================================================================================ UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ----------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 2002 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 0-19277 THE HARTFORD FINANCIAL SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3317783 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900 (Address of principal executive offices) (860) 547-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] As of April 30, 2002, there were outstanding 247,428,540 shares of Common Stock, $0.01 par value per share, of the registrant. ================================================================================
INDEX PART I. FINANCIAL INFORMATION - ------------------------------ ITEM 1. FINANCIAL STATEMENTS PAGE ---- Consolidated Statements of Income - First Quarter Ended March 31, 2002 and 2001 3 Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 4 Consolidated Statements of Changes in Stockholders' Equity - First Quarter Ended March 31, 2002 and 2001 5 Consolidated Statements of Cash Flows - First Quarter Ended March 31, 2002 and 2001 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 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 FIRST QUARTER ENDED MARCH 31, ----------------------------- (IN MILLIONS, EXCEPT FOR PER SHARE DATA) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ (Unaudited) <S> <C> <C> REVENUES Earned premiums $ 2,426 $ 2,310 Fee income 662 602 Net investment income 706 691 Other revenue 113 118 Net realized capital gains (losses) (7) 1 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 3,900 3,722 -------------------------------------------------------------------------------------------------------------------------- BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 2,256 2,211 Amortization of deferred policy acquisition costs and present value of future profits 555 518 Insurance operating costs and expenses 534 478 Goodwill amortization -- 11 Other expenses 187 183 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 3,532 3,401 ========================================================================================================================== INCOME BEFORE INCOME TAXES AND CUMULATIVE EFFECT OF ACCOUNTING CHANGE 368 321 Income tax expense 76 58 - ------------------------------------------------------------------------------------------------------------------------------------ INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 292 263 Cumulative effect of accounting change, net of tax -- (23) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 292 $ 240 ========================================================================================================================== BASIC EARNINGS PER SHARE Income before cumulative effect of accounting change $ 1.19 $ 1.14 Cumulative effect of accounting change, net of tax -- (0.10) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 1.19 $ 1.04 DILUTED EARNINGS PER SHARE Income before cumulative effect of accounting change $ 1.17 $ 1.12 Cumulative effect of accounting change, net of tax -- (0.10) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 1.17 $ 1.02 - ------------------------------------------------------------------------------------------------------------------------------------ Weighted average common shares outstanding 246.1 231.5 Weighted average common shares outstanding and dilutive potential common shares 249.7 235.5 - ------------------------------------------------------------------------------------------------------------------------------------ Cash dividends declared per share $ 0.26 $ 0.25 ==================================================================================================================================== </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 3 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED BALANCE SHEETS MARCH 31, DECEMBER 31, (IN MILLIONS, EXCEPT FOR SHARE DATA) 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> ASSETS Investments ----------- Fixed maturities, available for sale, at fair value (amortized cost of $39,811 and $39,154) $ 40,346 $ 40,046 Equity securities, available for sale, at fair value (cost of $1,256 and $1,289) 1,309 1,349 Policy loans, at outstanding balance 3,288 3,317 Other investments 2,116 1,977 - -------------------------------------------------------------------------------------------------------------------------------- Total investments 47,059 46,689 Cash 351 353 Premiums receivable and agents' balances 2,579 2,432 Reinsurance recoverables 5,141 5,162 Deferred policy acquisition costs and present value of future profits 6,581 6,420 Deferred income tax 747 693 Goodwill 1,725 1,725 Other assets 3,065 3,044 Separate account assets 117,689 114,720 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 184,937 $ 181,238 ======================================================================================================================== LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 16,712 $ 16,678 Life 9,029 8,819 Other policyholder funds and benefits payable 19,771 19,355 Unearned premiums 3,649 3,436 Short-term debt 615 599 Long-term debt 1,965 1,965 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,425 1,412 Other liabilities 5,043 5,241 Separate account liabilities 117,689 114,720 - -------------------------------------------------------------------------------------------------------------------------------- 175,898 172,225 COMMITMENTS AND CONTINGENCIES, NOTE 5 STOCKHOLDERS' EQUITY Common stock - authorized 400,000,000, issued 249,665,224 and 248,477,367 shares, par value $0.01 2 2 Additional paid-in capital 2,416 2,362 Retained earnings 6,380 6,152 Treasury stock, at cost - 2,941,340 shares (37) (37) Accumulated other comprehensive income 278 534 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 9,039 9,013 ======================================================================================================================== TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 184,937 $ 181,238 ======================================================================================================================== </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 4 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FIRST QUARTER ENDED MARCH 31, 2002 Accumulated Other Comprehensive Income (Loss) ------------------------------------------------- Net Gain Common Unrealized (Loss) 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 $2,364 $6,152 $(37) $606 $63 $(116) $(19) $9,013 245,536 Comprehensive income Net income 292 292 Other comprehensive income (loss), net of tax [1] Unrealized loss on securities (235) (235) [2] Cumulative translation adj. (4) (4) Net loss on cash-flow hedging instruments [3] (17) (17) --------- Total other comprehensive income (loss) (256) --------- Total comprehensive income 36 ========= Issuance of shares under incentive and stock purchase plan 44 44 1,188 Tax benefit on employee stock options and awards 10 10 Dividends declared on common stock (64) (64) - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $2,418 $6,380 $(37) $371 $46 $(120) $(19) $9,039 246,724 ==================================================================================================================================== </TABLE> <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31, 2001 Accumulated Other Comprehensive Income (Loss) ------------------------------------------------ Net Gain Common Unrealized 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 240 240 Other comprehensive income, net of tax [1] Cumulative effect of accounting change [4] (1) 24 23 Unrealized gain on securities 124 124 [2] Cumulative translation adj. (14) (14) Net gain on cash-flow hedging instruments [3] 20 20 --------- Total other comprehensive income 153 --------- Total comprehensive income 393 ========= Issuance of shares under incentive and stock purchase plans 27 4 31 572 Issuance of common stock in underwritten offering 169 446 615 10,000 Tax benefit on employee stock options and awards 2 2 Dividends declared on common stock (59) (59) - ----------------------------------------------------------------------------------------------------------------------------------- BALANCE, END OF PERIOD $1,886 $6,068 $(30) $620 $44 $(127) $(15) $8,446 236,862 =================================================================================================================================== <FN> [1] Unrealized gain (loss) on securities is net of tax expense (benefit) of $(127) and $67 for the first quarter ended March 31, 2002 and 2001, respectively. Net gain (loss) on cash-flow hedging instruments is net of tax expense (benefit) of $(9) and $11 for the first quarter ended March 31, 2002 and 2001, respectively. For the first quarter ended March 31, 2001, cumulative effect of accounting change is net of tax benefit of $12. There is no tax effect on cumulative translation adjustments. [2] Net of reclassification adjustment for gains realized in net income of $0 and $26 for the first quarter ended March 31, 2002 and 2001, respectively. [3] Net of amortization adjustment of $1 and $2 to net investment income for the first quarter ended March 31, 2002 and 2001, respectively. [4] For the first quarter ended March 31, 2001, unrealized gain (loss) on securities, net of tax, includes cumulative effect of accounting change of $(23) to net income and $24 to net gain on cash-flow hedging instruments. </FN> </TABLE> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. - 5 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS FIRST QUARTER ENDED MARCH 31, ---------------------------------- (IN MILLIONS) 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> OPERATING ACTIVITIES Net income $ 292 $ 240 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Change in receivables, payables and accruals (339) (113) Change in reinsurance recoverables and other related assets 45 215 Amortization of deferred policy acquisition costs and present value of future profits 555 518 Additions to deferred policy acquisition costs and present value of future profits (716) (687) Change in accrued and deferred income taxes 96 (39) Increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 440 310 Net realized capital losses (gains) 7 (1) Depreciation and amortization 13 15 Cumulative effect of accounting change, net of tax -- 23 Other, net (6) (175) - -------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 387 306 ================================================================================================================================ INVESTING ACTIVITIES Purchase of investments (3,760) (5,439) Sale of investments 2,604 2,893 Maturity of investments 412 653 Sale of affiliates -- 25 Additions to property, plant and equipment (31) (31) - -------------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR INVESTING ACTIVITIES (775) (1,899) ================================================================================================================================ FINANCING ACTIVITIES Short-term debt, net 16 -- Issuance of long-term debt -- 400 Issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures -- 200 Issuance of common stock in underwritten offering -- 615 Net proceeds from investment and universal life-type contracts charged against policyholder accounts 389 469 Dividends paid (64) (57) Proceeds from issuance of shares under incentive and stock purchase plans 45 16 - -------------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 386 1,643 ================================================================================================================================ Net increase (decrease) in cash (2) 50 Cash - beginning of period 353 227 - -------------------------------------------------------------------------------------------------------------------------------- CASH - END OF PERIOD $ 351 $ 277 ================================================================================================================================ SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: ================================================= NET CASH PAID DURING THE PERIOD FOR: Income taxes $ -- $ -- Interest $ 29 $ 5 </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 accounting principles generally accepted in the United States for interim periods. Less than majority-owned entities in which The Hartford has at least a 20% interest are reported on the 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 2001 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. Certain reclassifications have been made to prior year financial information to conform to the current year classification of transactions and accounts. (B) ADOPTION OF NEW ACCOUNTING STANDARDS In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for long-lived assets to be disposed of by sale that applies to all long-lived assets, including discontinued operations. SFAS No. 144 requires that those long-lived assets be measured at the lower of carrying amount or fair value less cost to sell, whether reported in continuing operations or in discontinued operations. The provisions of Statement 144 are effective for financial statements issued for fiscal years beginning after December 15, 2001. Adoption of SFAS No. 144 did not have a material impact on the Company's financial condition or results of operations. In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No. 141 eliminates the pooling-of-interests method of accounting for business combinations, requiring all business combinations to be accounted for under the purchase method. Accordingly, net assets acquired are recorded at fair value with any excess of cost over net assets assigned to goodwill. SFAS No. 141 also requires that certain intangible assets acquired in a business combination be recognized apart from goodwill. