10-K/A 1 a10k2000.txt THE HARTFORD FINANCIAL SERVICES GROUP, INC. ================================================================================ FORM 10-K/A Amendment No. 1 UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ------------------- (Mark One) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 0-19277 THE HARTFORD FINANCIAL SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3317783 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900 (Address of principal executive offices) (860) 547-5000 (Registrant's telephone number, including area code) Securities registered pursuant to Section 12(b) of the Act: the following, all of which are registered on the New York Stock Exchange, Inc.: Common Stock, par value $0.01 per share 6.375% Notes due November 1, 2002 7.75% Notes due June 15, 2005 6.375% Notes due November 1, 2008 7.90% Notes due June 15, 2010 7.30% Debentures due November 1, 2015 7.70% Cumulative Quarterly Income Preferred Securities, Series A, issued by Hartford Capital I 8.35% Cumulative Quarterly Income Preferred Securities, Series B, issued by Hartford Capital II Securities registered pursuant to Section 12 (g) of the Act: None Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No [ ] Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [ ] As of February 28, 2001, there were outstanding 236,640,967 shares of Common Stock, $0.01 par value per share, of the registrant. The aggregate market value of the shares of Common Stock held by non-affiliates of the registrant was $15,025,144,711 based on the closing price of $63.85 per share of the Common Stock on the New York Stock Exchange on February 28, 2001. Documents Incorporated by Reference: ================================================================================ Portions of the Registrant's definitive proxy statement for its 2001 annual meeting of shareholders are incorporated by reference in Part III of this Form 10-K. ================================================================================ Explanatory Note: This Amendment No. 1 to Part I, Item 1 of the Registrant's Annual Report on Form 10-K for the year ended December 31, 2000 is being filed solely for the purpose of revising the Company's Property and Casualty Claim and Claim Adjustment Expense Liability historical development tables for the 1998 and prior years as follows: PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY - NET Cumulative paid claims, current year diagonal Liabilities reestimated, current year diagonal Deficiency (Redundancy) PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY - GROSS Net reestimated reserve Gross reestimated reserve Gross deficiency (redundancy) PART I ITEM 1. BUSINESS OF THE HARTFORD (Dollar amounts in millions, except for share data, unless otherwise stated) GENERAL The Hartford Financial Services Group, Inc. (together with its subsidiaries, "The Hartford" or the "Company") is a diversified insurance and financial services company. The Hartford, headquartered in Connecticut, is among the largest providers of investment products, individual life, group life and group disability insurance products, and property and casualty insurance products in the United States. Hartford Fire Insurance Company, founded in 1810, is the oldest of The Hartford's subsidiaries. The Hartford writes insurance and reinsurance in the United States and internationally. At December 31, 2000, total assets and total stockholders' equity of The Hartford were $171.5 billion and $7.5 billion, respectively. ORGANIZATION The Hartford strives to maintain and enhance its position as a market leader within the financial services industry and to maximize shareholder value. The Company pursues a strategy of developing and selling diverse and innovative products through multiple distribution channels, continuously developing and expanding those distribution channels, achieving cost efficiencies through economies of scale and improved technology, maintaining effective risk management and prudent underwriting techniques and capitalizing on its brand name and customer recognition of The Hartford Stag Logo, one of the most recognized symbols in the financial services industry. The Hartford Financial Services Group, Inc., a Delaware corporation, was formed in December 1985 as a wholly-owned subsidiary of ITT Corporation ("ITT"). On December 19, 1995, ITT distributed all of the outstanding shares of The Hartford Financial Services Group, Inc. to ITT shareholders of record in an action known herein as the Distribution. As a result of the Distribution, The Hartford became an independent, publicly traded company. As a holding company that is separate and distinct from its insurance subsidiaries, The Hartford Financial Services Group, Inc. has no significant business operations of its own. Therefore, it relies on the dividends from its insurance company subsidiaries, which are primarily domiciled in Connecticut, as the principal source of cash flow to meet its obligations. Additional information regarding the cash flow and liquidity needs of The Hartford Financial Services Group, Inc. may be found in the Capital Resources and Liquidity section of Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A"). The Company maintains a retail mutual fund operation, whereby the Company, through wholly-owned subsidiaries, provides investment management and administrative services to The Hartford Mutual Funds, Inc., a family of fourteen mutual funds. Investors can purchase "shares" in the mutual funds, all of which are registered with the Securities and Exchange Commission, in accordance with the Investment Company Act of 1940. The mutual funds are owned by the shareholders of those funds and not by the Company. Pursuant to its initial public offering of Class A common stock on May 22, 1997 (the "Offering") of Hartford Life, Inc. ("HLI"), the holding company parent of The Hartford's significant life insurance subsidiaries, HLI sold to the public 26 million shares at $28.25 per share and received proceeds, net of offering expenses, of $687. The 26 million shares sold in the Offering represented approximately 19% of the equity ownership in HLI. On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI that it did not already own ("The HLI Repurchase"). As a result, HLI again became a wholly-owned subsidiary of The Hartford. Additional information on The HLI Repurchase may be found in the Capital Resources and Liquidity section of the ("MD&A") and Note 2 of Notes to Consolidated Financial Statements. On November 16, 1998, The Hartford completed the sale of its United Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh") subsidiary. The Hartford retained ownership of Excess Insurance Company Limited, London & Edinburgh's property and casualty insurance and reinsurance subsidiary, which discontinued writing new business in 1993. On December 22, 2000, The Hartford completed the sale of its Netherlands-based Zwolsche Algemeene N.V. subsidiary to Assurances Generales de France, a subsidiary of Allianz AG. The Hartford received $547, before costs of sale. Management used the proceeds from the sale to reduce outstanding commercial paper which was issued to partially fund The HLI Repurchase. On January 25, 2001, The Hartford agreed to acquire the U.S. individual life insurance, annuity and mutual fund businesses of Fortis, Inc. (operating as Fortis Financial Group, or "Fortis") for $1.12 billion in cash. The Company will effect the acquisition through several reinsurance agreements with subsidiaries of Fortis and the purchase of 100% of the stock of Fortis Advisors, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of Fortis. The Fortis transaction, which is subject to insurance regulatory approval and other customary conditions, is expected to be completed in the second quarter of 2001. The acquisition will be recorded as a purchase transaction. On February 8, 2001, The Hartford completed the sale of its Spain-based subsidiary, Hartford Seguros, to Liberty International, a subsidiary of Liberty Mutual Group. The Hartford received $29, before costs of sale. REPORTING SEGMENTS The Hartford is organized into two major operations: Worldwide Life and Worldwide Property & Casualty. Within these operations, The Hartford conducts business principally in eight operating segments. Additionally, all activities related to The HLI Repurchase, the minority interest in HLI for pre-acquisition periods and The Hartford Bank, FSB are included in Corporate. Worldwide Life, headquartered in Simsbury, Connecticut, is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits (formerly Employee - 2 - Benefits) and Corporate Owned Life Insurance ("COLI"). Worldwide Life also includes in an Other category its international operations, which are primarily located in Latin America and the Far East, and corporate items not directly allocable to any of its reportable operating segments, principally interest expense. Worldwide Property & Casualty is organized into four reportable operating segments: the underwriting segments of Commercial, Personal and Reinsurance, and an International and Other Operations segment. Also reported within Worldwide Property & Casualty is