================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 2001 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 0-19277 THE HARTFORD FINANCIAL SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3317783 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900 (Address of principal executive offices) (860) 547-5000 (Registrant's telephone number, including area code) 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[ ] As of April 30, 2001, there were outstanding 237,018,295 shares of Common Stock, $0.01 par value per share, of the registrant. ================================================================================
INDEX PART I. FINANCIAL INFORMATION - ------------------------------ ITEM 1. FINANCIAL STATEMENTS PAGE Consolidated Statements of Income - First Quarter Ended March 31, 2001 and 2000 3 Consolidated Balance Sheets - March 31, 2001 and December 31, 2000 4 Consolidated Statements of Changes in Stockholders' Equity - First Quarter Ended March 31, 2001 and 2000 5 Consolidated Statements of Cash Flows - First Quarter Ended March 31, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 16 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 28 PART II. OTHER INFORMATION - --------------------------- ITEM 1. LEGAL PROCEEDINGS 29 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 29 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 29 Signature 30 - 2 -
<TABLE> <CAPTION> PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME First Quarter Ended March 31, -------------------------- (In millions, except for per share data) 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> REVENUES Earned premiums $ 2,310 $ 2,133 Fee income 602 593 Net investment income 691 654 Other revenue 118 102 Net realized capital gains 1 17 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 3,722 3,499 ------------------------------------------------------------------------------------------------------------------------ BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 2,211 1,990 Amortization of deferred policy acquisition costs and present value of future profits 518 544 Insurance operating costs and expense 478 472 Other expenses 194 149 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 3,401 3,155 ------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 321 344 Income tax expense 58 78 Minority interest, net of tax -- (28) - ------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 263 238 Cumulative effect of accounting change, net of tax (23) -- - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 240 $ 238 ------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Income before cumulative effect of accounting change $ 1.14 $ 1.10 Cumulative effect of accounting change, net of tax (0.10) -- - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1.04 $ 1.10 DILUTED EARNINGS PER SHARE Income before cumulative effect of accounting change $ 1.12 $ 1.10 Cumulative effect of accounting change, net of tax (0.10) -- - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1.02 $ 1.10 - ------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 231.5 215.8 Weighted average common shares outstanding and dilutive potential common shares 235.5 217.3 - ------------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share $ 0.25 $ 0.24 =============================================================================================================================== </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 3 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED BALANCE SHEETS March 31, December 31, (In millions, except for share data) 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> ASSETS Investments ----------- Fixed maturities, available for sale, at fair value (amortized cost of $35,254 and $33,856) $ 36,243 $ 34,492 Equity securities, available for sale, at fair value (cost of $1,242 and $921) 1,238 1,056 Policy loans, at outstanding balance 3,658 3,610 Other investments 1,696 1,511 - -------------------------------------------------------------------------------------------------------------------------------- Total investments 42,835 40,669 Cash 277 227 Premiums receivable and agents' balances 2,342 2,295 Reinsurance recoverables 4,361 4,579 Deferred policy acquisition costs and present value of future profits 5,461 5,305 Deferred income tax 502 682 Other assets 3,799 3,721 Separate account assets 105,929 114,054 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 165,506 $ 171,532 ------------------------------------------------------------------------------------------------------------------------ LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 15,562 $ 15,874 Life 7,382 7,105 Other policyholder funds and benefits payable 16,324 15,848 Unearned premiums 3,256 3,093 Short-term debt 234 235 Long-term debt 2,263 1,862 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,444 1,243 Other liabilities 4,666 4,754 Separate account liabilities 105,929 114,054 - -------------------------------------------------------------------------------------------------------------------------------- 157,060 164,068 COMMITMENTS AND CONTINGENCIES, NOTE 9 STOCKHOLDERS' EQUITY Common stock - authorized 400,000,000, issued 239,678,674 and 238,645,675 shares, par value $0.01 2 2 Additional paid-in capital 1,884 1,686 Retained earnings 6,068 5,887 Treasury stock, at cost - 2,816,340 and 12,355,414 shares (30) (480) Accumulated other comprehensive income 522 369 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 8,446 7,464 ------------------------------------------------------------------------------------------------------------------------ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 165,506 $ 171,532 ------------------------------------------------------------------------------------------------------------------------ </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 4 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FIRST QUARTER ENDED MARCH 31, 2001 Accumulated Other Comprehensive Income -------------------------------------------------- Net Gain Common on Cash Minimum Stock/ Unrealized Flow Pension Outstanding Additional Treasury Gain on Hedging Cumulative Liability Shares Paid-in Retained Stock, Securities, Instruments, Translation Adjustment, (In (In millions) (Unaudited) Capital Earnings at Cost net of tax net of tax Adjustments net of tax Total thousands) - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> <C> <C> BALANCE, BEGINNING OF PERIOD $1,688 $5,887 $(480) $497 $-- $(113) $(15) $7,464 226,290 Comprehensive income Net income 240 240 Other comprehensive income, net of tax [1] Cumulative effect of accounting change [2] (1) 24 23 Unrealized gain on securities [3] 124 124 Cumulative translation adjustments (14) (14) Net gain on cash flow hedging instruments [4] 20 20 --------- Total other comprehensive income 153 --------- Total comprehensive income 393 --------- Issuance of shares under incentive and stock purchase plans 27 4 31 572 Issuance of common stock in underwritten offering 169 446 615 10,000 Tax benefit on employee stock options and awards 2 2 Dividends declared on common stock (59) (59) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, END OF PERIOD $1,886 $6,068 $(30) $620 $44 $(127) $(15) $8,446 236,862 - ----------------------------------------------------------------------------------------------------------------------------------- FIRST QUARTER ENDED MARCH 31, 2000 Accumulated Other Comprehensive Income (Loss) -------------------------------------- Common Unrealized Minimum Stock/ Gain Pension Outstanding Additional Treasury (Loss) on Cumulative Liability Shares Paid-in Retained Stock, Securities, Translation Adjustment, (In (In millions) (Unaudited) Capital Earnings at Cost net of tax Adjustments net of tax Total thousands) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, BEGINNING OF PERIOD $1,553 $5,127 $(942) $(198) $(63) $(11) $5,466 217,226 Comprehensive income Net income 238 238 Other comprehensive income, net of tax [1] Unrealized gain on securities [3] 93 93 Cumulative translation adjustments 7 7 ---------- Total other comprehensive income 100 ---------- Total comprehensive income 338 ---------- Issuance of shares under incentive and stock purchase plans 4 18 22 362 Tax benefit on employee stock options and awards 1 1 Treasury stock acquired (100) (100) (2,833) Dividends declared on common stock (52) (52) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, END OF PERIOD $1,558 $5,313 $(1,024) $(105) $(56) $(11) $5,675 214,755 - ----------------------------------------------------------------------------------------------------------------------------------- <FN> [1] Unrealized gain on securities is net of tax of $67 and $50 for the first quarter ended March 31, 2001 and 2000, respectively. Cumulative effect of accounting change is net of tax of $12 for the first quarter ended March 31, 2001. Net gain on cash flow hedging instruments is net of tax of $11 for the first quarter ended March 31, 2001. There is no tax effect on cumulative translation adjustments. [2] Unrealized gain on securities, net of tax, includes cumulative effect of accounting change of $(23) to net income and $24 to net gain on cash flow hedging instruments. [3] Net of reclassification adjustment for gains realized in net income of $26 and $12 for the first quarter ended March 31, 2001 and 2000, respectively. [4] Net of amortization adjustment of $2 to net investment income. </FN> </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 5 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS First Quarter Ended March 31, ---------------------------------- (In millions) 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> OPERATING ACTIVITIES Net income $ 240 $ 238 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Change in receivables, payables and accruals (113) (92) Change in reinsurance recoverables and other related assets 215 (35) Amortization of deferred policy acquisition costs and present value of future profits 518 544 Additions to deferred policy acquisition costs and present value of future profits (687) (652) Change in accrued and deferred income taxes (39) 135 Increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 310 116 Minority interest in consolidated subsidiary -- 28 Net realized capital gains (1) (17) Depreciation and amortization 15 20 Cumulative effect of accounting change, net of tax 23 -- Other, net (175) 51 - -------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 306 336 ================================================================================================================================ INVESTING ACTIVITIES Purchase of investments (5,439) (3,643) Sale of investments 2,893 4,232 Maturity of investments 653 408 Sale of affiliates 25 -- Additions to property, plant and equipment (31) (52) - -------------------------------------------------------------------------------------------------------------------------------- NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (1,899) 945 - -------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Issuance of long-term debt 400 -- Net proceeds from issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 200 -- Issuance of common stock in underwritten offering 615 -- Net proceeds from (disbursements for) investment and universal life-type contracts charged against policyholder accounts 469 (1,107) Dividends paid (57) (53) Acquisition of treasury stock -- (100) Proceeds from issuance of shares under incentive and stock purchase plans 16 16 - -------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 1,643 (1,244) - -------------------------------------------------------------------------------------------------------------------------------- Foreign exchange rate effect on cash -- (3) - -------------------------------------------------------------------------------------------------------------------------------- Net increase in cash 50 34 Cash - beginning of period 227 182 - -------------------------------------------------------------------------------------------------------------------------------- CASH - END OF PERIOD $ 277 $ 216 ================================================================================================================================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: ------------------------------------------------ NET CASH PAID (RECEIVED) DURING THE PERIOD FOR: Income taxes $ -- $ (79) Interest $ 26 $ 38 </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 6 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in millions except per share data unless otherwise stated) (unaudited) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of The Hartford Financial Services Group, Inc. and its consolidated subsidiaries ("The Hartford" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim periods. Less than majority-owned entities in which The Hartford has at least a 20% interest are reported on an equity basis. In the opinion of management, these statements include all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented. (For a description of accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in The Hartford's 2000 Form 10-K Annual Report.) 