================================================================================ 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 June 30, 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 July 31, 2001, there were outstanding 238,005,078 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 - Second Quarter and Six Months Ended June 30, 2001 and 2000 3 Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 4 Consolidated Statements of Changes in Stockholders' Equity - Six Months Ended June 30, 2001 and 2000 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2001 and 2000 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 14 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 27 PART II. OTHER INFORMATION - --------------------------- ITEM 1. LEGAL PROCEEDINGS 28 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 28 Signature 29 - 2 -
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME Second Quarter Ended Six Months Ended June 30, June 30, --------------------------- -------------------------- (In millions, except for per share data) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> REVENUES Earned premiums $ 2,357 $ 2,213 $ 4,667 $ 4,346 Fee income 686 596 1,288 1,189 Net investment income 719 643 1,410 1,297 Other revenue 123 108 241 210 Net realized capital losses (38) (46) (37) (29) - ------------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 3,847 3,514 7,569 7,013 ------------------------------------------------------------------------------------------------------------------------ BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 2,338 2,088 4,549 4,078 Amortization of deferred policy acquisition costs and present value of future profits 556 540 1,074 1,084 Insurance operating costs and expenses 470 473 948 945 Goodwill amortization 17 3 28 5 Other expenses 171 152 354 299 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 3,552 3,256 6,953 6,411 ------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE INCOME TAXES, MINORITY INTEREST AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES 295 258 616 602 Income tax expense 58 19 116 97 Minority interest, net of tax - (26) -- (54) - ------------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 237 213 500 451 Cumulative effect of accounting changes, net of tax (11) -- (34) -- - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 226 $ 213 $ 466 $ 451 ------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Income before cumulative effect of accounting changes $ 1.00 $ 0.98 $ 2.13 $ 2.09 Cumulative effect of accounting changes, net of tax (0.05) -- (0.14) -- - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 0.95 $ 0.98 $ 1.99 $ 2.09 DILUTED EARNINGS PER SHARE Income before cumulative effect of accounting changes $ 0.98 $ 0.97 $ 2.10 $ 2.07 Cumulative effect of accounting changes, net of tax (0.04) -- (0.15) -- - ------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 0.94 $ 0.97 $ 1.95 $ 2.07 - ------------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 237.3 216.5 234.4 216.2 Weighted average common shares outstanding and dilutive potential common shares 241.3 219.9 238.4 218.4 - ------------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share $ 0.25 $ 0.24 $ 0.50 $ 0.48 =============================================================================================================================== </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 3 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED BALANCE SHEETS June 30, 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 $36,712 and $33,856) $ 37,380 $ 34,492 Equity securities, available for sale, at fair value (cost of $1,288 and $921) 1,315 1,056 Policy loans, at outstanding balance 3,728 3,610 Other investments 1,869 1,511 - ------------------------------------------------------------------------------------------------------------------------------- Total investments 44,292 40,669 Cash 324 227 Premiums receivable and agents' balances 2,518 2,295 Reinsurance recoverables 4,510 4,579 Deferred policy acquisition costs and present value of future profits 6,200 5,305 Deferred income tax 511 682 Goodwill 1,701 1,202 Other assets 2,928 2,519 Separate account assets 114,943 114,054 - ------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 177,927 $ 171,532 ======================================================================================================================= LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 15,633 $ 15,874 Life 7,926 7,105 Other policyholder funds and benefits payable 18,661 15,848 Unearned premiums 3,385 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 4,959 4,754 Separate account liabilities 114,943 114,054 - ------------------------------------------------------------------------------------------------------------------------------- 169,448 164,068 COMMITMENTS AND CONTINGENCIES, NOTE 9 STOCKHOLDERS' EQUITY Common stock - authorized 400,000,000, issued 240,768,689 and 238,645,675 shares, par value $0.01 2 2 Additional paid-in capital 1,932 1,686 Retained earnings 6,234 5,887 Treasury stock, at cost - 2,816,340 and 12,355,414 shares (30) (480) Accumulated other comprehensive income 341 369 - ------------------------------------------------------------------------------------------- ----------------- ------------------ TOTAL STOCKHOLDERS' EQUITY 8,479 7,464 ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 177,927 $ 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 SIX MONTHS ENDED JUNE 30, 2001 Accumulated Other Comprehensive Income -------------------------------------------------- Common Unrealized Net Gain on Minimum Stock/ Gain Cash-Flow Pension Outstanding Additional Treasury (Loss) on Hedging Cumulative Liability Shares Paid-in Retained Stock, Securities, Instruments, Translation Adjustment, (In (In millions) (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 466 466 Other comprehensive income, net of tax [1] Cumulative effect of accounting change [2] (1) 24 23 Unrealized loss on securities [3] (49) (49) Cumulative translation adjustments (5) (5) Net gain on cash-flow hedging instruments [4] 3 3 --------- Total other comprehensive income (28) --------- Total comprehensive income 438 --------- Issuance of shares under incentive and stock purchase plans 64 4 68 1,662 Issuance of common stock in underwritten offering 169 446 615 10,000 Tax benefit on employee stock options and awards 13 13 Dividends declared on common stock (119) (119) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $1,934 $6,234 $(30) $447 $27 $(118) $(15) $8,479 237,952 - ------------------------------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED JUNE 30, 2000 Accumulated Other Comprehensive (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 451 451 Other comprehensive income, net of tax [1] Unrealized gain on securities [3] 78 78 Cumulative translation adjustments (54) (54) ---------- Total other comprehensive income 24 ---------- Total comprehensive income 475 ---------- Issuance of shares under incentive and stock purchase plans (8) 73 65 1,467 Issuance of common stock from treasury 56 342 398 7,250 Conversion of HLI employee options and restricted shares 86 86 72 Tax benefit on employee stock options and awards 1 1 Treasury stock acquired (100) (100) (2,832) Dividends declared on common stock (103) (103) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $1,688 $5,475 $(627) $(120) $(117) $(11) $6,288 223,183 - ------------------------------------------------------------------------------------------------------------------------------------ <FN> [1] Unrealized gain (loss) on securities is net of tax expense (benefit) of $(26) and $42 for the six months ended June 30, 2001 and 2000, respectively. Cumulative effect of accounting change is net of tax benefit of $12. Net gain on cash-flow hedging instruments is net of tax expense of $2 for the six months ended June 30, 2001. There is no tax effect on cumulative translation adjustments. [2] Unrealized gain (loss) on securities, net of tax, includes cumulative effect of accounting change of $(23) to net income and $24 to net gain on cash-flow hedging instruments. [3] Net of reclassification adjustment for gains (losses) realized in net income of $33 and $(14) for the six months ended June 30, 2001 and 2000, respectively. [4] Net of amortization adjustment of $3 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 Six Months Ended June 30, ---------------------------------- (In millions) 2001 2000 - -------------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> OPERATING ACTIVITIES Net income $ 466 $ 451 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Change in receivables, payables and accruals (143) (78) Change in reinsurance recoverables and other related assets 72 81 Amortization of deferred policy acquisition costs and present value of future profits 1,074 1,084 Additions to deferred policy acquisition costs and present value of future profits (1,377) (1,293) Change in accrued and deferred income taxes (60) 178 Increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 708 307 Minority interest in consolidated subsidiary -- 54 Net realized capital losses 37 29 Depreciation and amortization 4 27 Cumulative effect of accounting changes, net of tax 34 -- Other, net (133) 96 - -------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 682 936 - -------------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of investments (8,850) (7,271) Sale of investments 5,790 6,667 Maturity of investments 1,336 976 Purchase of business/affiliate (1,105) (1,108) Sale of affiliates 14 -- Additions to property, plant and equipment (73) (95) - -------------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR INVESTING