Certain of the statements contained herein or in Part I of the Company's Form 10-K (other than statements of historical fact) are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty which are, in many instances, beyond the Company's control and have been made based upon management's expectations and beliefs concerning future developments and their potential effect upon The Hartford. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on The Hartford will be those anticipated by management. Actual results could differ materially from those expected by The Hartford, depending on the outcome of certain factors, including the possibility of general economic and business conditions that are less favorable than anticipated, legislative developments, changes in interest rates or the stock markets, stronger than anticipated competitive activity, more frequent or severe natural catastrophes than anticipated and those factors described in such forward-looking statements.
The Hartford defines "core earnings" as after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes and certain other items. Core earnings is an internal performance measure
Core earnings increased $125, or 15%, due to earnings growth of 10% or more across all segments in Worldwide Life partially offset by a decline in Worldwide Property & Casualty, primarily due to an increase in personal automobile loss costs and adverse loss development in reinsurance.
Core earnings increased $21, or 3%, primarily due to higher fee income in the Investment Products segment as a result of increasing assets under management. Partially offsetting this increase was a decrease in Worldwide Property & Casualty results, due primarily to $55 of proceeds received in 1998 related to the Industrial Risk Insurance pool ("IRI transaction"), and lower International and Other Operations segment core earnings as a result of the sale of London & Edinburgh.
The effective tax rates for 2000, 1999 and 1998 were 28%, 23% and 26%, respectively. The increase in the effective tax rate for 2000 was primarily due to taxes related to the gain on the sale of Zwolsche Algemeene N.V. ("Zwolsche") partially offset by a $24 tax benefit resulting from a settlement with the Internal Revenue Service with respect to certain tax matters for the 1993-1995 tax years. For a further discussion on the sale of Zwolsche, see the International and Other Operations section. The decrease in the effective tax rate for 1999 was due to an increase in the proportionate share of tax-exempt net investment income to total pre-tax income for 1999 compared to 1998. Tax-exempt interest earned on invested assets was the principal cause of effective rates lower than the 35% U.S. statutory rate. Income taxes paid in 2000, 1999 and 1998 were $95, $41 and $407, respectively. (For additional information, see Note 14 of Notes to Consolidated Financial Statements.)
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 is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits (formerly Employee Benefits) and Corporate Owned Life Insurance ("COLI"). Worldwide Life also includes in an Other category its international operations as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense.
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.
not considered segments, the Company also reports and evaluates core earnings results for Worldwide Life and Worldwide Property & Casualty, including North American. Worldwide Property & Casualty includes core earnings for North American and the International and Other Operations segment.
Worldwide Life provides investment and retirement products such as variable and fixed annuities, mutual funds and retirement plan services; individual and corporate owned life insurance; and, group benefit products such as group life and group disability insurance.
Worldwide Life derives its revenues principally from: (a) fee income, including asset management fees on separate account and mutual fund assets and mortality and expense fees, as well as cost of insurance charges; (b) fully insured premiums; (c) certain other fees; and (d) net investment income on general account assets. Asset management fees and mortality and expense fees are primarily generated from separate account assets, which are deposited with the Company through the sale of variable annuity and variable life products, and mutual funds. Cost of insurance charges are assessed on the net amount at risk for investment-oriented life insurance products. Premium revenues are derived primarily from the sale of group life and group disability insurance products.
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"). This transaction is expected to be completed in the second quarter of 2001. (For additional information, see the Capital Resources and Liquidity section under "Subsequent Event".)
1999 COMPARED TO 1998 -- Revenues decreased $252, or 4%, primarily due to the declining block of leveraged COLI business. Excluding the COLI segment, revenues increased $484, or 11%, to $4.7 billion. This increase was driven primarily by the Investment Products and Group Benefits segments, where revenues increased $257, or 14%, and $215, or 12%, respectively. The revenue growth in the Investment Products segment was, for the most part, due to higher fee income in the individual annuity and mutual fund operations. Total fee income for these operations increased $301, or 33%, to $1.2 billion due to significant growth in related assets under management resulting from strong sales, favorable persistency and equity market appreciation. The Group Benefits segment experienced higher earned premiums due to strong sales and persistency.