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 unaudited consolidated financial statements reflect the minority interest in HLI of approximately 19% prior to the acquisition date. (For a further discussion on The HLI Repurchase, see Note 2 of Notes to Consolidated Financial Statements included in The Hartford's 2000 Form 10-K Annual Report.) Certain reclassifications have been made to prior year financial information to conform to the current year classification of transactions and accounts. (B) ADOPTION OF STATEMENT OF FINANCIAL ACCOUNTING STANDARD ("SFAS") NO. 133, "ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES" The Company adopted SFAS No. 133, as amended by SFAS Nos. 137 and 138, on January 1, 2001. The standard requires, among other things, that all derivatives be carried on the balance sheet at fair value. The standard also specifies hedge accounting criteria under which a derivative can qualify for special accounting. In order to receive special accounting, the derivative instrument must qualify as a hedge of either the fair value or the variability of the cash flow of a qualified asset or liability, or forecasted transaction. Special accounting for qualifying hedges provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of the corresponding changes in value of the hedged item. The Company's policy prior to adopting SFAS No. 133 was to carry its derivative instruments on the balance sheet in a manner similar to the hedged item(s). Upon adoption of SFAS No. 133, the Company recorded a $23 charge in net income as a net-of-tax cumulative effect of accounting change. The transition adjustment was primarily comprised of gains and losses on derivatives that had been previously deferred and not adjusted to the carrying amount of the hedged item. Also included in the transition adjustment were gains and losses related to recognizing at fair value all derivatives that are designated as fair-value hedging instruments offset by the difference between the book values and fair values of related hedged items attributable to the hedged risks. The entire transition amount was previously recorded in Accumulated Other Comprehensive Income ("OCI") - Unrealized Gain/Loss on Securities in accordance with SFAS No. 115. Gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of hedged items were not affected by the implementation of SFAS No. 133. The Company also reclassified $24, net-of-tax, to Accumulated OCI - Gain on Cash Flow Hedging Instruments from Accumulated OCI - Unrealized Gain/Loss on Securities. This reclassification reflects the January 1, 2001 net unrealized gain for all derivatives that are designated as cash-flow hedging instruments. As of March 31, 2001, the Company reported $117 of derivative assets in other invested assets and $85 of derivative liabilities in other liabilities. For a further discussion of the Company's accounting policies for derivative instruments, see Note 2, Derivatives and Hedging Activities. NOTE 2. DERIVATIVES AND HEDGING ACTIVITIES Overview - -------- The Company utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options, in order to achieve one of three Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transaction costs. The Company is considered an "end-user" of derivative instruments and as such does not make a market or trade in these instruments for the express purpose of earning trading profits. Derivative Instruments - ---------------------- 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 is exchanged at the inception of the contract and no principal payments are exchanged. 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. - 7 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED) 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. Hedging Strategies - ------------------ The economic objectives and strategies for which the Company utilizes derivatives have not changed as a result of SFAS No. 133 and are categorized as follows: Anticipatory Hedging -- For certain liabilities, the Company commits to the price of the product prior to receipt of the associated premium or deposit. Anticipatory hedges are executed to offset the impact of changes in asset prices arising from interest rate changes pending the receipt of premium or deposit and the subsequent purchase of an asset. These hedges involve taking a long position (purchase) in interest rate futures or entering into an interest rate swap with duration characteristics equivalent to the associated liabilities or anticipated investments. 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 are used to hedge against the risk of contract holder disintermediation in a rising interest rate environment. 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. 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. 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 cash flows of the hedging instrument are within a ratio of 80-120% of the inverse changes in the fair value or cash flows of the hedged item. High effectiveness is calculated using a cumulative approach (i.e., rolling 12-month average). If it is determined that a derivative is no longer highly effective as a hedge, the Company discontinues hedge accounting prospectively, as discussed below under discontinuance of hedge accounting. Credit Risk - ----------- By using derivative instruments, the Company is exposed to credit risk. If the counterparty fails to perform, credit risk is equal to the fair-value gain in a derivative. 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. The Company minimizes the credit risk in derivative instruments by entering into transactions with high quality counterparties that are reviewed periodically by the Company's internal compliance unit, reviewed frequently by senior management and reported to the Company's Finance Committee. The Company also maintains a policy of requiring that all derivative contracts be governed by an International Swaps and Derivatives Association Master Agreement which is structured by legal entity and by counterparty and permits right of offset. Accounting and Financial Statement Presentation of Derivative Instruments and - -------------------------------------------------------------------------------- Hedging Activities - ------------------ General 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 - 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED) Company designates the derivative as (1) a hedge of the fair value of a recognized asset or liability ("fair-value" hedge), (2) a hedge of a forecasted transaction or of the variability of cash flows to be received or paid related to a recognized asset or liability ("cash-flow" hedge), (3) a foreign-currency, fair-value or cash-flow hedge ("foreign-currency" hedge), (4) a hedge of a net investment in a foreign operation, or (5) "held for other risk management activities", which primarily involve managing asset or liability related risks which do not qualify for hedge accounting under SFAS No. 133. Changes in the fair value of a derivative that is designated and qualifies as a fair-value hedge, along with the loss or gain on the hedged asset or liability that is attributable to the hedged risk, are recorded in current period earnings as realized capital gains or losses. Changes in the fair value of a derivative that is designated and qualifies as a cash-flow hedge are recorded in OCI and are reclassified into earnings when earnings are impacted by the variability of the cash flow of the hedged item. Changes in the fair value of derivatives that are designated and qualify as foreign-currency hedges, are recorded in either current period earnings or OCI, depending on whether the hedge transaction is a fair-value hedge or a cash-flow hedge. If, however, a derivative is used as a hedge of a net investment in a foreign operation, its changes in fair value, to the extent effective as a hedge, are recorded in the cumulative translation adjustments account within stockholders' equity. Changes in the fair value of derivative instruments held for other risk management purposes are reported in current period earnings as realized capital gains or losses. Embedded Derivatives The Company occasionally purchases or issues financial instruments that contain a derivative instrument that is "embedded" in the financial instrument. When it is determined that (1) the embedded derivative possesses economic characteristics that are not clearly and closely related to the economic characteristics of the host contract, and (2) a separate instrument with the same terms would qualify as a derivative instrument, the embedded derivative is separated from the host contract, carried at fair value, and designated as a fair-value, cash-flow, or foreign-currency hedge, or as held for other risk management purposes. However, in cases where (1) the host contract is measured at fair value, with changes in fair value reported in current earnings or (2) the Company is unable to reliably identify and measure an embedded derivative for separation from its host contract, the entire contract is carried on the balance sheet at fair value and is not designated as a hedging instrument. 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 expires or is sold, terminated, or exercised; or (3) the derivative is dedesignated as a hedge instrument, because it is unlikely that a forecasted transaction will occur. 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 but reflected in OCI. When hedge accounting is discontinued because the Company becomes aware that it is probable that a forecasted transaction will not occur, the derivative continues to be carried on the balance sheet at its fair value, and gains and losses that were accumulated in OCI are recognized immediately in earnings. In all other situations in which hedge accounting is discontinued on a cash-flow hedge, including those where the derivative is sold, terminated or exercised, amounts previously deferred in OCI are amortized into earnings when earnings are impacted by the variability of the cash flow of the hedged item. If the derivative continues to be held, it is carried on the balance sheet, with changes in its fair value recognized in current period earnings. SFAS No. 133 Categorization of the Company's Hedging Activities - --------------------------------------------------------------- Cash-Flow Hedges General For the period ended March 31, 2001, the Company's gross gains and losses representing the total ineffectiveness of all cash-flow hedges essentially offset, with the net impact reported as realized capital gains/losses. All components of each derivative's gain or loss are included in the assessment of hedge effectiveness. Gains and losses on derivative contracts that are reclassified from OCI to current period earnings are included in the line item in the statement of income in which the hedged item is recorded. As of March 31, 2001, approximately $2 of after-tax deferred net gains on derivative instruments accumulated in OCI are expected to be reclassified to earnings during the next twelve months. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains/losses as an adjustment to interest income over the term of the investment cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows (for all forecasted transactions, excluding interest payments on variable-rate debt) is six months. As of March 31, 2001, the Company held approximately $1.9 billion in derivative notional value related to strategies categorized as cash-flow hedges. The following is a discussion of the Company's significant strategies that use cash-flow hedging. There were no reclassifications from OCI to earnings resulting from the discontinuance of cash-flow hedges during the quarter ended March 31, 2001. Specific Strategies The Company's primary use of cash-flow hedging is to use interest-rate swaps as an "asset hedging" strategy, in order to convert interest receipts on floating-rate fixed maturity investments to fixed rates. When multiple assets are designated in a hedging relationship under SFAS No. 133, a homogeneity test is performed to ensure that the assets react similarly to changes in market conditions. To satisfy this requirement, at inception of the - 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED) hedge, fixed maturity investments with identical variable rates are grouped together (for example: 1-month LIBOR or 3-month LIBOR, not both). The Company enters into "receive fixed/pay variable" interest rate swaps to hedge the variability in the first LIBOR-based interest payments received on each pool of eligible variable rate fixed maturity investments. Effectiveness is measured by comparing the present value of the variable rate pay side of the swaps to the present value of the first anticipated variable rate interest receipts on the hedged fixed maturity investments. At March 31, 2001, the Company held approximately $1.8 billion in derivative notional value related to this strategy. The Company also uses cash-flow hedges, in its anticipated purchase of fixed maturity investments as described under "anticipatory hedging" strategies above. Fair-Value Hedges General For the quarter ended March 31, 2001, the Company's gross gains and losses representing the total ineffectiveness of all fair-value hedges essentially offset, with the net impact reported as realized capital gains/losses. All components of each derivative's gain or loss are included in the assessment of hedge effectiveness. As of March 31, 2001, the Company held approximately $380 in derivative notional value related to strategies categorized as fair-value hedges. The following is a discussion of the Company's significant strategies that use fair-value hedging. Specific Strategies The Company purchases interest rate caps and sells interest rate floor contracts in an "asset hedging" strategy utilized to offset corresponding interest rate caps and floors that exist in certain of its variable-rate fixed maturity investments. The standalone interest rate cap and floor contracts are structured to exactly offset those embedded in the hedged investment. The calculation of ineffectiveness involves a comparison of the present value of the cumulative change in the expected future cash flows on the interest rate cap/floor and the present value of the cumulative change in the expected future interest cash flows that are hedged on the fixed maturity investment. If hedge ineffectiveness exists, it is recorded as realized capital gain or loss. All hedges involving variable rate bonds with embedded interest rate caps and floors are perfectly matched with respect to notional values, payment dates, maturity, index, and the hedge relationship does not contain any other basis differences. No component of the hedging instruments fair value is excluded from the determination of effectiveness. At March 31, 2001, the Company held approximately $160 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 .85 to 1.00. The calculation of ineffectiveness involves a comparison of the cumulative change in fair value of the embedded call option with the cumulative change in fair value of the swaption. Ineffectiveness is reported as realized capital gains and losses. No component of the hedging instruments' fair value is excluded from the determination of effectiveness. At March 31, 2001, the Company held approximately $150 in derivative notional value related to this strategy. Other Risk Management Activities General In general, the Company's other risk management activities relate to strategies used to meet the following Company-approved objectives; to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transaction costs. For the period ended March 31, 2001, the Company recognized an after-tax net gain of $5 (reported as realized capital gains 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 March 31, 2001, the Company held approximately $3.7 billion in derivative notional value related to strategies categorized as Other Risk Management Activities. Risk Management 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 caps 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 - 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. DERIVATIVES AND HEDGING ACTIVITIES (CONTINUED) underlying bond portfolio may be at a loss. The increase in yield in a rising interest rate environment due to the interest rate caps 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 March 31, 2001, the Company held approximately $500 in derivative notional value related to this strategy. Other 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 dedesignates the original contract and records the changes in value of both the original contract and the new offsetting contract through realized capital gains and losses. At March 31, 2001, the Company held approximately $1.7 billion in derivative notional value related to this strategy. The Company will issue an option in an "asset hedging" strategy utilized to monetize the option embedded in certain of its fixed maturity investments. The Company will receive a premium for issuing the freestanding option. The structure is designed such that the fixed maturity investment and freestanding option have identical expected lives, typically 3-5 years. At March 31, 2001, the Company held approximately $930 in derivative notional value related to this strategy. NOTE 3. FORTIS ACQUISITION 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") 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 Advisers, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis. The acquisition was recorded as a purchase transaction. The Company financed the acquisition from the proceeds of the (1) February 16, 2001, issuance of 10 million shares of common stock pursuant to an underwritten offering under its current shelf registration for $615, net, (2) March 1, 2001, issuance of $400 of senior debt securities under HLI's shelf registration and (3) March 6, 2001, issuance of $200 of trust preferred securities under HLI's shelf registration. NOTE 4. SALE OF HARTFORD SEGUROS On February 8, 2001, The Hartford completed the sale of its Spain-based subsidiary, Hartford Seguros, to Liberty International, a subsidiary of Liberty Mutual Group. The Hartford received $29 before costs of sale and recorded an after-tax net realized capital loss of $16. NOTE 5. DEBT (A) SHELF REGISTRATION STATEMENT On November 9, 2000, The Hartford filed with the Securities and Exchange Commission a shelf registration statement for the potential offering and sale of up to $2.6 billion in debt and equity securities. The registration statement was declared effective on February 12, 2001. As of March 31, 2001, The Hartford had $2.0 billion remaining on the shelf. (For a further discussion, see Note 6 of Notes to Consolidated Financial Statements included in The Hartford's 2000 Form 10-K Annual Report.) (B) LONG-TERM DEBT On March 1, 2001, HLI issued and sold $400 of senior debt securities from its existing shelf registration. The long-term debt was issued in the form of 7.375% thirty-year senior notes due March 1, 2031. Interest on the notes is payable semi-annually on March 1 and September 1, commencing on September 1, 2001. As previously discussed in Note 3, HLI used the net proceeds from the issuance of the notes to partially fund the Fortis acquisition. As of March 31, 2001, HLI had $150 remaining on its shelf. NOTE 6. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES On March 6, 2001, Hartford Life Capital II, a Delaware statutory business trust formed by HLI, issued 8,000,000, 7.625% Trust Preferred Securities, Series B. The proceeds from the sale of the Series B Preferred Securities were used to acquire $200 of 7.625% Series B Junior Subordinated Debentures issued by HLI. As previously discussed in Note 3, HLI used the proceeds from the offering to partially fund the Fortis acquisition. The Series B Preferred Securities represent undivided beneficial interests in Hartford Life Capital II's assets, which consist solely of the Series B Junior Subordinated Debentures. HLI owns all of the common securities of Hartford Life Capital II. Holders of Series B Preferred Securities are entitled to receive cumulative cash distributions accruing from March 6, 2001, the date of issuance, and payable quarterly in arrears commencing April 15, 2001 at the annual rate of 7.625% of the stated liquidation amount of $25.00 per Series B Preferred Security. The Series B Preferred Securities are subject to mandatory redemption upon repayment of the Series B Junior Subordinated Debentures at maturity or upon earlier redemption. HLI has the right to redeem the Series B Junior Subordinated Debentures on or after March 6, 2006 or earlier upon the occurrence of certain events. Holders of Series B Preferred Securities generally have no voting rights. The Series B Junior Subordinated Debentures bear interest at the annual rate of 7.625% of the principal amount, payable quarterly in arrears commencing April 15, 2001, and mature on February 15, 2050. The Series B Junior Subordinated Debentures are unsecured and rank junior and subordinate in right of payment to all present and future senior debt of HLI and are effectively subordinated to all existing and future obligations of HLI subsidiaries. - 11 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (CONTINUED) HLI has the right at any time, and from time to time, to defer payments of interest on the Series B Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters up to the debentures' maturity date. During any such period, interest will continue to accrue and HLI may not declare or pay any cash dividends or distributions on, or purchase, HLI's capital stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank equally with or junior to the Series B Junior Subordinated Debentures. HLI will have the right at any time to dissolve the Trust and cause the Series B Junior Subordinated Debentures to be distributed to the holders of the Series B Preferred Securities. HLI has guaranteed, on a subordinated basis, all of the Hartford Life Capital II obligations under the Series B Preferred Securities including payment of the redemption price and any accumulated and unpaid distributions upon dissolution, winding up or liquidation to the extent Hartford Life Capital II has funds available to make these payments. NOTE 7. STOCKHOLDERS' EQUITY 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. As previously discussed in Note 3, the proceeds were used to partially fund the Fortis acquisition. NOTE 8. EARNINGS PER SHARE The following tables present a reconciliation of income and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share. <TABLE> <CAPTION> MARCH 31, 2001 Income Shares Per Share Amount - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> BASIC EARNINGS PER SHARE Income available to common shareholders $ 240 231.5 $ 1.04 ---------------------- DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 4.0 ----------------------------- Income available to common shareholders plus assumed conversions $ 240 235.5 $ 1.02 - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2000 Income Shares Per Share Amount - ------------------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Income available to common shareholders $ 238 215.8 $ 1.10 ---------------------- DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 1.5 ----------------------------- Income available to common shareholders plus assumed conversions $ 238 217.3 $ 1.10 ==================================================================================================================================== </TABLE> Basic earnings per share is computed based on the weighted average number of shares outstanding during the period. Diluted earnings per share includes the dilutive effect of outstanding options, using the treasury stock method, and contingently issuable shares. Under the treasury stock method, exercise of options is assumed with the proceeds from exercise 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. NOTE 9. COMMITMENTS AND CONTINGENCIES (A) LITIGATION The Hartford is or may become involved in various legal actions, some of which involve claims for substantial amounts. In the opinion of management, the ultimate liability with respect to such actual and potential lawsuits, after consideration of provisions made for potential losses and costs of defense, is not expected to be material to the consolidated financial condition, results of operations or cash flows of The Hartford. (B) ENVIRONMENTAL AND ASBESTOS CLAIMS Information regarding environmental and asbestos claims may be found in the Environmental and Asbestos Claims section of Management's Discussion and Analysis of Financial Condition and Results of Operations. (C) TAX MATTERS The Hartford's federal income tax returns are routinely audited by the Internal Revenue Service ("IRS"). During 2000, the Company recorded a $24 tax benefit as a result of a settlement with the IRS with respect to certain tax matters for the 1993-1995 tax years. As of March 31, 2001, the same matter is under review with the IRS as part of their audit of the Company's 1996-1997 tax returns. 