North American, which includes the combined underwriting results of Commercial, Personal and Reinsurance along with income and expense items not directly allocable to these segments, such as net investment income. The following is a description of Worldwide Life and Worldwide Property & Casualty along with each of their segments, including a discussion of principal products, marketing and distribution and competitive environments. Additional information on The Hartford's reporting segments may be found in the MD&A and Note 18 of Notes to Consolidated Financial Statements. WORLDWIDE LIFE Worldwide Life's business is conducted by HLI, a leading financial services and insurance organization. Through Worldwide Life, The Hartford provides (i) investment products, including variable annuities, fixed market value adjusted ("MVA") annuities, mutual funds and retirement plan services for the savings and retirement needs of over 1.5 million customers, (ii) life insurance for income protection and estate planning to approximately 500,000 customers, (iii) group benefits products such as group life and group disability insurance for the benefit of millions of individuals and (iv) corporate owned life insurance. According to the latest publicly available data, with respect to the United States, the Company is the largest writer of individual variable annuities based on sales for the year ended December 31, 2000 and the third largest writer of group disability insurance based on sales for the nine months ended September 30, 2000. In addition, the Company offers a retail-oriented mutual fund family that is the fastest in history to reach $10 billion in assets. The Company's strong position in each of its core businesses provides an opportunity to increase the sale of The Hartford's products and services as individuals increasingly save and plan for retirement, protect themselves and their families against disability or death and engage in estate planning. The Company is the third largest consolidated life insurance group based on statutory assets as of December 31, 1999. In the past year, Worldwide Life's total assets under management, which include $11.4 billion of third-party assets invested in the Company's mutual funds, increased 7% to $155.1 billion at December 31, 2000. Worldwide Life generated $6.0 billion in revenues and net income of $575 in 2000. CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE Worldwide Life maintains advantageous economies of scale and operating efficiencies due to its continued growth, attention to expense and claims management and commitment to customer service and technology. These advantages allow the Company to competitively price its products for its distribution network and policyholders. The Company continues to achieve operating efficiencies in its Investment Products segment. Operating expenses associated with the Company's individual annuity products as a percentage of total individual annuity account values reduced by more than half, declining from 43 basis points in 1992 to 21 basis points in 2000. In addition, the Company utilizes computer technology to enhance communications within the Company and throughout its distribution network in order to improve the Company's efficiency in marketing, selling and servicing its products and, as a result, provides high-quality customer service. In recognition of excellence in customer service for variable annuities, The Hartford was awarded the 2000 Annuity Service Award by DALBAR Inc., a recognized independent financial services research organization, for the fifth consecutive year. The Hartford is the only company to receive this prestigious award in every year of the award's existence. Also, The Hartford Mutual Funds, Inc. have been named the leading mid-sized fund complex in the industry for top service providers, according to a survey of broker-dealers conducted by DALBAR Inc. RISK MANAGEMENT Worldwide Life's product designs, prudent underwriting standards and risk management techniques protect it against disintermediation risk and greater than expected mortality and morbidity experience. As of December 31, 2000, the Company had limited exposure to disintermediation risk on approximately 98% of its domestic life insurance and annuity liabilities through the use of non-guaranteed separate accounts, MVA features, policy loans, surrender charges and non-surrenderability provisions. The Company effectively utilizes prudent underwriting to select and price insurance risks and regularly monitors mortality and morbidity assumptions to determine if experience remains consistent with these assumptions and to ensure that its product pricing remains appropriate. The Company also enforces disciplined claims management to protect itself against greater than expected morbidity experience. INVESTMENT PRODUCTS The Investment Products segment focuses, through the sale of individual variable and fixed annuities, mutual funds, retirement plan services and other investment products, on the savings and retirement needs of the growing number of individuals who are preparing for retirement or who have already retired. From December 31, 1995 to December 31, 2000, this segment's assets under management grew to $116.0 billion from $43.9 billion, a five year compounded annual growth rate of 21%. Investment Products generated revenues of $2.4 billion, $2.0 billion and $1.8 billion in 2000, 1999 and 1998, respectively, of which individual annuities accounted for $1.5 billion, $1.4 billion and $1.1 billion of total Investment Products revenues in 2000, 1999 and 1998, respectively. Net income in the Investment Products segment was $424 in 2000, a 28% increase over 1999. The Hartford sells both variable and fixed individual annuity products through a wide distribution network of national and regional broker-dealer organizations, banks and other financial institutions and independent financial advisors. The Hartford is a market leader in the annuity industry with sales of $10.7 billion, $10.9 billion and $10.0 billion in 2000, 1999 and 1998, respectively. According to Variable Annuity and Research Data - 3 - Service ("VARDS"), The Hartford was the number one writer of individual variable annuities in the United States for 2000, 1999 and 1998 with sales of $9.0 billion, $10.3 billion and $9.9 billion, respectively. In addition, the Company was the number one seller of individual variable annuities through banks in 2000, 1999 and 1998, according to Kenneth Kehrer Associates (a leading consultant to banks). The Company's total account value related to individual annuity products was $87.2 billion as of December 31, 2000. Of this total account value, $78.2 billion, or 90%, related to individual variable annuity products and $9.0 billion, or 10%, related primarily to fixed MVA annuity products. The Hartford is emerging as a significant participant in the mutual fund business. The Company is among the top providers of retirement products and services, including asset management and plan administration, to municipalities pursuant to Section 457 and plans to corporations under Section 401(k) of the Internal Revenue Code of 1986, as amended (referred to as "Section 457" and "Section 401(k)", respectively). The Company also provides structured settlement contracts, terminal funding products and other investment products such as guaranteed investment contracts ("GICs"). As previously mentioned, in January 2001, The Hartford agreed to acquire the annuity and mutual fund businesses of Fortis. This acquisition is expected to increase assets under management in the Company's fast growing mutual fund business by over 30%, as well as solidify the Company's number one position in variable annuities. (For additional information, see the Capital Resources and Liquidity section of the MD&A under "Subsequent Event".) Principal Products ------------------ Individual Variable Annuities -- The Hartford earns fees, based on policyholders' account values, for managing variable annuity assets and maintaining policyholder accounts. The Company uses specified portions of the periodic deposits paid by a customer to purchase units in one or more mutual funds as directed by the customer who then assumes the investment performance risks and rewards. As a result, variable annuities permit policyholders to choose aggressive or conservative investment strategies, as they deem appropriate, without affecting the composition and quality of assets in the Company's general account. These products offer the policyholder a variety of equity and fixed income options, as well as the ability to earn a guaranteed rate of interest in the general account of the Company. The Company offers an enhanced guaranteed rate of interest for a specified period of time (no longer than twelve months) if the policyholder elects to dollar-cost average funds from the Company's general account into one or more non-guaranteed separate accounts. Due to this enhanced rate and the volatility experienced in the overall equity markets, this option continues to be popular with policyholders. Policyholders may make deposits of varying amounts at regular or irregular intervals and the