Benefits, claims and expenses decreased $353, or 7%, primarily due to the declining block of leveraged COLI business. Excluding the COLI segment, total benefits, claims and expenses increased $394, or 11%, consistent with the revenue growth described above. Core earnings increased $81, or 21%, driven mostly by increased fee income associated with higher assets under management in the Investment Products segment, as well as continued growth across its other reportable segments.
Core earnings increased $94, or 28%, primarily due to the growth in revenues discussed above. Additionally, the Investment Products segment continued to maintain its profit margins related to its primary businesses, thus contributing to the segment's earnings growth. In particular, its individual annuity operation's operating expenses as a percentage of average individual annuity account values remained consistent with the prior year at 21 basis points.
Associated with continued growth in this segment, total benefits, claims and expenses increased $165, or 12%. This increase was primarily driven by amortization of deferred policy acquisition costs, which grew $104, or 32%, and operating expenses, which increased $32, or 13%, as a result of growth in the individual annuity and retail mutual fund operations described above.
2000 COMPARED TO 1999 -- Revenues increased $56, or 10%, resulting primarily from fee income associated with the growing block of variable life insurance. Fee income increased $59, or 15%, as variable life account values increased $352, or 14%,
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 the Life Insurance Marketing and Research Association ("LIMRA"), the Company was the third largest provider of group disability insurance and the fourth largest writer of group term life insurance, based on sales, in the United States for the nine months ended September 30, 2000.
2000 COMPARED TO 1999 -- Revenues increased $183, or 9%, driven primarily by growth in fully insured premiums, excluding buyouts, which increased $182, or 10%, principally due to favorable persistency of the in force block of business, as well as new sales. Also contributing to the revenue growth was an increase in net investment income of $31, or 16%.
expenses as a percentage of earned premiums and other), excluding buyouts, remained consistent at 24%. The segment's effective income tax rate was reduced to 23% in 1999 from 28% in 1998 as a result of increasing the level of investment in tax-exempt securities. As a result of increased premium revenue, consistent loss and expense ratios and increased after-tax investment income, core earnings increased $8, or 11%.
As employers continue to offer benefit plans in order to attract and retain valued employees, management expects that the need for group life and group disability insurance will continue to expand and believes the Company is well positioned to take advantage of this growth potential.
2000 COMPARED TO 1999 -- Revenues in the COLI segment decreased $64, or 8%, primarily due to a decline in net investment income of $65, or 15%. This decline was principally due to the leveraged COLI block of business, as related account values decreased $751, or 13%, as a result of the continued downsizing caused by the HIPA Act of 1996.
Total benefits, claims and expenses decreased $70, or 9%, primarily due to the factor described above. Core earnings increased $4, or 13%, principally due to the variable COLI business where related account values increased $3.6 billion, or 29%, as well as earnings associated with a block of leveraged COLI business recaptured in 1998. For additional information on this recaptured business, see Note 13 of Notes to Consolidated Financial Statements.
1999 COMPARED TO 1998 -- Revenues decreased $736, or 47%, primarily attributable to the downsizing of the leveraged COLI business as a result of the HIPA Act of 1996. During 1999, leveraged COLI account values decreased $3.4 billion, or 37%.
As discussed above, 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, net realized capital gains or losses, other expenses including interest and income taxes.
2000 COMPARED TO 1999 -- Written premiums increased $304, or 10%, partially due to The Hartford's purchase of the in force, new and renewal financial products business as well as the majority of the excess and surplus lines of Reliance Group Holdings, Inc. ("Reliance") in 2000, which resulted in $108 of additional written premiums for the year. Continued premium growth in Select Customer, up $171, or 19%, over the prior year, also contributed to the increase in written premiums. Enhanced product offerings, targeted geographic strategies, new business growth coupled with modest price increases were the primary drivers of the Select Customer growth. These increases were slightly offset by a 2% decrease in mid-market standard commercial business. The decline in mid-market premiums continued to reflect the effective execution of the Company's underwriting initiatives, although significant price increases have partially mitigated this decrease.