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. Adoption of SFAS No. 141 did not have a material impact on the Company's financial condition or results of operations. In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets". Under SFAS No. 142, amortization of goodwill is precluded; however, its fair value is periodically (at least annually) reviewed and tested for impairment. Goodwill must be tested for impairment in the year of adoption, including an initial test performed within six months of adoption. If the initial test indicates a potential impairment, then a more detailed analysis to determine the extent of impairment must be completed within twelve months of adoption. SFAS No. 142 requires that useful lives for intangibles other than goodwill be reassessed and remaining amortization periods be adjusted accordingly. While the Company is in the process of testing its goodwill asset for recoverability, it does not expect any potential impairments to have a material impact on the Company's financial condition or results of operations. Adoption of all other provisions of SFAS No. 142 did not have a material impact on the Company's financial condition or results of operations. (For further discussion of the impact of SFAS No. 142, see Note 2.) Effective January 1, 2001, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138. Upon adoption of SFAS No. 133, as amended, the Company recorded a $23 charge to net income as a net-of-tax cumulative effect of accounting change. (C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections". Under current guidance all gains and losses resulting from the extinguishment of debt were required to be aggregated and, if material, classified as an extraordinary item, net of related income tax effect. SFAS No. 145 rescinds that guidance and requires that gains and losses from extinguishment of debt be classified as extraordinary items only if they are both unusual and infrequent in occurrence. Statement 145 also amends SFAS No. 13, "Accounting for Leases" for the required accounting treatment of certain lease modifications that have economic effects similar to sale-leaseback transactions. SFAS No. 145 requires that those lease modifications be accounted for in the same manner as sale-leaseback transactions. The provisions of Statement 145 related to the rescission of SFAS No. 4 shall be applied in fiscal years beginning after May 15, 2002. The provisions of Statement 145 related to SFAS No. 13 shall be effective for transactions occurring after May 15, 2002. Adoption of SFAS No. 145 will not have a material impact on the Company's financial condition or results of operations. - 7 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS Effective January 1, 2002, the Company adopted SFAS No. 142 and accordingly ceased all amortization of goodwill. The following tables show net income and earnings per share with the quarter ended March 31, 2001 adjusted for goodwill amortization occurring in that quarter. <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31, ------------------------------ NET INCOME 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Income before cumulative effect of accounting change $ 292 $ 263 Goodwill amortization, net of tax -- 10 - ----------------------------------------------------------------------------------------------------------------------------- Adjusted income before cumulative effect of accounting change 292 273 Cumulative effect of accounting change, net of tax -- (23) - ----------------------------------------------------------------------------------------------------------------------------- Adjusted net income $ 292 $ 250 ============================================================================================================================= </TABLE> <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31, ------------------------------ BASIC EARNINGS PER SHARE 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Income before cumulative effect of accounting change $ 1.19 $ 1.14 Goodwill amortization, net of tax -- 0.04 - ----------------------------------------------------------------------------------------------------------------------------- Adjusted income before cumulative effect of accounting change 1.19 1.18 Cumulative effect of accounting change, net of tax -- (0.10) - ----------------------------------------------------------------------------------------------------------------------------- Adjusted net income $ 1.19 $ 1.08 ============================================================================================================================= DILUTED EARNINGS PER SHARE Income before cumulative effect of accounting change $ 1.17 $ 1.12 Goodwill amortization, net of tax -- 0.04 - ----------------------------------------------------------------------------------------------------------------------------- Adjusted income before cumulative effect of accounting change 1.17 1.16 Cumulative effect of accounting change, net of tax -- (0.10) - ----------------------------------------------------------------------------------------------------------------------------- Adjusted net income $ 1.17 $ 1.06 ============================================================================================================================= </TABLE> The following table shows the Company's acquired intangible assets that continue to be subject to amortization and aggregate amortization expense. Except for goodwill, the Company has no intangible assets with indefinite useful lives. <TABLE> <CAPTION> AS OF MARCH 31, 2002 ------------------------------ GROSS ACCUMULATED CARRYING NET AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Present value of future profits $ 1,406 $ 187 Renewal rights 42 22 - ----------------------------------------------------------------------------------------------------------------------------- Total $ 1,448 $ 209 ============================================================================================================================= </TABLE> Net amortization expense for the quarter ended March 31, 2002 was $26. Estimated future net amortization expense for the succeeding five years is as follows: For the year ended December 31, - ----------------------------------------------------- 2002 $ 131 2003 $ 120 2004 $ 114 2005 $ 104 2006 $ 93 - ----------------------------------------------------- - 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 2. GOODWILL AND OTHER INTANGIBLE ASSETS (CONTINUED) The carrying amount of goodwill as of March 31, 2002 and December 31, 2001, respectively, is shown below. The Company is in the process of completing its allocation of goodwill to the reporting segment and unit levels. <TABLE> <CAPTION> MARCH 31, DECEMBER 31, 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Life $ 799 $ 799 Property & Casualty 154 154 Corporate 772 772 - ------------------------------------------------------------------------------------------------------------------------------------ Total $ 1,725 $ 1,725 ==================================================================================================================================== </TABLE> NOTE 3. 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 1(e) of Notes to Consolidated Financial Statements included in The Hartford's December 31, 2001 Form 10-K Annual Report. As of March 31, 2002, the Company reported $113 of derivative assets in other invested assets and $183 of derivative liabilities in other liabilities. Cash-Flow Hedges For the quarter ended March 31, 2002, 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 March 31, 2002, approximately $3 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 March 31, 2002, the Company held approximately $2.5 billion in derivative notional value related to strategies categorized as cash-flow hedges. There was $1 of reclassifications from OCI to earnings resulting from the discontinuance of cash-flow hedges during the quarter ended March 31, 2002. There were no reclassifications from OCI to earnings resulting from the discontinuance of cash-flow hedges during the quarter ended March 31, 2001. Fair-Value Hedges For the quarter ended March 31, 2002, 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 March 31, 2002, the Company held approximately $863 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 March 31, 2002, the Company held approximately $5.2 billion in derivative notional value related to strategies categorized as Other Risk Management Activities. - 9 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 4. EARNINGS PER SHARE The following tables present a reconciliation of income and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share. <TABLE> <CAPTION> MARCH 31, 2002 Income Shares Per Share Amount - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> BASIC EARNINGS PER SHARE Income available to common shareholders $ 292 246.1 $ 1.19 =================== DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 3.6 ----------------------------- Income available to common shareholders plus assumed conversions $ 292 249.7 $ 1.17 ==================================================================================================================================== MARCH 31, 2001 Income Shares Per Share Amount - ------------------------------------------------------------------------------------------------------------------------------------ BASIC EARNINGS PER SHARE Income available to common shareholders $ 240 231.5 $ 1.04 =================== DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 4.0 ----------------------------- Income available to common shareholders plus assumed conversions $ 240 235.5 $ 1.02 ==================================================================================================================================== </TABLE> Basic earnings per share reflects the actual 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 used to repurchase common stock at the average market price for the period. Contingently issuable shares are included upon satisfaction of certain conditions related to the contingency. NOTE 5. 