ACTIVITIES (2,888) (831) - -------------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Short-term debt, net -- 400 Issuance of long-term debt 400 516 Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 200 -- Issuance of common stock in underwritten offering 615 398 Net proceeds from (disbursements for) investment and universal life-type contracts charged against policyholder accounts 1,157 (1,215) Dividends paid (116) (105) Acquisition of treasury stock -- (100) Proceeds from issuance of shares under incentive and stock purchase plans 51 36 - -------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 2,307 (70) - -------------------------------------------------------------------------------------------------------------------------------- Foreign exchange rate effect on cash (4) (5) - -------------------------------------------------------------------------------------------------------------------------------- Net increase in cash 97 30 Cash - beginning of period 227 182 - -------------------------------------------------------------------------------------------------------------------------------- CASH - END OF PERIOD $ 324 $ 212 - -------------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - ------------------------------------------------- NET CASH PAID (RECEIVED) DURING THE PERIOD FOR: Income taxes $ 70 $ (69) Interest $ 129 $ 107 </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 April 2, 2001, The Hartford acquired the U.S. individual life insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as "Fortis Financial Group", or "Fortis"). The acquisition was accounted for as a purchase transaction and, as such, the revenues and expenses generated by this business from April 2, 2001 forward are included in the Company's Consolidated Statements of Income. (For a further discussion of the Fortis Acquisition, see Note 3.) 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 NEW ACCOUNTING STANDARDS Effective January 1, 2001, the Company adopted Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138. The standard requires, among other things, that all derivatives be carried on the balance sheet at fair value. The standard also specifies hedge accounting criteria under which a derivative can qualify for special accounting. In order to receive special accounting, the derivative instrument must qualify as a hedge of either the fair value or the variability of the cash flow of a qualified asset or liability, or forecasted transaction. Special accounting for qualifying hedges provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of the corresponding changes in value of the hedged item. The Company's policy prior to adopting SFAS No. 133 was to carry its derivative instruments on the balance sheet in a manner similar to the hedged item(s). Upon adoption of SFAS No. 133, the Company recorded a $23 charge in net income as a net of tax cumulative effect of accounting change. The transition adjustment was primarily comprised of gains and losses on derivatives that had been previously deferred and not adjusted to the carrying amount of the hedged item. Also included in the transition adjustment were gains and losses related to recognizing at fair value all derivatives that are designated as fair-value hedging instruments offset by the difference between the book values and fair values of related hedged items attributable to the hedged risks. The entire transition amount was previously recorded in Accumulated Other Comprehensive Income ("OCI") - Unrealized Gain/Loss on Securities in accordance with SFAS No. 115. Gains and losses on derivatives that were previously deferred as adjustments to the carrying amount of hedged items were not affected by the implementation of SFAS No. 133. Upon adoption, the Company also reclassified $24, net of tax, to Accumulated OCI - - Gain on Cash-Flow Hedging Instruments from Accumulated OCI - Unrealized Gain/Loss on Securities. This reclassification reflects the January 1, 2001 net unrealized gain for all derivatives that are designated as cash-flow hedging instruments. For a further discussion of the Company's accounting policies for derivative instruments, see Note 2 of Notes to Consolidated Financial Statements included in The Hartford's March 31, 2001 Form 10-Q. For a further discussion on The Hartford's derivative results by hedge category for the quarter and six months ended June 30, 2001 see Note 2, Derivatives and Hedging Activities below. Effective April 1, 2001, the Company adopted Emerging Issues Task Force ("EITF") Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets". Under the consensus, investors in certain asset-backed securities are required to record changes in their estimated yield on a prospective basis and to evaluate these securities for an other than temporary decline in value. If the fair value of the asset-backed security has declined below its carrying amount and the decline is determined to be other than temporary, the security is written down to fair value. Upon adoption of EITF Issue 99-20, the Company recorded an $11 charge in net income as a net of tax cumulative effect of accounting change. (C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 141, "Business Combinations". SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations and requires that all business combinations be accounted for under the purchase method. The purchase method of accounting requires that net assets acquired that constitute a business be recorded at their fair value with any excess cost over the amounts assigned to net assets acquired recorded as goodwill. - 7 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) (C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS (CONTINUED) SFAS No. 141 also requires that certain intangible assets acquired in a business combination be recognized apart from goodwill. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. Use of the pooling-of-interests method of accounting for those transactions is prohibited. Adoption of SFAS No. 141 will not have a material impact on the Company's financial condition or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". Under current accounting guidance, goodwill resulting from a business combination is amortized against income over its estimated useful life. Under SFAS No. 142, goodwill is no longer amortized as an expense but instead is reviewed and tested for impairment under a fair value approach. Goodwill will be tested for impairment at least annually, or more frequently as a result of an event or change in circumstances that would indicate an impairment may be necessary. Goodwill must be tested for impairment in the year of adoption with an initial test, to determine potential impairment, to be performed within six months of adoption. If the initial test indicates potential impairment, then a more detailed analysis to determine the extent of the impairment related to goodwill must be completed within twelve months of adoption. SFAS No. 142 also requires that the useful lives of previously recognized intangible assets other than goodwill be reassessed and the remaining amortization periods adjusted accordingly. The reassessment must be completed prior to the end of the first quarter of 2002. All of the provisions of SFAS No. 142 will be applied beginning January 1, 2002 to all goodwill and other intangible assets, regardless of when those assets were initially recognized. Adoption of SFAS No. 142 will result in the elimination of goodwill amortization. The Company expects goodwill amortization to approximate $52, after-tax, in 2001 and to have approximated $56, after-tax, in 2002. The Company is in the process of assessing the impacts from the implementation of the other provisions of SFAS No. 142. NOTE 2. DERIVATIVES AND HEDGING ACTIVITIES The Company utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options, in order to achieve one of three Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transaction costs. The Company is considered an "end-user" of derivative instruments and, as such, does not make a market or trade in these instruments for the express purpose of earning trading profits. For a detailed discussion of the Company's use of derivative instruments, see Note 2 of Notes to Consolidated Financial Statements included in The Hartford's March 31, 2001 Form 10-Q. As of June 30, 2001, the Company reported $101 of derivative assets in other invested assets and $199 of derivative liabilities in other liabilities. Cash-Flow Hedges For the quarter and six months ended June 30, 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 or 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 June 30, 2001, approximately $5 of after-tax deferred net gains on derivative instruments accumulated in OCI are expected to be reclassified to earnings during the next twelve months. This expectation is based on the anticipated interest payments on hedged investments in fixed maturity securities that will occur over the next twelve months, at which time the Company will recognize the deferred net gains/losses as an adjustment to interest income over the term of the investment cash flows. The maximum term over which the Company is hedging its exposure to the variability of future cash flows (for all forecasted transactions, excluding interest payments on variable-rate debt) is twelve months. As of June 30, 2001, the Company held approximately $2.2 billion in derivative notional value related to strategies categorized as cash-flow hedges. There were no reclassifications from OCI to earnings resulting from the discontinuance of cash-flow hedges during the quarter or six months ended June 30, 2001. Fair-Value Hedges For the quarter and six months ended June 30, 