value of these assets fluctuates in accordance with the investment performance of the funds selected by the policyholder. To encourage persistency, many of the Company's individual variable annuities are subject to withdrawal restrictions and surrender charges ranging initially from 6% to 8% of the contract's initial deposit less withdrawals which reduce to zero on a sliding scale, usually within seven policy years. Volatility experienced by the equity markets in 2000, 1999 and 1998 did not cause a significant increase in variable annuity surrenders, demonstrating that policyholders are generally aware of the long-term nature of these products. Individual variable annuity account values of $78.2 billion as of December 31, 2000, has grown significantly from $13.1 billion as of December 31, 1994 due to strong net cash flow, the result of a high level of sales, low levels of surrenders and equity market appreciation. Approximately 96% and 95% of the individual variable annuity account values were held in non-guaranteed separate accounts as of December 31, 2000 and 1999, respectively. The assets underlying the Company's variable annuities are managed both internally and by outside money managers, while the Company provides all policy administration services. The Company utilizes a select group of money managers, such as Wellington Management Company, LLP ("Wellington"), Putnam Financial Services, Inc. ("Putnam"), American Funds, MFS Investment Management ("MFS"), Franklin Templeton Group and Morgan Stanley Dean Witter InterCapital, Inc. All have an interest in the continued growth in sales of the Company's products and greatly enhance the marketability of the Company's annuities and the strength of its product offerings. Two of the industry's top twenty leading variable annuities, (based on sales for the year ended 2000), The Director(R) and Putnam Hartford Capital Manager Variable Annuity, are sponsored by The Hartford and are managed in part by Wellington and Putnam, respectively. The Hartford Leaders, a multi-manager variable annuity introduced in July 1999, combines the product manufacturing, wholesaling and service capabilities of The Hartford with the investment management expertise of three of the nation's most successful investment management organizations, American Funds, Franklin Templeton Group and MFS. The Hartford Leaders has proved to be a strong product from inception and is poised to join The Director(R) and Putnam Hartford Capital Manager Variable Annuity as an industry leader. Fixed MVA Annuities -- Fixed MVA annuities are fixed rate annuity contracts which guarantee a specific sum of money to be paid in the future, either as a lump sum or as monthly income. In the event that a policyholder surrenders a policy prior to the end of the guarantee period, the MVA feature increases or decreases the cash surrender value of the annuity in respect of any interest rate decreases or increases, respectively, thereby protecting the Company from losses due to higher interest rates at the time of surrender. The amount of payment will not fluctuate due to adverse changes in the Company's investment return, mortality experience or expenses. The Company's primary fixed MVA annuities have terms varying from one to ten years with an average term of approximately seven years. Sales of the Company's fixed MVA annuities increased during 2000 as a result of the higher interest rate environment making 2000 the best sales year for this product since 1995. Account values of fixed MVA annuities were $9.0 billion and $8.4 billion as of December 31, 2000 and 1999, respectively. Mutual Funds -- In September 1996, the Company launched a new family of retail mutual funds. The Company provides investment management and administrative services to The Hartford Mutual Funds, Inc., a family of fourteen mutual funds. These funds are managed by Wellington and Hartford Investment Management Company, a wholly-owned subsidiary - 4 - of The Hartford. The Company has entered into agreements with over 750 financial services firms to distribute these mutual funds. The Company charges management fees to the shareholders of the mutual funds, which are recorded as revenue by the Company. Investors can purchase shares in the mutual funds, all of which are registered with the Securities and Exchange Commission, in accordance with the Investment Company Act of 1940. The mutual funds are owned by the shareholders of those funds and not by the Company. As such, the mutual fund assets and liabilities, as well as related investment returns, are not reflected in the Company's consolidated financial statements since they are not assets, liabilities and operations of the Company. According to Strategic Insight (a mutual fund research and consulting organization), The Hartford Mutual Funds, Inc. reached $10 billion in assets faster than any other retail-oriented fund family in history. Eight of the fourteen funds have Morningstar ratings and all eight have three-, four- or five- star ratings as of December 31, 2000. Total retail mutual fund sales were $5.2 billion, $3.3 billion and $1.6 billion in 2000, 1999 and 1998, respectively. Corporate -- The Company sells retirement plan products and services to corporations under Section 401(k) plans targeting the small and medium case markets since the Company believes these markets are underpenetrated in comparison to the large case market. As of December 31, 2000, the Company administered over 1,400 Section 401(k) plans. Governmental -- The Company sells retirement plan products and services to municipalities under Section 457 plans. The Company offers a number of different funds, both fixed income and equity, to the employees in Section 457 plans. Generally, the Company manages the fixed income funds and certain other outside money managers act as advisors to the equity funds offered in Section 457 plans administered by the Company. As of December 31, 2000, the Company administered over 2,000 Section 457 plans. Institutional Liabilities -- The Company also sells structured settlement contracts which provide for periodic payments to an injured person or survivor for a generally determinable number of years, typically in settlement of a claim under a liability policy in lieu of a lump sum settlement. The Company's structured settlements are sold through The Hartford's property-casualty insurance operations as well as specialty brokers. The Company also markets other annuity contracts for special purposes such as the funding of terminated defined benefit pension plans. In addition, the Company offers GICs and short-term funding agreements. Marketing and Distribution -------------------------- The Investment Products distribution network is based on management's strategy of utilizing multiple and competing distribution channels to achieve the broadest distribution to reach target customers. The success of the Company's marketing and distribution system depends on its product offerings, fund performance, successful utilization of wholesaling organizations, quality of customer service, and relationships with national and regional broker-dealer firms, banks and other financial institutions, and independent financial advisors (through which the sale of the Company's individual annuities to customers is consummated). The Hartford maintains a distribution network of approximately 1,500 broker-dealers and approximately 500 banks. As of September 30, 2000, the Company was selling products through 24 of the 25 largest retail banks in the United States, including proprietary relationships with 10 of the top 25. The Company periodically negotiates provisions and terms of its relationships with unaffiliated parties, and there can be no assurance that such terms will remain acceptable to the Company or such third parties. In August 1998, the Company completed the purchase of all outstanding shares of PLANCO Financial Services, Inc. and its affiliate, PLANCO, Incorporated (collectively, "PLANCO"), a primary wholesaler of the Company's individual annuities and mutual funds. PLANCO is the nation's largest wholesaler of individual annuities and has played a significant role in The Hartford's growth over the past decade. As a wholesaler, PLANCO distributes The Hartford's fixed and variable annuities, mutual funds and single premium variable life insurance by providing sales support to registered representatives, financial planners and broker-dealers at brokerage firms and banks across the United States. This acquisition secured an important distribution channel for the Company and gives the Company a wholesale distribution platform which it can expand in terms of both the number of individuals wholesaling its products and the portfolio of products which they wholesale. In addition, the Company uses internal personnel with extensive experience in the Section 457 market, as well as access to the Section 401(k) market, to sell its products and services in the retirement plan market. Competition ----------- The Investment Products segment competes with numerous other insurance companies as well as certain banks, securities brokerage firms, investment advisors and other financial intermediaries