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. On March 15, 2002, a jury in the U.S. District Court for the Eastern District of Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life Insurance Company ("HLIC"), et al. in favor of Bancorp in the amount of $118. The case involved claims of patent infringement, misappropriation of trade secrets, and breach of contract against HLIC and its affiliate International Corporate Marketing Group, Inc. ("ICMG"). The judge dismissed the patent infringement claim on summary judgment. The jury's award was based on the last two claims. HLIC and ICMG have moved the district court for, inter alia, judgment as a matter of law or a new trial, and intend to appeal the judgment if the district court does not set it aside or substantially reduce it. In either event, the Company's management, based on the opinion of its legal advisers, believes that there is a substantial likelihood that the jury award will not survive at its current amount. Based on the advice of legal counsel regarding the potential outcome of this litigation, the Company recorded an $11 after-tax charge in the first quarter of 2002 to increase litigation reserves associated with this matter. Should HLIC and ICMG not succeed in eliminating or reducing the judgment, a significant additional expense would be recorded in the future related to this matter. (B) TAX MATTERS The Hartford's federal income tax returns are routinely audited by the Internal Revenue Service ("IRS"). Management believes that adequate provision has been made in the financial statements for any potential assessments that may result from tax examinations and other tax related matters for all open tax years. (C) 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 and Subsequent Event, below. (D) SUBSEQUENT EVENT On May 14, 2002, The Hartford announced its participation in a settlement in principle by its insured, PPG Industries ("PPG"), of litigation arising from asbestos exposures involving Pittsburgh Corning Corporation ("Pittsburgh Corning"), which is 50% owned by PPG. The structure of the settlement will allow The Hartford to make fixed payments to a settlement trust over a 20-year period beginning in 2004. The settlement is subject to a number of contingencies, including the negotiation of a definitive agreement among the parties and approval of the bankruptcy court supervising the reorganization of Pittsburgh Corning. The Hartford estimates the settlement amount to be between $120 and $150 (non tax-affected) on a discounted basis and net of anticipated reinsurance recoveries. The settlement is covered by existing asbestos reserves, and as a result, will not have a material impact on The Company's financial condition or results of operations. - 10 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. SEGMENT INFORMATION The Hartford is organized into two major operations: Life and Property & Casualty. Within these operations, The Hartford conducts business principally in nine operating segments. Additionally, all activities related to The HLI Repurchase in June 2000 and the minority interest in HLI for pre-acquisition periods are included in Corporate. Life is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI"). Investment Products offers individual variable and fixed annuities, mutual funds, retirement plan services and other investment products. Individual Life sells a variety of life insurance products, including variable life, universal life, interest sensitive whole life and term life insurance. Group Benefits sells group insurance products, including group life and group disability insurance as well as other products, including stop loss and supplementary medical coverages to employers and employer sponsored plans, accidental death and dismemberment, travel accident and other special risk coverages to employers and associations. COLI primarily offers variable products used by employers to fund non-qualified benefits or other postemployment benefit obligations as well as leveraged COLI. Life also includes in an Other category its international operations, which are primarily located in Latin America and Japan, as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. In January 2002, Property & Casualty integrated its Affinity Personal Lines and Personal Insurance segments, now reported as Personal Lines. As a result, Property & Casualty is now organized into five reportable operating segments, the North American underwriting segments of Business Insurance, Personal Lines, Specialty Commercial and Reinsurance; and the Other Operations segment. Business Insurance provides standard commercial insurance coverage to small commercial and middle market insureds. This segment also provides commercial risk management products and services to small and mid-sized members of affinity groups in addition to marine coverage. Personal Lines provides automobile, homeowners and home-based business coverages to the membership of AARP through a direct marketing operation; to customers of Sears and Ford as well as customers of financial institutions through an affinity center; 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. Personal Lines also operates a member contact center for health insurance products offered through AARP's Health Care Options. Specialty Commercial provides property, bond and professional liability coverages as well as insurance through retailers and wholesalers to large commercial clients and insureds requiring a variety of specialized coverages. The Reinsurance segment assumes reinsurance worldwide and primarily writes treaty reinsurance through professional reinsurance brokers covering various property, casualty, specialty and marine classes of business. The Other Operations segment currently consists of certain property and casualty insurance operations of The Hartford which have discontinued writing new business. For 2002, this includes the activity in the exited international lines of HartRe as a result of its restructuring in October 2001. (For further discussion of this restructuring, see Note 8 of Notes to Consolidated Financial Statements.) The Other Operations segment results also include activity for the Company's international property and casualty businesses up until their dates of sale. 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 and losses, the cumulative effect of accounting changes and certain other items. While not considered segments, the Company also reports and evaluates operating income results for Life, Property & Casualty and North American. North American includes the combined underwriting results of the North American underwriting segments along with income and expense items not directly allocable to these segments, such as net investment income. Property & Casualty includes operating income for North American and the Other Operations segment. Certain transactions between segments occur during the year that primarily relate to tax settlements, insurance coverage, expense reimbursements, services provided and capital contributions. Certain reinsurance stop loss agreements exist between the segments which specify that one segment will reimburse another for losses incurred in excess of a predetermined limit. Also, one segment may purchase group annuity contracts from another to fund pension costs and claim annuities to settle casualty claims. In addition, certain intersegment transactions occur in Life. These transactions include interest income on allocated surplus and the allocation of net realized capital gains and losses through net invested income utilizing the duration of the segment's investment portfolios. The following tables present revenues and operating income. Underwriting results are presented for the Business Insurance, Personal Lines, Specialty Commercial and Reinsurance segments, while operating income is presented for all other segments, along with Life and Property & Casualty, including North American. - 11 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. SEGMENT INFORMATION (CONTINUED) <TABLE> <CAPTION> REVENUES FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Life Investment Products $ 650 $ 604 Individual Life 232 163 Group Benefits 644 613 COLI 160 184 Other (10) 26 - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 1,676 1,590 - ------------------------------------------------------------------------------------------------------------------------------------ Property & Casualty North American Earned premiums and other revenue Business Insurance 732 620 Personal Lines 747 704 Specialty Commercial 290 285 Reinsurance 171 249 - ------------------------------------------------------------------------------------------------------------------------------------ Total North American earned premiums and other revenue 1,940 1,858 Net investment income 217 218 Net realized capital gains (losses) 7 (2) - ------------------------------------------------------------------------------------------------------------------------------------ Total North American 2,164 2,074 Other Operations 56 54 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 2,220 2,128 - ------------------------------------------------------------------------------------------------------------------------------------ Corporate 4 4 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 3,900 $ 3,722 ==================================================================================================================================== </TABLE> - 12 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED) NOTE 6. SEGMENT INFORMATION (CONTINUED) <TABLE> <CAPTION> OPERATING INCOME FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Life Investment Products $ 117 $ 111 Individual Life 31 20 Group Benefits 28 23 COLI -- 9 Other 1 (2) - ------------------------------------------------------------------------------------------------------------------------------------ Total Life 177 161 - ------------------------------------------------------------------------------------------------------------------------------------ Property & Casualty North American Underwriting results Business Insurance 4 (23) Personal Lines (11) 16 Specialty Commercial (10) (14) Reinsurance (4) (25) - ------------------------------------------------------------------------------------------------------------------------------------ Total North American underwriting results (21) (46) Net servicing and other income [1] 2 5 Net investment income 217 218 Other expenses (51) (62) Income tax expense (25) (8) - ------------------------------------------------------------------------------------------------------------------------------------ Total North American 122 107 Other Operations -- 1 - ------------------------------------------------------------------------------------------------------------------------------------ Total Property & Casualty 122 108 - ------------------------------------------------------------------------------------------------------------------------------------ Corporate (6) (16) - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME 293 253 Cumulative effect of accounting change, net of tax -- (23) Net realized capital gains (losses), after-tax (1) 10 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 292 $ 240 ==================================================================================================================================== <FN> [1] Net of expenses related to service business. </FN> </TABLE> NOTE 7. STOCKHOLDERS' EQUITY Increase in authorized shares - At the Company's annual meeting of shareholders held on April 18, 2002, shareholders approved an amendment to Section (a) Article Fourth of the Amended and Restated Certificate of Incorporation to increase the aggregate authorized number of shares of common stock from 400 million to 750 million. NOTE 8. RESTRUCTURING During the fourth quarter of 2001, the Company approved and implemented plans for restructuring the operations of both HartRe and The Hartford Bank, FSB ("The Hartford Bank"). HartRe announced a restructuring of its entire international and domestic operations, with the purpose of centralizing the underwriting organization in Hartford, Connecticut. Also, the Boards of Directors for both The Hartford Bank and The Hartford Financial Services Group, Inc., approved The Hartford Bank's dissolution plan. Both plans will be completed during 2002. As a result of these restructuring plans, the Company recorded a 2001 pretax charge and accrual of approximately $16. This amount included $8 in employee-related costs, $5 in occupancy-related costs and the remaining $3 in other restructuring costs. The 79 employees terminated under these restructuring plans primarily relate to all levels of the underwriting and claims areas. The occupancy-related costs represent the remaining lease liabilities for both the domestic and international offices of HartRe to be closed pursuant to the restructuring plan. As of March 31, 2002, the Company has paid approximately $3 in employee-related restructuring costs. - 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 subsidiaries (collectively, "The Hartford" or the "Company") as of March 31, 2002, compared with December 31, 2001, and its results of operations for the first quarter ended March 31, 2002, compared to the equivalent 2001 period. This discussion should be read in conjunction with the MD&A in The Hartford's 2001 Form 10-K Annual Report. Certain of the statements contained herein (other than statements of historical fact) are forward-looking statements. These forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty which are, in many instances, beyond the Company's control and have been made based upon management's expectations and beliefs concerning future developments and their potential effect upon the Company. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on The Hartford will be those anticipated by management. Actual results could differ materially from those expected by the Company, depending on the outcome of various factors. These factors include: the uncertain nature of damage theories and loss amounts and the development of additional facts related to the September 11 terrorist attack ("September 11"); the response of reinsurance companies under reinsurance contracts, the impact of increasing reinsurance rates, and the adequacy of reinsurance to protect the Company against losses; the possibility of more unfavorable loss experience than anticipated; the possibility of general economic and business conditions that are less favorable than anticipated; the incidence and severity of catastrophes, both natural and man-made; the effect of changes in interest rates, the stock markets or other financial markets; stronger than anticipated competitive activity; unfavorable legislative, regulatory or judicial developments; the difficulty in predicting the Company's potential exposure for environmental and asbestos claims and related litigation; the Company's ability to distribute its products through distribution channels, both current and future; the uncertain effects of emerging claim and coverage issues; the effect of assessments and other surcharges for guaranty funds and second-injury funds and other mandatory pooling arrangements; a downgrade in the Company's claims-paying, financial strength or credit ratings; the ability of the Company's subsidiaries to pay dividends to the Company; and other factors described in such forward-looking statements. Certain reclassifications have been made to prior year financial information to conform to the current year presentation. - -------------------------------------------------------------------------------- INDEX - -------------------------------------------------------------------------------- Consolidated Results of Operations: Operating Summary 14 Life 16 Investment Products 17 Individual Life 18 Group Benefits 18 Corporate Owned Life Insurance ("COLI") 19 Property & Casualty 19 Business Insurance 19 Personal Lines 20 Specialty Commercial 20 Reinsurance 20 Other Operations 21 Environmental and Asbestos Claims 21 Investments 22 Capital Markets Risk Management 24 Capital Resources and Liquidity 26 Regulatory Matters and Contingencies 27 Accounting Standards 27 - -------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, --------------------------- 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> TOTAL REVENUES $ 3,900 $ 3,722 - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 292 $ 240 Less: Cumulative effect of accounting change, net of tax [1] -- (23) Net realized capital gains (losses), after-tax (1) 10 - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 293 $ 253 ==================================================================================================================================== <FN> [1] Represents the cumulative impact of the Company's adoption of Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities", as amended by SFAS Nos. 137 and 138. </FN> </TABLE> "Operating income" is defined as after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes and certain other items. Management believes that this performance measure delineates the results of operations of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current business. However, operating income should only be analyzed in conjunction with, and not in lieu of, net income and may not be comparable to other performance measures used by the Company's competitors. OPERATING RESULTS Operating income increased $40, or 16%, for the first quarter ended March 31, 2002, from the comparable prior year period. - 14 -
The increase was due primarily to earnings growth in both Property & Casualty and Life operations. Property & Casualty's increase was led by strong pricing in Business Insurance and Specialty Commercial and the positive impact of underwriting initiatives in the Reinsurance segment. Contributing to the Life increase was strong growth in the Individual Life and Group Benefits segments. Also contributing to the earnings growth was the implementation of SFAS No. 142, "Goodwill and Other Intangible Assets," which eliminates the amortization of goodwill and other intangibles with indefinite useful lives. Goodwill amortization was $10, after-tax, for the quarter ended March 31, 2001. (For further discussion of the Company's goodwill, see Note 2 of Notes to Consolidated Financial Statements.) First quarter 2002 operating income includes $11 of after-tax expense at Hartford Life, Inc. ("HLI") related to litigation with Bancorp Services, LLC ("Bancorp"), partially offset by an $8 after-tax benefit related to the reduction of HLI's reserves associated with the September 11 terrorist attack. (For further discussion of the Bancorp litigation, see Note 5(a) of Notes to Consolidated Financial Statements.) Revenues for the first quarter ended March 31, 2002 increased $178, or 5%, over the comparable prior year period, primarily as a result of increased fee income in Individual Life, reflecting the April 2001 acquisition of the United States individual life insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as "Fortis" or "Fortis Financial Group"), as well as double-digit earned premium growth in the Business Insurance segment. These increases were partially offset by a decrease in Reinsurance revenues driven by the planned exit of nearly all international lines and a significant first quarter 2001 Alternative Risk Transfer ("ART") transaction. SIGNIFICANT ACCOUNTING POLICIES For information on the Company's significant accounting policies, see the Deferred Acquisition Costs, Reserves and Investments sections of the MD&A and Note 1 of Notes to Consolidated Financial Statements, both included in The Hartford's 2001 Form 10-K Annual Report. INCOME TAXES The effective tax rate for the first quarter ended March 31, 2002 was 21% compared with 18% for the comparable period in 2001. The 2001 effective tax rate included a tax benefit on the loss from the sale of Hartford Seguros. Tax-exempt interest earned on invested assets and, for 2001, the tax benefit on the sale of Hartford Seguros, were the principal causes 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 nine operating segments. Additionally, all activities related to The HLI Repurchase in June 2000 and the minority interest in HLI for pre-acquisition periods are included in Corporate. Life is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI"). Life also includes in an Other category its international operations, which are primarily located in Latin America and Japan, as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. In January 2002, Property & Casualty integrated its Affinity Personal Lines and Personal Insurance segments, now reported as Personal Lines. As a result, Property & Casualty is now organized into five reportable operating segments, the North American underwriting segments of Business Insurance, Personal Lines, Specialty Commercial and Reinsurance; and the Other Operations segment. 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 Other Operations segment. Certain transactions between segments occur during the year that primarily relate to tax settlements, insurance coverage, expense reimbursements, services provided and capital contributions. Certain reinsurance stop loss agreements exist between the segments which specify that one segment will reimburse another for losses incurred in excess of a predetermined limit. Also, one segment may purchase group annuity contracts from another to fund pension costs and claim annuities to settle casualty claims. In addition, certain intersegment transactions occur in Life. These transactions include interest income on allocated surplus and the allocation of net realized capital gains and losses through net invested income utilizing the duration of the segment's investment portfolios. The following is a summary of North American underwriting results by underwriting segment within Property & Casualty. Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses. <TABLE> <CAPTION> UNDERWRITING RESULTS (BEFORE-TAX) FIRST QUARTER ENDED MARCH 31, --------------------------- North American 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Business Insurance $ 4 $ (23) Personal Lines (11) 16 Specialty Commercial (10) (14) Reinsurance (4) (25) - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (21) $ (46) ==================================================================================================================================== </TABLE> - 15 -
The following is a summary of operating income and net income. <TABLE> <CAPTION> OPERATING INCOME FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Life Investment Products $ 117 $ 111 Individual Life 31 20 Group Benefits 28 23 COLI -- 9 Other 1 (2) - ---------------------------------------------------------------------------------------------------------------------------------- Total Life 177 161 Property & Casualty North American 122 107 Other Operations -- 1 - ---------------------------------------------------------------------------------------------------------------------------------- Total Property & Casualty 122 108 Corporate (6) (16) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL OPERATING INCOME $ 293 $ 253 ================================================================================================================================== </TABLE> <TABLE> <CAPTION> NET INCOME FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - ---------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Life Investment Products $ 117 $ 111 Individual Life 31 20 Group Benefits 28 23 COLI -- 9 Other (6) (25) - ---------------------------------------------------------------------------------------------------------------------------------- Total Life 170 138 Property & Casualty North American 127 115 Other Operations 1 3 - ---------------------------------------------------------------------------------------------------------------------------------- Total Property & Casualty 128 118 Corporate (6) (16) - ---------------------------------------------------------------------------------------------------------------------------------- TOTAL NET INCOME $ 292 $ 240 ================================================================================================================================== </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 FIRST QUARTER ENDED MARCH 31, -------------------------- 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Revenues $ 1,676 $ 1,590 Expenses 1,506 1,429 Cumulative effect of accounting change, net of tax [1] -- (23) - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME 170 138 Less: Cumulative effect of accounting change, net of tax [1] -- (23) Net realized capital losses, after-tax (7) -- - ------------------------------------------------------------------------------------------------------------------------------------ OPERATING INCOME $ 177 $ 161 ==================================================================================================================================== <FN> [1] For the first quarter ended March 31, 2001, represents the cumulative impact of the Company's adoption of SFAS No. 133. </FN> </TABLE> Life has the following reportable operating segments: Investment Products, Individual Life, Group Benefits and COLI. In addition, Life reports corporate items not directly allocable to any of its segments, principally interest expense, as well as its international operations in "Other". On April 2, 2001, The Hartford acquired the U.S. individual life insurance, annuity and mutual fund businesses of Fortis. (For further discussion, see Note 18(a) of Notes to Consolidated Financial Statements included in The Hartford's December 31, 2001 Form 10-K Annual Report.) - 16 -
