) Interest rate basis ___________ (D) Interest Period and the last day thereof ___________ Very truly yours, JPMORGAN CHASE BANK, as Administrative Agent, by________________________ Name: Title: - -------- 1/ The Competitive Bid must be received by the Administrative Agent (i) in - the case of Eurocurrency Competitive Loans, not later than 9:30 a.m., New York City time, three Business Days before a proposed Competitive Borrowing, and (ii) in the case of Fixed Rate Loans, not later than 9:30 a.m., New York City time, on the day of a proposed Competitive Borrowing. EXHIBIT A-3 FORM OF COMPETITIVE BID JPMorgan Chase Bank, as Administrative Agent for the Lenders referred to below, 270 Park Avenue New York, N.Y. 10017 [Date] Attention: [ ] Dear Ladies and Gentlemen: The undersigned, [Name of Lender], refers to the Three-Year Competitive Advance and Revolving Credit Facility Agreement dated as of December 31, 2002 (as it may be amended, modified, extended or restated from time to time, the "3-Year Agreement"), among The Hartford Financial Services Group, Inc, Hartford Life, Inc., the Lenders parties thereto, and JPMorgan Chase Bank and Citibank, N.A., as Co-Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the 3-Year Agreement. The undersigned hereby makes a Competitive Bid pursuant to Section 2.03(b) of the 3-Year Agreement, in response to the Competitive Bid Request made by [__________] (the "Borrower") on ________, 200[ ], and in that connection sets forth below the terms on which such Competitive Bid is made: (A) Principal Amount 1/ (B) Competitive Bid Rate 2/ (C) Interest Period and last day thereof The undersigned hereby confirms that it is prepared, subject to the conditions set forth in the 3- Year Agreement, to extend credit to the Borrower upon acceptance by the Borrower of this bid in accordance with Section 2.03(d) of the 3-Year Agreement. Very truly yours, [NAME OF LENDER], by____________________________ Name: Title: - -------- 1/ Not less than $5,000,000 or greater than the requested Competitive - Borrowing and in integral multiples of $1,000,000. Multiple bids will be accepted by the Administrative Agent. 2/ i.e., LIBO Rate + or - %, in the case of Eurocurrency Competitive Loans - or %, in the case of Fixed Rate Loans. EXHIBIT A-4 FORM OF COMPETITIVE BID ACCEPT/REJECT LETTER [Date] JPMorgan Chase Bank, as Administrative Agent for the Lenders referred to below 270 Park Avenue New York, N.Y. 10017 Attention: [ ] Dear Ladies and Gentlemen: The undersigned, ________________________ (the "Borrower"), refers to the Three-Year Competitive Advance and Revolving Credit Facility Agreement dated as of December 31, 2002 (as it may be amended, modified, extended or restated from time to time, the "3-Year Agreement"), among The Hartford Financial Services Group, Inc., Hartford Life, Inc., the Lenders parties thereto, and JPMorgan Chase Bank and Citibank, N.A., as Co-Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the 3-Year Agreement. In accordance with Section 2.03(c) of the 3-Year Agreement, we have received a summary of bids in connection with our Competitive Bid Request dated ______, and in accordance with Section 2.03(d) of the 3-Year Agreement, we hereby accept the following bids for maturity on [date]: Principal Amount Fixed Rate/Margin Lender $ [%]/[+/-. %] $ We hereby reject the following bids: Principal Amount Fixed Rate/Margin Lender $ [%]/[+/-. %] $ The $_____ should be deposited in JPMorgan Chase Bank account number [ ] on [date]. Very truly yours, [NAME OF BORROWER], by___________________________ Name: Title: EXHIBIT A-5 FORM OF STANDBY BORROWING REQUEST JPMorgan Chase Bank, as Administrative Agent for the Lenders referred to below, 270 Park Avenue New York, N.Y. 10017 [Date] Attention: [ ] Dear Ladies and Gentlemen: The undersigned, _______________________ (the "Borrower"), refers to the Three-Year Competitive Advance and Revolving Credit Facility Agreement dated as of December 31, 2002 (as it may be amended, modified, extended or restated from time to time, the "3-Year Agreement"), among The Hartford Financial Services Group, Inc., Hartford Life, Inc., the Lenders parties thereto, and JPMorgan Chase Bank and Citibank, N.A., as Co-Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Capitalized terms used herein and not otherwise defined herein shall have the meanings assigned to such terms in the 3-Year