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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended June 30, 1998
OR
[ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
As of July 31, 1998, there were outstanding 233,442,678 shares of Common Stock,
$0.01 par value per share, of the registrant.
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
- - -------------------------------
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Statements of Income - Second Quarter and Six Months
Ended June 30, 1998 and 1997 3
Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 4
Consolidated Statements of Changes in Stockholders' Equity - Six Months
Ended June 30, 1998 and 1997 5
Consolidated Statements of Cash Flows - Six Months Ended June 30,
1998 and 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 21
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
Signature 22
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<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
Second Quarter Ended Six Months Ended
June 30, June 30,
-------------------------------------------------------
(In millions, except for per share data) 1998 1997 1998 1997
- - -------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
REVENUES
<S> <C> <C> <C> <C>
Earned premiums and other considerations $ 2,730 $ 2,495 $ 5,678 $ 4,965
Net investment income 685 638 1,369 1,267
Net realized capital gains 78 36 174 73
- - -------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,493 3,169 7,221 6,305
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BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,035 1,928 4,146 3,886
Amortization of deferred policy acquisition costs 567 477 1,054 931
Other expenses 551 489 1,295 939
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TOTAL BENEFITS, CLAIMS AND EXPENSES 3,153 2,894 6,495 5,756
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OPERATING INCOME 340 275 726 549
Equity gain on HLI initial public offering -- 368 -- 368
- - -------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 340 643 726 917
Income tax expense 87 64 193 134
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INCOME BEFORE MINORITY INTEREST 253 579 533 783
Minority interest in consolidated subsidiary (17) (5) (33) (5)
- - -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 236 $ 574 $ 500 $ 778
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Basic earnings per share $ 1.00 $ 2.43 $ 2.12 $ 3.30
Diluted earnings per share $ 0.99 $ 2.40 $ 2.09 $ 3.26
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Weighted average common shares outstanding 235.4 236.0 235.6 235.7
Weighted average common shares outstanding and dilutive
potential common shares 239.1 238.8 239.1 238.5
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Cash dividends declared per share $ 0.21 $ 0.20 $ 0.42 $ 0.40
- - -------------------------------------------------------------------------------------------------------------------------
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
June 30, December 31,
(In millions, except for share data) 1998 1997
- - ------------------------------------------------------------------------------------------ ---------------- ------------------
ASSETS (Unaudited)
Investments
Fixed maturities, available for sale, at fair value (amortized cost of $34,921 and
<S> <C> <C>
$34,061) $ 36,038 $ 35,053
Equity securities, available for sale, at fair value (cost of $1,303 and $1,509) 1,710 1,922
Policy loans, at outstanding balance 3,770 3,759
Other investments, at cost 627 388
- - ------------------------------------------------------------------------------------------ ---------------- ------------------
Total investments 42,145 41,122
Cash 143 140
Premiums receivable and agents' balances 2,215 1,873
Reinsurance recoverables 10,407 10,839
Deferred policy acquisition costs 4,539 4,181
Deferred income tax 1,034 955
Other assets 2,560 2,502
Separate account assets 81,905 70,131
- - ------------------------------------------------------------------------------------------ ---------------- ------------------
TOTAL ASSETS $ 144,948 $ 131,743
==================================================================================== ================ ==================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 18,202 $ 18,376
Life 5,647 5,271
Other policy claims and benefits payable 21,075 21,143
Unearned premiums 3,258 2,895
Short-term debt 231 291
Long-term debt 1,482 1,482
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures 1,250 1,000
Other liabilities 5,021 4,672
Separate account liabilities 81,905 70,131
- - ------------------------------------------------------------------------------------------ ---------------- ------------------
138,071 125,261
COMMITMENTS AND CONTINGENCIES, NOTE 6
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 440 397
STOCKHOLDERS' EQUITY
Common stock - authorized 400,000,000, issued 238,405,140 and 239,374,389
shares, par value $0.01 2 2
Additional paid-in capital 1,593 1,641
Retained earnings 4,059 3,658
Treasury stock, at cost - 4,391,198 and 3,421,949 shares (108) (48)
Accumulated other comprehensive income 891 832
- - ------------------------------------------------------------------------------------------ ---------------- ------------------
TOTAL STOCKHOLDERS' EQUITY 6,437 6,085
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 144,948 $ 131,743
==================================================================================== ================ ==================
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
Accumulated Other
Comprehensive Income
--------------------------------
Common Stock/ Treasury Unrealized Gain Cumulative Outstanding
Additional Retained Stock, on Securities, Translation Shares
(Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD
<S> <C> <C> <C> <C> <C> <C> <C>
AS PREVIOUSLY REPORTED $1,660 $3,658 $(65) $853 $(21) $6,085 117,976
Two-for-one stock split (1) (17) 17 117,976
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD
AS ADJUSTED $1,643 $3,658 $(48) $853 $(21) $6,085 235,952
Comprehensive income
Net income 500 500
Other comprehensive income, net
of tax (2)
Unrealized gain on securities (3) 61 61
Cumulative translation adjustments (2) (2)
----------
Total other comprehensive income 59
----------
Total comprehensive income 559
----------
Issuance of shares under incentive
and stock purchase plans 23 26 49 1,324
Tax benefit on employee stock
options and awards 15 15
Dividends declared on common stock (99) (99)
Treasury stock acquired (86) (86) (172) (3,262)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $1,595 $4,059 $(108) $914 $(23) $6,437 234,014
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</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1997
Accumulated Other
Comprehensive Income
--------------------------------
Common Stock/ Treasury Unrealized Gain Cumulative Outstanding
Additional Retained Stock, on Securities, Translation Shares
(Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD
<S> <C> <C> <C> <C> <C> <C> <C>
AS PREVIOUSLY REPORTED $1,643 $2,515 $(30) $352 $40 $4,520 117,556
Two-for-one stock split (1) 117,557
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BALANCE, BEGINNING OF PERIOD
AS ADJUSTED $1,643 $2,515 $(30) $352 $40 $4,520 235,113
Comprehensive income
Net income 778 778
Other comprehensive income, net
of tax (2)
Unrealized gain on securities 175 175
(3)
Cumulative translation adjustments (44) (44)
----------
Total other comprehensive income 131
----------
Total comprehensive income 909
----------
Issuance of shares under incentive
and stock purchase plans 22 22 1,342
Dividends declared on common stock (94) (94)
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BALANCE, END OF PERIOD $1,665 $3,199 $(30) $527 $(4) $5,357 236,455
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) On May 21, 1998, the Board of Directors authorized a two-for-one stock
split effected in the form of a 100% stock dividend distributed on July 15,
1998 to shareholders of record as of June 24, 1998. Information has been
restated on a retroactive basis to reflect the effect of the stock split.
For additional information, see Note 4 of Notes to Consolidated Financial
Statements.
(2) Unrealized gain on securities is net of tax of $34 and $96 for the six
months ended June 30, 1998 and 1997, respectively. There is no tax effect
on cumulative translation adjustments.
(3) Net of reclassification adjustment for gains realized in net income of $113
and $49 for the six months ended June 30, 1998 and 1997, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
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<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended
June 30,
----------------------------------
(In millions) 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 500 $ 778
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Increase in receivables, payables and accruals (277) (176)
(Increase) decrease in reinsurance recoverables and other related assets 265 (179)
Increase in deferred policy acquisition costs (346) (294)
Accrued and deferred income taxes (53) 146
Increase in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums 338 635
Minority interest in consolidated subsidiary 33 5
Equity gain on HLI initial public offering -- (368)
Net realized capital gains (174) (73)
Depreciation and amortization 57 38
Other, net (40) 330
- - -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 303 842
- - -----------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investments (18,121) (23,539)
Sale of investments 6,245 7,568
Maturity of investments 11,635 14,597
Purchase of affiliate (189) --
Additions to plant, property and equipment (63) (28)
- - -----------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (493) (1,402)
- - -----------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Short-term debt, net (60) (412)
Issuance of long-term debt -- 650
Proceeds from issuance of company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior subordinated
debentures
250 --
Net receipts from (disbursements for) investment and universal life-type contracts
credited to (charged from) policyholder accounts 223 (265)
Net proceeds from sale of minority interest in subsidiary -- 687
Dividends paid (97) (95)
Acquisition of treasury stock (152) --
Proceeds from issuances under incentive and stock purchase plans 28 22
- - -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 192 587
- - -----------------------------------------------------------------------------------------------------------------------------
Foreign exchange rate effect on cash 1 (4)
- - -----------------------------------------------------------------------------------------------------------------------------
Net increase in cash 3 23
Cash - beginning of period 140 112
- - -----------------------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 143 $ 135
- - -----------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- - -------------------------------------------------
NET CASH PAID (REFUNDS RECEIVED) DURING THE PERIOD FOR:
Income taxes $ 191 $ (57)
Interest $ 106 $ 116
<FN>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
</FN>
</TABLE>
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<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL
STATEMENTS (Dollar amounts in millions except for
share data unless otherwise stated)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Hartford
Financial Services Group, Inc. ("The Hartford" or the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
periods. Less than majority-owned entities in which The Hartford has at least a
20% interest are reported on an equity basis. In the opinion of management,
these statements include all normal recurring adjustments necessary to present
fairly the financial position, results of operations and cash flows for the
periods presented. For a description of accounting policies, see Note 1 of Notes
to Consolidated Financial Statements included in The Hartford's 1997 Form 10-K
Annual Report.
