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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 March 31, 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 April 30, 1998, there were outstanding 117,839,232 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 - First Quarter Ended March 31,
1998 and 1997 3
Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 4
Consolidated Statements of Changes in Stockholders' Equity - First Quarter
Ended March 31, 1998 and 1997 5
Consolidated Statements of Cash Flows - First Quarter Ended March 31,
1998 and 1997 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
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ITEM 1. LEGAL PROCEEDINGS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18
Signature 19
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
First Quarter Ended
March 31,
--------------------------
(In millions, except for per share data) 1998 1997
- - ------------------------------------------------------------------------------------
(Unaudited)
REVENUES
<S> <C> <C>
Earned premiums and other considerations $ 2,948 $ 2,470
Net investment income 684 629
Net realized capital gains 96 37
- - ------------------------------------------------------------------------------------
TOTAL REVENUES 3,728 3,136
===============================================================================
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,111 1,958
Amortization of deferred policy acquisition costs 487 454
Other expenses 744 450
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TOTAL BENEFITS, CLAIMS AND EXPENSES 3,342 2,862
===============================================================================
OPERATING INCOME 386 274
Income tax expense 106 70
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INCOME BEFORE MINORITY INTEREST 280 204
Minority interest in consolidated subsidiary (16) --
- - ------------------------------------------------------------------------------------
NET INCOME $ 264 $ 204
===============================================================================
Basic earnings per share $ 2.24 $ 1.73
Diluted earnings per share $ 2.21 $ 1.71
- - ------------------------------------------------------------------------------------
Weighted average common shares outstanding 117.9 117.7
Weighted average common shares outstanding and dilutive
potential common shares 119.6 119.1
- - ------------------------------------------------------------------------------------
Cash dividends declared per share $ 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
March 31, December 31,
(In millions, except for share data) 1998 1997
- - ------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Investments
Fixed maturities, available for sale, at fair value (amortized cost of $34,919 and
<S> <C> <C>
$ 34,061) $ 35,891 $ 35,053
Equity securities, available for sale, at fair value (cost of $1,315 and $1,509) 1,795 1,922
Policy loans, at outstanding balance 3,764 3,759
Other investments, at cost 590 388
- - ------------------------------------------------------------------------------------------------------------------
Total investments 42,040 41,122
Cash 76 140
Premiums receivable and agents' balances 2,167 1,873
Reinsurance recoverables 10,340 10,839
Deferred policy acquisition costs 4,358 4,181
Deferred income tax 1,069 955
Other assets 2,736 2,502
Separate account assets 78,625 70,131
- - ------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 141,411 $ 131,743
============================================================================================================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 18,273 $ 18,376
Life 5,419 5,271
Other policy claims and benefits payable 21,100 21,143
Unearned premiums 3,117 2,895
Short-term debt 281 291
Long-term debt 1,482 1,482
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely parent junior subordinated debentures 1,000 1,000
Other liabilities 5,362 4,672
Separate account liabilities 78,625 70,131
- - ------------------------------------------------------------------------------------------------------------------
134,659 125,261
COMMITMENTS AND CONTINGENCIES, NOTE 3
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 411 397
STOCKHOLDERS' EQUITY
Common stock - authorized 200,000,000, issued 119,989,999 shares, par value
$ 0.01 1 1
Additional paid-in capital 1,687 1,659
Retained earnings 3,873 3,658
Treasury stock, at cost - 2,181,349 and 2,013,779 shares (89) (65)
Accumulated other comprehensive income 869 832
- - ------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,341 6,085
============================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 141,411 $ 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
FIRST QUARTER ENDED MARCH 31, 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)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $1,660 $3,658 $(65) $853 $(21) $6,085 117,976
Comprehensive income
Net income 264 264
Other comprehensive income, net
of tax (1)
Unrealized gain on securities 40 40
(2)
Cumulative translation adjustments (3) (3)
----------
Total other comprehensive income 37
----------
Total comprehensive income 301
----------
Issuance of shares under incentive
and stock purchase plans 13 22 35 306
Tax benefit on employee stock
options and awards 15 15
Dividends declared on common stock (49) (49)
Treasury stock acquired (46) (46) (473)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $1,688 $3,873 $(89) $893 $(24) $6,341 117,809
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
FIRST QUARTER ENDED MARCH 31, 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)
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $1,643 $2,515 $(30) $352 $40 $4,520 117,556
Comprehensive income
Net income 204 204
Other comprehensive income, net
of tax (1)
Unrealized loss on securities (256) (256)
(2)
Cumulative translation adjustments (52) (52)
----------
Total other comprehensive income (308)
----------
Total comprehensive income (104)
----------
Issuance of shares under incentive
and stock purchase plans 12 12 402
Dividends declared on common stock (47) (47)
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $1,655 $2,672 $(30) $96 $(12) $4,381 117,958
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
(1) Unrealized gain (loss) on securities is net of tax of $22 and $(141) for
the first quarter ended March 31, 1998 and 1997, respectively. There is no
tax effect on cumulative translation adjustments.