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 or losses. All components of each derivative's gain or loss are included in the assessment of hedge effectiveness. As of June 30, 2001, the Company held approximately $360 in derivative notional value related to strategies categorized as fair-value hedges. Other Risk Management Activities In general, the Company's other risk management activities relate to strategies used to meet the previously mentioned Company-approved objectives. Swap agreements, interest rate cap and floor agreements and option contracts are used to meet these objectives. Changes in the value of all derivatives held for other risk management purposes are reported in current period earnings as realized capital gains or losses. As of June 30, 2001, the Company held approximately $4.8 billion in derivative notional value related to strategies categorized as Other Risk Management Activities. - 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 3. FORTIS ACQUISITION On April 2, 2001, The Hartford acquired Fortis Financial Group for $1.12 billion in cash. The Company effected the acquisition through several reinsurance agreements with subsidiaries of Fortis, Inc. and the purchase of 100% of the stock of Fortis Advisers, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis, Inc. The acquisition was accounted for as a purchase transaction and, as such, the revenues and expenses generated by this business from April 2, 2001 forward are included in the Company's Consolidated Statement of Income. 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 June 1998 shelf registration and (3) March 6, 2001 issuance of $200 of trust preferred securities under HLI's June 1998 shelf registration. The assets and liabilities acquired in this transaction were recorded at values prescribed by applicable purchase accounting rules, which generally represent estimated fair value. In addition, an intangible asset representing the present value of future profits ("PVP") of the acquired business was established in the amount of $605. The PVP is amortized to expense in relation to the estimated gross profits of the underlying insurance contracts, and interest is accreted on the unamortized balance. For the quarter ended June 30, 2001, amortization of PVP amounted to $13. Goodwill of $553, representing the excess of the purchase price over the amount of net assets (including PVP) acquired, has also been recorded and is being amortized on a straight-line basis over a 25 year period. NOTE 4. SALE OF HARTFORD SEGUROS On February 8, 2001, The Hartford completed the sale of its Spain-based subsidiary, Hartford Seguros. The Hartford received $29 before costs of sale and recorded an after-tax net realized capital loss of $16. NOTE 5. DEBT (A) SHORT-TERM DEBT The Hartford's commercial paper ranks equally with its other unsecured and unsubordinated indebtedness. As of December 31, 2000, The Hartford had a $1.5 billion five-year revolving credit facility, which was terminated on June 20, 2001. Effective on that date, The Hartford entered into an amended and restated five-year revolving $1.0 billion credit facility with fourteen banks. This facility is available for general corporate purposes and to provide additional support to the Company's commercial paper program. As of June 30, 2001, there were no outstanding borrowings under the facility. As of June 30, 2001, HLI continued to maintain a $250 five-year revolving credit facility comprised of four participatory banks. This facility, which expires in 2003, is available for general corporate purposes and to provide additional support to HLI's commercial paper program. As of June 30, 2001, there were no outstanding borrowings under the facility. (B) LONG-TERM DEBT On March 1, 2001, HLI issued and sold $400 of senior debt securities under its June 1998 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. (C) SHELF REGISTRATION STATEMENTS On November 9, 2000, The Hartford filed with the Securities and Exchange Commission ("SEC") 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 June 30, 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.) On May 15, 2001, HLI filed with the SEC a shelf registration statement for the potential offering and sale of up to $1.0 billion in debt and preferred securities. The registration statement was declared effective on May 29, 2001. This registration statement includes an aggregate $150 of HLI securities remaining under the shelf registration filed by HLI with the SEC in June 1998. As of June 30, 2001, HLI had $1.0 billion 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 under its June 1998 shelf registration. The proceeds from the sale of the Series B Preferred Securities were used to acquire $200 of 7.625% Series B Junior Subordinated Debentures issued by HLI. 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. - 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (CONTINUED) The Series B Junior Subordinated Debentures bear interest at the annual rate of 7.625% of the principal amount, payable quarterly in arrears commencing April 15, 2001, and mature on February 15, 2050. The Series B Junior Subordinated Debentures are unsecured and rank junior and subordinate in right of payment to all present and future senior debt of HLI and are effectively subordinated to all existing and future obligations of HLI subsidiaries. HLI has the right at any time, and from time to time, to defer payments of interest on the Series B Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters up to the debentures' maturity date. During any such period, interest will continue to accrue and HLI may not declare or pay any cash dividends or distributions on, or purchase, HLI's capital stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank equally with or junior to the Series B Junior Subordinated Debentures. HLI will have the right at any time to dissolve the Trust and cause the Series B Junior Subordinated Debentures to be distributed to the holders of the Series B Preferred Securities. HLI has guaranteed, on a subordinated basis, all of the Hartford Life Capital II obligations under the Series B Preferred Securities including payment of the redemption price and any accumulated and unpaid distributions 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> Second Quarter Ended Six Months Ended -------------------------------------- ------------------------------------- Per Share Per Share JUNE 30, 2001 Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> BASIC EARNINGS PER SHARE Income available to common shareholders $ 226 237.3 $ 0.95 $ 466 234.4 $ 1.99 -------------- ------------ DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 4.0 -- 4.0 ------------------------ ------------------------- Income available to common shareholders plus assumed conversions $ 226 241.3 $ 0.94 $ 466 238.4 $ 1.95 - ------------------------------------------------------------------------------------------------------------------------------------ Second Quarter Ended Six Months Ended -------------------------------------- ------------------------------------- Per Share Per Share JUNE 30, 2000 Income Shares Amount Income Shares Amount - ------------------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Income available to common shareholders $ 213 216.5 $ 0.98 $ 451 216.2 $ 2.09 -------------- ------------ DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 3.4 -- 2.2 ------------------------ ------------------------- Income available to common shareholders plus assumed conversions $ 213 219.9 $ 0.97 $ 451 218.4 $ 2.07 - ------------------------------------------------------------------------------------------------------------------------------------ </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, if any, 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. - 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 9. COMMITMENTS AND CONTINGENCIES (CONTINUED) (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 June 30, 2001, the same matter is under review with the IRS as part of its 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. 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, which are primarily located in Latin America and the Far East, 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 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. while 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. - 11 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. SEGMENT INFORMATION (CONTINUED) <TABLE> <CAPTION> REVENUES SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Life Investment Products $ 643 $ 587 $ 1,247 $ 1,172 Individual Life 240 154 403 311 Group Benefits 641 557 1,254 1,077 COLI 181 170 365 335 Other (10) (27) 16 (8) - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 1,695 1,441 3,285 2,887 - ------------------------------------------------------------------------------------------------------------------------------------ Property & Casualty North American Earned premiums and other revenue Business Insurance 640 568 1,260 1,123 Affinity Personal Lines 469 432 924 850 Personal Insurance 252 242 501 475 Specialty Commercial 303 280 588 554 Reinsurance 230 200 479 383 - ------------------------------------------------------------------------------------------------------------------------------------ Total North American earned premiums and other revenue 1,894 1,722 3,752 3,385 Net investment income 234 207 452 428 Net realized capital losses (22) (8) (24) (1) - ------------------------------------------------------------------------------------------------------------------------------------ Total North American 2,106 1,921 4,180 3,812 International and Other Operations 41 153 95 315 