Certain reclassifications have been made to prior year financial information to
conform to the current year classification of transactions and accounts. In
addition, the consolidated financial statements have been restated to reflect a
two-for-one stock split effected in the form of a stock dividend (see Note 4).
Accordingly, all issued, outstanding and weighted average shares, as well as per
share amounts, have been adjusted.
(B) CHANGES IN ACCOUNTING PRINCIPLES
In June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard establishes accounting and
reporting guidance for derivative instruments, including certain derivative
instruments embedded in other contracts. The standard requires, among other
things, that all derivatives be carried on the balance sheet at fair value. The
standard also specifies hedge accounting criteria under which a derivative can
qualify for special accounting. In order to receive special accounting, the
derivative instrument must qualify as either a hedge of the fair value or the
variability of the cash flow of a qualified asset or liability. Special
accounting for qualifying hedges provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of the
corresponding changes in value of the hedged item. SFAS No. 133 will be
effective for fiscal years beginning after June 15, 1999. Initial application
for The Hartford will begin for the first quarter of the year 2000. The Hartford
is currently in the process of quantifying the impact of SFAS No. 133.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". This SOP provides guidance on
accounting for costs of internal use software and in determining whether
software is for internal use. The SOP defines internal use software as software
that is acquired, internally developed, or modified solely to meet internal
needs and identifies stages of software development and accounting for the
related costs incurred during the stages. This statement is effective for fiscal
years beginning after December 15, 1998 and is not expected to have a material
impact on the Company's financial condition or results of operations.
Effective January 1, 1998, The Hartford adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of this statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners. Comprehensive
income is the total of net income and all other nonowner changes in equity.
Accordingly, the Company has reported comprehensive income in the Consolidated
Statements of Changes in Stockholders' Equity.
NOTE 2. DEBT
On June 8, 1998, Hartford Life, Inc. ("HLI"), a public company in which The
Hartford has an 81.4% equity interest, filed an omnibus registration statement
with the Securities and Exchange Commission for the issuance of up to $1.0
billion of debt and equity securities, including up to $350 of previously
registered but unsold securities. After the issuance of Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Junior Subordinated Debentures on June 29, 1998 discussed below, HLI had $750
remaining on this shelf registration on June 30, 1998.
NOTE 3. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES
On June 29, 1998, Hartford Life Capital I, a special purpose Delaware trust
formed by HLI, issued 10,000,000, 7.2% Trust Preferred Securities, Series A
("Series A Preferred Securities"). The proceeds from the sale of the Series A
Preferred Securities were used to acquire $250 of 7.2%Series A Junior
Subordinated Deferrable Interest Debentures ("Junior Subordinated Debentures")
issued by HLI. HLI used the proceeds from the offering to retire $50 of its
outstanding commercial paper and will use the remainder for general corporate
purposes, which may include funding working capital, investments in or loans to
subsidiaries, or potential strategic acquisitions.
The Series A Preferred Securities represent undivided beneficial interests in
Hartford Life Capital I's assets, which consist solely of the Junior
Subordinated Debentures. HLI owns all of the beneficial interests represented by
Series A Common Securities of Hartford Life Capital I. Holders of Series A
Preferred Securities are entitled to receive cumulative cash distributions
accruing from June 29, 1998, the date of issuance, and payable quarterly in
arrears commencing July 15, 1998 at the annual rate of 7.2% of the stated
liquidation amount of $25.00 per Series A Preferred Security. The Series A
Preferred Securities are subject to mandatory redemption upon repayment of the
Junior Subordinate Debentures at maturity or upon earlier redemption. HLI has
the right to redeem the Series A Junior Subordinated Debt Securities on or after
June 30, 2003 or earlier upon the
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<PAGE>
occurrence of certain events. Holders of Series A Preferred Securities generally
have no voting rights.
The Junior Subordinated Debentures bear interest at the annual rate of 7.2% of
the principal amount, payable quarterly in arrears commencing June 29, 1998, and
mature on June 30, 2038. The Junior Subordinated Debentures are unsecured and
rank junior and subordinate in right of payment to all present and future senior
debt of HLI and are effectively subordinated to all existing and future
liabilities of its subsidiaries.
HLI has the right at any time, and from time to time, to defer payments of
interest on the Junior Subordinated Debentures for a period not exceeding 20
consecutive quarters up to the debentures' maturity date. During any such
period, interest will continue to accrue and HLI may not declare or pay any cash
dividends or distributions on , or purchase, HLI's capital stock nor make any
principal, interest or premium payments on or repurchase any debt securities
that rank pari passu with or junior to the Junior Subordinated Debentures. HLI
will have the right at any time to dissolve the Trust and cause the Series A
Junior Subordinated Debt Securities to be distributed to the holders of the
Series A Preferred Securities and the Series A Common Securities. HLI has
guaranteed, on a subordinated basis, all of the Hartford Life Capital I
obligations under the Series A Preferred Securities including payment of the
redemption price and any accumulated and unpaid distributions upon dissolution,
winding up or liquidation to the extent funds are available.
NOTE 4. STOCKHOLDERS' EQUITY
On May 21, 1998, The Hartford's shareholders approved an increase in the number
of authorized common shares from 200,000,000 to 400,000,000. On that date, the
Board of Directors declared a two-for-one stock split effected in the form of a
100% stock dividend distributed on July 15, 1998 to shareholders of record as of
June 24, 1998. Agreements concerning stock options and other commitments payable
in shares of the Company's common stock either provide for the issuance of the
additional shares due to the declaration of the stock split or have been
modified to reflect the stock split. In addition, retroactive adjustments to
treasury stock and additional paid-in capital have been made to reflect the
stock split. All references to issued, outstanding and weighted average shares,
as well as per share amounts, have been adjusted to reflect the stock split in
the consolidated financial statements and related notes. Par value per common
share remained unchanged at $0.01.
NOTE 5. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share", effective December 15,
1997, and as a result, the Company's reported earnings per share for June 30,
1997 were restated to reflect the effect of reporting diluted earnings per
share. The following tables present a reconciliation of income and shares used
in calculating basic earnings per share to those used in calculating diluted
earnings per share.
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
------------------------------------- -------------------------------------
Per Share Per Share
JUNE 30, 1998 Income Shares Amount Income Shares Amount
----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Income available to common shareholders $ 236 235.4 $ 1.00 $ 500 235.6 $ 2.12
------------- ------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 3.7 -- 3.5
------------------------ -------------------------
Income available to common shareholders plus
assumed conversions $ 236 239.1 $ 0.99 $ 500 239.1 $ 2.09
----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1997
----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 574 236.0 $ 2.43 $ 778 235.7 $ 3.30
------------- ------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 2.8 -- 2.8
------------------------ -------------------------
Income available to common shareholders plus
assumed conversions $ 574 238.8 $ 2.40 $ 778 238.5 $ 3.26
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Basic earnings per share are computed based on the weighted average number of
shares outstanding during the period. Diluted earnings per share include the
dilutive effect of outstanding stock options, using the treasury stock method,
and also contingently issuable shares. Under the treasury stock method, exercise
of options is assumed with the proceeds used to purchase common stock at the
average market price for the period. The difference between the number of shares
assumed issued and number of shares purchased represents the dilutive shares.
Contingently issuable shares are included upon satisfaction of certain
conditions related to the contingency.
NOTE 6. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
The Hartford is involved in various legal actions, some of which involve claims
for substantial amounts. In the opinion of management, the ultimate liability
with respect to such lawsuits is not expected to be material to the consolidated
financial condition, results of operations or cash flows of The Hartford.
(B) ENVIRONMENTAL AND ASBESTOS CLAIMS
Information regarding environmental and asbestos claims may be found in the
Environmental and Asbestos Claims section of the Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in millions except per share data unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of The Hartford as of June
30, 1998, compared with December 31, 1997, and its results of operations for the
second quarter and six months ended June 30, 1998 compared with the equivalent
1997 periods. This discussion should be read in conjunction with the MD&A
included in The Hartford's 1997 Form 10-K Annual Report.
Certain of the statements contained herein (other than statements of historical
fact) are forward-looking statements. Such forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
Company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect upon The
Hartford. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on The Hartford will be those anticipated by management. Actual
results could differ materially from those expected by The Hartford, depending
on the outcome of certain factors, including those described with the
forward-looking statements herein.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Consolidated Results of Operations: Operating Summary 9
North American Property & Casualty 10
Life 11
International 12
Other Operations 13
Environmental and Asbestos Claims 13
Investments 15
Capital Markets Risk Management 17
Capital Resources and Liquidity 18
Regulatory Initiatives and Contingencies 20
Accounting Standards 20
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 3,493 $ 3,169 $ 7,221 $ 6,305
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 236 $ 574 $ 500 $ 778
Less: Net realized capital gains, after-tax 50 24 113 49
Equity gain on HLI initial public offering -- 368 -- 368
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 186 $ 182 $ 387 $ 361
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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, allocated Distribution items and certain other items. Core
earnings is an internal performance measure used by the Company in the
management of its operations. Management believes that this performance measure
delineates the results of operations of the Company's ongoing lines of business
in a manner that allows for a better understanding of the underlying trends in
the Company's current business. However, core earnings should only be analyzed
in conjunction with, and not in lieu of, net income and may not be comparable to
other performance measures used by the Company's competitors.
Revenues for the second quarter and six months ended June 30, 1998 increased
$324, or 10%, and $916, or 15%, over the comparable prior year periods.