(2) Net of reclassification adjustment for gains realized in net income of $63
and $25 for the first quarter ended March 31, 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
First Quarter Ended
March 31,
----------------------------------
(In millions) 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 264 $ 204
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Increase in receivables, payables and accruals (310) (212)
(Increase) decrease in reinsurance recoverables and other related assets 232 (268)
Increase in deferred policy acquisition costs (157) (182)
Accrued and deferred income taxes (23) 89
Increase in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums 146 454
Minority interest in consolidated subsidiary 16 --
Net realized capital gains (96) (37)
Depreciation and amortization 36 21
Other, net 68 277
- - -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 176 346
=============================================================================================================================
INVESTING ACTIVITIES
Purchase of investments (10,550) (9,683)
Sale of investments 3,225 2,957
Maturity of investments 7,088 6,144
Purchase of affiliate (189) --
Additions to plant, property and equipment (38) (13)
- - -----------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (464) (595)
=============================================================================================================================
FINANCING ACTIVITIES
Short-term debt, net (10) 637
Net receipts from (disbursements for) investment and universal life-type contracts
credited to (charged from) policyholder accounts 312 (316)
Dividends paid (47) (48)
Acquisition of treasury stock (46) --
Proceeds from issuances under incentive and stock purchase plans 13 12
- - -----------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 222 285
=============================================================================================================================
Foreign exchange rate effect on cash 2 (2)
- - -----------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (64) 34
Cash - beginning of period 140 112
- - -----------------------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 76 $ 146
=============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- - ------------------------------------------------
NET CASH PAID (REFUNDS RECEIVED) DURING THE PERIOD FOR:
Income taxes $ 93 $ (70)
Interest $ 24 $ 40
<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.
(B) CHANGES IN ACCOUNTING PRINCIPLES
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 Statement of Financial
Accounting Standards ("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. 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 March 31,
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>
MARCH 31, 1998 Income Shares Per Share Amount
- - -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
<S> <C> <C> <C>
Income available to common shareholders $ 264 117.9 $ 2.24
--------------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 1.7
------------------------------
Income available to common shareholders plus assumed conversions $ 264 119.6 $ 2.21
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
MARCH 31, 1997 Income Shares Per Share Amount
- - -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
<S> <C> <C> <C>
Income available to common shareholders $ 204 117.7 $ 1.73
--------------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 1.4
------------------------------
Income available to common shareholders plus assumed conversions $ 204 119.1 $ 1.71
- - -----------------------------------------------------------------------------------------------------------------------------------
</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 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 3. 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.
- 7 -
<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
March 31, 1998, compared with December 31, 1997, and its results of operations
for the first quarter ended March 31, 1998 compared with the equivalent 1997
period. 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 8
North American Property & Casualty 9
Life 10
International 10
Other Operations 11
Environmental and Asbestos Claims 11
Investments 13
Capital Markets Risk Management 15
Capital Resources and Liquidity 16
Regulatory Initiatives and Contingencies 17
Accounting Standards 17
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1998 1997
------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 3,728 $ 3,136
- - -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 264 $ 204
Less: Net realized capital gains, after-tax 63 25
- - -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 201 $ 179
- - -----------------------------------------------------------------------------------------------------------------------------------
</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 first quarter ended March 31, 1998 increased $592, or 19%, from
the first quarter of 1997, primarily due to an increase in the aggregate fees
earned on separate account assets, an increase in fees associated with new
variable corporate owned life insurance ("COLI") sales, higher sales and
renewals of group life and disability insurance, proceeds from the sale of
renewal rights and other considerations related to the Industrial Risk Insurance
pool ("IRI transaction") and an increase in service fee revenue. Higher net
investment income and net realized capital gains also contributed to the
increase. (For an analysis of net investment income and net realized capital
gains, see the Investments section.)