Agreement. The Borrower hereby gives you notice pursuant to Section 2.04 of the 3-Year Agreement that it requests a Standby Borrowing under the 3-Year Agreement, and in that connection sets forth below the terms on which such Standby Borrowing is requested to be made: (A) Date of Standby Borrowing (which is a Business Day) ___________ (B) Principal amount of Standby Borrowing 1/ ___________ - (C) Interest rate basis 2/ ___________ - (D) Interest Period and the last day thereof 3/ ___________ - Upon acceptance of any or all of the Loans made by the Lenders in response to this request, the Borrower shall be deemed to have represented and warranted that the conditions to lending specified in Section 4.01(b) and (c) of the 3-Year Agreement have been satisfied. Very truly yours, [NAME OF BORROWER], by______________________________ Name: Title: [Financial Officer] - -------- 1/ Not less than $20,000,000 (and in integral multiples of $5,000,000) or - greater than the Total Commitment then available. 2/ Eurocurrency Standby Loan or ABR Loan. - 3/ Which shall be subject to the definition of "Interest Period" and end - not later than the Maturity Date. EXHIBIT B [FORM OF] ASSIGNMENT AND ACCEPTANCE Dated:_____ , ____ Reference is made to the Three-Year Competitive Advance and Revolving Credit Facility Agreement dated as of December 31, 2002 (the "3-Year Agreement"), among The Hartford Financial Services Group, Inc., Hartford Life, Inc., the Lenders parties thereto, and JPMorgan Chase Bank and Citibank, N.A., as Co-Administrative Agents (it being agreed that all references herein to the Administrative Agent shall be references to JPMorgan Chase Bank). Terms defined in the 3-Year Agreement are used herein with the same meanings. 1. The Assignor hereby sells and assigns, without recourse, to the Assignee, and the Assignee hereby purchases and assumes, without recourse, from the Assignor, effective as of the Effective Date set forth below, the interests set forth below (the "Assigned Interest") in the Assignor's rights and obligations under the 3-Year Agreement, including, without limitation, the interests set forth below in the Commitment of the Assignor on the Effective Date and the Competitive Loans and Standby Loans owing to the Assignor which are outstanding on the Effective Date. Each of the Assignor and the Assignee hereby makes and agrees to be bound by all the representations, warranties and agreements set forth in Section 8.04(c) of the 3-Year Agreement, a copy of which has been received by each such party. From and after the Effective Date, (i) the Assignee shall be a party to and be bound by the provisions of the 3-Year Agreement and, to the extent of the interests assigned by this Assignment and Acceptance, have the rights and obligations of a Lender thereunder and (ii) the Assignor shall, to the extent of the interests assigned by this Assignment and Acceptance, relinquish its rights and be released from its obligations under the 3-Year Agreement. 2. This Assignment and Acceptance is being delivered to the Administrative Agent together with (i) if the Assignee is organized under the laws of a jurisdiction outside the United States, the forms specified in Section 2.19(g) of the 3-Year Agreement, duly completed and executed by such Assignee, (ii) if the Assignee is not already a Lender under the 3-Year Agreement, an Administrative Questionnaire in the form distributed to such Assignee by the Administrative Agent and (iii) a processing and recordation fee of $3,500. 3. This Assignment and Acceptance shall be governed by and construed in accordance with the laws of the State of New York. Date of Assignment: Legal Name of Assignor: Legal Name of Assignee: Assignee's Address for Notices: 2 Effective Date of Assignment (may not be fewer than 5 Business Days after the Date of Assignment):
Percentage Assigned of Facility/Commitment (set forth, to at least 8 decimals, as a percentage of the Facility Principal Amount Assigned (and and the aggregate identifying information as to Commitments Facility individual Competitive Loans) of all Lenders thereunder) - -------- ----------------------------- -------------------------- Commitment Assigned: $____________ ___________ % Standby Loans: $____________ ___________ % Competitive Loans: $____________ ___________ %