Contributing to the increase in both periods were an increase in the aggregate
fees earned on separate account assets, an increase in service fee revenue, and
higher net investment income and net realized capital gains. In addition,
revenues for the six month period also increased as the result of an increase in
fees associated with new variable corporate owned life insurance ("COLI") sales
and proceeds from the sale of renewal rights and other considerations related to
the Industrial Risk Insurance pool ("IRI transaction"). (For an analysis of net
investment income and net realized capital gains, see the Investments section.)
Core earnings increased $4, or 2%, and $26, or 7%, for the second quarter and
six months ended June 30, 1998 from the comparable prior year periods.
Contributing to the increase in both periods were higher fee income earned on
increasing account values in the Annuity division of the Life segment and an
increase in net investment income, partially offset by increased underwriting
losses, primarily the result of higher catastrophe losses in North American
Property & Casualty totaling $57 and $86, after-tax, for the second quarter and
six months ended June 30, 1998, respectively, compared to $3 and $19, after-tax,
for the
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<PAGE>
same periods in 1997. In addition, core earnings for the six month period also
were higher as a result of proceeds from the IRI transaction, partially offset
by additional reserves associated with the IRI transaction.
The effective tax rates for the second quarter and six months ended June 30,
1998, excluding the equity gain on Hartford Life, Inc. ("HLI"), were 26% and
27%, respectively, compared to 23% and 24% for the comparable periods in 1997.
Tax-exempt interest earned on invested assets was a principal cause of effective
tax rates lower than the 35% U.S. statutory rate.
Net income for 1997 includes a $368 equity gain resulting from the initial
public offering of HLI's Class A common stock ("The Offering") on May 22, 1997
as discussed in The Hartford's 1997 Form 10-K Annual Report in Note 3 of Notes
to Consolidated Financial Statements and in the Capital Resources and Liquidity
section under "The Offering". HLI is the holding company parent of The
Hartford's significant life insurance subsidiaries.
SEGMENT RESULTS
The Hartford's reporting segments consist of North American Property & Casualty,
Life, International and Other Operations. Included in Other Operations is the
effect of an 18.6% minority interest in HLI's operating results.
The following is a summary of core earnings and net income by segment.
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
CORE EARNINGS 1998 1997 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
North American Property & Casualty $ 100 $ 100 $ 215 $ 204
Life 94 74 178 136
International 9 13 26 27
Other Operations (17) (5) (32) (6)
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 186 $ 182 $ 387 $ 361
====================================================================================================================================
NET INCOME
- - ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty $ 127 $ 111 $ 293 $ 215
Life 94 73 178 136
International 32 29 60 65
Other Operations (17) 361 (31) 362
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 236 $ 574 $ 500 $ 778
====================================================================================================================================
</TABLE>
The sections that follow analyze each segment's results. Specific topics such as
environmental and asbestos reserves and investment results are discussed
separately following the segment overviews.
<TABLE>
<CAPTION>
NORTH AMERICAN PROPERTY & CASUALTY
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 1,817 $ 1,683 $ 3,654 $ 3,306
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 127 $ 111 $ 293 $ 215
Less: Net realized capital gains, after-tax 27 11 78 11
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 100 $ 100 $ 215 $ 204
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues for the North American Property & Casualty segment increased $134, or
8%, for the second quarter and $348, or 11%, for the six months ended June 30,
1998 compared with the same periods in 1997. The increase for the quarter was
primarily due to a $50 increase in earned premiums, a $46 increase in servicing
revenues and $25 of additional before-tax net realized capital gains. The
increase for the six months resulted from a $43 increase in earned premiums, a
$108 increase in servicing revenues, an increase in before-tax net realized
capital gains of $104, proceeds of $55 from the IRI transaction and an increase
of $38 in net investment income. The primary contributor to the increase in
servicing revenues was the Hartford Customer Services Group, which provides
customer and telemarketing services for The American Association of Retired
Persons ("AARP") Health Care Options program as of January 1, 1998, generating
$41 of the revenue increase for the quarter and $100 of the increase for the six
month period.
Core earnings were flat for the quarter and increased $11, or 5%, for the first
six months of 1998 compared to the same period in 1997. This increase was
primarily due to increased after-tax net investment income and after-tax
proceeds from the IRI transaction, partially offset by increased underwriting
losses due to adverse property catastrophe losses and additional reserves
associated with the IRI transaction.
- 10 -
<PAGE>
UNDERWRITING RESULTS
Underwriting results represent premiums earned less incurred claims, claim
adjustment expenses and underwriting expenses. The following table displays
written premiums, underwriting results and combined ratios for The Hartford's
North American Property & Casualty segment:
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
Written premiums $ 1,569 $ 1,439 $ 3,031 $ 2,927
Underwriting results, before-tax $ (59) $ (40) $ (122) $ (60)
Combined ratio [1] 103.5 102.7 103.9 101.7
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] "Combined ratio" is a common industry measurement of property and casualty
underwriting profitability. This ratio is the sum of the ratio of incurred
claims and claim adjustment expenses to premiums earned and the ratio of
underwriting expenses incurred to premiums written.
</FN>
</TABLE>
The North American Property & Casualty segment's written premiums increased 9%
for the second quarter and 4% for the six months ended June 30, 1998 compared to
the same prior year periods. Increases in Personal and, for the second quarter,
Commercial operations, were partially offset by a decrease in Reinsurance
operations. Written premiums in the Commercial operation decreased slightly for
the six month period.
Commercial written premiums for the second quarter increased $48, or 6%,
contributing 3% to the increase in the North American Property and Casualty
segment. While growth was generated across most lines of business, strong growth
in three of the largest customer segments: Select Customers of 8%, Key Accounts
of 7% and Marine/Agriculture of 24% were the primary contributors. For the six
months, Commercial written premiums declined 1% resulting in a slight decrease
in the North American Property & Casualty segment, as growth in Select Customers
of 8%, Key Accounts of 4% and Marine/Agriculture of 15% were offset by decreases
in Major/National Accounts of 14% and Other Specialty of 36%. These decreases
were primarily due to increased conversion of workers' compensation to high
deductible policies and the elimination of Industrial Risk Insurance premiums in
1998 as a result of the IRI transaction.
Personal written premiums increased $90, or 18%, for the quarter and $137, or
15%, for the six months ended June 30, 1998. This contributed 6% and 5% of
growth to the North American Property & Casualty segment for the second quarter
and six months ended June 30, 1998, respectively. All three customer divisions
within Personal (AARP, Agency and Affinity) produced positive premium growth for
both 1998 periods over 1997. In addition, the acquisition of Omni Insurance
Group, Inc., completed on February 12, 1998, contributed $38 and $60 of this
increase, respectively, for the quarter and six months ended June 30, 1998.
Reinsurance written premiums declined $8, or 4%, in the second quarter and $24,
or 7%, for the six months ended June 30, 1998 resulting in a slight decrease to
the North American Property and Casualty segment in both periods. This decrease
was primarily due to timing of premium bookings in North America and reductions
in international premiums resulting from rate decreases, increased customer risk
retentions and unfavorable foreign exchange rates.
Underwriting results, before-tax, for the second quarter and six months ended
June 30, 1998 deteriorated over the comparable prior year periods $19, or 0.8
combined ratio points and $62 or 2.2 combined ratio points, respectively. The
deterioration in both 1998 periods was due to significantly increased property
catastrophe losses, partially offset by increased earned premiums and a
reduction in policyholder dividends in Personal operations. Also contributing to
the six month deterioration was the establishment of additional reserves in
connection with the IRI transaction in the first quarter of 1998 upon review of
existing claims and outstanding reinsurance assets of the Industrial Risk
Insurers pool.
<TABLE>
<CAPTION>
LIFE
OPERATING SUMMARY [1] SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 1,155 $ 1,042 $ 2,559 $ 2,097
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 94 $ 73 $ 178 $ 136
Less: Net realized capital losses, after-tax -- (1) -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 94 $ 74 $ 178 $ 136
====================================================================================================================================
<FN>
[1] Life results are presented before the effect of the 18.6% minority interest
in HLI, which is reflected in Other Operations.
</FN>
</TABLE>
Revenues increased $113, or 11%, and $462, or 22%, for the second quarter and
six months ended June 30, 1998 compared to the second quarter and six months
ended June 30, 1997, respectively. Excluding COLI, revenues increased $120, or
13%, and $308, or 17%, respectively, for the second quarter and six months ended
June 30, 1998 compared to the equivalent 1997 periods. This increase was
principally driven by the Annuity division which experienced a substantial
increase in the aggregate
- 11 -
<PAGE>
fees earned due to growth in variable annuity account values. Average total
annuity account values increased $19.3 billion, or 34%, compared to the second
quarter of 1997 and $16.9 billion, or 31%, compared to the six months ended June
30, 1997. The increase in average annuity account values resulted in an increase
in fee revenue of $83, or 50%, and $159, or 52%, over the second quarter and six
months ended June 30, 1997, respectively. The increase in account values was
driven primarily by sales of individual variable annuities as well as continued
market appreciation. Sales of individual variable annuities were $2.8 billion
and $5.1 billion for the second quarter and six months ended June 30, 1998,
respectively, compared to sales of $2.3 billion and $4.7 billion for the second
quarter and six months ended June 30, 1997, respectively. In addition, revenues
related to the Group Insurance operation of the Employee Benefits division
increased $21, or 5%, and $111, or 14%, compared to the second quarter and six
months ended June 30, 1997, respectively, as a result of strong sales.