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. - 12 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. SEGMENT INFORMATION The Hartford is organized into two major operations: Life and Property & Casualty. Within these operations, The Hartford conducts business principally in ten operating segments. Additionally, all activities related to The HLI Repurchase, the minority interest in HLI for pre-acquisition periods and The Hartford Bank, FSB 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 coverage to employers and employer sponsored plans, accidental death and dismemberment, travel accident and other special risk coverages to employers and associations. COLI primarily offers variable products used by employers to fund non-qualified benefits or other postemployment benefit obligations as well as leveraged COLI. Life also includes in an Other category its international operations as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. The Hartford's Property & Casualty operation was reorganized into six reportable operating segments and, effective January 1, 2001, is being reported as the North American underwriting segments of Business Insurance, Affinity Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance; and the International and Other Operations segment. Business Insurance provides standard commercial business for small accounts (Select Customer) and mid-sized insureds (Key Accounts). This segment also provides commercial risk management products and services to small and mid-sized members of affinity groups in addition to marine coverage. Affinity Personal Lines provides customized products and services to the membership of AARP through a direct marketing operation; and to customers of Sears and Ford as well as customers of financial institutions through an affinity center. Personal Insurance provides automobile, homeowners, home-based business and fire coverages to individuals who prefer local agent involvement through a network of independent agents in the standard personal lines market and through Omni in the non-standard automobile market. Specialty Commercial provides bond and financial products coverages as well as insurance through retailers and wholesalers to large commercial clients and insureds requiring a variety of specialized coverages. The Reinsurance segment assumes reinsurance worldwide and primarily writes treaty reinsurance through professional reinsurance brokers covering various property, casualty, specialty and marine classes of business. International consists primarily of The Hartford Insurance Company (Singapore), Ltd. which offers a variety of insurance products (primarily property and casualty products) designed to meet the needs of local customers. Other Operations consists of operations which have ceased writing new business. 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. "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, which includes the combined underwriting results of the North American underwriting segments along with income and expense items not directly allocable to these segments, such as net investment income. Property & Casualty includes operating income for North American and the International and Other Operations segment. Certain transactions between segments occur during the year that primarily relate to tax settlements, insurance coverage, expense reimbursements, services provided and capital contributions. Certain reinsurance stop loss agreements exist between the segments which specify that one segment will reimburse another for losses incurred in excess of a predetermined limit. Also, one segment may purchase group annuity contracts from another to fund pension costs and claim annuities to settle casualty claims. In addition, certain intersegment transactions occur in Life. These transactions include interest income on allocated surplus and the allocation of net realized capital gains and losses through net invested income utilizing the duration of the segment's investment portfolios. The following tables present revenues and operating income. Underwriting results are presented for the Business Insurance, Affinity Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance segments, while operating income is presented for all other segments, along with Life and Property & Casualty, including North American. - 13 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. SEGMENT INFORMATION (CONTINUED) <TABLE> <CAPTION> REVENUES FIRST QUARTER ENDED MARCH 31, ----------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Life Investment Products $ 604 $ 585 Individual Life 163 157 Group Benefits 613 520 COLI 184 165 Other 26 19 - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 1,590 1,446 - ------------------------------------------------------------------------------------------------------------------------------------ Property & Casualty North American Earned premiums and other revenue Business Insurance 620 555 Affinity Personal Lines 455 418 Personal Insurance 249 233 Specialty Commercial 285 274 Reinsurance 249 183 - ------------------------------------------------------------------------------------------------------------------------------------ Total North American earned premiums and other revenue 1,858 1,663 Net investment income 218 221 Net realized capital gains (losses) (2) 7 - ------------------------------------------------------------------------------------------------------------------------------------ Total North American 2,074 1,891 International and Other Operations 54 162 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 2,128 2,053 - ------------------------------------------------------------------------------------------------------------------------------------ Corporate 4 -- - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 3,722 $ 3,499 ==================================================================================================================================== </TABLE> - 14 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. SEGMENT INFORMATION (CONTINUED) <TABLE> <CAPTION> OPERATING INCOME FIRST QUARTER ENDED MARCH 31, ----------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Life Investment Products $ 111 $ 102 Individual Life 20 18 Group Benefits 23 19 COLI 9 8 Other (2) 3 - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 161 150 - ------------------------------------------------------------------------------------------------------------------------------------ Property & Casualty North American Underwriting results Business Insurance (23) (40) Affinity Personal Lines 15 14 Personal Insurance 1 (10) Specialty Commercial (14) (21) Reinsurance (25) (13) - ------------------------------------------------------------------------------------------------------------------------------------ Total North American underwriting results (46) (70) Net servicing and other income [1] 5 2 Net investment income 218 221 Other expenses (62) (49) Income tax expense (8) (4) - ------------------------------------------------------------------------------------------------------------------------------------ Total North American 107 100 International and Other Operations 1 4 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 108 104 - ------------------------------------------------------------------------------------------------------------------------------------ Corporate (16) (28) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING INCOME 253 226 Cumulative effect of accounting change, net of tax (23) -- Net realized capital gains, after-tax 10 12 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 240 $ 238 ==================================================================================================================================== <FN> [1] Net of expenses related to service business. </FN> </TABLE> - 15 -
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in millions except 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 consolidated subsidiaries (collectively, "The Hartford" or the "Company") as of March 31, 2001, compared with December 31, 2000, and its results of operations for the first quarter ended March 31, 2001, compared with the equivalent 2000 period. This discussion should be read in conjunction with the MD&A included in The Hartford's 2000 Form 10-K Annual Report. Certain of the statements contained herein (other than statements of historical fact) are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty which are, in many instances, beyond the Company's control and have been made based upon management's expectations and beliefs concerning future developments and their potential effect upon The Hartford. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on The Hartford will be those anticipated by management. Actual results could differ materially from those expected by The Hartford, depending on the outcome of certain factors, including the possibility of general economic and business conditions that are less favorable than anticipated, legislative developments, changes in interest rates or the stock markets, stronger than anticipated competitive activity, more frequent or severe natural catastrophes than anticipated and those factors described in such forward-looking statements. Certain reclassifications have been made to prior year financial information to conform to the current year presentation. - -------------------------------------------------------------------------------- INDEX - -------------------------------------------------------------------------------- Consolidated Results of Operations: Operating Summary 16 Life 18 Investment Products 19 Individual Life 19 Group Benefits 20 Corporate Owned Life Insurance (COLI) 20 Property & Casualty 20 Business Insurance 21 Affinity Personal Lines 21 Personal Insurance 21 Specialty Commercial 22 Reinsurance 22 International and Other Operations 22 Environmental and Asbestos Claims 23 Investments 24 Capital Markets Risk Management 26 Capital Resources and Liquidity 27 Regulatory Matters and Contingencies 28 Accounting Standards 28 - -------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, --------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> TOTAL REVENUES $ 3,722 $ 3,499 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 240 $ 238 Less: Cumulative effect of accounting change, net of tax [1] (23) -- Net realized capital gains, after-tax 10 12 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 253 $ 226 - ------------------------------------------------------------------------------------------------------------------------------------ <FN> [1] Represents the cumulative impact of the Company's adoption of Statement of Financial Accounting Standard ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138. </FN> </TABLE> "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. 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. Revenues for the first quarter ended March 31, 2001 increased $223, or 6%, over the comparable prior year period, primarily as a result of strong sales and new business development in Group Benefits along with earned premium growth in all of the North American Property & Casualty underwriting segments. These revenue increases were partially offset by a revenue decrease as a result of the sale of International's Zwolsche Algemeene, N.V. ("Zwolsche") subsidiary in December 2000. Operating income increased $27, or 12%, for the first quarter ended March 31, 2001, from the comparable prior year period. - 16 -