marketing annuities, mutual funds and other retirement-oriented products. As a result of court decisions and regulatory actions, national banks may become more significant competitors in the future for insurers which sell annuities. The 1999 Gramm-Leach-Bliley Act ("the Financial Services Modernization Act"), which allows affiliations among banks, insurance companies and securities firms, did not precipitate any significant changes in ownership in 2000. (For additional information, see the Regulatory Matters and Contingencies section of the MD&A.) Product sales are affected by competitive factors such as investment performance ratings, product design, visibility in the marketplace, financial strength ratings, distribution capabilities, levels of charges and credited rates, reputation and customer service. INDIVIDUAL LIFE The Individual Life segment sells a variety of products including variable life, universal life, interest sensitive whole life and term life insurance primarily to the high end estate and business planning markets. Life insurance in force increased 13% to $75.1 billion as of December 31, 2000 from $66.7 billion as of December 31, 1999. Account values grew 8% to $5.8 billion as of December 31, 2000 from $5.4 billion as of December 31, 1999. The Individual Life segment generated revenues of $640, $584 and $567 in 2000, 1999 and 1998, respectively. Net income in the Individual Life segment was $79 in 2000, an 11% increase over 1999. - 5 - As previously mentioned, in January 2001, The Hartford agreed to acquire the U.S. individual life insurance business of Fortis. This acquisition will add significant scale to the Company's individual life business, and according to data provided by Tillinghast-Towers Perrin, HLI will move to third largest from fifth largest writer of variable life insurance in the United States based upon new premium sales. It will also broaden the Company's reach in the emerging affluent market with the addition of a retail broker-dealer consisting of approximately 3,000 registered representatives. (For additional information, see the Capital Resources and Liquidity section of the MD&A under "Subsequent Event".) Principal Products ------------------ The trend in the individual life industry has been a shift away from traditional products and fixed universal life insurance towards variable life (including variable universal life) insurance products, in which The Hartford has been on the leading edge. In 2000, of the Company's new sales of individual life insurance, 89% was variable life and 10% was either universal life or interest sensitive whole life. The Company also sold a small amount of term life insurance. Variable Life -- Variable life insurance provides a return linked to an underlying investment portfolio and the Company allows policyholders to determine their desired asset mix among a variety of underlying mutual funds. As the return on the investment portfolio increases or decreases, as the case may be, the death benefit or surrender value of the variable life policy may increase or decrease. The Company's single premium variable life product provides a death benefit to the policy beneficiary based on a single premium deposit. The Company's second-to-die products are distinguished from other products in that two lives are insured rather than one, and the policy proceeds are paid upon the death of both insureds. Second-to-die policies are frequently used in estate planning, often to fund estate taxes for a married couple. Variable life account values were $2.9 billion and $2.6 billion as of December 31, 2000 and 1999, respectively. Universal Life and Interest Sensitive Whole Life -- Universal life and interest sensitive whole life insurance coverages provide life insurance with adjustable rates of return based on current interest rates. The Company offers both flexible and fixed premium policies and provides policyholders with flexibility in the available coverage, the timing and amount of premium payments and the amount of the death benefit, provided there are sufficient policy funds to cover all policy charges for the coming period. The Company also sells universal life insurance policies with a second-to-die feature similar to that of the variable life insurance product offered. Universal life and interest sensitive whole life account values were $2.1 billion and $2.0 billion as of December 31, 2000 and 1999, respectively. Marketing and Distribution -------------------------- Consistent with the Company's strategy to access multiple distribution outlets, the Individual Life distribution organization has been developed to penetrate a multitude of retail sales channels. These include independent life insurance sales professionals; agents of other companies; national, regional and independent broker-dealers; banks and property and casualty insurance organizations. The primary organization used to wholesale The Hartford's products to these outlets is a group of highly qualified life insurance professionals with specialized training in sophisticated life insurance sales, particularly as it pertains to estate and business planning. These individuals are generally employees of The Hartford, who are managed through a regional sales office system. The Company has grown this organization rapidly the past few years to over 210 individuals and expects to continue to increase the number of wholesalers in the future. Competition ----------- The Individual Life segment competes with approximately 1,500 life insurance companies in the United States, as well as other financial intermediaries marketing insurance products. Competitive factors related to this segment are primarily the breadth and quality of life insurance products offered, pricing, relationships with third-party distributors and the quality of underwriting and customer service. GROUP BENEFITS The Group Benefits segment sells group life and group disability insurance, as well as other products, including stop loss and supplementary medical coverage to employers and employer sponsored plans, accidental death and dismemberment, travel accident and other special risk coverages to employers and associations. The Company also offers disability underwriting, administration, claims processing services and reinsurance to other insurers and self-funded employer plans. According to the latest results published by Life Insurance Marketing and Research Association ("LIMRA"), the Company, based on sales, was the third largest provider of group disability insurance and the fourth largest writer of group term life insurance in the United States for the nine months ended September 30, 2000. Generally, policies sold in this segment are term insurance, typically with one or two year rate guarantees. These rate guarantees allow the Company to make adjustments in rate or terms of its policies in order to minimize the adverse effect of various market trends. In the disability market, the Company focuses on strong underwriting and claims management to derive a competitive advantage. As of December 31, 2000 and 1999, the Company had group disability reserves of $2.0 billion and $1.8 billion and group life reserves of $601 and $560, respectively. The Group Benefits segment generated revenues of $2.2 billion, $2.0 billion and $1.8 billion in 2000, 1999 and 1998, respectively, of which group disability insurance accounted for $939, $860 and $763 and group life insurance accounted for $687, $654 and $593 of total Group Benefits revenues in 2000, 1999 and 1998, respectively. Net income in the Group Benefits segment was $90 in 2000, a 14% increase over 1999. Principal Products ------------------ Group Disability -- The Hartford is one of the largest participants in the "large case" market of the group disability insurance business. The large case market, as defined by the Company, generally consists of group disability policies covering over 500 employees in a particular company. The Company is continuing its focus on the "small case" and "medium case" group markets, emphasizing name recognition and reputation as well as the Company's managed disability approach to claims and administration. The Company's efforts in the group disability market focus on early intervention, return-to-work programs, reduction of long-term disability - 6 - claims and successful rehabilitation. Over the last several years, the focus of new disability products introduced is to provide incentives for employees to return to independence. The Company also works with disability claimants to improve the receipt rate of Social Security offsets (i.e., reducing payment of benefits by the amount of Social Security payments received). The Hartford has concentrated on a managed disability approach, which emphasizes early claimant intervention in an effort to facilitate a disabled claimant's return to work and thereby contain costs. This approach, coupled with an individualized approach to claim servicing, and an incentive to contain costs, leads to an overall reduction in the cost of disability coverage for employers. The Company's short-term disability benefit plans provide a weekly benefit amount (typically 60% to 70% of