The terms set forth and on the reverse side Accepted: hereof are hereby agreed to: THE HARTFORD FINANCIAL SERVICES GROUP, INC., ________________________________, by: ___________________________ as Assignor, Name: Title: by: ____________________________ Name: Title: ________________________________, as Assignee, by: ____________________________ Name: Title: EXHIBIT C [FORM OF] OPINION OF COUNSEL FOR THE HARTFORD FINANCIAL SERVICES GROUP, INC. AND HARTFORD LIFE, INC. Brian S. Becker Senior Vice President, Director of Corporate Law And Corporate Secretary Law Department Telephone 860 547 3338 Facsimile 860 547 6959 December 31, 2002 To The Lenders Listed on Schedule A Attached Hereto (the "Lenders") Ladies and Gentlemen: This opinion is being rendered to you pursuant to Section 4.02(a) of the Three-Year Competitive Advance and Revolving Credit Facility Agreement (the "Agreement") among The Hartford Financial Services Group, Inc., a Delaware corporation (the "Company"), Hartford Life, Inc., a Delaware corporation ("Hartford Life") (the Company and Hartford Life are each herein referred to individually as a "Borrower" and collectively as the "Borrowers"), the lenders named therein (the "Lenders"), and JPMorgan Chase Bank and Citibank, N.A., as Co-Administrative Agents for the Lenders. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed to them in the Agreement. In connection with this opinion, as Senior Vice President of the Company, I or lawyers in the Company's legal staff working under my supervision, have (i) investigated such questions of law, (ii) examined such corporate documents and records of the Borrowers, certificates of public officials and other documents, and (iii) received such information from officers and representatives of the Borrowers as I have deemed necessary for the purpose of this opinion. I have made no independent investigation as to the information contained in such documents, records and certificates, but I have no reason to believe that such information is other than as reflected therein. In rendering this opinion, I have assumed (i) the authenticity of all documents submitted to me as originals, (ii) the conformity to original documents of all documents submitted to me as copies and (iii) the genuineness of all signatures. 2 Based upon the foregoing and subject to the qualifications set forth herein, I am of the opinion that: 1. Each Borrower (i) is a corporation duly incorporated, validly existing and in good standing under the laws of the State of Delaware, (ii) has all requisite corporate power and authority to own its property and assets and to carry on its business as now conducted, (iii) is qualified to do business in every jurisdiction within the United States where such qualification is required, except where the failure to so qualify would not result in a Material Adverse Effect on such Borrower, and (iv) has all requisite corporate power and authority to execute, deliver and perform its obligations under the Agreement and to borrow funds thereunder. 2. The execution, delivery and performance by each Borrower of the Agreement and the borrowings of each Borrower thereunder (collectively, the "Transactions") (i) have been duly authorized by all requisite corporate action and (ii) will not (a) (1) violate any provision of law, statute, rule or regulation (including without limitation, the Margin Regulations), or of the certificates of incorporation or other constitutive documents or by-laws of the Borrowers, (2) violate any order of any governmental authority, or (3) to my knowledge, violate any provision of any indenture, agreement or other instrument to which a Borrower is a party or by which a Borrower or its property is or may be bound, (b) to my knowledge, be in conflict with, result in a breach of or constitute (along or with notice or lapse of time or both) a default under any such indenture, agreement or other instrument or (c) to my knowledge, except as allowed under the Agreement, result in the creation or imposition of any lien upon any property or assets of the Borrowers. 3. The Agreement has been duly executed and delivered by the Borrowers and constitutes a valid and binding obligation of each Borrower enforceable against each Borrower in accordance with its terms, subject to bankruptcy, reorganization, insolvency, moratorium or other similar laws of general application relating to or affecting creditors' rights generally and general principles of equity (whenever applied by a court of law or equity). 