Core earnings increased $20, or 27%, and $42, or 31%, for the second quarter and
six months ended June 30, 1998, respectively, primarily due to growth in the
Annuity, Individual Life and Employee Benefits divisions. Annuity earnings
increased $17, or 35%, and $35, or 38%, respectively, compared to the prior year
periods, as a result of higher fee income earned on increasing account values
and continued operating efficiencies. Individual Life earnings increased $3, or
25%, and $5, or 22%, respectively, compared to the prior year periods, primarily
as a result of continued growth in variable life account values. Earnings in the
Group Insurance operation increased $2, or 13%, and $6, or 23%, respectively,
compared to the prior year periods, as a result of increased premium revenues.
Partially offsetting these increases was an operating loss from the division's
international operation of ($2) and ($4) for the second quarter and six months
ended June 30, 1998, respectively, compared to earnings of $1 and $2 for the
second quarter and six months ended June 30, 1997, respectively.
<TABLE>
<CAPTION>
INTERNATIONAL
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 478 $ 407 $ 924 $ 824
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 32 $ 29 $ 60 $ 65
Less: Net realized capital gains, after-tax 23 16 34 38
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 9 $ 13 $ 26 $ 27
====================================================================================================================================
</TABLE>
Revenues for the second quarter and six months ended June 30, 1998 increased
$71, or 17%, and $100, or 12%, over the comparable periods in 1997. This
increase was primarily due to earned premium growth of $57, or 17%, and $101, or
15%, respectively, for the second quarter and six month periods, principally at
ITT London & Edinburgh, as a result of growth in creditor, property and life
business, partially offset by reductions in the motor business. In addition, for
the six month period, earned premiums increased $5, or 15%, at ITT Ercos
primarily due to growth in the motor business. Net investment income also
increased $3, or 7%, and $5, or 6%, for the second quarter and six month
periods, respectively, as compared to the equivalent 1997 periods. An increase
in net realized capital gains of $14, or 67%, at Zwolsche Algemeene contributed
to the increase for the quarter while, for the six month period, net realized
capital gains in the International segment decreased by $6, or 11%. (For an
analysis of net investment income and net realized capital gains, see the
Investments section.)
Core earnings for the second quarter and six months ended June 30, 1998
decreased $4, or 31%, and $1, or 4%, respectively, compared to the same periods
in 1997. The decline for the quarter was primarily due to a $3, or 50%, decrease
at ITT London & Edinburgh due to flood damage of approximately $15, before-tax,
in the United Kingdom in early April 1998. This decrease was partially offset by
improved underwriting results in other lines of business at ITT London &
Edinburgh. For the six month period, core earnings at ITT London & Edinburgh of
$12 were flat compared with the prior year. Underwriting results for the six
month period at ITT London & Edinburgh declined $3, before-tax, over the prior
year due to January 1998 winter storms and the effect of the April flood damage.
Partially offsetting this decline were improvements resulting from strong
pricing and underwriting actions taken in the motor line of business at ITT
London & Edinburgh in 1997. For the six month period, core earnings at ITT Ercos
and Zwolsche Algemeene were in line with the prior year. In local currency
terms, Zwolsche Algemeene achieved 10% growth in core earnings while ITT Ercos
declined 8% in core earnings over the prior year.
The U.S. dollar remained weak against the sterling while strengthening against
the guilder during the second quarter and six months ended June 30, 1998 as
compared to the same periods in 1997. This resulted in an overall negligible
foreign exchange impact on revenues and core earnings for the second quarter.
For the six month period, there was an overall negative foreign exchange impact
on total revenues and core earnings of $8 and $1, respectively.
In a July 1998 decision, which could adversely impact loss reserves and
underwriting results at ITT London & Edinburgh, a court in the United Kingdom
changed the formula for determination of lump-sum settlements of bodily injury
claims, including the discount rate to be used. This decision is subject to
change by a government official having the authority to prescribe the discount
rate. While the impact of this development may be material to the results of
operations of the International segment, management does not expect the impact
to be material to The Hartford's consolidated financial condition or results of
operations.
- 12 -
<PAGE>
<TABLE>
<CAPTION>
OTHER OPERATIONS
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------------------------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 43 $ 37 $ 84 $ 78
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (17) $ 361 $ (31) $ 362
Less: Net realized capital gains (losses), after-tax -- (2) 1 --
Equity gain on HLI initial public offering -- 368 -- 368
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ (17) $ (5) $ (32) $ (6)
====================================================================================================================================
</TABLE>
Other Operations consist of property and casualty operations of The Hartford
which have discontinued writing new and renewal business as well as the effect
of an 18.6% minority interest in HLI's operating results.
For the second quarter and six months ended June 30, 1998, core earnings
respectively included $(17) and $(33) minority interest in HLI's operating
results while 1997 included $(5) for both periods. (For additional information
regarding HLI's results, see the Life section.) Excluding minority interest,
core earnings increased $2 over the six months ended June 30, 1997.
The equity gain consisted of a $368 non-taxable gain related to the increased
value of its equity ownership in HLI, as discussed in The Hartford's 1997 Form
10-K Annual Report in the Life section of the MD&A.
ENVIRONMENTAL AND ASBESTOS CLAIMS
The Hartford continues to receive claims asserting damages from environmental
exposures and for injuries from asbestos and asbestos-related products, both of
which affect the North American Property & Casualty, International and Other
Operations segments. Environmental claims relate primarily to pollution and
related clean-up costs. With regard to these claims, uncertainty exists which
impacts the ability of insurers and reinsurers to estimate the ultimate reserves
for unpaid losses and related settlement expenses. The Hartford finds that
conventional reserving techniques cannot estimate the ultimate cost of these
claims because of inadequate development patterns and inconsistent emerging
legal doctrine. For the majority of environmental claims and many types of
asbestos claims, unlike any other type of contractual claim, there is almost no
agreement or consistent precedent to determine what, if any, coverage exists or
which, if any, policy years and insurers or reinsurers may be liable. Further
uncertainty arises with environmental claims since claims are often made under
policies, the existence of which may be in dispute, the terms of which may have
changed over many years, which may or may not provide for legal defense costs,
and which may or may not contain environmental exclusion clauses that may be
absolute or allow for fortuitous events. Courts in different jurisdictions have
reached disparate conclusions on similar issues and in certain situations have
broadened the interpretation of policy coverage and liability issues. In light
of the extensive claim settlement process for environmental and asbestos claims,
involving comprehensive fact gathering, subject matter expertise and intensive
litigation, The Hartford established an environmental claims facility in 1992 to
defend itself aggressively against unwarranted claims and to minimize costs.
Within the property and casualty insurance industry, progress has been made in
developing sophisticated, alternative methodologies utilizing company experience
and supplemental databases to assess environmental and asbestos liabilities.
Consistent with The Hartford's practice of using the best techniques to estimate
the Company's environmental and asbestos exposures, a study was conducted in
1996 utilizing internal staff supplemented by outside legal and actuarial
consultants. Use of these new methodologies resulted in The Hartford adjusting
its environmental and asbestos liabilities in the third quarter of 1996. (For
additional information, see The Hartford's 1997 Form 10-K Annual Report.)
Reserve activity for both reported and unreported environmental and asbestos
claims, including reserves for legal defense costs, for the six months ended
June 30, 1998 and the year ended December 31, 1997, was as follows (net of
reinsurance):
- 13 -
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS CLAIMS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
SIX MONTH ENDED YEAR ENDED
JUNE 30, 1998 DECEMBER 31, 1997
--------------------------------------------------------------------------------
Environmental Asbestos Total Environmental Asbestos Total
--------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning liability $ 1,312 $ 688 $ 2,000 $ 1,439 $ 717 $ 2,156
Claims and claim adjustment expenses incurred 2 3 5 -- 2 2
Claims and claim adjustment expenses paid (90) (23) (113) (113) (45) (158)
Other [1] -- -- -- (14) 14 --
- - ---------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY [2] $ 1,224 $ 668 $ 1,892 $ 1,312 $ 688 $ 2,000
=================================================================================================================================
<FN>
[1] Other represents reclassifications of beginning reserves between
environmental and asbestos for December 31, 1997.
[2] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,716 and $1,853 for June 30, 1998 and December 31, 1997,
respectively. Gross of reinsurance, as of June 30, 1998 and December 31,
1997 reserves for environmental and asbestos were $1,960 and $1,648 and
$2,165 and $1,688, respectively.
</FN>
</TABLE>
The Hartford believes that the environmental and asbestos reserves recorded at
June 30, 1998 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 developments and methodologies as they become
available for use in supplementing 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 effects of future changes
in facts, legal and other issues 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.
- 14 -
<PAGE>
INVESTMENTS
An important element of the financial results of The Hartford is return on
invested assets. The Hartford's investment activities are divided between the
reportable segments of North American Property & Casualty, Life, International
and Other Operations. The investment portfolios for these segments are managed
based on the underlying characteristics and nature of their respective
liabilities. For a further discussion on The Hartford's approach to managing
risks, see the Capital Markets Risk Management section.
Please refer to The Hartford's 1997 Form 10-K Annual Report for a description of
the Company's investment objectives and policies.
NORTH AMERICAN PROPERTY & CASUALTY
Total invested assets were $15.0 billion at June 30, 1998 and were comprised of
fixed maturities of $13.6 billion and other investments of $1.4 billion,
primarily equity securities.