Underwriting results improved $42, or 0.7 combined ratio points, attributable to a decline in the loss ratio of 1.3 points resulting from underwriting initiatives and price increases. Partially offsetting this improvement was an increase in the other underwriting expense ratio due to investments in growth areas, primarily Select Customer.
The personal insurance market remains highly competitive. Management believes that market conditions in the personal industry will improve in 2001. The current environment in the personal market involves rising loss costs resulting from inflation in both medical and automobile repair costs. Management believes that the Personal segment is positioned for continued written premium growth through multiple distribution channels. Initiatives are being implemented to further strengthen the AARP relationship and attract more members to the program. In 2000, Affinity entered into an agreement with Sears to market to its customers. The Hartford expects the Sears program to be a major market in the future. In the independent agency channel, investments in agency interface, new products and agency relations continue to position The Hartford for premium growth. The segment's investments in such areas as advertising, product research and development, agency relations, technology and staff training will continue in an effort to further heighten brand awareness, increase product offerings, further develop alternative distribution channels, improve productivity and reduce the expense ratio.
2000 COMPARED TO 1999 -- Reinsurance written premiums increased $123, or 17%, primarily due to successful pricing increases in a firming pricing environment in North America, as well as growth in new casualty programs business, and continued execution of new business development strategies in the alternative risk transfer line and in Europe.
Underwriting results decreased $25 with a corresponding 1.7 point increase in the combined ratio. This decrease was primarily due to continued adverse prior underwriting years loss development, partially offset by lower property catastrophe losses.
1999 COMPARED TO 1998 -- Written premiums decreased $8, or 1%, primarily due to an increase in ceded reinsurance premium, principally as a result of cessions under an aggregate stop loss treaty in 1999, and the non-recurrence of a significant single finite risk account written in 1998. These decreases were partially offset by the first quarter 1999 acquisition of renewal rights for the reinsurance business of Vesta Fire Insurance Corp., a subsidiary of Vesta Insurance Group Inc.
The International and Other Operations segment results for 2000 and 1999 include activity for Zwolsche located in the Netherlands, Belgium and Luxembourg until its sale on December 22, 2000 (discussed below), Hartford Seguros in Spain (formerly ITT Ercos), which was sold in February 2001 (discussed below) and The Hartford Insurance Company (Singapore), Ltd. (formerly People's Insurance Company, Ltd. ("Singapore Insurance")), of which The Hartford acquired a 49% interest in January 1998 and an additional 31% interest in December 2000. In addition, segment results for 1998, also include London & Edinburgh in the United Kingdom, until its sale by The Hartford in November 1998, (discussed below). Products offered by these companies include property and casualty products in both personal and commercial lines as well as life insurance products and services designed to meet the needs of local customers. The sale of the majority of The Hartford's International Operations continued the company's strategic shift in its International Operations to emphasize growth opportunities in asset accumulation business.
2000 COMPARED TO 1999 -- Revenues were down $59, or 9%, primarily due to lower earned premiums at Zwolsche. Core earnings were down $5, or 23%, primarily due to a higher calendar year loss ratio in automobile business in Hartford Seguros and unfavorable foreign exchange impacts.
1999 COMPARED TO 1998 -- Revenues of $661 were down $1.1 billion, or 63%, primarily due to the sale of London & Edinburgh, while core earnings were down $23 or 51% also as a result of the sale of London & Edinburgh.