The increase was due to earnings growth across all Life segments, including Investment Products, despite the recent declines in the equity markets, and improved pricing, loss cost trends and a lower level of catastrophe losses in Property & Casualty. The effective tax rate for the first quarter ended March 31, 2001 was 18% compared with 23% for the comparable period in 2000. The decrease in the effective tax rate related primarily to the tax benefit on the loss on sale of Hartford Seguros. Tax-exempt interest earned on invested assets was the principal cause of the effective tax rates being lower than the 35% U.S. statutory rate. SEGMENT RESULTS The Hartford is organized into two major operations: Life and Property & Casualty. Within these operations, The Hartford conducts business principally in ten operating segments. Additionally, all activities related to The HLI Repurchase, the minority interest in HLI for pre-acquisition periods and The Hartford Bank, FSB 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 as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. The Hartford's Property & Casualty operation was reorganized into six reportable operating segments and, effective January 1, 2001, is being reported as the North American underwriting segments of Business Insurance, Affinity Personal Lines, Personal Insurance, Specialty Commercial and Reinsurance; and the International and Other Operations segment. The measure of profit or loss used by The Hartford's management in evaluating performance is operating income, except for its North American underwriting segments, which are evaluated by The Hartford's management primarily based upon underwriting results. While not considered segments, the Company also reports and evaluates operating income results for Life, Property & Casualty, and North American, which includes the combined underwriting results of the North American underwriting segments along with income and expense items not directly allocable to these segments, such as net investment income. Property & Casualty includes operating income for North American and the International and Other Operations segment. (For discussion of the Company's intersegment transactions, see Note 10 of Notes to Consolidated Financial Statements.) The following is a summary of North American underwriting results by segment within Property & Casualty. Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses. <TABLE> <CAPTION> UNDERWRITING RESULTS FIRST QUARTER ENDED MARCH 31, --------------------------- North American 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Business Insurance $ (23) $ (40) Affinity Personal Lines 15 14 Personal Insurance 1 (10) Specialty Commercial (14) (21) Reinsurance (25) (13) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (46) $ (70) ==================================================================================================================================== </TABLE> The following is a summary of operating income and net income. <TABLE> <CAPTION> OPERATING INCOME FIRST QUARTER ENDED MARCH 31, -------------- ----------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Life Investment Products $ 111 $ 102 Individual Life 20 18 Group Benefits 23 19 COLI 9 8 Other (2) 3 - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 161 150 Property & Casualty North American 107 100 International and Other Operations 1 4 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 108 104 Corporate (16) (28) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING INCOME $ 253 $ 226 ==================================================================================================================================== </TABLE> - 17 -
<TABLE> <CAPTION> NET INCOME FIRST QUARTER ENDED MARCH 31, -------------- ----------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Life Investment Products $ 111 $ 102 Individual Life 20 18 Group Benefits 23 19 COLI 9 8 Other [1] (25) 3 - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 138 150 Property & Casualty North American 115 105 International and Other Operations 3 11 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 118 116 Corporate (16) (28) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NET INCOME $ 240 $ 238 ==================================================================================================================================== <FN> [1] First quarter ended March 31, 2001, includes a $23 cumulative effect of accounting change charge related to the Company's adoption of SFAS No. 133. </FN> </TABLE> An analysis of the operating results summarized above is included on the following pages. Environmental and Asbestos Claims and Investments are discussed in separate sections. - -------------------------------------------------------------------------------- LIFE - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY [1] FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Revenues $ 1,590 $ 1,446 Expenses 1,429 1,296 Cumulative effect of accounting change, net of tax [2] (23) -- - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME 138 150 Less: Cumulative effect of accounting change, net of tax [2] (23) -- Net realized capital gains, after-tax -- -- - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 161 $ 150 ==================================================================================================================================== <FN> [1] Life excludes the effect of activities related to The HLI Repurchase, along with minority interest for pre-acquisition periods, both of which are reflected in Corporate. [2] Represents the cumulative impact of the Company's adoption of SFAS No. 133. </FN> </TABLE> Life has the following reportable operating segments: Investment Products, Individual Life, Group Benefits and COLI. In addition, Life reports corporate items not directly allocable to any of its segments, principally interest expense, as well as its international operations in "Other". 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"). (For a further discussion, see "Fortis Acquisition" in the Capital Resources and Liquidity section.) Revenues in the Life operation increased $144, or 10%, as a result of growth across each of its operating segments, particularly the Group Benefits segment, which experienced higher earned premiums as a result of strong sales and solid persistency. Expenses increased $133, or 10% associated with the revenue growth described above. Operating income increased $11, or 7%. Excluding an after-tax benefit relating to state income taxes of $8 recorded in the first quarter of 2000, operating income increased $19, or 13%, as each of Life's reportable operating segments experienced earnings growth. - 18 -
<TABLE> <CAPTION> INVESTMENT PRODUCTS FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Revenues $ 604 $ 585 Expenses 493 483 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 111 $ 102 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Individual variable annuity account values $ 70,649 $ 85,264 Other individual annuity account values 8,926 8,254 Other investment products account values 16,994 16,773 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ACCOUNT VALUES 96,569 110,291 Mutual fund assets under management 11,271 7,969 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 107,840 $ 118,260 ==================================================================================================================================== </TABLE> Revenues in the Investment Products segment increased $19, or 3%, primarily due to higher net investment income and fee income in the other investment products operation, partially offset by lower fee income and net investment income in individual annuity. Net investment income in the other investment products operation increased $30, or 23%, due primarily to growth in the institutional liabilities business, where related assets increased $1.0 billion, or 15%. Fee income from other investment products increased $9, or 13%, principally driven by the Company's retail mutual fund operation, where assets under management increased $2.4 billion, or 30%, from a year ago. This substantial increase in retail mutual fund assets was due to strong sales of $5.2 billion for the last twelve months, partially offset by redemptions and the retreating equity markets. Fee income generated by individual annuities decreased $11, or 3%, as related account values decreased $13.9 billion, or 15%, from March 31, 2000, primarily due to declining equity markets. Net investment income in the individual annuity operation decreased $6, or 12%, also due to the decline in related account values. Expenses increased $10, or 2%, driven by an $18, or 17%, increase in benefits and claims and a $15, or 27%, increase in insurance expenses and other in the other investment products operation associated with the revenue growth described above. Partially offsetting these increases were a $7, or 10%, decrease in benefits and claims in the individual annuity operation corresponding with the decline in account values described above and a $12, or 27%, decrease in individual annuity income tax expense due to the tax impact associated with separate account investment activity. Operating income increased $9, or 9%, driven by the growth in revenues related to the other investment products operation and the lower effective tax rate in the individual annuity operation. <TABLE> <CAPTION> INDIVIDUAL LIFE FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Revenues $ 163 $ 157 Expenses 143 139 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 20 $ 18 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Variable life account values $ 2,755 $ 2,817 Total account values $ 5,681 $ 5,653 - ------------------------------------------------------------------------------------------------------------------------------------ Variable life insurance in force $ 35,734 $ 25,788 Total life insurance in force $ 77,070 $ 68,223 ==================================================================================================================================== </TABLE> Revenues in the Individual Life segment increased $6, or 4%, resulting primarily from higher fee income associated with the growing block of variable life insurance. Asset-based fees increased $3, or 33%, as average variable life account values increased $145, or 5%. Additionally, cost of insurance charges increased $4, or 7%, as variable life insurance in force increased $9.9 billion, or 39%. Expenses increased $4, or 3%, principally due to a $7, or 26%, increase in mortality expenses. Mortality experience (expressed as death claims as a percentage of net amount at risk) for the first quarter of 2001 was higher than the same period of 2000, due to favorable mortality experience in the first quarter of 2000. Additionally, 2001 year to date mortality experience was trending within pricing assumptions and was slightly lower than full year 2000 levels. Operating income increased $2, or 11%, as higher fee income more than offset the higher mortality costs. - 19 -