FIXED MATURITIES BY TYPE
- - ----------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
Municipal - tax-exempt $ 7,981 58.5% $ 7,873 58.5%
Corporate 2,029 14.9% 2,257 16.8%
Commercial MBS 670 4.9% 687 5.1%
CMO 586 4.3% 483 3.6%
Gov't/Gov't agencies - For. 576 4.2% 459 3.4%
ABS 505 3.7% 559 4.2%
MBS - agency 396 2.9% 540 4.0%
Gov't/Gov't agencies - U.S. 53 0.4% 32 0.2%
Municipal - taxable 25 0.2% 31 0.2%
Short-term 763 5.6% 479 3.6%
Redeemable pref'd stock 61 0.4% 56 0.4%
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 13,645 100.0% $ 13,456 100.0%
- - ----------------------------------------------------------------
The taxable equivalent duration of the June 30, 1998 fixed maturity portfolio
was 4.5 years compared to 4.7 years at December 31, 1997. Duration is defined as
the market price sensitivity of the portfolio to parallel shifts in the yield
curve.
INVESTMENT RESULTS
The table below summarizes the North American Property & Casualty segment's
results.
SECOND QUARTER SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
----------------------------------------
1998 1997 1998 1997
- - -----------------------------------------------------------------
Net investment income,
before-tax $ 206 $ 193 $ 408 $ 370
Net investment income,
after-tax [1] $ 164 $ 154 $ 326 $ 297
Yield on average
invested assets,
before-tax [2] 5.8% 5.7% 5.8% 5.6%
Yield on average
invested assets,
after-tax [1] [2] 4.6% 4.5% 4.6% 4.5%
Net realized capital
gains, before-tax $ 42 $ 17 $ 121 $ 17
- - -----------------------------------------------------------------
[1] Due to the significant holdings in tax-exempt investments, an after-tax net
investment income and after-tax yield are also included.
[2] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed maturities
at amortized cost).
For the second quarter ended June 30, 1998, before-tax net investment income was
$206 compared to $193 in 1997, an increase of 7%, while after-tax net investment
income increased 6% to $164. For the six months ended June 30, 1998, before-tax
net investment income was $408 compared to $370 in 1997, an increase of 10%,
while after-tax net investment income also increased by 10%. Yields on average
invested assets also increased for both the second quarter and six month period.
The increase in investment income for both periods was the result of higher
invested assets as a result of increased cash flow from operating and financing
activities. The increase in yields on average invested assets was due primarily
to the reallocation from equities to higher yielding fixed maturities.
Year to date before-tax net realized capital gains increased to $121 at June 30,
1998 resulting primarily from opportunities taken in a strong equity market.
LIFE
Invested assets, excluding separate accounts, totaled $21.8 billion at June 30,
1998 and were comprised of $17.5 billion of fixed maturities, $3.8 billion of
policy loans, and other investments of $520. Policy loans, which had a
weighted-average interest rate of 11.1% as of June 30, 1998, are secured by the
cash value of the life policy. These loans do not mature in a conventional
sense, but expire in conjunction with the related policy liabilities.
FIXED MATURITIES BY TYPE
- - -----------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
Corporate $ 7,998 45.7% $ 7,970 47.3%
ABS 3,081 17.6% 3,199 19.0%
Commercial MBS 1,903 10.9% 1,606 9.5%
CMO 961 5.5% 978 5.8%
Municipal - tax-exempt 653 3.7% 171 1.0%
Gov't/Gov't agencies - For. 589 3.4% 502 3.0%
MBS - agency 561 3.2% 514 3.1%
Municipal - taxable 240 1.4% 267 1.6%
Gov't/Gov't agencies - U.S. 97 0.5% 241 1.4%
Short-term 1,417 8.1% 1,395 8.3%
Redeemable preferred stock 5 -- 5 --
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 17,505 100.0% $ 16,848 100.0%
- - ----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Life segment's results.
SECOND QUARTER SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
----------------------------------------
(before-tax) 1998 1997 1998 1997
- - -----------------------------------------------------------------
Net investment income $ 392 $ 362 $ 792 $ 737
Yield on average
invested assets, [1] 7.4% 7.2% 7.6% 7.4%
Net realized capital
losses $ -- $ (2) $ -- $ (1)
- - -----------------------------------------------------------------
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed maturities
at amortized cost).
For the second quarter ended June 30, 1998, before-tax net investment income
totaled $392, compared to $362 in 1997, an increase of 8% as a result of higher
average invested assets and
- 15 -
<PAGE>
increased yields on average invested assets. Before-tax yields on average
invested assets for the second quarter increased to 7.4%. For the six months
ended June 30, 1998, before-tax net investment income was $792 compared to $737
in 1997, an increase of $55, or 7%. Before-tax yields for the six month period
increased to 7.6% from 7.4% in 1997. The increase in yields on average invested
assets for both periods was due, in part, to an increase in allocation to assets
rated BBB.
There were no net realized capital gains for the quarter and six months ended
June 30, 1998.
INTERNATIONAL
Invested assets, excluding separate accounts, were $2.8 billion at June 30, 1998
and were comprised of fixed maturities of $2.4 billion and other investments of
$406, primarily equity securities.
FIXED MATURITIES BY TYPE
- - -----------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
Gov't/Gov't agencies - For. $ 885 36.4% $ 829 36.5%
Corporate 517 21.3% 414 18.3%
Gov't/Gov't agencies - U.S. 11 0.5% 19 0.8%
Short-term 1,015 41.8% 1,007 44.4%
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 2,428 100.0% $ 2,269 100.0%
- - ----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the International segment's results.
SECOND QUARTER SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
----------------------------------------
(before-tax) 1998 1997 1998 1997
- - -----------------------------------------------------------------
Net investment income $ 46 $ 43 $ 89 $ 84
Yield on average
invested assets, [1] 7.0% 6.6% 6.8% 6.4%
Net realized capital
gains $ 35 $ 24 $ 51 $ 57
- - -----------------------------------------------------------------
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the second quarter ended June 30, 1998, before-tax net investment income
increased $3, or 7%, as compared to the same period in 1997. Yields on average
invested assets increased to 7.0% as of June 30, 1998 from 6.6% in 1997. For the
six months ended June 30, 1998, before-tax net investment income increased 6%,
and before-tax yields increased to 6.8% from 6.4% for the same period in 1997.
The increase in yields on average invested assets was primarily due to an
increase in short-term interest rates in the U.K. and a reallocation of funds
from equities to fixed maturities.
Net realized capital gains for the second quarter ended June 30, 1998 increased
to $35 compared to $24 for the same period in 1997, resulting primarily from
opportunities taken in a strong equity market.
OTHER OPERATIONS
Invested assets were $2.5 billion at June 30, 1998 and were substantially
comprised of fixed maturities.
FIXED MATURITIES BY TYPE
- - -----------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
Corporate $ 1,605 65.2% $ 1,530 61.7%
Commercial MBS 150 6.1% 149 6.0%
ABS 137 5.6% 142 5.7%
Gov't/Gov't agencies - U.S. 99 4.0% 88 3.5%
Gov't/Gov't agencies - For. 62 2.5% 83 3.3%
MBS - agency 49 2.0% 56 2.3%
Municipal - taxable 39 1.6% 39 1.6%
CMO 21 0.9% 27 1.1%
Short-term 289 11.7% 357 14.4%
Redeemable preferred stock 9 0.4% 9 0.4%
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 2,460 100.0% $ 2,480 100.0%
- - ----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Other Operations segment's results.
SECOND QUARTER SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
----------------------------------------
(before-tax) 1998 1997 1998 1997
- - -----------------------------------------------------------------
Net investment income $ 41 $ 40 $ 80 $ 76
Yield on average
invested assets, [1] 6.8% 7.0% 6.6% 6.6%
Net realized capital
gains (losses) $ 1 $ (3) $ 2 $ --
- - -----------------------------------------------------------------
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the second quarter ended June 30, 1998, before-tax net investment income
totaled $41 compared to $40 in 1997, an increase of 3%. For the six months ended
June 30, 1998, before-tax net investment income increased 5% to $80 and
before-tax yields remained at 6.6% .
- 16 -
<PAGE>
CAPITAL MARKETS RISK MANAGEMENT
The Hartford has a disciplined approach to managing risks associated with its
capital markets and asset/liability management activities. Investment portfolio
management is organized to focus investment management expertise on specific
classes of investments while asset/liability management is the responsibility of
separate and distinct risk management units supporting the property and casualty
and life operations. Derivative instruments are utilized in accordance with
established Company policy and are monitored internally and reviewed by senior
management.
The Company is exposed to two primary sources of investment and asset/liability
management risk: credit risk, relating to the uncertainty associated with the
ability of an obligor or counterparty to make timely payments of principal
and/or interest, and market risk, relating to the market price and/or cash flow
variability associated with changes in interest rates, securities prices, market
indices, yield curves or currency exchange rates. The Company does not hold any
financial instruments entered into for trading purposes.
Please refer to The Hartford's 1997 Form 10-K Annual Report for a description of
the Company's objectives, policies and strategies.
CREDIT RISK
The Company invests primarily in investment grade securities and has established
exposure limits, diversification standards and review procedures for all credit
risks whether borrower, issuer or counterparty. Creditworthiness of specific
obligors is determined by an internal credit evaluation supplemented by
consideration of external determinants of creditworthiness, typically ratings
assigned by nationally recognized ratings agencies. Obligor, geographic, asset
sector and industry concentrations are subject to established limits and
monitored on a regular interval. The Hartford is not exposed to any significant
credit concentration risk of a single issuer.
The following tables identify fixed maturity securities for the property and
casualty operations, including international and other operations, and the life
operations, including international operations and guaranteed separate accounts,
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.