Revenues in the Life operation increased $86, or 5%, as a result of growth across its primary operating segments, particularly the Individual Life segment where revenues grew $69, or 42%, to $232 for the first quarter ended March 31, 2002, primarily due to the acquisition of Fortis. Revenue in the Investment Products segment grew $46, or 8%, to $650 for the first quarter ended March 31, 2002. The increase was primarily attributable to increased asset levels related to mutual funds and institutional investment products. Revenues within Group Benefits, excluding buyouts, were $644 for the first quarter ended March 31, 2002, an increase of $63, or 11%, over the comparable prior year period. The revenue increase was attributable to higher earned premiums as a result of strong sales and solid persistency. The increases in revenue were partially offset by a decrease in COLI revenue of $24, or 13%, as compared to the first quarter ended March 31, 2001, primarily as a result of decreased net investment income as leveraged COLI account values declined $702, or 14%, as compared to a year ago. Expenses increased $77, or 5%, directly related to the revenue growth described above. Expenses for the first quarter ended March 31, 2002 include $11, after-tax, of accrued expenses recorded in connection with Bancorp litigation within the COLI segment. The litigation expense accrual was partially offset by an after-tax benefit of $8 recorded within Other, associated with favorable development related to the Company's estimated September 11 exposure. Operating income increased $16, or 10%, as Life's three primary reportable operating segments experienced earnings growth, led by Individual Life whose earnings increased $11, or 55%, to $31 for the first quarter ended March 31, 2002. The increase in operating income in the Individual Life segment was primarily the result of the Fortis acquisition and was partially offset by unfavorable mortality experience in the first quarter 2002. Earnings for the Investment Products segment were $117 for the first quarter ended March 31, 2002, an increase of $6, or 5%. The increase in earnings was primarily due to growth in the mutual funds and institutional investment products businesses. This was partially offset by individual annuity earnings, which declined slightly to $90, as compared to $91 in the same prior year period. The decrease was primarily related to the decline in the equity markets. Group Benefits operating income was $28 and $23 for the first quarter ended March 31, 2002 and 2001, respectively, an increase of $5, or 22%, driven principally by ongoing premium growth and an improved loss ratio (defined as benefits and claims as a percentage of premiums and other considerations excluding buyouts). The increase in operating income was partially offset by a decrease of $9 in operating income in the COLI segment, primarily due to the $11 after-tax expense related to the Bancorp litigation. As mentioned above, Life operating income was positively impacted by an $8 benefit related to favorable development on the Company's estimated September 11 exposure. - -------------------------------------------------------------------------------- INVESTMENT PRODUCTS - -------------------------------------------------------------------------------- <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Revenues $ 650 $ 604 Expenses 533 493 - -------------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 117 $ 111 ================================================================================================================================ Individual variable annuity account values $ 75,044 $ 70,649 Other individual annuity account values 10,080 8,926 Other investment products account values 19,894 16,994 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL ACCOUNT VALUES 105,018 96,569 Mutual fund assets under management 17,695 11,271 - -------------------------------------------------------------------------------------------------------------------------------- TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 122,713 $ 107,840 ================================================================================================================================ </TABLE> Revenues in the Investment Products segment increased $46, or 8%, primarily due to higher net investment income and fee income related to other investment products which was partially offset by lower fee income in individual annuity. Fee income generated by individual annuities decreased $12, or 4%, as average account values decreased from prior year levels, primarily due to the lower equity markets. Net investment income related to other investment products was $186 for the first quarter ended March 31, 2002, an increase of $25, or 16%. This increase was primarily due to growth in the institutional investment business, where related assets under management increased $1.5 billion, or 19%, to $9.3 billion as of March 31, 2002. Fee income from other investment products was $100 as of March 31, 2002, an increase of $23, or 30%, principally driven by the Company's retail mutual fund business. Mutual fund assets under management increased $6.4 billion, or 57%, from a year ago. This substantial increase was primarily due to strong sales of retail mutual funds over the last twelve months and the addition of the mutual fund business acquired from Fortis. Expenses increased $40, or 8%, primarily driven by increases in benefits and claim expenses and operating expenses as a result of the growth in the other investment products businesses. Interest credited to policyholders related to other investment products increased $13, or 10%, to $138 for the first quarter ended March 31, 2002 primarily related to the growth in the institutional investment business. Additionally, insurance expenses and other related to other investment products was $107 for the first quarter ended March 31, 2002, an increase of $23, or 27%, as compared to the same period in 2001. Partially offsetting these increases was a $10, or 9%, decrease in amortization of policy acquisition costs in the individual annuity operation which declined as a result of lower estimated gross profits driven by the decrease in fee income. - 17 -
Operating income increased $6, or 5%, driven by the growth in revenues in the other investment products businesses and the lower effective tax rate in the individual annuity operation driven primarily by separate account investment activity. - -------------------------------------------------------------------------------- INDIVIDUAL LIFE - -------------------------------------------------------------------------------- <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Revenues $ 232 $ 163 Expenses 201 143 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 31 $ 20 - ----------------------------------------------------------------------------------------------------------------------------- Variable life account values $ 4,119 $ 2,755 Total account values $ 7,983 $ 5,681 - ----------------------------------------------------------------------------------------------------------------------------- Variable life insurance in force $ 63,288 $ 35,734 Total life insurance in force $ 121,935 $ 77,070 ============================================================================================================================= </TABLE> Revenues in the Individual Life segment increased $69, or 42%, resulting primarily from higher fee and investment income due to the acquisition of Fortis. Fee income was $167 and $115 for the first quarter ended March 31, 2002 and 2001, respectively, an increase of $52, or 45%, as account values increased $2.3 billion, or 41%, and life insurance in force increased $44.9 billion, or 58%. Additionally, net investment income increased $17, or 37%, as general account assets increased $1.1 billion, or 42%, to $3.6 billion as of March 31, 2002. Expenses increased $58, or 41%, principally due to increases in benefits, claims and claim adjustment expenses and operating expenses. Although the increase in these expenses was primarily driven by the growth in the business resulting from the Fortis acquisition, mortality experience (expressed as death claims as a percentage of net amount at risk) for the first quarter of 2002 was higher than the comparable prior year period primarily due to a higher than expected occurrence of large claims. Operating income increased $11, or 55%, as the contribution to earnings from the Fortis acquisition more than offset the unfavorable mortality experience. - -------------------------------------------------------------------------------- GROUP BENEFITS - -------------------------------------------------------------------------------- <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - ----------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Revenues $ 644 $ 613 Expenses 616 590 - ----------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 28 $ 23 ============================================================================================================================= </TABLE> Revenues in the Group Benefits segment increased $31, or 5%, and excluding buyouts, increased $63, or 11%. Growth in fully insured ongoing premiums, which were $577 for the first quarter ended March 31, 2002, an increase of $61, or 12%, over the same period in 2001, primarily drove this increase. The growth in premium revenues was due to solid persistency of the in-force block of business and strong sales to new customers. Fully insured ongoing sales for the first quarter of 2002 were $354, a $120, or 51%, increase over the same prior year period. Expenses increased $26, or 4%, and excluding buyouts, increased $58, or 10%. The increase in expenses is primarily driven by the growth in revenues described above. Benefits and claims expenses, excluding buyouts, were $474 for the first quarter ended March 31, 2002, an increase of $38, or 9%. The segment's loss ratio (defined as benefits and claims as a percentage of premiums and other considerations excluding buyouts) was approximately 81.4% for the first quarter ended March 31, 2002, as compared to 83.7% for the comparable prior year period. Other insurance expenses were $135 for the first quarter 2002, an increase of $19, or 16%, due to the revenue growth previously described and continued investment in the service operations of this segment. The segment's expense ratio (defined as insurance expenses as a percentage of premiums and other considerations excluding buyouts) was 23.2% for the first quarter ended March 31, 2002, compared to 22.3% for the comparable period. Operating income increased $5, or 22%, as higher earned premium and favorable loss costs more than offset the increase in other insurance expenses. - 18 -