The Hartford continues to explore acquisition opportunities in Latin America and Asia with an emphasis on asset accumulation businesses.
years. Such surrender charge is initially a percentage of either the accumulation value or considerations received, which varies by product, and generally decreases gradually during the penalty period. Surrender charges are set at levels to protect The Hartford from loss on early terminations and to reduce the likelihood of policyholders terminating their policies during periods of increasing interest rates, thereby lengthening the effective duration of policy liabilities and improving the Company's ability to maintain profitability on such policies.
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. Adjustments to previously established reserves, if any, will be reflected in the operating results of the period in which the adjustment is made. 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. In the judgment of management, all information currently available has been properly considered in the reserves established for claims and claim adjustment expenses. For a discussion of environmental and asbestos claims and the uncertainties related to these reserves, refer to the next section.
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.
The Hartford believes that the environmental and asbestos reserves reported at December 31, 2000 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.
An important element of the financial results of The Hartford is return on invested assets. The Hartford's investment portfolios are divided between Worldwide Life and Worldwide 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.)
The investment portfolios of Worldwide Life and Worldwide Property & Casualty are managed by distinct investment strategy groups. They are responsible for monitoring and managing the asset/liability profile, establishing investment objectives and guidelines, and determining, within specified risk tolerances and investment guidelines, the appropriate asset allocation, duration, convexity and other characteristics of the portfolios. Hartford Investment Management Company, a wholly-owned subsidiary of The Hartford executes the investment plan of the strategy groups for Worldwide Life and Worldwide Property & Casualty, including the identification and purchase of securities that fulfill the objectives of the strategy groups.
The following table identifies the invested assets by type held in the general account as of December 31, 2000 and 1999.
During 2000, Worldwide Life continued its investment strategy of increasing its allocation to municipal tax-exempt securities with the objective of increasing after-tax yield. Short-term and corporate securities declined primarily as a result of the funding of scheduled liability maturities and reallocation into other asset sectors, particularly ABS and CMBS. Additionally, investments were shifted from MBS to CMO to increase the prepayment protection of the portfolio.
Company's investment credit policies, see the Capital Markets Risk Management section under "Credit Risk".)
1999 COMPARED TO 1998 -- Total net investment income decreased $393, or 20%, primarily due to a decrease in policy loan income resulting from the decrease in leveraged COLI business. The decline in yield on average invested assets was due to the decrease in policy loan income and the decline in the policy loan weighted average interest rate to 7.5% for 1999 from 9.9% for 1998.
Net realized capital gains on the sale of equity securities and fixed maturities for the year ended December 31, 1999 partially offset a $32, after-tax, other than temporary impairment and sale of asset-backed securities securitized and serviced by Commercial Financial Services, Inc. ("CFS").
The following table identifies by type the fixed maturity securities held as of December 31, 2000 and 1999.
Foreign government and foreign government agency securities declined due to the December 2000 sale of Zwolsche.
Net realized capital gains increased by $195 for 2000 primarily as a result of the $242 before-tax gain recognized on the sale of Zwolsche, partially offset by net realized losses in the investment portfolio.
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 Worldwide Life and Worldwide 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 Hartford has established investment credit policies that focus on the credit quality of obligors and counterparties, limit credit concentrations, encourage diversification and require frequent creditworthiness reviews. Investment activity, including setting of policy and defining acceptable risk levels, is subject to regular review and approval by senior management and by the Company's Finance Committee.
The following tables identify fixed maturity securities for Worldwide Life, including guaranteed separate accounts, and Worldwide 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.
As of December 31, 2000 and 1999, over 95% of the fixed maturity portfolio was invested in securities rated investment grade.
The Hartford has several objectives in managing market risk associated with Worldwide Life and Worldwide Property & Casualty. Worldwide Life is responsible for maximizing after-tax returns within acceptable risk parameters, including the management of the interest rate sensitivity of invested assets to that of policyholder obligations. Worldwide Life's fixed maturity portfolios have material market exposure to interest rate risk. Worldwide Property & Casualty attempts to maximize economic value while generating appropriate after-tax income and sufficient liquidity to meet corporate and policyholder obligations. Worldwide Property & Casualty has material exposure to interest rate and equity market risk. The Company continually monitors these exposures and makes portfolio adjustments to manage these risks within established limits.