PROPERTY AND CASUALTY OPERATIONS
As of June 30, 1998, over 95% of the fixed maturity portfolio was invested in
investment-grade securities.
FIXED MATURITIES BY CREDIT QUALITY
- - ----------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
U.S. Gov't/Gov't agencies$ 1,047 6.4% $ 1,083 6.1%
AAA 5,843 35.5% 6,337 35.4%
AA 3,038 18.4% 3,426 19.1%
A 3,138 19.1% 3,096 17.3%
BBB 1,549 9.4% 1,352 7.6%
BB & below 782 4.7% 767 4.3%
Short-term 1,072 6.5% 1,832 10.2%
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,469 100.0% $ 17,893 100.0%
- - ----------------------------------------------------------------
LIFE OPERATIONS
As of June 30, 1998, 99% of the fixed maturity portfolio was invested in
investment-grade securities.
FIXED MATURITIES BY CREDIT QUALITY
- - ---------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
U.S.Gov't/Gov't agencies $ 2,758 9.3% $ 2,907 10.6%
AAA 4,777 16.0% 4,252 15.4%
AA 3,005 10.1% 2,990 10.9%
A 9,061 30.4% 9,351 33.9%
BBB 6,982 23.4% 5,966 21.7%
BB & below 307 1.0% 205 0.7%
Short-term 2,907 9.8% 1,880 6.8%
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 29,797 100.0% $ 27,551 100.0%
- - ----------------------------------------------------------------
MARKET RISK
The Hartford has material exposure to both interest rate and equity market risk.
The Company employs several risk management tools to quantify and manage market
risk arising from its 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. There have been
no material changes in market risk exposures since December 31, 1997.
DERIVATIVE INSTRUMENTS
The Hartford utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or to control transaction costs. The
Company does not make a market or trade derivatives for the express purpose of
earning trading profits.
- 17 -
<PAGE>
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the Company's Finance Committee.
The notional amounts of derivative contracts represent the basis upon which pay
or receive amounts are calculated and are not reflective of credit risk.
Notional amounts pertaining to derivative instruments for both general and
guaranteed separate accounts totaled $11.6 billion and $11.1 billion at June 30,
1998 and December 31, 1997, respectively.
For a further discussion of market risk exposure including derivative
instruments please refer to the Hartford's 1997 Form 10-K Annual Report.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of The
Hartford and its ability to generate strong cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The capital structure of The Hartford consists of debt, minority interest
and equity, summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1998 DECEMBER 31, 1997
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term debt $ 231 $ 291
Long-term debt 1,482 1,482
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures (QUIPS and TruPS) 1,250 1,000
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 2,963 $ 2,773
-----------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ 379 $ 351
-----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities, net of tax $ 5,523 $ 5,232
Unrealized gain on securities, net of tax 914 853
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 6,437 $ 6,085
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 8,865 $ 8,356
-----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 54% 53%
Debt to capitalization [2] [3] 33% 33%
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Excludes unrealized gain on securities, net of tax, of $61 and $46 as of
June 30, 1998 and December 31, 1997, respectively.
[2] Excludes unrealized gain on securities, net of tax.
[3] Excluding QUIPS and TruPS, the debt to equity ratios were 31% and 34% as of
June 30, 1998 and December 31, 1997, respectively, and the debt to capital
ratios were 19% and 21% as of June 30, 1998 and December 31, 1997,
respectively.
</FN>
</TABLE>
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain on securities,
net of tax, increased by $509 as of June 30, 1998 compared to December 31, 1997.
This change primarily was the result of earnings and additional net borrowings,
partially offset by dividends declared on The Hartford's common stock and the
effect of treasury stock acquired net of reissuances under incentive and stock
purchase plans.
DEBT
For a discussion of Debt, see Note 2 of Notes to Consolidated Financial
Statements.
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUPS)
For a discussion of Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures,
see Note 3 of Notes to Consolidated Financial Statements.
STOCKHOLDERS' EQUITY
Stock Split in the Form of a Stock Dividend - For a discussion of stock split in
the form of a stock dividend, see Note 4 of Notes to Consolidated Financial
Statements.
Dividends - On February 19, 1998, The Hartford's Board of Directors approved a
5% increase in the quarterly dividend to $0.21 per share (post-split basis). The
dividend was paid on April 1, 1998 to shareholders of record as of March 2,
1998. On May 21, 1998, The Hartford declared a dividend on its common stock of
$0.21 per share payable on July 1, 1998 to shareholders of record as of June 1,
1998. On July 16, 1998, The Hartford declared a dividend on its common stock of
$0.21 per share payable October 21, 1998 to shareholders of record as of
September 1, 1998. The Hartford expects to continue to pay quarterly dividends
on its common stock of $0.21 per share throughout the remainder of 1998.
Treasury Stock - During the six months of 1998, The Hartford repurchased
3,261,600 shares of its common stock in the open market at a total cost of $172
under the Company's $1.0 billion repurchase program announced in December 1997.
Certain of
- 18 -
<PAGE>
these repurchased shares were reissued pursuant to certain stock-based benefit
plans.
RATINGS
As of July 1998, the financial ratings for Hartford Life Capital I's trust
preferred securities from the major independent rating organizations were A from
Duff & Phelps, a2 from Moody's and A- from Standard & Poor's.
CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
--------------------------
1998 1997
- - ------------------------------------------------------------------
Cash provided by operating activities $ 303 $ 842
Cash used for investing activities $ (493) $ (1,402)
Cash provided by financing activities $ 192 $ 587
Cash - end of period $ 143 $ 135
- - ------------------------------------------------------------------
The change in cash provided by operating activities was primarily the result of
timing in settlement of receivables and payables and an increase in income taxes
paid. The decrease in cash provided by financing activities was primarily the
result of proceeds from the HLI offering in May of 1997 partially offset by
increases in investment type contracts written in the Life segment. The change
in cash used for investing activities primarily reflects the investment of cash
from operating and financing activities. Operating cash flows in both periods
have been more than adequate to meet liquidity requirements.
OMNI
On February 12, 1998, The Hartford completed the purchase of all outstanding
shares of Omni Insurance Group, Inc. ("Omni"), a holding company of two
non-standard auto insurance subsidiaries licensed in 25 states and the District
of Columbia. The Hartford paid cash of $31.75 per share, plus transaction costs,
for a total of $189. The acquisition has been reported as a purchase transaction
and accordingly, the results of Omni's operations have been included in The
Hartford's consolidated financial statements from the closing date of the
transaction.
SUBSEQUENT EVENT
On July 30, 1998, HLI announced that it will acquire PLANCO Financial Services
Inc. ("PLANCO") and its affiliate, PLANCO Incorporated. PLANCO, a primary
distributor of HLI's annuity and investment products, is the nation's largest
wholesaler of individual annuities and has played a significant role in HLI's
growth over the past decade. As a wholesaler, PLANCO distributes HLI's annuity
and investment products, including fixed and variable annuities, mutual funds
and single premium variable life insurance, as well as providing sales support
to registered representatives, financial planners and broker-dealers at
brokerage firms and banks across the United States. Management anticipates that
the closing of the transaction, which is subject to regulatory approval, will
take place during the third quarter of 1998.
- 19 -
<PAGE>
REGULATORY INITIATIVES AND CONTINGENCIES
NAIC PROPOSALS
The National Association of Insurance Commissioners ("NAIC") adopted the
Codification of Statutory Accounting Principles ("SAP") in March, 1998. The
proposed effective date for the statutory accounting guidance is January 1,
2001. It is expected that each of The Hartford's domiciliary states will adopt
SAP and the Company will make the necessary changes required for implementation.
These changes are not anticipated to have a material impact on the statutory
financial statements of The Hartford.
YEAR 2000
The Year 2000 issue relates to the ability or inability of computer systems to
properly process information and data containing or related to dates beginning
with the year 2000 and beyond. The Year 2000 issue exists because, historically,
many computer systems that are in use today were developed years ago when a year
was identified using a two-digit field rather than a four-digit field. As
information and data containing or related to the century date are introduced to
computer hardware, software and other systems, date sensitive systems may
recognize the year 2000 as "1900", or not at all, which may result in computer
systems processing information incorrectly. This, in turn, may significantly and
adversely affect the integrity and reliability of information databases and may
result in a wide variety of adverse consequences to a company. In addition, Year
2000 problems that occur with third parties with which a company does business,
such as suppliers, computer vendors, distributors and others, may also adversely
affect any given company.
As an insurance and financial services company, The Hartford has thousands of
individual and business customers that have insurance policies, annuities,
mutual funds and other financial products of The Hartford. Nearly all of these
policies and products contain date sensitive data, such as policy expiration
dates, birth dates, premium payment dates, and the like. In addition, The
Hartford has business relationships with numerous third parties that affect
virtually all aspects of The Hartford's business, including, without limitation,
suppliers, computer hardware and software vendors, insurance agents and brokers,
securities broker-dealers and other distributors of financial products.
Beginning in 1990, The Hartford began working on making its computer systems
Year 2000 ready, either through installing new programs or replacing systems. In
January 1998, The Hartford commenced a company-wide program to further identify,
assess and remediate the impact of Year 2000 problems in The Hartford's business
segments. The Hartford currently anticipates that this internal program will be
substantially completed by the end of 1998, and testing of computer systems will
continue through 1999. The costs of addressing the Year 2000 issue that have
been incurred by The Hartford through the year ended December 31, 1997 have not
been material to The Hartford's financial condition or results of operations.