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 2,147 2,074 4,275 4,127 - ------------------------------------------------------------------------------------------------------------------------------------ Corporate 5 (1) 9 (1) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 3,847 $ 3,514 $ 7,569 $ 7,013 - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> - 12 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 10. SEGMENT INFORMATION (CONTINUED) <TABLE> <CAPTION> OPERATING INCOME SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ---------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Life Investment Products $ 117 $ 110 $ 228 $ 212 Individual Life 36 20 56 38 Group Benefits 27 21 50 40 COLI 10 8 19 16 Other (14) 15 (16) 18 - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 176 174 337 324 - ------------------------------------------------------------------------------------------------------------------------------------ Property & Casualty North American Underwriting results Business Insurance 10 (12) (13) (52) Affinity Personal Lines (21) (15) (6) (1) Personal Insurance (22) (4) (21) (14) Specialty Commercial (24) (22) (38) (43) Reinsurance (37) (11) (62) (24) - ------------------------------------------------------------------------------------------------------------------------------------ Total North American underwriting results (94) (64) (140) (134) Net servicing and other income [1] 7 -- 12 2 Net investment income 234 207 452 428 Other expenses (41) (53) (103) (102) Income tax (expense) benefit (5) 2 (13) (2) - ------------------------------------------------------------------------------------------------------------------------------------ Total North American 101 92 208 192 International and Other Operations 1 5 2 9 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 102 97 210 201 - ------------------------------------------------------------------------------------------------------------------------------------ Corporate (16) (32) (32) (60) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING INCOME 262 239 515 465 Cumulative effect of accounting changes, net of tax (11) -- (34) -- Net realized capital losses, after-tax (25) (26) (15) (14) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 226 $ 213 $ 466 $ 451 - ------------------------------------------------------------------------------------------------------------------------------------ <FN> [1] Net of expenses related to service business. </FN> </TABLE> - 13 -
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 June 30, 2001, compared with December 31, 2000, and its results of operations for the second quarter and six months ended June 30, 2001, compared with the equivalent 2000 periods. 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 less success in integrating the U.S. individual life insurance, annuity and mutual fund businesses of Fortis, Inc. than anticipated, unfavorable loss activity, general economic and business conditions that are less favorable than anticipated, unfavorable legislative or judicial 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 14 Life 16 Investment Products 17 Individual Life 18 Group Benefits 18 Corporate Owned Life Insurance ("COLI") 19 Property & Casualty 19 Business Insurance 19 Affinity Personal Lines 20 Personal Insurance 20 Specialty Commercial 20 Reinsurance 21 International and Other Operations 21 Environmental and Asbestos Claims 21 Investments 23 Capital Markets Risk Management 25 Capital Resources and Liquidity 26 Regulatory Matters and Contingencies 27 Accounting Standards 28 - -------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> TOTAL REVENUES $ 3,847 $ 3,514 $ 7,569 $ 7,013 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 226 $ 213 $ 466 $ 451 Less: Cumulative effect of accounting changes, net of tax [1] (11) -- (34) -- Net realized capital losses, after-tax (25) (26) (15) (14) - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 262 $ 239 $ 515 $ 465 - ------------------------------------------------------------------------------------------------------------------------------------ <FN> [1] For the quarter ended June 30, 2001, represents the cumulative impact of the Company's adoption of Emerging Issues Task Force ("EITF") Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets." For the six months ended June 30, 2001, represents the cumulative impact of the Company's adoption of EITF Issue 99-20 and Statement of Financial Accounting Standards ("SFAS") No. 133, as amended, "Accounting for Derivative Instruments and Hedging Activities". </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 second quarter and six months ended June 30, 2001 increased $333, or 9%, and $556, or 8%, respectively, over the comparable prior year periods, primarily as a result of strong - 14 -
new business growth in Group Benefits, increased fee income in Individual Life, earned premium growth in all of the North American Property & Casualty underwriting segments and the incremental benefit of the April 2, 2001, acquisition of 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 of the Fortis acquisition, see Note 3 of Notes to Consolidated Financial Statements.) These revenue increases were partially offset by a revenue decrease as a result of the sale of The Hartford's Netherlands-based Zwolsche Algemeene, N.V. ("Zwolsche") subsidiary in December 2000 and its Spain-based subsidiary, Hartford Seguros, in February 2001. Operating income increased $23, or 10%, and $50, or 11%, respectively, for the second quarter and six months ended June 30, 2001, from the comparable prior year periods. The increases were primarily due to continued earnings growth in all Life segments which included the Fortis results, and strong performance in Property & Casualty's Business Insurance segment due to improved pricing and renewal retentions, partially offset by higher loss costs in the Personal Insurance, Affinity Personal Lines and Reinsurance segments. The effective tax rate for the second quarter and six months ended June 30, 2001 was 20% and 19%, respectively, compared with 7% and 16%, respectively, for the comparable periods in 2000. The increase in the effective tax rates for both periods related primarily to the Company's second quarter 2000 settlement with the Internal Revenue Service with respect to certain tax matters for the 1993-1995 tax years. The settlement resulted in a $24 tax benefit being recorded in the Company's second quarter 2000 results of operations. The increase for the six month period was partially offset by the tax benefit on the loss on sale of Hartford Seguros in the first quarter of 2001. 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 June 27, 2000 acquisition of all the outstanding shares of Hartford Life, Inc. ("HLI") that The Hartford did not already own ("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, which are primarily located in Latin America and the Far East, 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 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 SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------------------------------- North American 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Business Insurance $ 10 $ (12) $ (13) $ (52) Affinity Personal Lines (21) (15) (6) (1) Personal Insurance (22) (4) (21) (14) Specialty Commercial (24) (22) (38) (43) Reinsurance (37) (11) (62) (24) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (94) $ (64) $ (140) $ (134) - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> - 15 -
The following is a summary of operating income and net income. <TABLE> <CAPTION> OPERATING INCOME SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Life Investment Products $ 117 $ 110 $ 228 $ 212 Individual Life 36 20 56 38 Group Benefits 27 21 50 40 COLI 10 8 19 16 Other (14) 15 (16) 18 - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 176 174 337 324 Property & Casualty North American 101 92 208 192 International and Other Operations 1 5 2 9 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 102 97 210 201 Corporate (16) (32) (32) (60) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL OPERATING INCOME $ 262 $ 239 $ 515 $ 465 ==================================================================================================================================== </TABLE> <TABLE> <CAPTION> NET INCOME SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Life Investment Products $ 117 $ 110 $ 228 $ 212 Individual Life 36 20 56 38 Group Benefits 27 21 50 40 COLI 10 8 19 16 Other (28) (13) (53) (10) - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 162 146 300 296 Property & Casualty North American 78 86 193 191 International and Other Operations 2 9 5 20 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 80 95 198 211 Corporate (16) (28) (32) (56) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NET INCOME $ 226 $ 213 $ 466 $ 451 ==================================================================================================================================== </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] SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Revenues $ 1,695 $ 1,441 $ 3,285 $ 2,887 Expenses 1,530 1,295 2,959 2,591 Cumulative effect of accounting changes, net of tax [2] (3) -- (26) -- - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME 162 146 300 296 Less: Cumulative effect of accounting changes, net of tax [2] (3) -- (26) -- Net realized capital losses, after-tax (11) (28) (11) (28) - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 176 $ 174 $ 337 $ 324 ==================================================================================================================================== <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] For the quarter ended June 30, 2001, represents the cumulative impact of the Company's adoption of EITF Issue 99-20. For the six months ended June 30, 2001, represents the cumulative impact of the Company's adoption of EITF Issue 99-20 and SFAS No. 133. </FN> </TABLE> Life has the following reportable segments: Investment Products, Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI"). The Company reports corporate items not directly allocable to any of its segments, principally interest expense, as well as its international operations in "Other". - 16 -