<TABLE> <CAPTION> GROUP BENEFITS FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Revenues $ 613 $ 520 Expenses 590 501 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 23 $ 19 ==================================================================================================================================== </TABLE> Revenues in the Group Benefits segment increased $93, or 18%, and excluding buyouts, increased $61, or 12%. This increase was primarily driven by growth in fully insured ongoing premiums, excluding buyouts, which increased $49, or 12%, due to solid persistency of the in force block of business and strong sales to new customers. Fully insured ongoing sales for the first quarter of 2001 were $234, a $43, or 23%, increase over the same prior year period. Additionally, net investment income increased $7, or 13%, as a result of growth in the business. Expenses increased $89, or 18%, and $57, or 11%, excluding buyouts, driven primarily by higher benefits and claims which, excluding buyouts, increased $44, or 11%. This increase was due to growth in the business described above as the loss ratio (defined as benefits and claims as a percentage of premiums and other considerations excluding buyouts) of 83.7% remained essentially flat with the comparable prior year period. The revenue growth described above, coupled with the segment's stable loss and expense ratios, resulted in an increase in operating income of $4, or 21%. The Group Benefits segment currently offers Medicare supplement insurance to members of The Retired Officers Association, an organization consisting of retired military officers. Congress recently passed legislation, effective in the fourth quarter of 2001, whereby retired military officers age 65 and older will receive full medical insurance, eliminating the need for Medicare supplement insurance. This legislation is expected to reduce Group Benefits annualized premium revenues by approximately $170. <TABLE> <CAPTION> CORPORATE OWNED LIFE INSURANCE (COLI) FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Revenues $ 184 $ 165 Expenses 175 157 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 9 $ 8 ==================================================================================================================================== Variable COLI account values $ 16,207 $ 12,601 Leveraged COLI account values 4,995 4,960 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ACCOUNT VALUES $ 21,202 $ 17,561 ==================================================================================================================================== </TABLE> COLI revenues increased $19, or 12%, mostly due to higher fee income and net investment income. Fee income increased $8, or 10%, primarily due to growth in the variable COLI business, as account values increased $3.6 billion, or 29%, to $16.2 billion. Net investment income increased $8, or 9%, driven by higher interest rates on policy loans related to the leveraged COLI business. Expenses increased $18, or 11%, consistent with the growth in revenues. Operating income increased $1, or 13%, due to the factors described above. PROPERTY & CASUALTY <TABLE> <CAPTION> OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> TOTAL REVENUES $ 2,128 $ 2,053 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 118 $ 116 Less: Net realized capital gains, after-tax 10 12 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 108 $ 104 ==================================================================================================================================== </TABLE> Revenues for Property & Casualty increased $75, or 4%, for the first quarter ended March 31, 2001 compared with the first quarter of 2000 due primarily to strong premium growth. The revenue increase was partially offset by a revenue decrease as a result of the sale of Zwolsche in December 2000. Operating income increased $4, or 4%, for the first quarter of 2001 compared to the same prior year period as improved pricing, loss cost trends and lower catastrophes in Business Insurance, Affinity Personal Lines and Personal Insurance were partially offset by unfavorable loss development on prior underwriting years in Reinsurance. - 20 -
<TABLE> <CAPTION> BUSINESS INSURANCE OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Written premiums $ 702 $ 579 Underwriting results $ (23) $ (40) Combined ratio 101.2 106.3 ==================================================================================================================================== </TABLE> Business Insurance written premiums increased $123, or 21%, from the comparable prior year period driven by strong growth in Select Customer and Key Accounts. Select Customer increased $53, or 20%, reflecting pricing increases, strong renewal retention and the success of product, marketing, technology and service growth initiatives. The increase in Key Accounts of $51, or 21%, was also due primarily to significant pricing increases and improved renewal retention as well as strong new business growth. Underwriting results increased $17, or 43%, with a corresponding 5.1 point decrease in the combined ratio, for the first quarter as compared with the same prior year period. The improvement was primarily due to unusually high catastrophes and field office reorganization costs in the first quarter of 2000, and minimal loss costs in the current quarter. <TABLE> <CAPTION> AFFINITY PERSONAL LINES OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Written premiums $ 422 $ 386 Underwriting results $ 15 $ 14 Combined ratio 97.9 97.2 ==================================================================================================================================== </TABLE> Written premiums increased $36, or 9%, for the first quarter ended March 31, 2001 over the comparable prior year period driven by growth in both the AARP program and Affinity business unit. AARP increased primarily from new business growth, pricing increases and improved premium renewal retention. The improvement in Affinity reflects increased new business flow from the Ford and Sears accounts, partially offset by lower financial institution written premiums. Underwriting results improved slightly, while the combined ratio increased by 0.7 points for the first quarter as compared with the same prior year period. Loss cost improvements favorably impacted underwriting results and the loss ratio, while the increase in the combined ratio was due primarily to an increase in the loss adjustment expense ratio. The underwriting expense ratio was essentially level with the prior year. <TABLE> <CAPTION> - -------------------------------------------------------------------------------- PERSONAL INSURANCE - -------------------------------------------------------------------------------- OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Written premiums $ 240 $ 227 Underwriting results $ 1 $ (10) Combined ratio 98.5 103.8 ==================================================================================================================================== </TABLE> Written premiums increased $13, or 6%, for the first quarter ended March 31, 2001 over the comparable prior year period. Written premiums for the automobile and homeowners lines increased primarily due to pricing increases and improved renewal retention. Underwriting results increased $11 with a corresponding 5.3 point decrease in the combined ratio. The increase in underwriting results and related decrease in the combined ratio were primarily due to lower catastrophes and favorable loss costs in standard business. - 21 -
<TABLE> <CAPTION> SPECIALTY COMMERCIAL OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Written premiums $ 254 $ 251 Underwriting results $ (14) $ (21) Combined ratio 107.2 105.2 ==================================================================================================================================== </TABLE> Specialty Commercial written premiums increased $3, or 1%, from the comparable prior year period. The increase was primarily due to pricing increases and The Hartford's purchase of the in force, new and renewal financial products business as well as the majority of the excess and surplus lines business of Reliance in 2000, which resulted in $31 of additional written premiums as compared with the same prior year period. Partially offsetting the increase was a decrease in written premiums from sold or exited business lines which include farm, public entity ("PENCO") and Canada. Underwriting results improved $7, or 33%, while the combined ratio increased 2.0 points, for the first quarter as compared with the same prior year period. Improved underwriting results were primarily due to ceding commissions in the professional liability line as well as lower commissions from sold or exited businesses, while the combined ratio was unfavorably impacted by increased catastrophes and adverse PENCO results. <TABLE> <CAPTION> REINSURANCE OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Written premiums $ 363 $ 267 Underwriting results $ (25) $ (13) Combined ratio 109.5 103.1 ==================================================================================================================================== </TABLE> Reinsurance written premiums increased $96, or 36%, primarily due to a $79, or 144%, increase in Alternative Risk Transfer ("ART") written premiums resulting from a significant first quarter transaction. Successful pricing increases in a firming pricing environment also contributed to the increase in premiums. Underwriting results decreased $12 with a corresponding 6.4 point increase in the combined ratio. This decrease in underwriting results and corresponding increase in the combined ratio was primarily due to continued adverse prior underwriting years loss development, partially offset by improvement in the commission ratio, reflecting improved contract terms. <TABLE> <CAPTION> INTERNATIONAL AND OTHER OPERATIONS OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> TOTAL REVENUES $ 54 $ 162 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 3 $ 11 Less: Net realized capital gains, after-tax 2 7 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 1 $ 4 ==================================================================================================================================== </TABLE> INTERNATIONAL International revenues for the first quarter ended March 31, 2001 decreased $109, or 86%, over the comparable period in 2000 while operating income decreased $4. Both decreases were primarily due to the sale of Zwolsche in December 2000. On February 8, 2001, The Hartford completed the sale of Hartford Seguros to Liberty International, a subsidiary of Liberty Mutual Group. The Hartford received $29, before cost of sale and recorded a $16, after-tax, net realized capital loss. OTHER OPERATIONS Other Operations consist of property and casualty operations of The Hartford which have discontinued writing new business. Other Operations first quarter revenues increased $1, or 3%, in comparison to first quarter 2000. Operating income increased $1 compared to earnings from the prior year period. - 22 -
- -------------------------------------------------------------------------------- ENVIRONMENTAL AND ASBESTOS CLAIMS - -------------------------------------------------------------------------------- The Hartford continues to receive claims that assert damages from environmental exposures and for injuries from asbestos and asbestos-related products, both of which affect the Property & Casualty operation. Environmental claims relate primarily to pollution and related clean-up costs. With regard to these claims, uncertainty exists which impacts the ability of insurers and reinsurers to estimate the ultimate reserves for unpaid losses and related settlement expenses. The Hartford finds that conventional reserving techniques cannot estimate the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. The majority of environmental claims and many types of asbestos claims differ from any other type of contractual claim because there is almost no agreement or consistent precedent to determine what, if any, coverage exists or which, if any, policy years and insurers or reinsurers may be liable. Further uncertainty arises with environmental claims since claims are often made under policies, the existence of which may be in dispute, the terms of which may have changed over many years, which may or may not provide for legal defense costs, and which may or may not contain environmental exclusion clauses that may be absolute or allow for fortuitous events. Courts in different jurisdictions have reached disparate conclusions on similar issues and in certain situations have broadened the interpretation of policy coverage and liability issues. In light of the extensive claim settlement process for environmental and asbestos claims, which involves comprehensive fact gathering, subject matter expertise and intensive litigation, The Hartford established an environmental claims facility in 1992 to defend itself aggressively against unwarranted claims and to minimize costs. Within the property and casualty insurance industry in the mid-1990's, progress was made in developing sophisticated, alternative methodologies utilizing company experience and supplemental databases to assess environmental and asbestos liabilities. Consistent with The Hartford's practice of using the best techniques to estimate the Company's environmental and asbestos exposures, a study was initiated in April 1996 based on known cases. The Hartford, utilizing internal staff supplemented by outside legal and actuarial consultants, completed the study in October 1996. (For further discussion on the study, see the MD&A section "Environmental and Asbestos Claims" in The Hartford's 2000 Form 10-K Annual Report.) Reserve activity for both reported and unreported environmental and asbestos claims, including reserves for legal defense costs, for the first quarter ended March 31, 2001 and the