Management estimates that after-tax costs related to these Year 2000 efforts in
1998 and 1999 will be from $40 to $50 in total. These costs are being expensed
as incurred and are not expected to have a material impact to the Company's
financial condition or results of operations.
As part of its Year 2000 program, The Hartford is identifying third parties with
which it has significant business relations in order to attempt to assess the
potential impact on The Hartford of their Year 2000 issues and remediation
plans. The Hartford currently anticipates that it will substantially complete
this evaluation by the end of 1998, and will conduct systems testing with
certain third parties through 1999. The Hartford does not have control over
these third parties and, as a result, The Hartford cannot currently determine to
what extent future operating results may be adversely affected by the failure of
these third parties to successfully address their Year 2000 issues. However, The
Hartford expects to develop plans to attempt to minimize identified third party
exposures.
In addition, as an insurer, The Hartford may incur losses and loss adjustment
expenses (including attorneys' fees and other legal expenses) arising from
property and casualty insurance claims by its insureds, who may incur losses as
a result of Year 2000 problems. To the extent claims are ultimately made,
insurance coverage, if any, will depend upon the provisions of the policies and
the facts and circumstances of each claim. It is not possible to determine in
advance whether and to what extent insureds would incur losses, the amount of
the losses, or whether any such losses would be covered under The Hartford's
insurance policies. Because of this uncertainty, it is also not possible to
determine in advance whether such losses and related loss adjustment expenses
would have a material impact upon The Hartford's financial condition or results
of operations.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Consolidated
Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the Capital Markets Risk Management section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
- 20 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Hartford is a defendant in various lawsuits arising out of its business. In
the opinion of management, final outcome of these matters will not materially
affect the consolidated financial condition, results of operations or cash flows
of The Hartford.
The Hartford is involved in claims litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed in the MD&A under the Environmental and Asbestos
Claims section, The Hartford continues to receive environmental and asbestos
claims which involve significant uncertainty regarding policy coverage issues.
Regarding these claims, The Hartford continually reviews its overall reserve
levels, reserving methodologies and reinsurance coverages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 1998, The Hartford held its annual meeting of shareholders. The
following matters were considered and voted upon: (1) the election of directors
to serve for a one year term; (2) the amendment of the Company's certificate of
incorporation to increase the number of the Company's authorized shares of
common stock from 200,000,000 to 400,000,000; and (3) the ratification of the
appointment of Arthur Andersen LLP as independent auditors of the Company for
the fiscal year ending December 31, 1998.
Each of the nominees for election as directors was elected to the Board of
Directors, and each of the other items set forth above was approved. Set forth
below is the vote tabulation relating to the election of directors and each of
the other items voted upon: (All shares are on a pre-split basis)
(1) Election of Directors
NAME OF DIRECTOR
NOMINEES SHARES FOR SHARES WITHHELD*
---------------------- ---------------- ---------------------
Bette B. Anderson 105,222,651 545,791
Rand V. Araskog 104,647,679 1,120,763
Ramani Ayer 105,313,794 454,648
Robert A. Burnett 105,208,021 560,421
Donald R. Frahm 105,272,769 495,673
Paul G. Kirk, Jr. 105,264,113 504,329
Robert W. Selander 105,303,703 464,739
Lowndes A. Smith 105,295,154 473,288
H. Patrick Swygert 105,288,124 480,318
DeRoy C. Thomas 104,996,542 771,900
Gordon I. Ulmer 105,258,238 510,204
David K. Zwiener 105,323,043 443,399
---------------------- ---------------- ---------------------
* Shares withheld include broker non-votes and abstentions.
(2) Amendment of the Company's Certificate of Incorporation to increase the
Company's Authorized Shares of Common Stock
Shares For 84,624,809
Shares Against 20,697,778
Shares Abstained 445,855
(3) Ratification of the appointment of Arthur Andersen LLP
Shares For 105,107,701
Shares Against 422,599
Shares Abstained 238,142
Shareholders of record on March 24, 1998 were entitled to vote at the annual
meeting. As of that date, there were 117,748,146 shares of the Company's common
stock outstanding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index.
(b) Reports on Form 8-K - During the second quarter of 1998, The Hartford filed
two Reports on Form 8-K under Item 5, Other Events. In the Form 8-K dated May
21, 1998, The Hartford reported that its Board of Directors declared a
two-for-one stock split on the Company's shares of common stock in the form of a
100% stock dividend. In the Form 8-K dated June 18, 1998, The Hartford reported
that it issued a press release regarding anticipated catastrophe losses for the
quarter ending June 30, 1998.
- 21 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Hartford Financial Services Group, Inc.
(Registrant)
/s/ James J. Westervelt
-------------------------------------------
James J. Westervelt
Senior Vice President and Group Controller
(Chief Accounting Officer)
AUGUST 13, 1998
- 22 -
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHBITS INDEX
EXHIBIT #
- - ---------
3.01 Amended and Restated Certificate of Incorporation of The Hartford
Financial Services Group, Inc. ("The Hartford"), amended effective May
21,1998, is filed herewith.
27 Financial Data Schedule is filed herewith.
- 23 -
<PAGE>
EXHIBIT 3.01
AMENDED AND
RESTATED CERTIFICATE OF INCORPORATION
OF
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
THE HARTFORD FINANCIAL SERVICES GROUP, INC., a Corporation organized
and existing under the laws of the State of Delaware, hereby certifies as
follows:
1. The name of the Corporation is THE HARTFORD FINANCIAL SERVICES GROUP,
INC., and the name under which the corporation was originally
incorporated is ITT Hartford Group, Inc. The date of filing of its
original Certificate of Incorporation with the Secretary of State was
December 9, 1985.
2. This Amended and Restated Certificate of Incorporation restates and
integrates and further amends the Certificate of Incorporation of this
Corporation by amending ARTICLE FOURTH, subsection (a), to read in its
entirety as follows: "The aggregate number of shares of stock that the
Corporation shall have authority to issue is 450,000,000 shares,
consisting of 400,000,000 shares designated "Common Stock" and
50,000,000 shares designated "Preferred Stock." The shares of Common
Stock and the shares of Preferred Stock shall have a par value of $.01
per share."
3. The text of the Certificate of Incorporation as amended or supplemented
heretofore is further amended hereby to read as herein set forth in
full:
ARTICLE FIRST
-------------
The name of the Corporation is THE HARTFORD FINANCIAL SERVICES GROUP,
INC. (the "Corporation").
ARTICLE SECOND
--------------
The address of the registered office of the Corporation in the State of
Delaware is 1209 Orange Street, Wilmington, New Castle County, Delaware 19801.
The name of the registered agent of the Corporation at such address is The
Corporation Trust Company.
ARTICLE THIRD
-------------
The purpose of the Corporation is to engage in any lawful act or
activity for which corporations may be organized under the Delaware General
Corporation Law.
<PAGE>
Amended and Restated Certificate of Incorporation
The Hartford Financial Services Group, Inc.
Page 2
ARTICLE FOURTH
--------------
(a) The aggregate number of shares of stock that the Corporation shall have
authority to issue is 450,000,000 shares, consisting of 400,000,000
shares designated "Common Stock" and 50,000,000 shares designated
"Preferred Stock." The shares of Common Stock and the shares of
Preferred Stock shall have a par value of $.01 per share.
(b) The Board of Directors of the Corporation shall have the full authority
permitted by law, at any time and from time to time, to divide the
authorized and unissued shares of Preferred Stock into classes or
series, or both, and to determine the following provisions,
designations, powers, preferences and relative, participating, optional
and other special rights and the qualifications, limitations or
restrictions thereof for shares of any such class or series of
Preferred Stock:
(1) the designation of such class or series, the number of
shares to constitute such class or series and the stated or
liquidation value thereof;
(2) whether the shares of such class or series shall have
voting rights, in addition to any voting rights provided by
law, and, if so, the terms of such voting rights;
(3) the dividends, if any, payable on such class or series,
whether any such dividends shall be cumulative, and, if so,
the rate or rates thereof, from what dates, the conditions and
dates upon which such dividends shall be payable, the
preference or relation which such dividends shall bear to the
dividends payable on any shares of stock of any other class or
any other series of the same class;
(4) whether the shares of such class or series shall be
subject to redemption at the option of the Corporation and/or
the holders of such class or series, or upon the happening of
a specified event, and, if so, the times, price or prices, and
other conditions of such redemption, including securities or
other property payable upon any such redemption, if any;
(5) the amount or amounts, if any, payable upon shares of such
class or series upon, and the rights of the holders of such
class or series in, the voluntary or involuntary liquidation,
dissolution or winding up, or any distribution of the assets,
of the Corporation;
<PAGE>
Amended and Restated Certificate of Incorporation
The Hartford Financial Services Group, Inc.