Core earnings increased $22, or 12%, for the first quarter ended March 31, 1998
from the comparable prior year period due primarily to increasing account values
and continued operating efficiencies in the Annuity division, strong sales and
renewal activity as well as favorable morbidity experience in the group
disability block of business, an increase in net investment income and proceeds
from the IRI transaction, partially offset by increased underwriting losses,
including additional reserves associated with the IRI transaction.
The effective tax rate for the first quarter ended March 31, 1998 was 27%
compared to 26% for the comparable period in 1997.
- 8 -
<PAGE>
Tax-exempt interest earned on invested assets was a principal cause of effective
tax rates lower than the 35% U.S. statutory rate.
SEGMENT RESULTS
The Hartford's reporting segments consist of North American Property & Casualty,
Life, International and Other Operations. Included in Other Operations in 1998
is the effect of an 18.6% minority interest in Hartford Life, Inc.'s ("HLI")
operating results. On May 22, 1997, HLI, the holding company parent of The
Hartford's significant life insurance subsidiaries, completed the initial public
offering of 18.6% of it's Class A common stock. (For additional information,
please refer to The Hartford's 1997 Form 10-K Annual Report.)
Below is a summary of net income and core earnings by segment for the first
quarter ended March 31, 1998 and 1997, respectively.
<TABLE>
<CAPTION>
NET INCOME CORE EARNINGS
--------------------------- ---------------------------
1998 1997 1998 1997
------------- ------------- ------------- -------------
<S> <C> <C> <C> <C>
North American Property & Casualty $ 166 $ 104 $ 115 $ 104
Life 84 63 84 62
International 28 36 17 14
Other Operations (14) 1 (15) (1)
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 264 $ 204 $ 201 $ 179
- - -----------------------------------------------------------------------------------------------------------------------------------
</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 FIRST QUARTER ENDED
MARCH 31,
---------------------------
1998 1997
------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 1,837 $ 1,623
- - -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 166 $ 104
Less: Net realized capital gains, after-tax 51 --
- - -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 115 $ 104
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues for the North American Property & Casualty segment increased $214, or
13%, for the first quarter ended March 31, 1998 compared with the first quarter
of 1997. This increase was primarily due to $79 of pre-tax net realized capital
gains which resulted essentially from favorable stock market conditions, $55 of
proceeds from the IRI transaction and an increase of $25 in net investment
income. In addition, 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, generated
$59 of the revenue increase. Partially offsetting these increases was a slight
decrease in earned premiums.
Core earnings increased $11, or 11%, for the first quarter 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 other expenses, primarily employee benefits, and increased
underwriting losses, including additional reserves associated with the IRI
transaction, as discussed below.
UNDERWRITING RESULTS
Underwriting results represent premiums earned less incurred claims, claim
adjustment expenses and underwriting expenses. The following table summarizes
written premiums, underwriting results and combined ratios for The Hartford's
North American Property & Casualty segment.
FIRST QUARTER ENDED
MARCH 31,
------------------------------
1998 1997
-----------------------------
Written premiums $ 1,462 $ 1,488
Underwriting results, before-tax $ (63) $ (20)
Combined ratio [1] [2] 104.3 100.7
- - -------------------------------------------------------------------
[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.
[2] Combined ratio, excluding reserve additions associated with the IRI
transaction, was 101.8.
The North American Property & Casualty segment's written premiums decreased 2%
for the first quarter ended March 31, 1998 compared to the first quarter of
1997, as decreases in Commercial and Reinsurance operations were partially
offset by an increase in Personal operations.
Commercial written premiums decreased $57, or 6%, contributing 4% to the decline
in the North American Property and Casualty segment. Growth in Select Customers
of 9%, Commercial Affinity of 5% and Bond of 10% was more than offset by
decreases in Major/National Accounts of 30% and Other Specialty of 35%. These
decreases were primarily due to increased conversion of workers' compensation to
high deductible policies and lower premium audits and retrospectively
- 9 -
<PAGE>
rated policy premium adjustments, and the elimination of Industrial Risk
Insurance premiums in 1998 as a result of the IRI transaction.