On April 2, 2001, The Hartford acquired Fortis Financial Group. (For further discussion, see "Fortis Acquisition" in the Capital Resources and Liquidity section.) This transaction was accounted for as a purchase and, as such, the revenues and expenses generated by this business from April 2, 2001 forward are included in Life's consolidated results of operations. Revenues increased $254, or 18%, and $398, or 14%, for the second quarter and six months ended June 30, 2001, respectively, as Life experienced growth in each of its operating segments. Most notably, Individual Life earned higher fee income and net investment income due primarily to the business acquired from Fortis, Inc. and Group Benefits experienced higher earned premiums resulting from strong sales and solid persistency. In addition, Investment Products had higher fee income and net investment income due principally to growth in the retail mutual fund and institutional businesses. Expenses increased $235, or 18%, and $368, or 14% for the second quarter and six months ended June 30, 2001, respectively, associated with the revenue growth described above. Operating income increased $2, or 1%, and $13, or 4%, for the second quarter and six months ended June 30, 2001, respectively. For the second quarter and six months ended June 30, 2000, Life recorded after-tax benefits of $24 and $32, respectively, related to favorable tax settlements. Excluding these benefits, operating income increased $26, or 17%, and $45, or 15%, for the second quarter and six months ended June 30, 2001, respectively, as each of the Life's operating segments experienced growth in operating income from a year ago. - -------------------------------------------------------------------------------- INVESTMENT PRODUCTS - -------------------------------------------------------------------------------- <TABLE> <CAPTION> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Revenues $ 643 $ 587 $ 1,247 $ 1,172 Expenses 526 477 1,019 960 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 117 $ 110 $ 228 $ 212 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Individual variable annuity account values $ 78,415 $ 82,264 Other individual annuity account values 9,228 8,624 Other investment products account values 18,101 16,862 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ACCOUNT VALUES 105,744 107,750 Mutual fund assets under management 16,180 8,729 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 121,924 $ 116,479 ==================================================================================================================================== </TABLE> Revenues in the Investment Products segment increased $56, or 10%, and $75, or 6%, for the second quarter and six months ended June 30, 2001, respectively, driven primarily by the other investment products operation. Fee income in other investment products increased $25, or 37%, and $34, or 25% for the second quarter and six-month periods, respectively, principally due to growth in the Company's retail mutual fund assets which increased $6.5 billion, or 75%, to $15.2 billion as of June 30, 2001 as a result of strong sales and the Fortis acquisition. Net investment income in other investment products increased $27, or 20%, and $57, or 21%, due primarily to growth in the institutional business where related assets increased $1.3 billion, or 18%, from a year ago. Individual annuity revenues were relatively flat for the second quarter and six months ended June 30, 2001 as compared to the prior year, as fee income and net investment income from the business acquired from Fortis, Inc. helped offset lower revenues associated with decreased account values resulting from the lower equity markets. Individual annuity account values decreased $3.2 billion, or 4%, from June 30, 2000. Expenses increased $49, or 10%, and $59, or 6%, for the second quarter and six months ended June 30, 2001, respectively, driven by higher benefits and claims and higher insurance operating costs and expenses in other investment products associated with the revenue growth described above. For the respective second quarter and six-month periods, benefits and claims in other investment products increased $23, or 21%, and $41, or 19%, while insurance operating costs and expenses increased $14, or 21%, and $29, or 24%. Partially offsetting these increases were decreases in individual annuity expenses, including amortization of deferred acquisition costs and present value of future profits, which decreased $12, or 10%, and $18, or 8%, for the respective periods. Additionally, individual annuity income tax expense decreased $4, or 11%, and $16, or 20%, due to the tax impact associated with separate account investment activity. Operating income increased $7, or 6%, and $16, or 8%, for the second quarter and six months ended June 30, 2001, respectively, as compared to the equivalent periods in 2000. These increases were driven by the growth in revenues in other investment products described above, the favorable impact of the Fortis acquisition and the lower effective tax rate related to the individual annuity business. - 17 -
- -------------------------------------------------------------------------------- INDIVIDUAL LIFE - -------------------------------------------------------------------------------- <TABLE> <CAPTION> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Revenues $ 240 $ 154 $ 403 $ 311 Expenses 204 134 347 273 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 36 $ 20 $ 56 $ 38 ==================================================================================================================================== - ------------------------------------------------------------------------------------------------------------------------------------ Variable life account values $ 3,932 $ 2,848 Total account values $ 7,744 $ 5,695 - ------------------------------------------------------------------------------------------------------------------------------------ Variable life insurance in force $ 57,677 $ 28,503 Total life insurance in force $ 116,740 $ 70,613 ==================================================================================================================================== </TABLE> Revenues in the Individual Life segment increased $86, or 56%, and $92, or 30%, for the second quarter and six months ended June 30, 2001, respectively, primarily due to the Fortis acquisition. Fee income, including cost of insurance charges, increased $61, or 56%, and $65, or 30%, respectively, driven primarily by growth in the variable life business where account values increased $1.1 billion, or 38%, and life insurance in force increased $29.2 billion, more than double the amount from a year ago. In addition, net investment income on general account business (universal life, interest sensitive whole life and term life) increased $22, or 50%, and $23, or 26%, respectively, consistent with the growth in related account values. Expenses increased $70, or 52%, and $74, or 27%, respectively, due principally to the growth in revenues described above. Year to date mortality experience (expressed as death claims as a percentage of net amount at risk) for 2001 was higher than the same period of the prior year; however, 2001 year to date mortality experience was within pricing assumptions and was slightly lower than the full year 2000 levels. Operating income increased $16, or 80%, and $18, or 47%, for the second quarter and six months ended June 30, 2001, respectively, as compared to the equivalent prior year periods due to the growth factors discussed above. - -------------------------------------------------------------------------------- GROUP BENEFITS - -------------------------------------------------------------------------------- <TABLE> <CAPTION> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Revenues $ 641 $ 557 $ 1,254 $ 1,077 Expenses 614 536 1,204 1,037 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 27 $ 21 $ 50 $ 40 ==================================================================================================================================== </TABLE> Revenues in the Group Benefits segment increased $84, or 15%, and $177, or 16%, and excluding buyouts, increased $74, or 14%, and $135, or 13%, for the second quarter and six months ended June 30, 2001, respectively. These increases were driven by growth in fully insured ongoing premiums which increased $63, or 14%, and $112, or 13%, for the respective second quarter and six-month periods, due to solid persistency of the in force block of business and strong sales to new customers. Fully insured ongoing sales for the second quarter and six months ended June 30, 2001 were $80 and $314, 18% and 21% higher, respectively, than the equivalent 2000 periods. Additionally, net investment income increased $7, or 13%, and $14, or 13%, for the second quarter and six-month periods, respectively, due to the growth in the overall business described above. Expenses, excluding buyouts, increased $68, or 13%, and $125, or 12%, for the second quarter and six months ended June 30, 2001, respectively, driven primarily by higher benefits and claims which increased $56, or 14%, and $100, or 13%, respectively. These increases are consistent with the growth in the business described above as the loss ratios (defined as benefits and claims as a percentage of premiums and other considerations) have remained relatively flat with the comparable prior year periods. In addition, expenses other than benefits and claims increased $12, or 10%, and $25, or 11%, excluding buyouts, for the respective second quarter and six-month periods. Operating income increased $6, or 29%, and $10, or 25%, for the second quarter and six months ended June 30, 2001, respectively, primarily due to revenue growth, stable loss ratios and lower expenses as a percentage of premiums and other considerations as compared to the prior year. 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. - 18 -