4. No action, consent or approval of, registration or filing with, any other action by, any government authority is or will be required in connection with the Transactions, except such as have been made or obtained and are in full force and effect. 5. Neither Borrower nor any of their subsidiaries is (a) except as set forth in the next sentence, an "investment company" as defined in, or subject to regulation under, the Investment Company Act of 1940 (the "1940 Act") or (b) a "holding company" as defined in, or subject to regulation under, the Public Utility Holding Company Act of 1935. While certain subsidiaries of the Borrowers are "investment companies" as defined in the 1940 Act, the transactions contemplated by this Agreement will not violate or require any approval under such Act or any regulations promulgated pursuant thereto. The opinions expressed above are limited to questions arising under the laws of the State of Connecticut, the General Corporation Law of the State of Delaware and the Federal laws of the United States of America. With your approval, with respect to my opinion in paragraph 3 above, I have assumed that the laws of the State of New York are identical to those of the State of Connecticut. 3 Also with your approval, I have relied as to certain matters on information obtained from public officials, officers of the Borrowers and other sources believed by me to be responsible and I have assumed that the Agreement has been duly authorized, executed and delivered by each of the Lenders and by JPMorgan Chase Bank and Citibank, N.A. in their capacities as Co-Administrative Agents of the Lenders. This opinion is rendered in my capacity as an officer of the Company, and is solely for your benefit and may not be quoted or relied upon by, nor may copies be delivered to, any other person, nor used for any other purpose, without my prior written consent in each instance. Very truly yours, Brian S. Becker EX-12 13 exh12_01.txt THE HARTFORD FINANCIAL SERVICES GROUP
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) 2002 2001 2000 1999 1998 - --------------------------------------------------------------------------------------------------------------------------------- EARNINGS $ 1,068 $ 341 $ 1,418 $ 1,235 $ 1,475 ADD: FIXED CHARGES Interest expense 265 295 250 219 216 Interest factor attributable to rentals 73 72 67 61 54 Interest credited to contractholders 1,288 1,260 1,124 1,197 1,475 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED CHARGES 1,626 1,627 1,441 1,477 1,745 - --------------------------------------------------------------------------------------------------------------------------------- TOTAL FIXED CHARGES EXCLUDING INTEREST CREDITED TO CONTRACTHOLDERS 338 367 317 280 270 - --------------------------------------------------------------------------------------------------------------------------------- EARNINGS, AS DEFINED 2,694 1,968 2,859 2,712 3,220 - --------------------------------------------------------------------------------------------------------------------------------- EARNINGS, AS DEFINED, EXCLUDING INTEREST CREDITED TO CONTRACTHOLDERS $ 1,406 $ 708 $ 1,735 $ 1,515 $ 1,745 - --------------------------------------------------------------------------------------------------------------------------------- RATIOS Earnings, as defined, to total fixed charges [2] 1.7 1.2 2.0 1.8 1.8 - --------------------------------------------------------------------------------------------------------------------------------- Earnings, as defined, excluding interest credited to contractholders, to total fixed charges excluding interest credited to contractholders [3] [4] 4.2 1.9 5.5 5.4 6.5 - --------------------------------------------------------------------------------------------------------------------------------- [1] The Company had no dividends on preferred stock for the years 1998 to 2002. [2] Excluding the impact of September 11 of $678, the 2001 ratio of earnings to fixed charges was 1.6. [3] Excluding the impact of September 11 of $678, the 2001 ratio of earnings to fixed charges excluding interest credited to contractholders was 3.8. [4] This secondary ratio is disclosed for the convenience of fixed income investors and the rating agencies that serve them and is more comparable to the ratios disclosed by all issuers of fixed income securities.