- -------------------------------------------------------------------------------- CORPORATE OWNED LIFE INSURANCE (COLI) - -------------------------------------------------------------------------------- <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Revenues $ 160 $ 184 Expenses 160 175 - --------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ - $ 9 - --------------------------------------------------------------------------------------------------------------------------- Variable COLI account values $ 18,764 $ 16,207 Leveraged COLI account values 4,293 4,995 - --------------------------------------------------------------------------------------------------------------------------- TOTAL ACCOUNT VALUES $ 23,057 $ 21,202 =========================================================================================================================== </TABLE> COLI revenues decreased $24, or 13%, mostly due to lower net investment and fee income. Net investment income was $76 and $94 for the first quarter ended March 31, 2002 and 2001, respectively, a decrease of $18, or 19%. The decrease was primarily related to the decline in leveraged COLI account values, which decreased $702, or 14%. Expenses decreased $15, or 9%, consistent with the decrease in revenues described above. However, the decrease was partially offset by $11, after-tax, in expenses accrued in connection with litigation costs related to the Bancorp dispute. Operating income decreased $9, or 100%, primarily related to amounts accrued in connection with the Bancorp litigation. - -------------------------------------------------------------------------------- PROPERTY & CASUALTY - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> TOTAL REVENUES $ 2,220 $ 2,128 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 128 $ 118 Net realized capital gains, after-tax 6 10 - --------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ 122 $ 108 =========================================================================================================================== </TABLE> Revenues for Property & Casualty increased $92, or 4%, for the first quarter ended March 31, 2002 compared with the first quarter of 2001. The increase was due primarily to earned premium growth in the Business Insurance and Personal Lines segments as a result of price increases, new business growth and strong renewal retention. Partially offsetting this increase were lower revenues as a result of the sale of the Company's ongoing international property and casualty businesses and lower earned premiums in the Reinsurance segment, primarily due to a significant first quarter 2001 transaction in ART. Operating income increased $14, or 13%, for the first quarter compared to the same prior year period due to strong earned pricing in the Business Insurance and Specialty Commercial segments, the impact of underwriting initiatives in Reinsurance and lower catastrophes. Partially offsetting this increase were higher automobile losses in the Personal Lines segment. - -------------------------------------------------------------------------------- BUSINESS INSURANCE - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Written premiums $ 825 $ 702 - --------------------------------------------------------------------------------------------------------------------------- Underwriting results $ 4 $ (23) Combined ratio 96.1 101.2 =========================================================================================================================== </TABLE> Business Insurance written premiums increased $123, or 18%, over the comparable prior year period driven by strong growth in small commercial and middle market. Small commercial increased $57, or 16%, reflecting price increases, strong renewal retention and the success of product, marketing, technology and service growth initiatives. The increase in middle market of $66, or 19%, was due primarily to double-digit price increases as well as strong new business growth and renewal retention. Underwriting results increased $27, with a corresponding 5.1 point decrease in the combined ratio, for the first quarter as compared with the same prior year period. The improvement was primarily due to favorable market conditions, as well as an improved expense ratio. The loss ratio improved 2.9 points as a result of double-digit earned pricing and minimal loss costs. - 19 -
- -------------------------------------------------------------------------------- PERSONAL LINES - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Written premiums $ 726 $ 662 - --------------------------------------------------------------------------------------------------------------------------- Underwriting results $ (11) $ 16 Combined ratio 101.7 98.1 =========================================================================================================================== </TABLE> Written premiums increased $64, or 10%, for the first quarter of 2002 over the comparable prior year period driven by growth in the AARP program and non-standard business. AARP increased $55, or 15%, primarily from strong new business growth and continued steady premium renewal retention. Non-Standard increased $10, or 17%, as a result of double-digit price increases. Underwriting results decreased $27, with a corresponding 3.6 point increase in the combined ratio, for the first quarter of 2002 as compared with the same prior year period. Higher automobile losses adversely impacted underwriting results and the combined ratio. The losses were primarily due to an increase in severity as a result of medical inflation and higher repair costs, and bodily injury frequency loss costs. In addition, higher losses and increased litigation costs resulted in a 1.0 point increase in the loss adjustment expense ratio. - -------------------------------------------------------------------------------- SPECIALTY COMMERCIAL - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Written premiums $ 300 $ 254 - --------------------------------------------------------------------------------------------------------------------------- Underwriting results $ (10) $ (14) Combined ratio 100.7 107.2 =========================================================================================================================== </TABLE> Specialty Commercial written premiums increased $46, or 18%, from the comparable prior year period driven by the property and professional liability lines of business. Written premiums for property grew $43, or 90%, due primarily to significant price increases reflecting an improving business environment. Professional liability written premiums grew $12, or 39%, also due to significant price increases as well as lower premium cessions. Underwriting results improved $4, or 29%, while the combined ratio decreased 6.5 points, for the first quarter as compared with the same prior year period. Improved underwriting and combined ratio results were primarily due to favorable property results, partially offset by deterioration in risk management business. In addition, catastrophes were significantly lower in the first quarter of 2002 as a result of the Seattle earthquake in the first quarter of 2001. - -------------------------------------------------------------------------------- REINSURANCE - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Written premiums $ 214 $ 363 - --------------------------------------------------------------------------------------------------------------------------- Underwriting results $ (4) $ (25) Combined ratio 100.9 109.5 =========================================================================================================================== </TABLE> Reinsurance written premiums decreased $149, or 41%, due to decreases in both traditional reinsurance and ART written premiums. Traditional reinsurance written premiums decreased $80, or 35%, due primarily to the planned exit from nearly all international lines. ART written premiums decreased $69, or 51%, primarily as a result of a significant transaction in the first quarter of 2001. Excluding ART and international, written premiums declined 14% due primarily to underwriting discipline to maintain profitability targets, partially offset by the achievement of significant price increases due to continued market firming. Underwriting results improved $21 with a corresponding 8.6 point decrease in the combined ratio for the first quarter of 2002 as compared with the same prior year period. The improvement was primarily due to underwriting initiatives including a shift to excess of loss policies and increased property business mix, as well as an intense focus on returns. In addition, first quarter 2002 catastrophes were significantly lower than the same prior year period. - 20 -
- -------------------------------------------------------------------------------- OTHER OPERATIONS - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, ----------------------------- 2002 2001 - --------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> TOTAL REVENUES $ 56 $ 54 - --------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 1 $ 3 Less: Net realized capital gains, after-tax 1 2 - --------------------------------------------------------------------------------------------------------------------------- OPERATING INCOME $ -- $ 1 =========================================================================================================================== </TABLE> The Other Operations segment consists of property and casualty operations of The Hartford which have discontinued writing new business. Operating income decreased $1 for the first quarter ended March 31, 2002 compared with the first quarter ended March 31, 2001. Revenues increased $2, or 4%, primarily due to the movement of nearly all international reinsurance lines from the Reinsurance segment to the Other Operations segment. Partially offsetting this increase was a decrease in revenue as a result of the sales of Hartford Seguros and Hartford Insurance Company (Singapore), Ltd. - -------------------------------------------------------------------------------- ENVIRONMENTAL AND ASBESTOS CLAIMS - -------------------------------------------------------------------------------- The Hartford continues to receive claims that assert damages from environmental exposures and for injuries from asbestos and asbestos-related products, both of which affect the Property & Casualty operation. Environmental claims relate primarily to pollution and related clean-up costs. With regard to these claims, uncertainty exists which impacts the ability of insurers and reinsurers to estimate the ultimate reserves for unpaid losses and related settlement expenses. The Hartford finds that conventional reserving techniques cannot estimate the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. The majority of environmental claims and many types of asbestos claims differ from any other type of contractual claims because there is almost no agreement or consistent precedent to determine what, if any, coverage exists or which, if any, policy years and insurers or reinsurers may be liable. Further uncertainty arises with environmental claims since claims are often made under policies, the existence of which may be in dispute, the terms of which may have changed over many years, which may or may not provide for legal defense costs, and which may or may not contain environmental exclusion clauses that may be absolute or allow for fortuitous events. Courts in different jurisdictions have reached disparate conclusions on similar issues and in certain situations have broadened the interpretation of policy coverage and liability issues. In light of the extensive claim settlement process for environmental and asbestos claims, which involves comprehensive fact gathering, subject matter expertise and intensive litigation, The Hartford established an environmental claims facility in 1992 to defend itself aggressively against unwarranted claims and to minimize costs. Within the property and casualty insurance industry in the mid-1990s, progress was made in developing sophisticated, alternative methodologies utilizing company experience and supplemental databases to assess environmental and asbestos liabilities. Consistent with The Hartford's practice of using the best techniques to estimate the Company's environmental and asbestos exposures, a study was initiated in April 1996 based on known cases. The Hartford, utilizing internal staff supplemented by outside legal and actuarial consultants, completed the study in October 1996. The study included a review of identified environmental and asbestos exposures of North American Property & Casualty, along with the United States exposures of The Hartford's Other Operations segment. The methodology utilized a ground-up analysis of policy, site and exposure level data for a representative sample of The Hartford's claims. The results of the evaluation were extrapolated against the balance of the claim population to estimate the Company's overall exposure for reported claims. In addition to estimating liabilities on reported environmental and asbestos claims, The Hartford estimated reserves for claims incurred but not reported. The IBNR reserve was estimated using information on reporting patterns of known insureds, characteristics of insureds such as limits exposed, attachment points and number of coverage years involved, third party costs and closed claims. Included in The Hartford's analysis of environmental and asbestos exposures was a review of applicable reinsurance coverage. Reinsurance coverage applicable to the sample was used to estimate the reinsurance coverage that applied to the balance of the reported environmental and asbestos claims and to the IBNR estimates. An international actuarial firm reviewed The Hartford's approach and concluded that the way the Company studied its exposures, the thoroughness of its analysis and the way The Hartford came to its estimates were reasonable and comprehensive. The Company believes that its methodology continues to be reasonable and comprehensive. Reserve activity for both reported and unreported environmental and asbestos claims, including reserves for legal defense costs, for the first quarter ended March 31, 2002 and the year ended December 31, 2001, was as follows (net of reinsurance): - 21 -