- -------------------------------------------------------------------------------- CORPORATE OWNED LIFE INSURANCE (COLI) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Revenues $ 181 $ 170 $ 365 $ 335 Expenses 171 162 346 319 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 10 $ 8 $ 19 $ 16 ==================================================================================================================================== Variable COLI account values $ 16,628 $ 12,925 Leveraged COLI account values 4,856 4,975 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ACCOUNT VALUES $ 21,484 $ 17,900 ==================================================================================================================================== </TABLE> COLI revenues increased $11, or 6%, and $30, or 9%, for the second quarter and six months ended June 30, 2001, respectively, mostly due to higher fee income and net investment income. Fee income increased $4, or 5%, and $12, or 7%, for the second quarter and six months ended June 30, 2001, respectively, due to growth in the variable COLI business as related account values increased $3.7 billion, or 29%, from a year ago. In addition, net investment income increased $4, or 5%, and $12, or 7%, driven by income on policy loans related to the leveraged COLI business. Expenses increased $9, or 6%, and $27, or 8%, and operating income increased $2, or 25%, and $3, or 19%, for the second quarter and six months ended June 30, 2001, respectively, as compared to the equivalent 2000 periods, primarily due to the growth in revenues described above. - -------------------------------------------------------------------------------- PROPERTY & CASUALTY - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> TOTAL REVENUES $ 2,147 $ 2,074 $ 4,275 $ 4,127 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 80 $ 95 $ 198 $ 211 Less: Cumulative effect of accounting change, net of tax [1] (8) -- (8) -- Net realized capital gains (losses), after-tax (14) (2) (4) 10 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 102 $ 97 $ 210 $ 201 - ------------------------------------------------------------------------------------------------------------------------------------ <FN> [1] Represents the cumulative impact of the Company's adoption of EITF Issue 99-20. </FN> </TABLE> Revenues for Property & Casualty increased $73, or 4%, for the second quarter and $148, or 4%, for the six months ended June 30, 2001, as compared with the same periods in 2000. The increase in revenues for both periods was attributable to earned premium growth in North American Property & Casualty operations of 10% and 11%, respectively, due to price increases, strong business growth and improved renewal retention, primarily within the Business Insurance segment. Partially offsetting the increase were revenue declines in International operations as a result of the sales of Zwolsche in December 2000 and Hartford Seguros in February 2001. Operating income increased $5, or 5%, for the second quarter and $9, or 4%, for the six months ended June 30, 2001, as compared with the same prior year periods. The second quarter and six month increases reflect strong results in North American Property & Casualty, partially offset by declines in International and Other Operations. North American Property & Casualty operating income growth for both periods was driven by favorable pricing and loss cost trends in Business Insurance as well as North American Property & Casualty expense ratio improvements. Operating income growth was partially offset by higher personal automobile and Reinsurance losses. - -------------------------------------------------------------------------------- BUSINESS INSURANCE - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Written premiums $ 714 $ 605 $ 1,416 $ 1,184 Underwriting results $ 10 $ (12) $ (13) $ (52) Combined ratio 96.4 100.1 98.7 103.2 ==================================================================================================================================== </TABLE> Business Insurance written premiums increased $109, or 18%, for the second quarter and $232, or 20%, for the six months ended June 30, 2001, as compared to the same periods in 2000. Select Customer increased $55, or 20%, for the quarter and $108, or 20%, for the six-month period as a result of pricing increases, strong renewal retention and the success of product, marketing, technology and service growth initiatives. The increase in Key Accounts of $38, or 15%, for the second quarter and $89, or - 19 -
18%, for the six-month period continues to be attributable primarily to significant pricing increases and improved renewal retention as well as strong new business growth. Underwriting results increased $22, or 3.7 combined ratio points, for the second quarter and $39, or 4.5 combined ratio points, for the six-month period, as compared with the same periods in 2000. The improvement in both periods was primarily due to strong pricing and minimal loss costs as well as an improved expense ratio. The favorable expense ratio was the result of prudent expense management and prior year field office reorganization costs not recurring in 2001. - -------------------------------------------------------------------------------- AFFINITY PERSONAL LINES - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Written premiums $ 483 $ 440 $ 905 $ 826 Underwriting results $ (21) $ (15) $ (6) $ (1) Combined ratio 105.4 103.7 101.7 100.5 ==================================================================================================================================== </TABLE> Written premiums increased $43, or 10%, for the second quarter and $79, or 10%, for the six months ended June 30, 2001, as compared to the same periods in 2000. The increase in both periods continues to be driven by growth in the AARP program and Affinity business unit. AARP increased primarily as a result of strong new business growth and continued steady premium renewal retention. The improvement in Affinity reflects the increased new business from the Ford and Sears accounts, partially offset by lower financial institution written premiums. Underwriting results decreased $6, with a corresponding 1.7 point increase in the combined ratio, for the second quarter and $5, with a corresponding 1.2 point increase, for the six-month period, as compared with the same prior year periods. Heavy catastrophes in the second quarter along with higher personal automobile losses adversely impacted underwriting results and the combined ratios. Although underwriting expenses increased in both periods as a result of increased written premiums, the expense ratios improved slightly primarily as a result of prudent expense management. - -------------------------------------------------------------------------------- PERSONAL INSURANCE - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Written premiums $ 260 $ 252 $ 500 $ 479 Underwriting results $ (22) $ (4) $ (21) $ (14) Combined ratio 107.2 100.8 102.8 102.3 ==================================================================================================================================== </TABLE> Written premiums increased $8, or 3%, and $21, or 4%, for the second quarter and six months ended June 30, 2001, respectively, as compared to the equivalent prior year periods. The increase in written premiums for both periods was primarily due to premium growth in the automobile and homeowners lines as a result of pricing increases and strong renewal retention. Underwriting results decreased $18, with a corresponding 6.4 point increase in the combined ratio, for the second quarter and $7, with a corresponding 0.5 point increase, for the six months ended June 30, 2001, as compared with the same periods in 2000. Increased automobile losses in both standard and non-standard as well as higher catastrophes in the second quarter significantly impacted the quarter and six-month period underwriting results and combined ratios. In addition, there was an increase in the second quarter loss adjustment expense ratio as a result of the increase in the loss ratio. - -------------------------------------------------------------------------------- SPECIALTY COMMERCIAL - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Written premiums $ 257 $ 253 $ 511 $ 504 Underwriting results $ (24) $ (22) $ (38) $ (43) Combined ratio 104.3 106.4 105.7 105.8 ==================================================================================================================================== </TABLE> Specialty Commercial written premiums increased $4, or 2%, for the second quarter and $7, or 1%, for the six months ended June 30, 2001, as compared to the prior year periods. These increases were primarily due to The Hartford's purchase of the in force, new and renewal financial products business as well as the majority of the excess and surplus lines business of Reliance in 2000, which resulted in $30 and $61 of additional written premiums for the second quarter and six-month periods, respectively, as compared to the same periods in 2000. Partially offsetting the increases was a decrease in written premiums in - 20 -