EX-21 14 exh21_01.txt THE HARTFORD FINANCIAL SERVICES GROUP 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 Capstone Risk Management, LLC Delaware Carina Investment Partners, L.P. Delaware CCS Commercial, L.L.C. Delaware CLA Corporation Connecticut Claimplace, Inc. Delaware Ersatz Corporation Delaware Excess Insurance Company Limited U.K. Fedcap Capitalizacao S.A. Brazil Fencourt Reinsurance Company, Ltd. Bermuda First State Insurance Company Connecticut First State Management Group, Inc. Delaware First State Management Group Insurance Services of Massachusetts, L.L.C. Massachusetts First State Management Group Insurance Services of Texas, L.L.C. Texas 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 Advantage Investment, Ltd. Bermuda Hartford Advisers HLS Fund, Inc. Maryland Hartford Bond HLS Fund, Inc. Maryland Hartford Capital Appreciation HLS Fund, Inc. Maryland Hartford Casualty General Agency, Inc. Texas Hartford Casualty Insurance Company Indiana Hartford-Comprehensive Employee Benefit Service Company Connecticut Hartford Dividend and Growth HLS Fund, Inc. Maryland Hartford Equity Sales Company, Inc. Connecticut Hartford Financial Services Life Insurance Company Connecticut Hartford Financial Services, LLC Delaware Hartford Fire General Agency, Inc. Texas Hartford Fire Insurance Company Connecticut Hartford Fire International (Germany) GMBH Germany Hartford Fire International, Ltd. Connecticut Hartford Hedge Fund Company, LLC Delaware Hartford Hedge Fund Management, LLC Delaware Hartford Holdings, Inc. Delaware 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 EXHIBIT 21.01 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, L.L.C. Delaware Hartford Investment Management Company Delaware Hartford Investment Services, Inc. Connecticut Hartford Investments Canada Corp. Canada Hartford Investor Services Company, LLC Connecticut Hartford Life and Accident Insurance Company Connecticut Hartford Life and Annuity Insurance Company Connecticut Hartford Life Insurance Company Connecticut Hartford Life Insurance KK Japan Hartford Life 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 Management Services Limited United Kingdom 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 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 Strategic Investments, LLC Connecticut Hartford Technology Service Company Connecticut Hartford Technology Services Company, L.L.C. Delaware Hartford Underwriters Insurance Company Connecticut HartRe Company, L.L.C. Connecticut Heritage Holdings, Inc. Connecticut Heritage Reinsurance Company, Ltd. Bermuda HL Investment Advisors, L.L.C. 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 New England Management Company, Inc. Massachusetts New England Insurance Company Connecticut New England Reinsurance Corporation Connecticut New Ocean Insurance Co. Ltd. Bermuda Nutmeg Administrator, LLC Delaware EXHIBIT 21.01 Nutmeg Insurance Agency, Inc. Connecticut Nutmeg Insurance Company Connecticut Nutmeg Life Insurance Company Iowa Omni General Agency, Inc. Texas Omni Indemnity Company Illinois Omni Insurance Company Illinois Omni Insurance Group, Inc. Georgia P2P Link LLC Delaware Pacific Insurance Company, Limited Connecticut Personal Lines Insurance Center, Inc. Connecticut Planco Financial Services, Inc. Pennsylvania Planco Incorporated Pennsylvania PPL Holdings LLC Delaware 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, Incorporated New York The Hartford Club of Simsbury, Inc. Connecticut The Hartford Fidelity & Bonding Company Connecticut The Hartford International Financial Services Group, LLC Delaware Thesis, S.A. Argentina Trumbull Associates, L.L.C. Connecticut 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 Insurance Agency MA, Inc. Massachusetts Woodbury Financial Agency TX, Inc. Texas Woodbury Financial Services, Inc. Minnesota EX-23 15 exh23_01.txt THE HARTFORD FINANCIAL SERVICES GROUP EXHIBIT 23.01 INDEPENDENT AUDITORS' CONSENT We consent to the incorporation by reference in the following registration statements of our report dated February 19, 2003 (which report expresses an unqualified opinion and includes an explanatory paragraph relating to the Company's changes in its method of accounting for [a] goodwill and indefinite-lived intangible assets in 2002 [b] accounting for derivative instruments and hedging activities in 2001 and [c] the recognition of interest income and impairment on purchased retained beneficial interests in securitized financial assets in 2001), appearing in this Annual Report on Form 10-K of The Hartford Financial Services Group, Inc. for the year ended December 31, 2002. Form S-3 Registration Nos. Form S-8 Registration Nos. ----------------------------- ----------------------------- 333-12617 33-80663 333-49666 33-80665 333-88762 333-12563 333-49170 333-34092 Deloitte & Touche LLP Hartford, Connecticut February 28, 2003 -----END PRIVACY-ENHANCED MESSAGE-----