Personal written premiums increased $47, or 11%, in the first quarter
contributing 3% of growth to the North American Property & Casualty segment. All
three customer divisions within Personal (AARP, Agency and Affinity) produced
positive premium growth in the quarter. In addition, the acquisition of Omni
Insurance Group, Inc., completed on February 12, 1998, contributed $22 of this
increase.
Reinsurance written premiums declined $16, or 10%, in the first quarter
contributing 1% of the decrease in the North American Property and Casualty
segment. This decrease was primarily due to timing of premium bookings in North
America and reductions in international premiums resulting from rate decreases,
increased customer retentions and unfavorable foreign exchange rates.
Underwriting results, before-tax, for the first quarter ended March 31, 1998
deteriorated $43, or 3.6 combined ratio points, over the comparable prior year
period. In connection with the IRI transaction, a review of existing claims and
outstanding reinsurance assets of the Industrial Risk Insurance pool was
performed by The Hartford and additional reserves were established.
Additionally, increased property catastrophe losses contributed to the decrease.
Excluding the impact of these two items, underwriting results improved $13, or
0.3 combined ratio points, for the first quarter of 1998 over the first quarter
of 1997. Strong underwriting performance in Personal, Reinsurance and Commercial
operation's Select Customers and Key Accounts was partially offset by a
deterioration in Other Specialty within Commercial, primarily due to reduced
premium revenues.
<TABLE>
<CAPTION>
LIFE
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
--------------------------
1998 1997
------------- ------------
<S> <C> <C>
TOTAL REVENUES $ 1,404 $ 1,055
- - -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 84 $ 63
Less: Net realized capital gains, after-tax -- 1
- - -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 84 $ 62
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues increased $349, or 33%, for the first quarter ended March 31, 1998,
over the comparable prior year period. This was partially due to COLI revenues
which increased $161 over the same period last year as a result of fees
associated with new variable COLI sales. Excluding COLI, revenues increased
$188, or 21%, over the first quarter of 1997. This increase was principally
driven by the Annuity division which experienced a substantial increase in the
aggregate fees earned on its growing block of separate account assets. Average
annuity separate account assets increased $17.4 billion resulting in fees
increasing $89, or 49%, over the first three months of 1997. In addition, higher
sales and renewals of group life and disability insurance resulted in increased
revenues of $90, or 23%, over the first quarter of 1997.
Core earnings increased $22, or 35%, over the first quarter of 1997 primarily
due to growth in the Annuity and Employee Benefits divisions. Annuity earnings
increased $18, or 42%, as a result of increasing account values and continued
operating efficiencies, which resulted in a further reduction in operating
expenses as a percentage of account value, particularly in Individual Annuity.
The increase in account values was driven primarily by sales of individual
variable annuities of approximately $2.4 billion and significant market
appreciation. Group Insurance operation earnings, within the Employee Benefits
division, increased $4, or 36%, as a result of strong sales and renewal
activity, as well as favorable morbidity experience in the group disability
block of business. Partially offsetting this increase was a $2 operating loss
from the division's international operation, while earnings on COLI remained
consistent with the prior year. The Guaranteed Investment Contracts division had
no net income in the first quarter of 1998 or 1997, consistent with management's
expectations.
<TABLE>
<CAPTION>
INTERNATIONAL
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1998 1997
------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 446 $ 417
- - -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 28 $ 36
Less: Net realized capital gains, after-tax 11 22
- - -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 17 $ 14
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
International segment revenues for the first quarter ended March 31, 1998
increased $29, or 7%, over the comparable period in 1997 due to earned premium
growth of $44, or 13%, primarily at ITT London & Edinburgh, offset by a decrease
in net realized
- 10 -
<PAGE>
capital gains of $17, or 52%. Also, net investment income increased $2, or 5%,
as compared to the first quarter of 1997. (For an analysis of net realized
capital gains and net investment income, see the Investments section.)
Due to continued strengthening of the U.S. dollar against the Netherlands
guilder, there was a negative foreign exchange impact on total revenues of $10
for the first quarter ended March 31, 1998 compared to a negligible impact for
the first quarter of 1997.