the employee's earned income up to a specified maximum benefit) to insured employees when they are unable to work due to an accident or illness. Long-term disability insurance provides a monthly benefit for those extended periods of time not covered by a short-term disability benefit plan when insured employees are unable to work due to disability. Employees may receive total or partial disability benefits. Most of these policies begin providing benefits following a 90 or 180 day waiting period and generally continue providing benefits until the employee reaches age 65. Long-term disability benefits are paid monthly and are limited to a portion, generally 50-70%, of the employee's earned income up to a specified maximum benefit. Group Life -- Group term life insurance provides term coverage to employees and their dependents for a specified period and has no accumulation of cash values. The Company offers options for its basic group life insurance coverage, including portability of coverage and a living benefit option, whereby terminally ill policyholders can receive death benefits prior to their deaths. In addition, the Company offers premium waivers and accidental death and dismemberment coverage to employee groups. Other -- The Hartford provides excess of loss medical coverage (known as stop loss insurance) to employers who self-fund their medical plans and pay claims using the services of a third party administrator. The Company provides Medicare Supplement, travel accident, hospital indemnity and other coverages (including group life and disability) primarily to individual members of various associations as well as employee groups. Marketing and Distribution -------------------------- The Hartford uses an experienced group of Company employees, managed through a regional sales office system, to distribute its group insurance products and services through a variety of distribution outlets. The Company expanded its sales office system during 1999, by increasing the sales force and the number of sales offices by about 25% and 15%, respectively. The Company will continue to expand the system over the coming years in areas that have the highest growth potential. The Company will also continue to develop alternative distribution channels to sell its products, such as sales to employers through brokers, consultants and third-party administrators as well as to multiple employer groups through its relationships with trade associations. In keeping with its strategy of developing multiple distribution channels, the Company signed an agreement in January 2001 with Wausau Benefits, Inc., the country's tenth largest third-party administrator, to sell its group life and group disability products. Competition ----------- Competitive factors primarily affecting Group Benefits are the variety and quality of products offered, the price quoted for coverage and services, the Company's relationships with its third-party distributors and the quality of customer service. Group Benefits competes with numerous other insurance companies and other financial intermediaries marketing insurance products. However, many of these businesses have relatively high barriers to entry and there have been very few new entrants over the past few years, while other major carriers have exited the market. CORPORATE OWNED LIFE INSURANCE ("COLI") The Hartford is a leader in the COLI market, which includes life insurance policies purchased by a company on the lives of its employees, with the company or a trust sponsored by the company named as the beneficiary under the policy. Until the Health Insurance Portability Act of 1996 ("HIPA Act of 1996"), the Company sold two principal types of COLI, leveraged and variable products. Leveraged COLI is a fixed premium life insurance policy owned by a company or a trust sponsored by a company. The HIPA Act of 1996 phased out the deductibility of interest on policy loans under leveraged COLI at the end of 1998, virtually eliminating all future sales of leveraged COLI. Variable COLI continues to be a product used by employers to fund non-qualified benefits or other postemployment benefit liabilities. Variable COLI account values were $15.9 billion and $12.4 billion as of December 31, 2000 and 1999, respectively. Leveraged COLI account values decreased to $5.0 billion as of December 31, 2000 from $5.7 billion as of December 31, 1999, primarily due to the HIPA Act of 1996. Although COLI revenues decreased in 2000 to $767 from $831 in 1999, COLI net income increased 13%, to $34 in 2000. WORLDWIDE PROPERTY & CASUALTY The Hartford has the tenth largest property and casualty insurance operation in the United States based on written premiums for the year ended December 31, 1999 according to A.M. Best. Worldwide Property & Casualty generated $8.7 billion in revenues, $7.3 billion in written premiums and $494 in net income in 2000. Total assets for Worldwide Property & Casualty were $27.1 billion as of December 31, 2000. Worldwide Property & Casualty is organized into four reportable operating segments: the underwriting segments of Commercial, Personal and Reinsurance, and an International and Other Operations segment. Also reported within Worldwide Property & Casualty is North American, which includes the combined underwriting results of Commercial, Personal and Reinsurance along with income and expense items not directly allocable to these segments, such as net investment income. COMMERCIAL The Commercial segment provides insurance coverages to commercial accounts primarily throughout the United States. Commercial is organized into three customer markets: Business Insurance, Commercial Affinity and Commercial Specialty. - 7 - Business Insurance provides standard commercial business for small accounts ("Select Customer") and mid-sized insureds ("Key Accounts"). Commercial Affinity provides commercial risk management products and services to small and mid-sized members of affinity groups and customers of financial institutions. Commercial Specialty provides insurance through retailers and wholesalers to large commercial clients ("Major/National") and insureds requiring a variety of specialized coverages. The Commercial segment had written premiums of $3.5 billion, $3.2 billion and $3.2 billion in 2000, 1999 and 1998, respectively. Underwriting losses for 2000, 1999 and 1998 were $153, $171 and $213, respectively. Principal Products ------------------ The Commercial segment offers workers' compensation, property, automobile, liability, financial products, marine, agricultural and bond coverages. Excess and surplus lines coverages not normally written by standard line insurers are also provided. Marketing and Distribution -------------------------- The Commercial segment provides insurance products and services through its home office located in Hartford, Connecticut, and multiple domestic regional and district office locations and insurance centers. The segment markets its products nationwide utilizing a variety of distribution networks including approximately 5,400 independent agents as well as wholesalers and direct marketing including trade associations, customers of financial institutions and employee groups. Independent agents, who often represent other companies as well, are compensated on a commission basis and are not employees of The Hartford. Competition ----------- The commercial insurance industry continues to be a highly challenging and competitive environment in which the Commercial segment competes with other stock insurance companies, self insurers and other underwriting organizations. This competitive environment is created by price competition, consolidation and globalization of companies, excess capital within the commercial insurance industry, exploration and utilization of alternative distribution techniques and emphasis on cost containment and reduction. In 2000, market conditions in the commercial industry have improved as a result of a firming pricing environment. PERSONAL The Hartford ranks among the largest carriers of personal lines insurance. The Personal segment provides insurance coverages to individuals throughout the United States. Personal is organized to provide customized products and services to the following markets: the membership of AARP through a direct marketing operation; customers who prefer local agent involvement through a network of independent agents in the standard personal lines market and in the non-standard automobile market through Omni Insurance Group, Inc. ("Omni"), which was acquired in 1998; customers of Sears, Roebuck & Co. ("Sears") and Ford Motor Company and Ford Motor Credit Company (collectively, "Ford") as well as customers of financial institutions through an affinity center which began in 1996; and customer service for all health insurance products offered through AARP's Health Care Options effective January 1, 1998. AARP's exclusive licensing arrangement continues through the year 2002 for automobile, homeowners and home-based business and through 2007 for Health Care Options. These agreements provide the Personal segment with an important competitive advantage. The Personal segment had written premiums of $2.6 