both periods from sold or exited business lines which include farm, public entity ("PENCO") and Canada. Underwriting results decreased $2 for the second quarter of 2001, while the combined ratio improved 2.1 points. For the six-month period, underwriting results increased $5 with a slight improvement of 0.1 point in the combined ratio. The second quarter and six-month underwriting results primarily reflect increased losses in the casualty business lines, offset by favorable results in property lines of business and lower underwriting expenses as a result of ceding commissions in the professional liability line. The improvement in the combined ratio in the second quarter was primarily due to a lower expense ratio from the lower underwriting expenses. - -------------------------------------------------------------------------------- REINSURANCE - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Written premiums $ 205 $ 188 $ 568 $ 455 Underwriting results $ (37) $ (11) $ (62) $ (24) Combined ratio 119.4 108.1 113.2 104.9 ==================================================================================================================================== </TABLE> Reinsurance written premiums increased $17, or 9%, for the second quarter and $113, or 25%, for the six months ended June 30, 2001, as compared with the same prior year periods. The increases in both periods can be attributable to growth in Alternative Risk Transfer ("ART") written premiums, with year-to-date growth primarily due to a significant first quarter ART transaction. The achievement of double-digit pricing increases in traditional reinsurance was mitigated by higher terminations to maintain profitability targets. Underwriting results decreased $26, or 11.3 combined ratio points, for the second quarter and $38, or 8.3 points, for the six months ended June 30, 2001 as compared with 2000. The decrease in underwriting results and corresponding increase in the combined ratios for both periods was primarily due to continued adverse loss development on prior underwriting years, partially offset by improvement in the commission ratio, reflecting improved contract terms. - -------------------------------------------------------------------------------- INTERNATIONAL AND OTHER OPERATIONS - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> TOTAL REVENUES $ 41 $ 153 $ 95 $ 315 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 2 $ 9 $ 5 $ 20 Less: Net realized capital gains, after-tax 1 4 3 11 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 1 $ 5 $ 2 $ 9 ==================================================================================================================================== </TABLE> INTERNATIONAL International revenues for the second quarter ended June 30, 2001 decreased $111, or 97%, over the comparable period in 2000 while operating income decreased $2. Both decreases were primarily due to the sale of Zwolsche in December 2000. On February 8, 2001, The Hartford completed the sale of its Spain-based subsidiary Hartford Seguros. The Hartford received $29, before costs of sale and recorded a $16, after-tax, net realized capital loss, which was reported in the 2001 investment results of North American Property & Casualty. OTHER OPERATIONS Other Operations consist of property and casualty operations of The Hartford which have discontinued writing new business. Other Operations revenues decreased $1, or 3%, for the second quarter and were flat for the six months ended June 30, 2001 compared to the same prior year period. Operating income decreased $2 and $1 compared to second quarter and the six months ended June 30, 2000, respectively. - -------------------------------------------------------------------------------- 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, - 21 -
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 second quarter ended June 30, 2001 and the year ended December 31, 2000, was as follows (net of reinsurance): <TABLE> <CAPTION> ENVIRONMENTAL AND ASBESTOS CLAIMS AND CLAIM ADJUSTMENT EXPENSES - ------------------------------------------------------------------------------------------------------------------------------------ SIX MONTHS ENDED YEAR ENDED JUNE 30, 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 5 2 7 8 8 16 Claims and claim adjustment expenses paid (128) (51) (179) (92) (61) (153) - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITY [1] $ 788 $ 523 $ 1,311 $ 911 $ 572 $ 1,483 ==================================================================================================================================== <FN> [1] The ending liabilities are net of reinsurance on reported and unreported claims of $1,429 and $1,506 for June 30, 2001 and December 31, 2000, respectively. Gross of reinsurance as of June 30, 2001 and December 31, 2000, reserves for environmental and asbestos were $1,312 and $1,428 and $1,483 and $1,506, respectively. </FN> </TABLE> The Hartford believes that the environmental and asbestos reserves reported at June 30, 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. - 22 -
- -------------------------------------------------------------------------------- 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 June 30, 2001 and December 31, 2000. <TABLE> <CAPTION> COMPOSITION OF INVESTED ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Fixed maturities, at fair value $ 21,335 80.0% $ 18,248 79.6% Equity securities, at fair value 380 1.4% 171 0.7% Policy loans, at outstanding balance 3,728 14.0% 3,610 15.7% Other investments 1,214 4.6% 910 4.0% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 26,657 100.0% $ 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 June 30, 2001 and December 31, 2000. <TABLE> <CAPTION> FIXED MATURITIES BY TYPE - ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Corporate $ 9,595 45.0% $ 7,663 42.0% Asset-backed securities (ABS) 3,393 15.9% 3,070 16.8% Commercial mortgage-backed securities (CMBS) 2,855 13.4% 2,776 15.2% Municipal - tax-exempt 1,351 6.3% 1,390 7.6% Mortgage-backed securities (MBS) - agency 948 4.4% 602 3.3% Collateralized mortgage obligations (CMO) 737 3.5% 928 5.1% Government/Government agencies - United States 605 2.8% 244 1.3% Government/Government agencies - Foreign 371 1.7% 321 1.8% Municipal - taxable 52 0.2% 83 0.5% Short-term 1,371 6.5% 975 5.3% Redeemable preferred stock 57 0.3% 196 1.1% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 21,335 100.0% $ 18,248 100.0% ==================================================================================================================================== </TABLE> Fixed maturity investments increased by $3.1 billion primarily as a result of the Fortis acquisition. The securities acquired as part of the transaction were principally corporate and ABS. 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> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- (before-tax) 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Net investment income - excluding policy loan income $ 365 $ 312 $ 717 $ 620 Policy loan income 78 72 156 146 --------------------------------------------------------- Net investment income - total $ 443 $ 384 $ 873 $ 766 Yield on average invested assets [1] 6.9% 7.0% 7.1% 6.9% Net realized capital losses $ (17) $ (43) $ (17) $ (43) ==================================================================================================================================== <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> - 23 -
For the second quarter and six months ended June 30, 2001 net investment income, excluding policy loans, increased 17% and 16% compared to the respective prior periods. The increases were primarily due to income earned on the previously discussed increase in fixed maturity investments. Yields on average invested assets were essentially flat. Net realized capital losses for the second quarter and six months ended June 30, 2001 decreased by $26 compared to the respective prior year periods. Realized gains and losses were attributable to investment portfolio rebalancing activities. Included in 2001 net losses were losses associated with the credit deterioration of certain investments in which the Company has an indirect economic interest. PROPERTY & CASUALTY The following table identifies invested assets by type as of June 30, 2001 and December 31, 2000. <TABLE> <CAPTION> COMPOSITION OF INVESTED ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Fixed maturities, at fair value $ 16,041 91.0% $ 16,239 91.6% Equity securities, at fair value 935 5.3% 885 5.0% Other investments 655 3.7% 601 3.4% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 17,631 100.0% $ 17,725 100.0% ==================================================================================================================================== </TABLE> The following table identifies fixed maturities by type as of June 30, 2001 and December 31, 2000. <TABLE> <CAPTION> FIXED MATURITIES BY TYPE - ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Municipal - tax-exempt $ 8,348 52.0% $ 8,527 52.5% Corporate 3,980 24.8% 3,105 19.1% Commercial mortgage-backed securities (CMBS) 1,116 7.0% 1,141 7.0% Asset-backed securities (ABS) 756 4.7% 760 4.7% Government/Government agencies - Foreign 518 3.2% 682 4.2% Mortgage-backed securities (MBS) - agency 345 2.2% 315 1.9% Collateralized mortgage obligations (CMO) 165 1.0% 236 1.5% Government/Government agencies - United States 68 0.4% 63 0.4% Municipal - taxable 46 