Page 3
(6) whether the shares of such class or series shall be
subject to the operation of a retirement or sinking fund and,
if so, the extent to and manner in which any such retirement
or sinking fund shall be applied to the purchase or redemption
of the shares of such class or series for retirement or other
corporate purposes and the terms and provisions relative to
the operation thereof;
(7) whether the shares of such class or series shall be
convertible into, or exchangeable for, shares of stock of any
other class or any other series of the same class or any
securities, whether or not issued by the Corporation, at the
option of the Corporation and/or the holders of such class or
series, or upon the happening of a specified event, and, if
so, the price or prices or the rate or rates of conversion or
exchange and the method, if any, of adjusting the same, and
any other terms and conditions of conversion or exchange;
(8) the limitations and restrictions, if any, to be effective
while any shares of such class or series are outstanding upon
the payment of dividends or the making of other distributions
on, and upon the purchase, redemption or other acquisition by
the Corporation of, the Common Stock or shares of stock of any
other class or any other series of the same class;
(9) the conditions or restrictions, if any, upon the creation
of indebtedness of the Corporation or upon the issuance of any
additional shares of stock, including additional shares of
such class or series or of any other series of the same class
or of any other class;
(10) the ranking (be it pari passu, junior or senior) of each
class or series vis-a-vis any other class or series of any
class of Preferred Stock as to the payment of dividends, the
distribution of assets and all other matters; and
(11) any other powers, preferences and relative,
participating, optional and other special rights and any
qualifications, limitations or restrictions thereof, insofar
as they are not inconsistent with the provisions of this
Certificate of Incorporation, to the full extent permitted in
accordance with the laws of the State of Delaware.
(c) Such divisions and determinations may be accomplished by an amendment
to this ARTICLE FOURTH, which amendment may be made solely by action of
the Board of Directors, which shall have the full authority permitted
by law to make such divisions and determinations.
<PAGE>
Amended and Restated Certificate of Incorporation
The Hartford Financial Services Group, Inc.
Page 4
(d) The powers, preferences and relative, participating, optional and other
special rights of each class or series of Preferred Stock and the
qualifications, limitations or restrictions thereof, if any, may differ
from those of any and all other classes or series at any time
outstanding; provided that each series of a class is given a
--------
distinguishing designation and that all shares of a series have powers,
preferences and relative, participating, optional and other special
rights and the qualifications, limitations or restrictions thereof
identical with those of other shares of the same series and, except to
the extent otherwise provided in the description of the series, with
those other series of the same class.
(e) Holders of shares of Preferred Stock shall be entitled to receive,
when, as and if declared by the Board of Directors, out of funds
legally available for the payment thereof, dividends at the rates fixed
by the Board of Directors for the respective series before any
dividends shall be declared and paid, or set aside for payment, on
shares of Common Stock with respect to the same dividend period.
Nothing in this ARTICLE FOURTH shall limit the power of the Board of
Directors to create a series of Preferred Stock with dividends the rate
of which is calculated by reference to, and the payment of which is
concurrent with, dividends on shares of Common Stock.
(f) In the event of the voluntary or involuntary liquidation, dissolution
or winding up of the Corporation, holders of shares of each series of
Preferred Stock will be entitled to receive the amount fixed for such
series upon any such event plus, in the case of any series on which
dividends will have been determined by the Board of Directors to be
cumulative, an amount equal to all dividends accumulated and unpaid
thereon to the date of final distribution whether or not earned or
declared before any distribution shall be paid, or set aside for
payment, to holders of Common Stock. If the assets of the Corporation
are not sufficient to pay such amounts in full, holders of all shares
of Preferred Stock will participate in the distribution of assets
ratably in proportion to the full amounts to which they are entitled or
in such order or priority, if any, as will have been fixed in the
resolution or resolutions providing for the issue of the series of
Preferred Stock. Neither the merger nor consolidation of the
Corporation into or with any other corporation, nor a sale, transfer or
lease of all or part of its assets, will be deemed a liquidation,
dissolution or winding up of the Corporation within the meaning of this
paragraph except to the extent specifically provided for herein.
Nothing in this ARTICLE FOURTH shall limit the power of the Board of
Directors to create a series of Preferred Stock for which the amount to
be distributed upon any liquidation, dissolution or winding up of the
Corporation is calculated by reference to, and the payment of which is
concurrent with, the amount to be distributed to the holders of shares
of Common Stock.
(g) The Corporation, at the option of the Board of Directors, may redeem
all or part of the shares of any series of Preferred Stock on the terms
and conditions fixed for such series.
<PAGE>
Amended and Restated Certificate of Incorporation
The Hartford Financial Services Group, Inc.
Page 5
(h) Except as otherwise required by law, as otherwise provided herein or as
otherwise determined by the Board of Directors as to the shares of any
series of Preferred Stock prior to the issuance of any such shares, the
holders of Preferred Stock shall have no voting rights and shall not be
entitled to any notice of meetings of stockholders.
(i) Each holder of shares of Common Stock shall be entitled to one vote for
each share of Common Stock held of record on all matters on which the
holders of shares of Common Stock are entitled to vote. Except as
otherwise required by law, this Certificate of Incorporation or any
certificate of designations providing for the creation of any series of
Preferred Stock, the holders of outstanding shares of Common Stock
shall have and possess the exclusive right to notice of stockholders'
meetings and the exclusive power to vote. No stockholder will be
permitted to cumulate votes at any election of directors.
(j) Subject to all the rights of the Preferred Stock, the holders of the
Common Stock shall be entitled to receive, when, as and if declared by
the Board of Directors, out of funds legally available for the payment
thereof, dividends payable in cash, stock or otherwise. Upon any
liquidation, dissolution or winding up of the Corporation, whether
voluntary or involuntary, and after the holders of the Preferred Stock
of each series shall have been paid in full in cash the amounts to
which they respectively shall be entitled or a sum sufficient for such
payment in full shall have been set aside, the remaining net assets of
the Corporation shall be distributed pro rata to the holders of the
Common Stock in accordance with their respective rights and interest,
to the exclusion of the holders of the Preferred Stock.
ARTICLE FIFTH
-------------
(a) Any action required or permitted to be taken by the stockholders of the
Corporation must be effected at a duly called annual or special
stockholders' meeting and may not be effected by consent in writing by
such stockholders. Special meetings of stockholders of the Corporation
may be called by the Chairman of the Board of Directors or by a
majority vote of the entire Board of Directors.
(b) Stockholders of the Corporation shall not have any preemptive rights to
subscribe for additional issues of stock of the Corporation except as
may be agreed from time to time by the Corporation and any such
stockholder.
(c) Notwithstanding the foregoing, whenever the holders of any one or more
classes or series of Preferred Stock issued by the Corporation, if any,
shall have the right, voting separately by class or series, to elect
directors at an annual or special meeting of stockholders, an election,
term of office, filling of vacancies and other features of such
directorships shall be governed by the terms of the applicable
resolution or resolutions of the Board of Directors adopted pursuant to
ARTICLE FOURTH of this Certificate of Incorporation.
<PAGE>
Amended and Restated Certificate of Incorporation
The Hartford Financial Services Group, Inc.
Page 6
ARTICLE SIXTH
-------------
To the fullest extent permitted by applicable law as then in effect, no
director or officer shall be personally liable to the Corporation or any of its
stockholders for damages for breach of fiduciary duty as a director or officer,
except for liability (a) for any breach of the Director's duty of loyalty to the
Corporation or its stockholders, (b) for acts or omissions not in good faith or
which involve intentional misconduct or a knowing violation of law, (c) under
Section 174 of the Delaware General Corporation Law, (d) for any transaction
from which the director derived an improper personal benefit or (e) for any act
or omission occurring prior to the effective date of this ARTICLE SIXTH. Any
repeal or modification of this ARTICLE SIXTH by the stockholders of the
Corporation shall not adversely affect any right or protection of a director or
officer of the Corporation existing at the time of such repeal or modification
with respect to acts or omissions occurring prior to such repeal or
modification.
ARTICLE SEVENTH
---------------
The holders of the capital stock of the Corporation shall not be
personally liable for the payment of the Corporation's debts and the private
property of the holders of the capital stock of the Corporation shall not be
subject to the payment of debts of the Corporation to any extent whatsoever.
ARTICLE EIGHTH
--------------
Subject to any express provision of the laws of the State of Delaware,
this Certificate of Incorporation or the Bylaws of the Corporation, the Bylaws
of the Corporation may from time to time be supplemented, amended or repealed,
or new Bylaws may be adopted, by the Board of Directors at any regular or
special meeting of the Board of Directors, if such supplement, amendment, repeal
or adoption is approved by a majority of the entire Board of Directors. Subject
to any express provision of the laws of the State of Delaware, this Certificate
of Incorporation or the Bylaws of the Corporation, the Bylaws of the Corporation
may from time to time be supplemented, amended or repealed, or new Bylaws may be
adopted, by the stockholders at any regular or special meeting of the
stockholders at which a quorum is present, if such supplement, amendment, repeal
or adoption is approved by the affirmative vote of the holders of at least a
majority of the voting power of all outstanding shares of stock of the
Corporation entitled to vote generally in an election of directors.
ARTICLE NINTH
-------------
The Corporation reserves the right to supplement, amend or repeal any
provision contained in this Certificate of Incorporation, in the manner now or
hereafter prescribed by the laws of the State of Delaware and all rights
conferred on stockholders herein are granted subject to this reservation.
<PAGE>
Amended and Restated Certificate of Incorporation
The Hartford Financial Services Group, Inc.
Page 7
4. This Amended and Restated Certificate of Incorporation was duly adopted
by vote of stockholders in accordance with Sections 242 and 245 of the
General Corporation Law of the State of Delaware.
IN WITNESS WHEREOF, said THE HARTFORD FINANCIAL SERVICES GROUP, INC.
has caused this Certificate to be signed by Michael O'Halloran, its Senior Vice
President and Corporate Secretary, this 21st day of May, 1998.
------
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
By /S/ Michael O'Halloran
--------------------------------
Michael O'Halloran
Senior Vice President &
Corporate Secretary
ES/BYLAWS/COFIHTGP.DOC
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<F1> REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
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