Downward movement in market interest rates during 2000 resulted in a significant increase in the unrealized appreciation of the fixed maturity security portfolio from 1999. However, The Hartford's asset allocation and its exposure to market risk have not changed materially from its position at December 31,
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.
As described above, Worldwide Life holds a significant fixed maturity portfolio that includes both fixed and variable rate features. The following table reflects the principal amounts of Worldwide Life's general and guaranteed separate account fixed and variable rate fixed maturity portfolios, along with the respective weighted average coupons by estimated maturity year at December 31, 2000. Comparative totals are included as of December 31, 1999. Expected maturities differ from contractual maturities due to call or prepayment provisions. The weighted average coupon ("WAC") on variable rate securities is based on spot rates as of December 31, 2000 and 1999, and is primarily based on London Interbank Offered Rate ("LIBOR"). Callable bonds and notes are distributed to either call dates or maturity, depending on which date produces the most conservative yield. Asset-backed securities, collateralized mortgage obligations and mortgage-backed securities are distributed based on estimates of the rate of future prepayments of principal over the remaining life of the securities. These estimates are developed using prepayment speeds provided in broker consensus data. Such estimates are derived from prepayment speeds previously experienced at the interest rate levels projected for the underlying collateral. Actual prepayment experience may vary from these estimates. Financial instruments with certain leverage features have been included in each of the fixed maturity categories. These instruments have not been separately displayed because they were immaterial to the Worldwide Life investment portfolio.
Worldwide Life employs several risk management tools to quantify and manage market risk arising from their investments and interest sensitive liabilities. For certain portfolios, management monitors the changes in present value between assets and liabilities resulting from various interest rate scenarios using integrated asset/liability measurement systems and a proprietary system that simulates the impacts of parallel and non-parallel yield curve shifts. Based on this current and prospective information, management implements risk reducing techniques to improve the match between assets and liabilities.
Derivatives play an important role in facilitating the management of interest rate risk, creating opportunities to efficiently fund obligations, hedge against risks that affect the value of certain liabilities and adjust broad investment risk characteristics as a result of any significant changes in market risks. As an end-user of derivatives, Worldwide Life uses a variety of derivatives, including swaps, caps, floors, forwards and exchange-traded financial futures and options, in order to hedge exposure primarily to interest rate risk on anticipated investment purchases or existing assets and liabilities. At December 31, 2000, notional amounts pertaining to derivatives totaled $8.5 billion ($6.5 billion related to insurance investments and $2.0 billion related to life insurance liabilities). Notional amounts pertaining to derivatives totaled $9.6 billion at December 31, 1999 ($6.3 billion related to insurance investments and $3.3 billion related to life insurance liabilities).
Anticipatory Hedging -- For certain liabilities, Worldwide Life commits to the price of the product prior to receipt of the associated premium or deposit. Anticipatory hedges are executed to offset the impact of changes in asset prices arising from interest rate changes pending the receipt of premium or deposit and the subsequent purchase of an asset. These hedges involve taking a long position in interest rate futures or entering into an interest rate swap with duration characteristics equivalent to the associated liabilities or anticipated investments. The notional amounts of anticipatory hedges as of December 31, 2000 and 1999 were $144 and $314, respectively. Liability Hedging -- Several products obligate Worldwide Life to credit a return to the contractholder which is indexed to a market rate. To hedge risks associated with these products, Worldwide Life enters into various derivative contracts. Interest rate swaps are used to convert the contract rate into a rate that trades in a more liquid and efficient market. This hedging strategy enables Worldwide Life to customize contract terms and conditions to customer objectives and satisfies the operation's asset/liability matching policy. Interest rate swaps are used to convert certain fixed contract rates into floating rates, thereby allowing them to be appropriately matched against floating rate assets. Additionally, interest rate caps are used to hedge against the risk of contractholder disintermediation in a rising interest rate environment. The notional amounts of derivatives used for liability hedging as of December 31, 2000 and 1999 were $2.0 billion and $3.3 billion, respectively.