year ended December 31, 2000, was as follows (net of reinsurance): <TABLE> <CAPTION> ENVIRONMENTAL AND ASBESTOS CLAIMS AND CLAIM ADJUSTMENT EXPENSES - ------------------------------------------------------------------------------------------------------------------------------------ FIRST QUARTER ENDED YEAR ENDED MARCH 31, 2001 DECEMBER 31, 2000 --------------------------------------- ---------------------------------------- Environmental Asbestos Total Environmental Asbestos Total - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Beginning liability $ 911 $ 572 $ 1,483 $ 995 $ 625 $ 1,620 Claims and claim adjustment expenses incurred (1) 1 -- 8 8 16 Claims and claim adjustment expenses paid (19) (20) (39) (92) (61) (153) - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITY [1] $ 891 $ 553 $ 1,444 $ 911 $ 572 $ 1,483 ==================================================================================================================================== <FN> [1] The ending liabilities are net of reinsurance on reported and unreported claims of $1,479 and $1,506 for March 31, 2001 and December 31, 2000, respectively. Gross of reinsurance as of March 31, 2001 and December 31, 2000, reserves for environmental and asbestos were $1,453 and $1,470 and $1,483 and $1,506, respectively. </FN> </TABLE> The Hartford believes that the environmental and asbestos reserves reported at March 31, 2001 are a reasonable estimate of the ultimate remaining liability for these claims based upon known facts, current assumptions and The Hartford's methodologies. Future social, economic, legal or legislative developments may alter the original intent of policies and the scope of coverage. The Hartford will continue to evaluate new methodologies and developments, such as the increasing level of asbestos claims being tendered under the comprehensive general liability operations (non-product) section of policies, as they arise in order to supplement the Company's ongoing analysis and review of its environmental and asbestos exposures. These future reviews may result in a change in reserves, impacting The Hartford's results of operations in the period in which the reserve estimates are changed. While the impact of these changes could have a material effect on future results of operations, The Hartford does not expect such changes would have a material effect on its liquidity or financial condition. - 23 -
- -------------------------------------------------------------------------------- INVESTMENTS - -------------------------------------------------------------------------------- An important element of the financial results of The Hartford is return on invested assets. 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 managed within established risk parameters. (For a further discussion on The Hartford's approach to managing risks, see the Capital Markets Risk Management section.) Please refer to The Hartford's 2000 Form 10-K Annual Report for a description of the Company's investment objectives and policies. LIFE The following table identifies invested assets by type held in the Life general account as of March 31, 2001 and December 31, 2000. <TABLE> <CAPTION> COMPOSITION OF INVESTED ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Fixed maturities, at fair value $ 20,003 79.8% $ 18,248 79.6% Equity securities, at fair value 294 1.2% 171 0.7% Policy loans, at outstanding balance 3,658 14.6% 3,610 15.7% Other investments 1,104 4.4% 910 4.0% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 25,059 100.0% $ 22,939 100.0% ==================================================================================================================================== </TABLE> Policy loans are secured by the cash value of the life policy and do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. The following table identifies fixed maturities by type held in the Life general account as of March 31, 2001 and December 31, 2000. <TABLE> <CAPTION> FIXED MATURITIES BY TYPE - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Corporate $ 8,425 42.1% $ 7,663 42.0% Asset-backed securities (ABS) 3,088 15.4% 3,070 16.8% Commercial mortgage-backed securities (CMBS) 2,737 13.7% 2,776 15.2% Municipal - tax-exempt 1,363 6.8% 1,390 7.6% Collateralized mortgage obligations (CMO) 890 4.4% 928 5.1% Mortgage-backed securities (MBS) - agency 613 3.1% 602 3.3% Government/Government agencies - Foreign 333 1.7% 321 1.8% Government/Government agencies - United States 240 1.2% 244 1.3% Municipal - taxable 72 0.4% 83 0.5% Short-term 2,190 10.9% 975 5.3% Redeemable preferred stock 52 0.3% 196 1.1% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 20,003 100.0% $ 18,248 100.0% ==================================================================================================================================== </TABLE> Fixed maturity investments increased by $1.8 billion primarily as the result of investing the funds raised through the debt and equity offerings made in connection with the April 2, 2001 acquisition of Fortis. Also contributing to the increase was new cash flow and an increase in the fair value of fixed maturity investments due to a lower interest rate environment. INVESTMENT RESULTS The table below summarizes Life's results. <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31 (before-tax) 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Net investment income - excluding policy loan income $ 352 $ 308 Policy loan income 78 74 --------------------------- Net investment income - total $ 430 $ 382 Yield on average invested assets [1] 7.2% 6.9% Net realized capital gains $ -- $ -- - ------------------------------------------------------------------------------------------------------------------------------------ <FN> [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). </FN> </TABLE> - 24 -
For the first quarter ended March 31, 2001, net investment income, excluding policy loans, increased $44 or 14% compared to the same period in 2000. The increase was primarily due to income earned on a higher invested asset base. Invested assets increased 18% from March 31, 2000. Yield on average invested assets increased as a result of higher yields on new investment purchases and increased partnership income. There were no net realized capital gains for the quarters ended March 31, 2001 and 2000. PROPERTY & CASUALTY The following table identifies invested assets by type as of March 31, 2001 and December 31, 2000. <TABLE> <CAPTION> COMPOSITION OF INVESTED ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Fixed maturities, at fair value $ 16,236 91.3% $ 16,239 91.6% Equity securities, at fair value 944 5.3% 885 5.0% Other investments 592 3.4% 601 3.4% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 17,772 100.0% $ 17,725 100.0% ==================================================================================================================================== </TABLE> The following table identifies fixed maturities by type as of March 31, 2001 and December 31, 2000. <TABLE> <CAPTION> FIXED MATURITIES BY TYPE - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Municipal - tax-exempt $ 8,489 52.3% $ 8,527 52.5% Corporate 3,684 22.7% 3,105 19.1% Commercial mortgage-backed securities (CMBS) 1,156 7.1% 1,141 7.0% Asset-backed securities (ABS) 752 4.6% 760 4.7% Government/Government agencies - Foreign 569 3.5% 682 4.2% Mortgage-backed securities (MBS) - agency 305 1.9% 315 1.9% Collateralized mortgage obligations (CMO) 180 1.1% 236 1.5% Government/Government agencies - United States 99 0.6% 63 0.4% Municipal - taxable 46 0.3% 46 0.3% Short-term 854 5.3% 1,120 6.9% Redeemable preferred stock 102 0.6% 244 1.5% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 16,236 100.0% $ 16,239 100.0% ==================================================================================================================================== </TABLE> Corporate securities increased primarily as the result of investing proceeds from a reallocation of short-term investments and redeemable preferred stock and an increase in new cash flow. INVESTMENT RESULTS The table below summarizes Property & Casualty's results. <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Net investment income, before-tax $ 257 $ 272 Net investment income, after-tax [1] $ 201 $ 210 --------------------------- Yield on average invested assets, before-tax [2] 6.0% 6.3% Yield on average invested assets, after-tax [1] [2] 4.7% 4.9% Net realized capital gains, before-tax $ 1 $ 17 ==================================================================================================================================== <FN> [1] Due to the significant holdings in tax-exempt investments, after-tax net investment income and after-tax yield are also included. [2] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). </FN> </TABLE> For the first quarter ended March 31, 2001, before- and after-tax net investment income decreased by 6% and 4%, respectively. The decreases were primarily due to a decline in interest income due to the sale of Zwolsche. Excluding the results of Zwolsche, net investment income was relatively level, as an increase in fixed maturities income was offset by a decrease in partnership income. Yield on average invested assets decreased primarily as a result of lower partnership income. Net realized capital gains for the first quarter ended March 31, 2001 decreased by $16 compared to the same period in 2000. The decline in realized gains reflects the capital loss generated from the sale of Hartford Seguros partially offset by gains from the sale of fixed maturities and equities. CORPORATE In connection with The HLI Repurchase, the carrying value of the purchased fixed maturity 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 investments' carrying values is reported in - 25 -
Corporate's net investment income. The total amount of amortization for the quarter ended March 31, 2001 was $4, before-tax. Also reported in Corporate were $4 of fixed maturity investments for The Hartford Bank, FSB. - -------------------------------------------------------------------------------- CAPITAL MARKETS RISK MANAGEMENT - -------------------------------------------------------------------------------- The Hartford has a disciplined approach to managing risks associated with its capital markets and asset/liability management activities. Investment portfolio management is organized to focus investment management expertise on specific classes of investments while asset/liability management is the responsibility of separate and distinct risk management units supporting the Life and Property & Casualty operations. 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. Please refer to The Hartford's 2000 Form 10-K Annual Report for a description of the Company's objectives, policies and strategies. CREDIT RISK The Company invests primarily in securities rated investment grade and has established exposure limits, diversification standards and review procedures for all credit risks including borrower, issuer or counterparty. Creditworthiness of specific obligors is determined by an internal credit assessment and ratings assigned by nationally recognized ratings agencies. Obligor, asset sector and industry concentrations are subject to established limits and are monitored on a regular interval. The Hartford is not exposed to any significant credit concentration risk of a single issuer. The following tables identify fixed maturity securities for Life, including guaranteed separate accounts, and Property & Casualty, by credit quality. The ratings referenced in the tables are based on the ratings of a nationally recognized rating organization or, if not rated, assigned based on the Company's internal analysis of such securities. Life As of March 31, 2001 and December 31, 2000, over 97% of the fixed maturity portfolio was invested in securities rated investment grade. <TABLE> <CAPTION> FIXED MATURITIES BY CREDIT QUALITY - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> United States Government/Government agencies $ 2,232 7.6% $ 2,329 8.4% AAA 4,687 15.9% 4,896 17.6% AA 3,496 11.8% 3,546 12.7% A 9,926 33.6% 9,675 34.7% BBB 6,129 20.8% 5,633 20.2% BB & below 843 2.9% 708 2.5% Short-term 2,197 7.4% 1,085 3.9% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 29,510 100.0% $ 27,872 100.0% ==================================================================================================================================== </TABLE> Property & Casualty As of March 31, 2001 and December 31, 2000, over 95% of the fixed maturity portfolio was invested in securities rated investment grade. <TABLE> <CAPTION> FIXED MATURITIES BY CREDIT QUALITY - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> United States Government/Government agencies $ 515 3.2% $ 516 3.2% AAA 6,303 38.7% 6,414 39.5% AA 3,232 19.9% 3,414 21.0% A 2,948 18.2% 2,664 16.4% BBB 1,650 10.2% 1,442 8.9% BB & below 734 4.5% 669 4.1% Short-term 854 5.3% 1,120 6.9% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 16,236 100.0% $ 16,239 100.0% ==================================================================================================================================== </TABLE> - 26 -