billion, $2.5 billion and $2.2 billion in 2000, 1999 and 1998, respectively. Underwriting income for 2000, 1999 and 1998 were $2, $34 and $77, respectively. Principal Products ------------------ The Personal segment provides automobile, homeowners, home-based business and fire coverages to individuals across North America, including a special program designed exclusively for members of AARP. Marketing and Distribution -------------------------- The Personal segment reaches diverse markets through multiple distribution channels. The segment markets directly to the 33 million members of AARP, sells its products through independent agents and also markets through affinity groups, including Sears, Ford and financial institutions. Competition ----------- The personal lines marketplace continues to be competitive, especially in the personal automobile line. Over the last two years, intense price competition, upward trends in loss costs and the significant expense of establishing alternative distribution channels have caused underwriting results to decrease. The personal lines marketplace reported a combined ratio of 108.9 for the first nine months of 2000, according to A.M. Best. In the absence of renewal price increases by competitors, attracting new customers becomes more difficult, forcing companies to offer greater price incentives and product features and to increase advertising costs. A major competitive advantage of the Personal segment is the exclusive licensing arrangement with AARP to provide personal automobile, homeowners and home-based business insurance products to its members through 2002. Favorable "baby boomer" demographics are expected to increase AARP membership during this period. The Personal segment's relationship with AARP was further strengthened when it was awarded a contract, effective January 1, 1998, to provide customer service for all health insurance products offered through AARP's Health Care Options. The Hartford's contract with Sears entered into in 2000, joins two major brands in marketing automobile, homeowners, and home-based business, further enhancing The Hartford's reputation and competitive advantage. REINSURANCE The Hartford is a major global reinsurer, with operations in the United States, Canada, the United Kingdom, France, Italy, Germany, Spain, Hong Kong and Taiwan. The Reinsurance segment had written premiums of $826, $703 and $711 in 2000, 1999 and 1998, respectively. Underwriting losses for 2000, 1999 and 1998 were $73, $48 and $36, respectively. - 8 - Principal Products ------------------ The Reinsurance segment offers a full range of treaty and facultative reinsurance products including property, casualty, marine, fidelity, finite risk, including alternative risk transfer, and specialty coverages. Marketing and Distribution -------------------------- The Reinsurance segment assumes insurance from other insurers, primarily through reinsurance brokers in the worldwide reinsurance market. Competition ----------- The worldwide property and casualty reinsurance market remains extremely competitive with consolidation in the market creating fewer, but stronger, competitors. Also, nontraditional solutions are beginning to emerge, which complement traditional reinsurance products. The pricing environment in the worldwide reinsurance market continued to improve throughout 2000. INTERNATIONAL AND OTHER OPERATIONS Worldwide Property & Casualty's International operations have historically consisted primarily of Western European companies offering a variety of insurance products designed to meet the needs of local customers. The Company's strategic shift to emphasize growth opportunities in international asset accumulation businesses has resulted in the sale of the majority of its international property and casualty operations. London & Edinburgh, located in the United Kingdom, was sold by The Hartford in November 1998. Zwolsche, located in the Netherlands, Belgium and Luxembourg, was sold in December 2000. Hartford Seguros, located in Spain, was sold in February 2001. Worldwide Property & Casualty's remaining International operation is The Hartford Insurance Company (Singapore), Ltd. (formerly People's Insurance Company, Ltd. ("Singapore Insurance")), of which The Hartford owned an 80% interest at December 31, 2000, after acquiring an additional 31% in December 2000. Worldwide Property & Casualty's Other Operations consist of the property and casualty insurance operations of The Hartford which have ceased writing new business. These operations primarily include First State Insurance Company, located in Boston, Massachusetts; Heritage Reinsurance Company, Ltd., headquartered in Bermuda; and Excess Insurance Company Limited, located in the United Kingdom. The primary objectives of Other Operations are the proper disposition of claims, the resolution of disputes, and the collection of reinsurance proceeds primarily related to policies written and reinsured prior to 1985. As such, Other Operations have no new product sales, distribution systems, or competitive issues. The International and Other Operations segment generated revenues of $602, $661 and $1.8 billion in 2000, 1999 and 1998, respectively. Net income for 2000, 1999 and 1998 were $28, $33 and $97, respectively. Principal Products ------------------ Singapore Insurance writes property and casualty products, primarily automobile. Zwolsche offered property and casualty, life and asset management products and services. Hartford Seguros provided both personal and commercial lines property and casualty, and life insurance products. Methods of Distribution ----------------------- The International operations conducts its business primarily through independent brokers who are compensated on a commission basis. Zwolsche distributed its products through various financial institutions. Competition ----------- Singapore is a relatively small market with traditional local companies as well as a large foreign presence primarily through branch operations. Competition is very strong in most product lines with pricing set freely by the market. WORLDWIDE LIFE RESERVES In accordance with applicable insurance regulations under which Worldwide Life operates, life insurance subsidiaries of The Hartford establish and carry as liabilities actuarially determined reserves which are calculated to meet The Hartford's future obligations. Reserves for life insurance and disability contracts are based on actuarially recognized methods using prescribed morbidity and mortality tables in general use in the United States, which are modified to reflect The Hartford's actual experience when appropriate. These reserves are computed at amounts that, with additions from estimated premiums to be received and with interest on such reserves compounded annually at certain assumed rates, are expected to be sufficient to meet The Hartford's policy obligations at their maturities or in the event of an insured's death. Reserves also include unearned premiums, premium deposits, claims incurred but not reported and claims reported but not yet paid. Reserves for assumed reinsurance are computed in a manner that is comparable to direct insurance reserves. Additional information on Worldwide Life Reserves may be found in the Reserves section of the MD&A. WORLDWIDE PROPERTY & CASUALTY RESERVES The Hartford establishes reserves to provide for the estimated costs of paying claims made by policyholders or against policyholders. These reserves include estimates for both claims that have been reported and those that have been incurred but not yet reported to The Hartford and include estimates of all expenses associated with processing and settling these claims. This estimation process is primarily based on historical experience and involves a variety of actuarial techniques which analyze trends and other relevant factors. For the year ended December 31, 2000, there were no changes to these reserving assumptions that had a significant impact on the reserves or results of operations. The Hartford continually reviews its estimated claims and claim adjustment expense reserves as additional experience and other relevant data become available, and reserve levels are adjusted accordingly. Such adjustments are reflected in net income of the period in which they are made. In the judgment of The - 9 - Hartford's management, all information currently available has been properly considered in establishing the reserves for unpaid claims and claim adjustment expenses. Further discussion on The Hartford's property and casualty reserves may be found in the Reserves section of the MD&A. The Hartford continues to receive claims that assert damages from environmental pollution and related clean-up costs and injuries from asbestos and asbestos-related products. Due to deviations from past experience and a variety of social, economic and legal issues, the Company's ability to estimate the future policy benefits, unpaid claims and claim adjustment expenses is significantly impacted. A study which reviewed and identified environmental and asbestos exposures in the United States was performed in 1996 and is discussed in the Environmental and Asbestos