<TABLE> <CAPTION> ENVIRONMENTAL AND ASBESTOS CLAIMS AND CLAIM ADJUSTMENT EXPENSES - ------------------------------------------------------------------------------------------------------------------------------------ FIRST QUARTER ENDED YEAR ENDED MARCH 31, 2002 DECEMBER 31, 2001 -------------------------------------------------------------------------------- Environmental Asbestos Total Environmental Asbestos Total - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> <C> <C> Beginning liability $ 654 $ 616 $ 1,270 $ 911 $ 572 $ 1,483 Claims and claim adjustment expenses incurred (7) 5 (2) 15 28 43 Claims and claim adjustment expenses paid (24) (13) (37) (172) (84) (256) Other [1] -- -- -- (100) 100 -- - ------------------------------------------------------------------------------------------------------------------------------------ ENDING LIABILITY [2] $ 623 $ 608 $ 1,231 $ 654 $ 616 $ 1,270 ==================================================================================================================================== <FN> [1] 2001 includes a $100 reclassification from environmental to asbestos. [2] The ending liabilities are net of reinsurance on reported and unreported claims of $1,247 and $1,282 for March 31, 2002 and December 31, 2001, respectively. Gross of reinsurance as of March 31, 2002 and December 31, 2001, reserves for environmental and asbestos were $880 and $1,598 and $919 and $1,633, respectively. </FN> </TABLE> The Hartford believes that the environmental and asbestos reserves, reported at March 31, 2002, 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. On May 14, 2002, The Hartford announced its participation in a settlement in principle by its insured, PPG Industries, of litigation arising from asbestos exposures. (For additional information, see Note 5(d) of Notes to Consolidated Financial Statements.) - -------------------------------------------------------------------------------- INVESTMENTS - -------------------------------------------------------------------------------- Return on invested assets is an important element of The Hartford's financial results. Significant fluctuations in the fixed income or equity markets could weaken the Company's financial condition or its results of operations. Fluctuations in interest rates affect the Company's return on, and the fair value of, fixed maturity investments, which comprised approximately 86% of the fair value of its invested assets as of March 31, 2002 and December 31, 2001. Other events beyond the Company's control could also adversely impact the fair value of these investments. Specifically, a downgrade of an issuer's credit rating or default of payment by an issuer could reduce the Company's investment return. A significant decrease in the fair value of any investment that is deemed other than temporary could result in the Company's recognition of a loss in its financial results prior to the actual sale of the investment. The Hartford's investment portfolios are divided between Life and Property & Casualty. The investment portfolios are managed based on the underlying characteristics and nature of each operation's respective liabilities and within established risk parameters. (For a further discussion on The Hartford's approach to managing risks, see the Capital Markets Risk Management section.) Please refer to the Investments section of the MD&A in The Hartford's 2001 Form 10-K Annual Report for a description of the Company's investment objectives and policies. LIFE The following table identifies invested assets by type held in the Life general account as of March 31, 2002 and December 31, 2001. <TABLE> <CAPTION> COMPOSITION OF INVESTED ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2002 DECEMBER 31, 2001 AMOUNT PERCENT AMOUNT PERCENT ----------------------------------------------------------- <S> <C> <C> <C> <C> Fixed maturities, at fair value $ 23,558 82.4% $ 23,301 82.1% Equity securities, at fair value 412 1.4% 428 1.5% Policy loans, at outstanding balance 3,288 11.5% 3,317 11.7% Limited partnerships, at fair value 862 3.0% 811 2.9% Other investments 484 1.7% 520 1.8% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 28,604 100.0% $ 28,377 100.0% ==================================================================================================================================== </TABLE> Fixed maturity investments increased slightly since December 31, 2001, as increased operating cash flows were partially offset by decreases in fair value. - 22 -
The following table identifies fixed maturities by type held in the Life general account as of March 31, 2002 and December 31, 2001. <TABLE> <CAPTION> FIXED MATURITIES BY TYPE - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2002 DECEMBER 31, 2001 FAIR VALUE PERCENT FAIR VALUE PERCENT --------------------------------------------------------- <S> <C> <C> <C> <C> Corporate $ 11,472 48.7% $ 11,419 49.0% Asset-backed securities (ABS) 3,476 14.8% 3,427 14.7% Commercial mortgage-backed securities (CMBS) 3,047 12.9% 3,029 13.0% Municipal - tax-exempt 1,644 7.0% 1,565 6.7% Mortgage-backed securities (MBS) - agency 1,217 5.2% 981 4.2% Collateralized mortgage obligations (CMO) 671 2.8% 767 3.3% Government/Government agencies - Foreign 397 1.7% 390 1.7% Government/Government agencies - United States 325 1.4% 374 1.6% Municipal - taxable 45 0.2% 47 0.2% Short-term 1,208 5.1% 1,245 5.3% Redeemable preferred stock 56 0.2% 57 0.3% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 23,558 100.0% $ 23,301 100.0% ==================================================================================================================================== </TABLE> INVESTMENT RESULTS The table below summarizes Life's results. <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31, -------------------------- (before-tax) 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Net investment income - excluding policy loan income $ 381 $ 352 Policy loan income 67 78 --------------------------- Net investment income - total $ 448 $ 430 Yield on average invested assets [1] 6.3% 7.2% Net realized capital losses $ (15) $ -- ==================================================================================================================================== <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> For the first quarter ended March 31, 2002, net investment income, excluding policy loans, increased $29, or 8%, compared to the same period in 2001. The increase was primarily due to income earned on a higher invested asset base partially offset by lower investment yields. Invested assets increased 14% from March 31, 2001 primarily due to the Fortis acquisition. Yields on average invested assets decreased as a result of lower rates on new investment purchases and decreased policy loan income. Net realized capital losses for the first quarter ended March 31, 2002 increased by $15 compared to the same period in 2001. Included in 2002 net realized capital losses were write-downs for other than temporary impairments on fixed maturities of $15. PROPERTY & CASUALTY The following table identifies invested assets by type as of March 31, 2002 and December 31, 2001. <TABLE> <CAPTION> COMPOSITION OF INVESTED ASSETS - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2002 DECEMBER 31, 2001 AMOUNT PERCENT AMOUNT PERCENT -------------------------------------------------------- <S> <C> <C> <C> <C> Fixed maturities, at fair value $ 16,786 91.0% $ 16,742 91.5% Equity securities, at fair value 897 4.9% 921 5.0% Limited partnerships, at fair value 643 3.4% 561 3.0% Other investments 127 0.7% 85 0.5% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENTS $ 18,453 100.0% $ 18,309 100.0% ==================================================================================================================================== </TABLE> - 23 -
Total fixed maturities remained essentially flat since December 31, 2001. The following table identifies fixed maturities by type as of March 31, 2002 and December 31, 2001. <TABLE> <CAPTION> FIXED MATURITIES BY TYPE - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2002 DECEMBER 31, 2001 FAIR VALUE PERCENT FAIR VALUE PERCENT -------------------------------------------------------- <S> <C> <C> <C> <C> Municipal - tax-exempt $ 8,444 50.3% $ 8,401 50.2% Corporate 4,286 25.5% 4,179 25.0% Commercial mortgage-backed securities (CMBS) 1,123 6.7% 1,145 6.8% Asset-backed securities (ABS) 700 4.2% 717 4.3% Government/Government agencies - Foreign 624 3.7% 613 3.6% Mortgage-backed securities (MBS) - agency 300 1.8% 381 2.3% Collateralized mortgage obligations (CMO) 82 0.5% 97 0.6% Government/Government agencies - United States 71 0.4% 201 1.2% Municipal - taxable 47 0.3% 47 0.3% Short-term 1,011 6.0% 862 5.1% Redeemable preferred stock 98 0.6% 99 0.6% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 16,786 100.0% $ 16,742 100.0% ==================================================================================================================================== </TABLE> INVESTMENT RESULTS The table below summarizes Property & Casualty's results. <TABLE> <CAPTION> FIRST QUARTER ENDED MARCH 31, -------------------------- 2002 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Net investment income, before-tax $ 254 $ 257 Net investment income, after-tax [1] $ 199 $ 201 --------------------------- Yield on average invested assets, before-tax [2] 5.7% 6.0% Yield on average invested assets, after-tax [1] [2] 4.5% 4.7% Net realized capital gains (losses), before-tax $ 8 $ 1 ==================================================================================================================================== <FN> [1] Due to the significant holdings in tax-exempt investments, after-tax net investment income and after-tax yield are also included. [2] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). </FN> </TABLE> For the first quarter ended March 31, 2002, both before- and after-tax net investment income decreased by 1% compared to the same period in 2001. The decrease in net investment income was primarily due to a reduction in investment income resulting from the sale of Hartford Seguros partially offset by an increase in limited partnership income. Yields on average invested assets declined due to the lower interest rate environment. Net realized capital gains for the first quarter ended March 31, 2002 increased $7 compared to the same period in 2001. Included in the first quarter ended March 31, 2002 were net realized capital gains on sales of equity securities, partially offset by write-downs for other than temporary impairments on fixed maturities of $19 and equities of $8. Net realized capital gains for the first quarter ended March 31, 2001 included a $16, after-tax, capital loss generated from the sale of Hartford Seguros offset by gains from the sales of fixed maturities and equities. CORPORATE In connection with The HLI Repurchase, the carrying value of the purchased fixed maturity investments was adjusted to fair market value as of the date of the repurchase. This adjustment was reported in Corporate. The amortization of the adjustment to the fixed maturity investments' carrying values is reported in Corporate's net investment income. The total amount of amortization for the quarters ended March 31, 2002 and 2001 was $4, before-tax. Also reported in Corporate were $2 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 Life and Property & Casualty operations. Derivative instruments are utilized in compliance with established Company policy and regulatory requirements and are monitored internally and reviewed by senior management. The Company is exposed to two primary sources of investment and asset/liability management risk: credit risk, relating to the uncertainty associated with the ability of an obligor or 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. - 24 -