Asset Hedging -- To meet the various policyholder obligations and to provide cost-effective prudent investment risk diversification, Worldwide Life may combine two or more financial instruments to achieve the investment characteristics of a fixed maturity security or that match an associated liability. The use of derivative instruments in this regard effectively transfers unwanted investment risks or attributes to others. The selection of the appropriate derivative instruments depends on the investment risk, the liquidity and efficiency of the market, and the asset and liability characteristics. The notional amounts of asset hedges as of December 31, 2000 and 1999, were $5.4 billion and $4.8 billion, respectively.
The following tables provide information as of December 31, 2000 with comparative totals for December 31, 1999 on derivative instruments used in accordance with the
Worldwide Life's insurance liabilities, other than non-guaranteed separate accounts, include accumulation vehicles such as fixed and variable annuities, other investment and universal life-type contracts, and other insurance products such as long-term disability and term life insurance.
Interest Credited -- Products in this category credit interest to policyholders, subject to market conditions and minimum guarantees. Policyholders may surrender at book value but are subject to surrender charges for an initial period. Product examples include universal life contracts and the general account portion of Worldwide Life's variable annuity products.
Long-term Pay Out Liabilities -- Products in this category are long-term in nature and may contain significant actuarial (including mortality and morbidity) pricing and cash flow risks. The cash flows associated with these policy liabilities are not interest rate sensitive but do vary based on the timing and amount of benefit payments. The primary risks associated with these products are that the benefits will exceed expected actuarial pricing and/or that the actual timing of the cash flows differ from those anticipated, resulting in an investment return lower than that assumed in pricing. Product examples include structured settlement contracts, on-benefit annuities (i.e., the annuitant is currently receiving benefits thereon) and long-term disability contracts. Contract duration is generally five to ten years.
Short-term Pay Out Liabilities -- These liabilities are short-term in nature with a duration of less than one year. The primary risks associated with these products are determined by the non-investment contingencies such as mortality or morbidity and the variability in the timing of the expected cash flows. Liquidity is of greater concern than for the long-term pay out liabilities. Products include individual and group term life insurance contracts and short-term disability contracts.
For liabilities whose cash flows are not substantially affected by changes in interest rates ("fixed liabilities") and where investment experience is substantially absorbed by Worldwide Life, the sensitivity of the net economic value (discounted present value of asset cash flows less the discounted present value of liability cash flows) of those portfolios to 100 basis point shifts in interest rates are shown in the following tables. These fixed liabilities represented about 60% and 55% of Worldwide Life's general and guaranteed separate account liabilities at December 31, 2000 and 1999, respectively. The remaining liabilities generally allow Worldwide Life significant flexibility to adjust credited rates to reflect actual investment experience and thereby pass through a substantial portion of actual investment experience to the policyholder. The fixed liability portfolios are managed and monitored relative to defined objectives and are analyzed regularly by management for internal risk management purposes using scenario simulation techniques, and are evaluated on an annual basis, in compliance with regulatory requirements.
The primary exposure to interest rate risk in Worldwide Property & Casualty relates to its fixed maturity investments. Changes in market interest rates directly impact the market value of the fixed maturity securities. In addition, but to a lesser extent, interest rate risk exists on debt issued. Derivative instruments are used periodically to manage interest rate risk and as a result, their value will change as market rates change, generally in the opposite direction of the item being hedged. The total notional amounts of derivatives used for hedging interest rate risk as of December 31, 2000 and 1999 were $318 and $136, respectively.
of principal over the remaining life of the securities. These estimates are developed using prepayment speeds contained in broker consensus data. Such estimates are derived from prepayment speeds previously experienced at interest rate levels projected for the underlying collateral. Actual prepayment experience may vary from these estimates. Financial instruments with certain leverage features have been included in each of the fixed maturity categories. These instruments have not been separately displayed as they were immaterial to Worldwide Property & Casualty's investment portfolio.