0.3% 46 0.3% Short-term 589 3.7% 1,120 6.9% Redeemable preferred stock 110 0.7% 244 1.5% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 16,041 100.0% $ 16,239 100.0% ==================================================================================================================================== </TABLE> Total fixed maturities decreased slightly since December 31, 2000 primarily as a result of the sale of Hartford Seguros. Corporate fixed maturity investments increased primarily due to a reallocation from municipal tax-exempt and short-term investments. INVESTMENT RESULTS The table below summarizes Property & Casualty's results. <TABLE> <CAPTION> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2001 2000 2001 2000 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> Net investment income, before-tax $ 271 $ 259 $ 528 $ 531 Net investment income, after-tax [1] $ 210 $ 204 $ 411 $ 414 --------------------------------------------------------- Yield on average invested assets, before-tax [2] 6.4% 6.0% 6.2% 6.1% Yield on average invested assets, after-tax [1] [2] 4.9% 4.7% 4.8% 4.8% Net realized capital gains (losses), before-tax $ (21) $ (2) $ (20) $ 15 - ------------------------------------------------------------------------------------------------------------------------------------ <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 second quarter ended June 30, 2001, before- and after-tax net investment income increased by 5% and 3%, respectively. The increases in net investment income and yields on average invested assets were due to higher taxable fixed maturity and partnership income in the North American Property & Casualty operations, partially offset by a decline in investment income in International operations resulting from the sales of Zwolsche and Hartford Seguros. For the six months ended June 30, 2001, investment income was relatively flat as improved earnings in North American Property & Casualty were offset by the - 24 -
reduction in earnings from International operations. Yields on average invested assets for the six months ended June 30, 2001 were essentially flat. Net realized capital losses for the second quarter increased by $19 compared to the respective prior year period. Net realized losses were $20 for the six months ended June 30, 2001, compared to net realized gains of $15 for the respective prior year period. Realized gains and losses were attributable to investment portfolio rebalancing activities. Included in 2001 net losses were losses associated with the credit deterioration of certain investments in which the Company has an indirect economic interest. CORPORATE In connection with The HLI Repurchase, the carrying value of the purchased fixed maturity investments was increased to fair market value as of the date of the repurchase. This adjustment was reported in Corporate. The amortization benefit of the increase to the fixed maturity investments' carrying values is reported in Corporate's net investment income. The total amount of amortization benefit for the second quarter and six months ended June 30, 2001 was $5 and $9, respectively, 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 June 30, 2001 and December 31, 2000, over 96% of the fixed maturity portfolio was invested in securities rated investment grade. <TABLE> <CAPTION> FIXED MATURITIES BY CREDIT QUALITY - ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> United States Government/Government agencies $ 2,873 9.3% $ 2,329 8.4% AAA 4,704 15.3% 4,896 17.6% AA 3,405 11.0% 3,546 12.7% A 10,574 34.4% 9,675 34.7% BBB 6,719 21.8% 5,633 20.2% BB & below 963 3.1% 708 2.5% Short-term 1,581 5.1% 1,085 3.9% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 30,819 100.0% $ 27,872 100.0% ==================================================================================================================================== </TABLE> PROPERTY & CASUALTY As of June 30, 2001 and December 31, 2000, over 95% of the fixed maturity portfolio was invested in securities rated investment grade. - 25 -
<TABLE> <CAPTION> FIXED MATURITIES BY CREDIT QUALITY - ------------------------------------------------------------------------------------------------------------------------------------ JUNE 30, 2001 DECEMBER 31, 2000 FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> United States Government/Government agencies $ 522 3.3% $ 516 3.2% AAA 6,151 38.3% 6,414 39.5% AA 3,225 20.1% 3,414 21.0% A 2,970 18.5% 2,664 16.4% BBB 1,788 11.1% 1,442 8.9% BB & below 796 5.0% 669 4.1% Short-term 589 3.7% 1,120 6.9% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 16,041 100.0% $ 16,239 100.0% ==================================================================================================================================== </TABLE> 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> JUNE 30, 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] $ 8,005 $ 6,967 Unrealized gain on securities and other, net of tax [1] 474 497 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 8,479 $ 7,464 ----------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION [2] $ 11,946 $ 10,307 ----------------------------------------------------------------------------------------------------------------------------- Debt to equity [2] [3] 49% 48% Debt to capitalization [2] [3] 33% 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 31% and 30% and the debt to capitalization ratio was 21% and 20% as of June 30, 2001 and December 31, 2000, respectively. </FN> </TABLE> FORTIS ACQUISITION On April 2, 2001, The Hartford acquired Fortis Financial Group for $1.12 billion in cash. The Company effected the acquisition through several reinsurance agreements with subsidiaries of Fortis, Inc. and the purchase of 100% of the stock of Fortis Advisers, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis, Inc. The acquisition was accounted for as a purchase transaction. 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 June 1998 shelf registration and (3) March 6, 2001 issuance of $200 of trust preferred securities under HLI's June 1998 shelf registration. CAPITALIZATION The Hartford's total capitalization, excluding unrealized gain on securities and other, net of tax, increased by $1.6 billion as of June 30, 2001 compared to December 31, 2000. This increase was primarily the result of earnings along with financing activities related to the Fortis acquisition, partially offset by dividends declared. - 26 -
DEBT On March 1, 2001, HLI issued and sold $400 of senior debt securities from its June 1998 shelf registration to partially finance the Fortis acquisition. Effective June 20, 2001, The Hartford entered into an amended and restated five-year revolving $1.0 billion credit facility with fourteen banks. This facility is available for general corporate purposes and to provide additional support to the Company's commercial paper program. As of June 30, 2001 there were no outstanding borrowings under the facility. As of June 30, 2001, HLI continued to maintain a $250 five-year revolving credit facility comprised of four participatory banks. As of June 30, 2001, there were no outstanding borrowings under the facility. 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 June 1998 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. Dividends - On May 17, 2001, The Hartford declared a dividend on its common stock of $0.25 per share payable on July 2, 2001 to shareholders of record as of June 1, 2001. Treasury stock - During the six months ended June 30, 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 SIX MONTHS ENDED JUNE 30, -------------------------- 2001 2000 - ------------------------------------------------------------------ Cash provided by operating activities $ 682 $ 936 Cash used for investing activities $ (2,888) $ (831) Cash provided by (used for) financing activities $ 2,307 $ (70) Cash - end of period $ 324 $ 212 - ------------------------------------------------------------------ The decrease in cash provided by operating activities was primarily due to lower cash flow in Life operations, as a result of the timing of settlement of receivables and payables, partially offset by increased cash flow in North American Property & Casualty. The increase in cash from financing activities was primarily the result of 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 majority of the change in cash from investing activities. Operating cash flows in both periods have been more than adequate to meet liquidity requirements. - -------------------------------------------------------------------------------- REGULATORY MATTERS AND CONTINGENCIES - -------------------------------------------------------------------------------- NAIC CODIFICATION The National Association of Insurance Commissioners ("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 June 30, 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. - 27 -
- -------------------------------------------------------------------------------- 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. 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, if any, 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 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibits Index. (b) Reports on Form 8-K - None. - 28 -
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 AUGUST 13, 2001 - 29 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. FORM 10-Q EXHBITS INDEX EXHIBIT # --------- 10.1 Amended and Restated Five-Year Competitive Advance and Revolving Credit Facility Agreement dated as of June 20, 2001 among The Hartford Financial Services Group, Inc., the lenders named therein, and The Chase Manhattan Bank and Bank of America, N.A. as Co-Administrative Agents is filed herewith. - 30 -