Claims section of the MD&A. Certain liabilities for unpaid claims, principally for permanently disabled claimants, terminated reinsurance treaties and certain contracts that fund loss run-offs for unrelated parties, have been discounted to present value. The amount of the discount was approximately $396 and $480 as of December 31, 2000 and 1999, respectively, and amortization of the discount had no material effect on net income during 2000, 1999 and 1998. As of December 31, 2000, statutory basis property and casualty reserves for claims and claim adjustment expenses exceeded those reported under Generally Accepted Accounting Principles ("GAAP") by $10. The primary differences resulted from the discounting of GAAP-basis workers' compensation reserves at risk free interest rates which exceeded the required statutory discount rates set by regulators, and the required exclusion from statutory reserves of assumed retroactive reinsurance. There were no significant changes in the mix of the Company's business which have impacted property and casualty claims and claim adjustment expense reserves; nor has the Company completed any significant portfolio loss transfers, structured settlements or other transactions which would change claim payment patterns. The Company had no unusually large property and casualty insurance losses or gains for the year ended December 31, 2000. A reconciliation of liabilities for unpaid claims and claim adjustment expenses is herein referenced from Note 1(h) of Notes to Consolidated Financial Statements. A table depicting the historical development of the liabilities for unpaid claims and claim adjustment expenses follows.
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - NET FOR THE YEARS ENDED DECEMBER 31, [1] 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 ------------------------------------------------------------------------------------------------------------------------------------ Liabilities for unpaid claims and claim adjustment expenses [2] $8,887 $9,204 $10,498 $10,717 $10,776 $11,063 $12,242 $12,297 $12,485 $12,122 $11,963 CUMULATIVE PAID CLAIMS AND CLAIM EXPENSES One year later 2,584 2,684 2,596 2,578 2,654 2,434 2,569 2,475 2,939 2,982 -- Two years later 4,341 4,350 4,282 4,207 4,179 4,022 4,099 4,256 4,672 -- -- Three years later 5,490 5,550 5,433 5,268 5,286 5,074 5,412 5,399 -- -- -- Four years later 6,325 6,396 6,229 6,112 6,040 6,097 6,234 -- -- -- -- Five years later 6,961 7,020 6,895 6,682 6,877 6,738 -- -- -- -- -- Six years later 7,456 7,569 7,354 7,391 7,406 -- -- -- -- -- -- Seven years later 7,913 7,954 7,987 7,861 -- -- -- -- -- -- -- Eight years later 8,256 8,532 8,411 -- -- -- -- -- -- -- -- Nine years later 8,795 8,924 -- -- -- -- -- -- -- -- -- Ten years later 9,159 -- -- -- -- -- -- -- -- -- -- LIABILITIES REESTIMATED One year later 9,174 10,535 10,757 10,811 11,019 12,025 12,217 12,119 12,280 12,090 -- Two years later 10,512 10,866 10,970 11,009 12,142 12,023 12,096 11,840 12,143 -- -- Three years later 10,818 11,095 11,182 12,094 12,127 11,947 11,919 11,668 -- -- -- Four years later 11,094 11,417 12,304 12,157 12,113 11,820 11,803 -- -- -- -- Five years later 11,427 12,515 12,406 12,184 12,082 11,798 -- -- -- -- -- Six years later 12,516 12,642 12,462 12,165 12,088 -- -- -- -- -- -- Seven years later 12,619 12,757 12,414 12,218 -- -- -- -- -- -- -- Eight years later 12,739 12,710 12,500 -- -- -- -- -- -- -- -- Nine years later 12,701 12,789 -- -- -- -- -- -- -- -- -- Ten years later 12,785 -- -- -- -- -- -- -- -- -- -- DEFICIENCY (REDUNDANCY) $3,898 $3,585 $2,002 $1,501 $1,312 $735 $(439) $(629) $(342) $(32) $-- ------------------------------------------------------------------------------------------------------------------------------------
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PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS FOR THE YEARS ENDED DECEMBER 31, [1] 1994 1995 1996 1997 1998 1999 2000 ------------------------------------------------------------------------------------------------------------------------------------ NET RESERVE [2] $10,776 $11,063 $12,242 $12,297 $12,485 $12,122 $11,963 Reinsurance recoverables 5,156 4,829 4,357 3,996 3,280 3,267 3,452 ------------------------------------------------------------------------------------------------------------------------------------ GROSS RESERVE $15,932 $15,892 $16,599 $16,293 $15,765 $15,389 $15,415 ------------------------------------------------------------------------------------------------------------------------------------ NET REESTIMATED RESERVE $12,088 $11,798 $11,803 $11,668 $12,143 $12,090 Reestimated reinsurance 5,578 4,817 4,154 3,878 3,423 3,687 recoverables ------------------------------------------------------------------------------------------------------------------------------------ GROSS REESTIMATED RESERVE $17,666 $16,615 $15,957 $15,546 $15,566 $15,777 ------------------------------------------------------------------------------------------------------------------------------------ GROSS DEFICIENCY (REDUNDANCY) $1,734 $723 $(642) $(747) $(199) $388 ------------------------------------------------------------------------------------------------------------------------------------ [1] The above tables exclude Zwolsche as a result of its sale on December 22, 2000 and London & Edinburgh as a result of its sale on November 16, 1998. [2] The above tables exclude the liabilities and claim developments for reinsurance coverage written for affiliated parties.
1994 1995 1996 1997 1998 1999 2000 ------------------------------------------------------------------------------------------------------------------------------------ Liabilities, net and gross of reinsurance for unpaid claims and claim adjustment expenses excluded $495 $550 $500 $505 $501 $456 $459 ------------------------------------------------------------------------------------------------------------------------------------ Included in the tables above is the impact of the change in The Hartford's method of discounting to present value certain workers' compensation reserves, principally for permanently disabled claimants, which was effective January 1, 1994.
The following table reconciles the Loss Development Table to the Consolidated Financial Statements: 2000 1999 1998 ------------------------------------------------------------------ Loss Development Table: Gross reserves $ 15,415 $ 15,389 $ 15,765 Exclusion of Zwolsche -- 169 183 Reinsurance - affiliated parties 459 456 501 ------------------------------------------------------------------ Gross reserves per Consolidated Financial Statements (see Note 1 (h)) $ 15,874 $ 16,014 $ 16,449 ------------------------------------------------------------------ CEDED REINSURANCE Consistent with normal industry practice, The Hartford cedes insurance risk to reinsurance companies. For property and casualty operations, these reinsurance arrangements provide greater diversification of business and limit The Hartford's maximum net loss arising from large risks or catastrophes. A major portion of The Hartford's property and casualty reinsurance is effected under general reinsurance contracts known as treaties, or, in some instances, is negotiated on an individual risk basis, known as facultative reinsurance. The Hartford also has in-force excess of loss contracts with reinsurers that protect it against a specified part or all of certain losses over stipulated amounts. The ceding of insurance obligations does not discharge the original insurer from its primary liability to the policyholder. The original insurer would remain liable in those situations where the reinsurer is unable to meet the obligations assumed under reinsurance agreements. The Hartford has established strict standards that govern the placement of reinsurance and monitors ceded reinsurance security. Virtually all of The Hartford's property and casualty reinsurance is placed with reinsurers that meet strict financial criteria established by a credit committee. In accordance with normal industry practice, Worldwide Life is involved in both the cession and assumption of insurance with other insurance and reinsurance companies. As of December 31, 2000, the maximum amount of life insurance retained on any one life by any one of the life operations was approximately $2.5. In 2000, the Company did not make any significant changes in the terms under which reinsurance is ceded to other insurers. Also in 2000, there were no specific reinsurance transactions that had a material effect on earnings or reserves. INVESTMENT OPERATIONS An important element of the financial results of The Hartford is return on invested assets. The Hartford's investment activities are primarily divided between Worldwide Life and Worldwide Property & Casualty. The investment activities of both the Worldwide Life and Worldwide Property & Casualty operations are managed based on the underlying characteristics and nature of their respective liabilities. The primary investment objective of Worldwide Life's general account and guaranteed separate accounts is to maximize after-tax returns consistent with acceptable risk parameters, including the management of the interest