The following table reflects equity securities owned at December 31, 2000 and 1999, grouped by major market type.
2000 1999 FAIR VALUE PERCENT FAIR VALUE PERCENT - --------------------------------------------------------------- EQUITY SECURITIES Domestic Large cap $ 521 58.9% $ 519 45.8% Midcap/small cap 179 20.2% 114 10.1% Foreign EAFE [1]/Canadian 185 20.9% 465 41.0% Emerging -- -- 35 3.1% - --------------------------------------------------------------- TOTAL $ 885 100.0% $ 1,133 100.0% =============================================================== [1] Europe, Australia, Far East countries index.
Currency exchange risk also exists with respect to investments in foreign equity securities. Forward foreign contracts with a notional amount of $8 and $48 were used to manage this risk at December 31, 2000 and 1999, respectively.
The amount of the purchase price allocated to PVP was $801. PVP is amortized to expense in relation to the estimated gross profits on those contracts, and interest is accreted on the unamortized balance. For the year ended December 31, 2000, amortization of PVP amounted to $47. Amortization of all purchase adjustments, excluding goodwill, will not have a significant impact on the Company's ongoing results of operations.
Issuance of: - ----------- Common stock from treasury (7.25 million shares @ $54.90 per share) $ 398 Long-term notes: $250 7.75% notes due June 15, 2005 244 $275 7.90% notes due June 15, 2010 272 Commercial paper 400 - ----------------------------------------------------------------- Consideration raised 1,314 Other, including conversion of HLI employee stock options and restricted shares 102 - ----------------------------------------------------------------- Total consideration $1,416 =================================================================
On June 16, 2000, The Hartford issued and sold $525 of unsecured redeemable long-term debt. On June 23, 2000, The Hartford issued $400 of commercial paper. Proceeds from the debt issuances were used to partially fund The HLI Repurchase. The Company used proceeds from the sale of Zwolsche to pay off all the $400 of commercial paper on December 29, 2000. (For additional information regarding debt, see Note 6 of Notes to Consolidated Financial Statements.)
On March 1, 2001, HLI issued and sold $400 of senior debt securities from its existing shelf registration. (For additional information, see Note 17 of Notes to Consolidated Financial Statements.)
On October 19, 2000, The Hartford declared a dividend on its common stock of $0.25 per share payable on January 2, 2001 to shareholders of record as of December 1, 2000.
Treasury Stock - In December 1997, The Hartford's Board of Directors authorized the repurchase of up to $1.0 billion of the Company's outstanding common stock over a three-year period beginning with the first quarter of 1998. The Hartford completed the $1.0 billion repurchase authorization during 1999 by repurchasing 9.2 million shares of its common stock in the open market at a total cost of $453. In October 1999, The Hartford's Board of Directors authorized the repurchase of up to an additional $1.0 billion of the Company's outstanding common stock. This repurchase authorization was effective in November 1999 and covers a three-year period. For the year ended December 31, 2000, The Hartford repurchased 2.8 million shares of its common stock in the open market at a total cost of $100. Since the inception of the 1999 repurchase program, The Hartford has repurchased 5.9 million shares at a total cost of $243. Certain of these repurchased shares have been reissued pursuant to certain stock-based benefit plans. During the first quarter of 2000 and in conjunction with The HLI Repurchase, management elected to discontinue repurchase activity.
Unrealized Gain (Loss) - Unrealized gain (loss) on securities, net of tax, increased by $695 as of December 31, 2000 compared to December 31, 1999. The change resulted primarily from the impact of decreased interest rates on the fixed maturity portfolio.
Subsequent Event - On February 16, 2001, The Hartford issued 10 million shares of common stock pursuant to an underwritten offering for net proceeds of $615. (For additional information, see Note 17 of Notes to Consolidated Financial Statements.)