Please refer to the Capital Markets Risk Management section of the MD&A in The Hartford's 2001 Form 10-K Annual Report for a description of the Company's objectives, policies and strategies. CREDIT RISK The Company invests primarily in securities which are rated investment grade and has established exposure limits, diversification standards and review procedures for all credit risks including borrower, issuer or counterparty. Creditworthiness of specific obligors is determined by an internal credit assessment and ratings assigned by nationally recognized ratings agencies. Obligor, asset sector and industry concentrations are subject to established limits and are monitored on a regular interval. The Hartford is not exposed to any significant credit concentration risk of a single issuer. The following tables identify fixed maturity securities for Life, including guaranteed separate accounts, and Property & Casualty, by credit quality. The ratings referenced in the tables are based on the ratings of a nationally recognized rating organization or, if not rated, assigned based on the Company's internal analysis of such securities. LIFE As of March 31, 2002 and December 31, 2001, 96% of the fixed maturity portfolio was invested in securities rated investment grade. <TABLE> <CAPTION> FIXED MATURITIES BY CREDIT QUALITY - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2002 DECEMBER 31, 2001 FAIR VALUE PERCENT FAIR VALUE PERCENT --------------------------------------------------------- <S> <C> <C> <C> <C> United States Government/Government agencies $ 2,790 8.3% $ 2,639 8.0% AAA 5,053 15.0% 5,070 15.3% AA 3,729 11.0% 3,644 11.0% A 11,497 34.0% 11,528 34.8% BBB 8,255 24.4% 7,644 23.1% BB & below 1,356 4.0% 1,148 3.4% Short-term 1,131 3.3% 1,470 4.4% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 33,811 100.0% $ 33,143 100.0% ==================================================================================================================================== </TABLE> PROPERTY & CASUALTY As of March 31, 2002 and December 31, 2001, over 94% of the fixed maturity portfolio was invested in securities rated investment grade. <TABLE> <CAPTION> FIXED MATURITIES BY CREDIT QUALITY - ------------------------------------------------------------------------------------------------------------------------------------ MARCH 31, 2002 DECEMBER 31, 2001 FAIR VALUE PERCENT FAIR VALUE PERCENT --------------------------------------------------------- <S> <C> <C> <C> <C> United States Government/Government agencies $ 422 2.5% $ 639 3.8% AAA 6,188 36.9% 6,160 36.8% AA 3,146 18.7% 3,126 18.7% A 3,078 18.3% 3,193 19.1% BBB 2,011 12.0% 1,876 11.2% BB & below 930 5.6% 886 5.3% Short-term 1,011 6.0% 862 5.1% - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL FIXED MATURITIES $ 16,786 100.0% $ 16,742 100.0% ==================================================================================================================================== </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, 2001. DERIVATIVE INSTRUMENTS The Hartford utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options, in compliance with Company policy and regulatory requirements in order to achieve one of three Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transaction costs. The Company does not make a market or trade derivatives for the express purpose of earning trading profits. (For further discussion on The Hartford's use of derivative instruments, refer to Note 3 of Notes to Consolidated Financial Statements.) - 25 -
- -------------------------------------------------------------------------------- CAPITAL RESOURCES AND LIQUIDITY - -------------------------------------------------------------------------------- Capital resources and liquidity represent the overall financial strength of The Hartford and its ability to generate strong cash flows from each of the business segments and borrow funds at competitive rates to meet operating and growth needs. The capital structure of The Hartford consists of debt and equity summarized as follows: <TABLE> <CAPTION> MARCH 31, 2002 DECEMBER 31, 2001 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Short-term debt $ 615 $ 599 Long-term debt 1,965 1,965 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures (trust preferred securities) 1,425 1,412 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEBT $ 4,005 $ 3,976 ----------------------------------------------------------------------------------------------------------------------------- Equity excluding unrealized gain on securities and other, net of tax [1] $ 8,622 $ 8,344 Unrealized gain on securities and other, net of tax [1] 417 669 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 9,039 $ 9,013 ----------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION [2] $ 12,627 $ 12,320 ----------------------------------------------------------------------------------------------------------------------------- Debt to equity [2] [3] 46% 48% Debt to capitalization [2] [3] 32% 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 trust preferred securities, the debt to equity ratio was 30% and 31% and the debt to capitalization ratio was 20% and 21% as of March 31, 2002 and December 31, 2001, respectively. </FN> </TABLE> CONTRACTUAL OBLIGATIONS AND COMMITMENTS There have been no significant changes to The Hartford's contractual obligations and commitments since December 31, 2001. CAPITALIZATION The Hartford's total capitalization, excluding unrealized gain on securities and other, net of tax, increased by $307 as of March 31, 2002 compared to December 31, 2001. This increase was a result of earnings and stock issued related to stock compensation plans partially offset by dividends declared. DEBT In March 2002, the Company borrowed $16 of short-term commercial notes for general corporate purposes. STOCKHOLDERS' EQUITY Increase in authorized shares - At the Company's annual meeting of shareholders held on April 18, 2002, shareholders approved an amendment to Section (a) Article Fourth of the Amended and Restated Certificate of Incorporation to increase the aggregate authorized number of shares of common stock from 400 million to 750 million. Dividends - On February 21, 2002, The Hartford declared a dividend on its common stock of $0.26 per share payable on April 1, 2002 to shareholders of record as of March 4, 2002. CASH FLOWS FIRST QUARTER ENDED MARCH 31, -------------------------- 2002 2001 - ------------------------------------------------------------------ Cash provided by operating activities $ 387 $ 306 Cash used for investing activities $ (775) $ (1,899) Cash provided by financing activities $ 386 $ 1,643 Cash - end of period $ 351 $ 277 - ------------------------------------------------------------------ The decrease in cash provided by financing activities was primarily the result of the issuance of debt and equity related to the Fortis acquisition in 2001. The decrease in cash used for investing activities was also related to the Fortis acquisition, as funds were invested short-term until the transaction closed in April 2001. Operating cash flows in both periods have been more than adequate to meet liquidity requirements. RATINGS As a result of the September 11 terrorist attack and subsequent reviews by major independent rating agencies, all insurance financial strength and debt ratings of The Hartford were reaffirmed. However, negative outlooks were placed upon the debt ratings of the Company by Moody's and the property and casualty financial strength rating by Standard & Poor's. All other ratings were reaffirmed with stable outlooks. - 26 -
- -------------------------------------------------------------------------------- REGULATORY MATTERS AND CONTINGENCIES - -------------------------------------------------------------------------------- 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 Note 5 of Notes to Consolidated Financial Statements and The Hartford's 2001 Form 10-K Annual Report, Note 15 of Notes to Consolidated Financial Statements. - -------------------------------------------------------------------------------- ACCOUNTING STANDARDS - -------------------------------------------------------------------------------- For a discussion of accounting standards, see Note 1 of Notes to Consolidated Financial Statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the Capital Markets Risk Management section of Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference. - 27 -
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. On March 15, 2002, a jury in the U.S. District Court for the Eastern District of Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life Insurance Company ("HLIC"), et al. in favor of Bancorp in the amount of $118. The case involved claims of patent infringement, misappropriation of trade secrets, and breach of contract against HLIC and its affiliate International Corporate Marketing Group, Inc. ("ICMG"). The judge dismissed the patent infringement claim on summary judgment. The jury's award was based on the last two claims. HLIC and ICMG have moved the district court for, inter alia, judgment as a matter of law or a new trial, and intend to appeal the judgment if the district court does not set it aside or substantially reduce it. In either event, the Company's management, based on the opinion of its legal advisers, believes that there is a substantial likelihood that the jury award will not survive at its current amount. Based on the advice of legal counsel regarding the potential outcome of this litigation, the Company recorded an $11 after-tax charge in the first quarter of 2002 to increase litigation reserves associated with this matter. Should HLIC and ICMG not succeed in eliminating or reducing the judgment, a significant additional expense would be recorded in the future related to this matter. The Hartford is involved in claims litigation arising in the ordinary course of business and accounts for such activity through the establishment of policy reserves. As further discussed in the MD&A under the Environmental and Asbestos Claims section, The Hartford continues to receive environmental and asbestos claims that involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels, methodologies and reinsurance coverages. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On April 18, 2002, The Hartford held its annual meeting of shareholders. The following matters were considered and voted upon: (1) the election of twelve directors to serve for a one year term, (2) amending the Company's Certificate of Incorporation to increase the number of authorized shares of common stock; and (3) a shareholder proposal regarding The Hartford's investment in tobacco equities. Set forth below is the vote tabulation relating to the three items presented to the shareholders at the annual meeting: (1) The shareholders elected each of the twelve nominees to the Board of Directors for a one-year term: Name of Director Nominees Shares For Shares Withheld -------------------------------------------------------------- Rand V. Araskog 208,684,300 2,878,506 Ramani Ayer 209,106,336 2,456,470 Dina Dublon 142,693,518 68,869,288 Donald R. Frahm 204,883,156 6,679,650 Edward J. Kelly, III 209,108,089 2,454,717 Paul G. Kirk, Jr. 208,984,868 2,577,938 Thomas M. Marra 209,143,947 2,418,859 Robert W. Selander 209,116,261 2,446,545 Charles B. Strauss 209,112,040 2,450,766 H. Patrick Swygert 209,115,808 2,446,998 Gordon I. Ulmer 209,092,007 2,470,799 David K. Zwiener 209,136,524 2,426,282 -------------------------------------------------------------- (2) The shareholders approved the amendment to the Company's Certificate of Incorporation: Shares For: 190,371,714 Shares Against: 19,800,537 Shares Abstained: 1,390,555 (3) The shareholders defeated a shareholder proposal regarding The Hartford's investment in tobacco equities: Shares For: 8,562,284 Shares Against: 177,210,455 Shares Abstained: 4,025,331 Broker Non-Votes: 21,764,736 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibit Index. (b) Reports on Form 8-K: During the quarterly period ended March 31, 2002, the Company filed the following Current Reports on Form 8-K: o dated March 20, 2002, Item 5, Other Events, to report a verdict by a jury in the U.S. District Court for the Eastern District of Missouri in Bancorp Services, LLC v. Hartford Life Insurance Company, et al in favor of Bancorp. o dated March 26, 2002, Item 4, Change in Registrant's Certifying Accountants, to report the dismissal of Arthur Andersen LLP as The Hartford's independent public accountants. o dated March 29, 2002, Item 4, Change in Registrant's Certifying Accountants, amending The Hartford's Current Report on Form 8-K dated March 26, 2002. - 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 MAY 15, 2002 - 29 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. FORM 10-Q EXHIBIT INDEX EXHIBIT # --------- 3.01 Amended and Restated Articles of Incorporation, effective May 21, 1998, as amended by Amendment No. 1, effective May 1, 2002, is filed herewith. - 30 -