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. There have been no material changes in market risk exposures from December 31, 2000. DERIVATIVE INSTRUMENTS The Hartford utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options, in accordance with Company policy and in order to achieve one of three Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transaction costs. The Company does not make a market or trade derivatives for the express purpose of earning trading profits. (For further discussion on The Hartford's use of derivative instruments, refer to Note 2 of Notes to Consolidated Financial Statements.) - -------------------------------------------------------------------------------- CAPITAL RESOURCES AND LIQUIDITY - -------------------------------------------------------------------------------- Capital resources and liquidity represent the overall financial strength of The Hartford and its ability to generate strong cash flows from each of the business segments and borrow funds at competitive rates to meet operating and growth needs. The capital structure of The Hartford consists of debt and equity summarized as follows: <TABLE> <CAPTION> MARCH 31, 2001 DECEMBER 31, 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Short-term debt $ 234 $ 235 Long-term debt 2,263 1,862 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures (QUIPS and TruPS) 1,444 1,243 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEBT $ 3,941 $ 3,340 ----------------------------------------------------------------------------------------------------------------------------- Equity excluding unrealized gain on securities and other, net of tax [1] $ 7,782 $ 6,967 Unrealized gain on securities and other, net of tax [1] 664 497 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 8,446 $ 7,464 ----------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION [2] $ 11,723 $ 10,307 ----------------------------------------------------------------------------------------------------------------------------- Debt to equity [2] [3] 51% 48% Debt to capitalization [2] [3] 34% 32% ==================================================================================================================================== <FN> [1] Other represents the net gain on cash-flow hedging instruments as a result of the Company's adoption of SFAS No. 133. [2] Excludes unrealized gain on securities and other, net of tax. [3] Excluding QUIPS and TruPS, the debt to equity ratio was 32% and 30% and the debt to capitalization ratio was 21% and 20% as of March 31, 2001 and December 31, 2000, respectively. </FN> </TABLE> FORTIS ACQUISITION On April 2, 2001, The Hartford acquired the U.S. individual life insurance, annuity and mutual fund businesses of 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 Advisers, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis. The acquisition was recorded as a purchase transaction. The Company financed the acquisition from the proceeds of the (1) February 16, 2001, issuance of 10 million shares of common stock pursuant to an underwritten offering under its current shelf registration for $615, net, (2) March 1, 2001, issuance of $400 of senior debt securities under HLI's shelf registration and (3) March 6, 2001, issuance of $200 of trust preferred securities under HLI's shelf registration. CAPITALIZATION The Hartford's total capitalization, excluding unrealized gain on securities and other, net of tax, increased by $1.4 billion as of March 31, 2001 compared to December 31, 2000. This change was primarily the result of earnings and financing activities related to the Fortis acquisition, partially offset by dividends declared. DEBT On March 1, 2001, HLI issued and sold $400 of senior debt securities from its existing shelf registration to partially finance the Fortis acquisition. (For a further discussion of the debt, see Note 5 of Notes to Consolidated Financial Statements.) COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES On March 6, 2001, HLI issued and sold $200 of trust preferred securities from its existing shelf registration to partially finance the Fortis acquisition. (For a further discussion of the company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures, see Note 6 of Notes to Consolidated Financial Statements.) STOCKHOLDERS' EQUITY Issuance of common stock - 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 acquisition. - 27 -
Dividends - On February 22, 2001, The Hartford declared a dividend on its common stock of $0.25 per share payable on April 2, 2001 to shareholders of record as of March 5, 2001. Treasury stock - During the first quarter of 2000, The Hartford repurchased 2.8 million shares of its common stock in the open market at a total cost of $100 under the Company's $1.0 billion repurchase program authorized in October 1999. In conjunction with The HLI Repurchase, management elected to discontinue all repurchase activity indefinitely. CASH FLOWS FIRST QUARTER ENDED MARCH 31, -------------------------- 2001 2000 - ------------------------------------------------------------------ Cash provided by operating activities $ 306 $ 336 Cash (used for) provided by investing activities $ (1,899) $ 945 Cash provided by (used for) financing activities $ 1,643 $ (1,244) Cash - end of period $ 277 $ 216 - ------------------------------------------------------------------ The increase in cash from financing activities was primarily the result of financing related to the Fortis acquisition and current period proceeds on investment type contracts versus the prior period disbursements for investment type contracts. The increase in cash from financing activities accounted for the change in cash from investing activities, as the purchase of Fortis closed in April 2001. - -------------------------------------------------------------------------------- REGULATORY MATTERS AND CONTINGENCIES - -------------------------------------------------------------------------------- NAIC CODIFICATION The NAIC adopted the Codification of Statutory Accounting Principles ("Codification") in March 1998. The effective date for the statutory accounting guidance was January 1, 2001. Each of The Hartford's domiciliary states has adopted Codification, and the Company has made the necessary changes in its statutory reporting required for implementation. As of March 31, 2001, the impact of applying the new guidance resulted in a benefit of approximately $400 in statutory surplus. DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS The Company distributes its annuity, life and certain property and casualty insurance products through a variety of distribution channels, including broker-dealers, banks, wholesalers, its own internal sales force and other third party organizations. The Company periodically negotiates provisions and renewals of these relationships and there can be no assurance that such terms will remain acceptable to the Company or such third parties. An interruption in the Company's continuing relationship with certain of these third parties could materially affect the Company's ability to market its products. OTHER For information on other contingencies, please refer to The Hartford's 2000 Form 10-K Annual Report, Note 15 of Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- ACCOUNTING STANDARDS - -------------------------------------------------------------------------------- For a discussion of accounting standards, see Note 1 of Notes to Consolidated Financial Statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the Capital Markets Risk Management section of Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference. - 28 -
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Hartford is or may become involved in various legal actions, some of which involve claims for substantial amounts. In the opinion of management, the ultimate liability with respect to such actual and potential lawsuits, after consideration of provisions made for potential losses and costs of defense, is not expected to be material to the consolidated financial condition, results of operations or cash flows of The Hartford. The Hartford is involved in claims litigation arising in the ordinary course of business and accounts for such activity through the establishment of policy reserves. As further discussed in the MD&A under the Environmental and Asbestos Claims section, The Hartford continues to receive environmental and asbestos claims that involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels, methodologies and reinsurance coverages. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 19, 2001, The Hartford held its annual meeting of shareholders. The following matters were considered and voted upon: (1) the election of directors to serve for a one year term, (2) the ratification of the appointment of Arthur Andersen LLP as independent auditors of the Company for the fiscal year ending December 31, 2001 and (3) a shareholder proposal regarding The Hartford's investment in tobacco equities. Set forth below is the vote tabulation relating to the three items presented to the shareholders at the annual meeting: (1) The shareholders elected each of the ten nominees to the Board of Directors for a one-year term: NAME OF DIRECTOR SHARES WITHHELD NOMINEES SHARES FOR ------------------------- --------------- ------------------- Rand V. Araskog 184,179,130 2,070,006 Ramani Ayer 184,481,130 1,768,006 Dina Dublon 184,483,355 1,765,781 Donald R. Frahm 179,349,689 6,899,447 Paul G. Kirk, Jr. 184,451,549 1,797,587 Robert W. Selander 184,490,461 1,758,675 Lowndes A. Smith 184,479,320 1,769,816 H. Patrick Swygert 184,470,727 1,778,409 Gordon I. Ulmer 184,436,708 1,812,428 David K. Zwiener 184,470,868 1,778,268 ------------------------- --------------- ------------------- (2) The shareholders ratified the appointment of Arthur Andersen LLP as independent auditors of The Hartford: Shares For 184,593,846 Shares Against 804,191 Shares Abstained 851,099 (3) The shareholders defeated a shareholder proposal regarding The Hartford's investment in tobacco equities: For 14,131,637 Against 141,467,595 Abstain 7,012,625 Broker Non-Vote 23,637,279 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibits Index. (b) Reports on Form 8-K: The Company filed a Form 8-K Current Report on January 31, 2001 to report its fourth quarter and full year 2000 financial results and its agreement to acquire the U.S. individual life insurance, annuity and mutual fund businesses of Fortis, Inc. No financial statements were required to be or were filed with this Form 8-K. The Company filed a Form 8-K Current Report on March 19, 2001 to incorporate by reference into Registration Statement No. 333-21865 the Underwriting Agreement dated February 12, 2001 between the Company and Goldman Sachs & Co., Bear, Stearns & Co. Inc., Credit Suisse First Boston Corporation, A.G. Edwards & Sons, Inc., Edward D. Jones & Co., L.P., Salomon Smith Barney Inc., and UBS Warburg LLC for the issuance and sale of certain of the Company's equity securities. No financial statements were required to be or were filed with this Form 8-K. - 29 -
SIGNATURE Pursuant to the requirements 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. (Registrant) /s/ John N. Giamalis --------------------------------------------- John N. Giamalis Senior Vice President and Controller MAY 14, 2001 - 30 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. FORM 10-Q EXHBITS INDEX EXHIBIT # --------- 10.1 Employment Agreement dated as of March 20, 2001 between The Hartford and Neal Wolin as Executive Vice President and General Counsel is filed herewith. 10.2 Employment Agreement dated as of April 26, 2001 between The Hartford and David M. Johnson as Executive Vice President and Chief Financial Officer is filed herewith. - 31 -