The following table summarizes The Hartford's significant U.S. member companies' financial ratings from the major independent rating organizations as of February 28, 2001.
A.M. FITCH STANDARD BEST [1] & POOR'S MOODY'S - ----------------------------------------------------------------- INSURANCE RATINGS: Hartford Fire A+ AA AA Aa3 Hartford Life Insurance Company A+ AA+ AA Aa3 Hartford Life & Accident A+ AA+ AA Aa3 Hartford Life & Annuity A+ AA+ AA Aa3 - ----------------------------------------------------------------- OTHER RATINGS: The Hartford Financial Services Group, Inc.: Senior debt a+ A+ A A2 Commercial paper AMB-1 A-1 P-1 Hartford Capital I and II quarterly income preferred securities [2] a- A BBB+ a2 Hartford Life, Inc.: Senior debt a+ A+ A A2 Commercial paper -- A-1 P-1 Hartford Life, Inc.: Capital I trust preferred securities [2] a- A BBB+ a2 ================================================================= [1] Formerly Duff & Phelps [2] A.M. Best ratings were adjusted to reflect the integration of A.M. Best's debt and preferred stock scales.
Ratings are an important factor in establishing the competitive position of an insurance company such as The Hartford. There can be no assurance that the Company's ratings will continue for any given period of time or that they will not be changed.
On January 26, 2001, Moody's confirmed the insurance and debt financial ratings of The Hartford Financial Services Group, Inc. and HLI following the announcement of the Fortis acquisition, but changed the outlook on both companies' debt ratings to negative from stable. Moody's stated that the revision in debt ratings outlook was based upon Moody's concerns that the Fortis acquisition would increase The Hartford's operating and financial leverage over the medium term and fixed charge coverage would weaken. The revision in ratings outlook does not constitute a ratings "downgrade", nor has Moody's placed the Company on its "watchlist" for possible downgrade.
As of December 31, 2000, the maximum amount of statutory dividends which may be paid to The Hartford Financial Services Group, Inc. from its insurance subsidiaries in 2001, without prior regulatory approval, is $779.
The primary uses of funds are to pay claims, policy benefits, operating expenses and commissions, and to purchase new investments. In addition, The Hartford has a policy of carrying a significant short-term investment position and accordingly does not anticipate selling intermediate- and long-term fixed maturity investments to meet any liquidity needs. (For a discussion of the Company's investment objectives and strategies, see the Investments and Capital Markets Risk Management sections.)
2000 1999 1998 - ---------------------------------------------------------------- Net cash provided by operating activities $ 2,350 $ 891 $ 907 Net cash (used for) provided by investing activities $ (2,079) $ 2,279 $ 411 Net cash used for financing activities $ (208) $ (3,104) $ (1,340) Cash - end of year $ 227 $ 182 $ 123 - ----------------------------------------------------------------
Enactment of the Financial Services Modernization Act at the federal level has also focused renewed attention on state regulation of insurance. Elements of the insurance industry are involved in a countrywide initiative to streamline regulatory procedures, notably the elimination of rate and form filing requirements for property and casualty lines. Altogether, about half the states have considered a variety of such measures, which could result in reduced transaction costs and improved speed to market.
Congress is expected to continue to consider reform of the Superfund hazardous waste cleanup program and the creation of a centralized mechanism for handling asbestos injury claims. Both proposals have the potential to reduce claim exposures; however, enactment of such legislation may not occur in the current Congress. Proposed legislation to reduce abusive class-action lawsuits would also have a beneficial impact, but prospects for near-term enactment are likewise uncertain. So-called "patient protection" legislation introduced in Congress and passed in many states includes provisions permitting lawsuits against health maintenance organizations ("HMOs") for denial of coverage. Although the Company is not a health insurer or health care provider, passage of such legislation could affect medical claim costs to the extent that HMOs were constrained from actively managing care.