rate sensitivity of invested assets relative to that of policyholder obligations. The investment objective for the majority of Worldwide Property & Casualty is to maximize economic value while generating after-tax income and sufficient liquidity to meet corporate and policyholder obligations. For Worldwide Property & Casualty's Other Operations, the investment objective is to ensure the full and timely payment of all liabilities. Property and casualty investment strategies are developed based on a variety of factors including business needs, regulatory requirements and tax considerations. For a further discussion of The Hartford's approach to managing risks, including derivative utilization, see the Capital Markets Risk Management section of the MD&A, as well as Note 3 of Notes to Consolidated Financial Statements. REGULATION AND PREMIUM RATES Although there has been some deregulation with respect to large commercial insureds in recent years, insurance companies, for the most part, are still subject to comprehensive and detailed regulation and supervision throughout the United States. The - 11 - extent of such regulation varies, but generally has its source in statutes which delegate regulatory, supervisory and administrative powers to state insurance departments. Such powers relate to, among other things, the standards of solvency that must be met and maintained; the licensing of insurers and their agents; the nature of and limitations on investments; premium rates; claim handling and trade practices; restrictions on the size of risks which may be insured under a single policy; deposits of securities for the benefit of policyholders; approval of policy forms; periodic examinations of the affairs of companies; annual and other reports required to be filed on the financial condition of companies or for other purposes; fixing maximum interest rates on life insurance policy loans and minimum rates for accumulation of surrender values; and the adequacy of reserves and other necessary provisions for unearned premiums, unpaid claims and claim adjustment expenses and other liabilities, both reported and unreported. Regulatory requirements applying to property and casualty premium rates vary from state to state, but generally provide that rates shall not be inadequate, excessive or unfairly discriminatory. Rates for many products, including automobile and homeowners insurance, are subject to prior regulatory approval in many states. Ocean marine insurance rates are exempt from rate regulation. Subject to regulatory requirements, management determines the rates charged for its policies. Methods for arriving at rates vary by product, exposure assumed and size of risk. While premium rates in the property and casualty insurance business are for the most part subject to regulation, such rates are not in most instances uniform for all insurers within a given jurisdiction, or in all jurisdictions. The Hartford is a member of various fire, casualty and surety rating organizations. For some lines of business, The Hartford uses the rates and rating plans which are filed by these organizations in the various states, while for other lines of business it uses loss cost data published by such organizations. The Hartford also uses its own independent rates or otherwise departs from rating organization rates, where appropriate. Most states have enacted legislation that regulates insurance holding company systems such as The Hartford. This legislation provides that each insurance company in the system is required to register with the insurance department of its state of domicile and furnish information concerning the operations of companies within the holding company system which may materially affect the operations, management or financial condition of the insurers within the system. All transactions within a holding company system affecting insurers must be fair and equitable. Notice to the insurance departments is required prior to the consummation of transactions affecting the ownership or control of an insurer and of certain material transactions between an insurer and any entity in its holding company system. In addition, certain of such transactions cannot be consummated without the applicable insurance department's prior approval. State insurance regulations require property and casualty insurers to participate in assigned risk plans, reinsurance facilities and joint underwriting associations, which are mechanisms to provide risks with various basic or minimum insurance coverage when they are not available in voluntary markets. Such mechanisms are most prevalent for automobile and workers' compensation insurance, but a majority of states also mandate participation in so-called FAIR Plans or Windstorm Plans providing basic property coverage. Additionally, some states mandate such participation in facilities for providing medical malpractice insurance. Participation is based upon the amount of a company's written premiums in a particular state for the classes of insurance involved. The extent of insurance regulation on business outside the United States varies significantly among the countries in which The Hartford operates. Some countries have minimal regulatory requirements, while others regulate insurers extensively. Foreign insurers in many countries are faced with greater restrictions than domestic competitors domiciled in that particular jurisdiction. The Hartford's international operations are comprised of insurers licensed in their respective countries and, therefore, are subject to the generally less restrictive domestic insurance regulations. RATINGS Reference is made to the Capital Resources and Liquidity section of the MD&A under "Ratings". RISK-BASED CAPITAL Reference is made to the Capital Resources and Liquidity section of the MD&A under "Risk-based Capital". LEGISLATIVE INITIATIVES Reference is made to the Regulatory Matters and Contingencies section of the MD&A under "Legislative Initiatives". INSOLVENCY FUND Reference is made to the Regulatory Matters and Contingencies section of the MD&A under "Insolvency Fund". NAIC CODIFICATION Reference is made to the Regulatory Matters and Contingencies section of the MD&A under "NAIC Codification". YEAR 2000 Reference is made to the Regulatory Matters and Contingencies section of the MD&A under "Year 2000". EMPLOYEES The Hartford had approximately 26,600 employees as of February 28, 2001. EXECUTIVE OFFICERS OF THE HARTFORD Information about the executive officers of The Hartford who are also directors and/or nominees for election as directors is set forth in The Hartford's 2001 Proxy Statement. Set forth below is information about other executive officers of the Company: BRENDA FURLONG, 52, became Chief Investment Officer of the Company and President of Hartford Investment Management Company ("HIMCO"), a wholly-owned subsidiary of the Company, effective October 1, 1999. Previously, Ms. Furlong was Senior Vice President, Capital Planning and Development with responsibility for mergers and acquisitions, strategic - 12 - planning and capital allocation. Prior to joining the Company in 1996, she was Vice President and Treasurer of Sheraton Corp. and held senior positions at several ITT Corporation companies. Ms. Furlong began her career at State Street Bank and Trust, where she was a commercial lending officer. JOHN N. GIAMALIS, 43, is Senior Vice President and Controller of the Company. Mr. Giamalis joined the Company in January 1997, functioning as Corporate Controller and Director, Financial Reporting and Analysis. He was appointed in mid-1998 to the position of Deputy Controller. Prior to joining the Company, Mr. Giamalis held senior financial positions in the insurance and technology industries. Previously, he served in public accounting positions, including as Senior Manager with responsibility for insurance, securities and middle market clients for Deloitte & Touche. He holds a B.S. degree in business administration and a Master of professional accountancy from West Virginia University. He is a member of the American Institute and Connecticut Society of Certified Public Accountants. RANDALL I. KIVIAT, 50, has held the position of Group Senior Vice President of Human Resources for the Company since June 1999. Since joining the Company in 1982, he has held positions of increasing responsibility, including Director of Payroll, Director of Employee Benefits, and Vice President of Human Resources Services. EDWARD L. MORGAN, 57, has held the position of Group Senior Vice President, Corporate Relations and Government Affairs, of the Company since 1998. Previously, he was Senior Vice President, Corporate Relations and Public Affairs since 1995. Mr. Morgan also has held the position since 1993 of Senior Vice President, Corporate Relations and Public Affairs of Hartford Fire. - 13 - SIGNATURES Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this amendment to report to be signed on its behalf by the undersigned, thereunto duly authorized. THE HARTFORD FINANCIAL SERVICES GROUP, INC. By: /s/ John N. Giamalis ------------------------------------- John N. Giamalis Senior Vice President and Controller Date: April 24, 2001 - 14 -