Core earnings in the International segment for the first quarter ended March 31,
1998 increased $3, or 21%, compared to the same period in 1997, due to a $3, or
50%, improvement at ITT London & Edinburgh. This improvement in core earnings
was achieved as a result of a 16% improvement in after-tax underwriting results
compared with the first quarter of 1997 due in part to strong pricing and
underwriting actions taken in the motor line of business at ITT London &
Edinburgh in 1997.
The strength of the U.S. dollar against the Netherlands guilder gave rise to a
negative foreign exchange impact on core earnings of $1 for the three months
ended March 31, 1998 compared to a negligible impact for the first quarter of
1997.
<TABLE>
<CAPTION>
OTHER OPERATIONS
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1998 1997
------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 41 $ 41
- - -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ (14) $ 1
Less: Net realized capital gains, after-tax 1 2
- - -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ (15) $ (1)
- - -----------------------------------------------------------------------------------------------------------------------------------
</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 first quarter of 1998, core earnings included $(16) minority interest in
HLI's operating results. (For additional information regarding HLI's results,
see the Life section.) Excluding minority interest, core earnings increased $2
over the prior year first quarter.
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.)
- 11 -
<PAGE>
Reserve activity for both reported and unreported environmental and asbestos
claims, including reserves for legal defense costs, for the first quarter ended
March 31, 1998 and the year ended December 31, 1997, was as follows (net of
reinsurance):
<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS CLAIMS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
FIRST QUARTER ENDED YEAR ENDED
MARCH 31, 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 3 2 5 -- 2 2
Claims and claim adjustment expenses paid (44) (8) (52) (113) (45) (158)
Other [1] -- -- -- (14) 14 --
- - ------------------------------------------------ -- -------------- - -------- -- -------- -- -------------- -- ------- -- --------
ENDING LIABILITY [2] $ 1,271 $ 682 $ 1,953 $ 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 $1,815 and $1,853 for March 31, 1998 and December 31, 1997,
respectively. Gross of reinsurance, as of March 31, 1998 and December 31,
1997 reserves for environmental and asbestos were $2,101 and $1,667 and
$2,165 and $1,688, respectively.
</FN>
</TABLE>
The Hartford believes that the environmental and asbestos reserves recorded at
March 31, 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.
- 12 -
<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 $15.1 billion at March 31, 1998 and were comprised of
fixed maturities of $13.7 billion and other investments of $1.4 billion,
primarily equity securities.
FIXED MATURITIES BY TYPE
- - ----------------------------------------------------------------
MARCH 31, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
Municipal - tax-exempt $ 7,989 58.2% $ 7,873 58.5%
Corporate 2,123 15.5% 2,257 16.8%
Commercial MBS 740 5.4% 687 5.1%
CMO 643 4.7% 483 3.6%
ABS 623 4.5% 559 4.2%
Gov't/Gov't agencies - For. 611 4.4% 459 3.4%
MBS - agency 369 2.7% 540 4.0%
Gov't/Gov't agencies - U.S. 60 0.4% 32 0.2%
Municipal - taxable 24 0.2% 31 0.2%
Short-term 501 3.6% 479 3.6%
Redeemable pref'd stock 56 0.4% 56 0.4%
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 13,739 100.0% $ 13,456 100.0%
================================================================
The North American Property & Casualty segment continued its strategy to
increase its ownership of taxable bonds, specifically, asset backed securities
("ABS") and commercial mortgage backed securities ("CMBS"). In addition, the
segment's percentage ownership of equity securities to total invested assets
decreased primarily as a result of opportunities taken in a favorable equity
market.
The taxable equivalent duration of the March 31, 1998 fixed maturity portfolio
was 4.6 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.
FIRST QUARTER
ENDED MARCH 31,
-------------------
1998 1997
- - -----------------------------------------------------------------
Net investment income,
before-tax $202 $177
Net investment income,
after-tax [1] $162 $143
Yield on average invested
assets, before-tax [2] 5.7% 5.5%
Yield on average invested
assets, after-tax [1] [2] 4.6% 4.5%
Net realized capital
gains, before-tax $79 --
- - -----------------------------------------------------------------
[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 three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the first quarter ended March 31, 1998, before-tax net investment income was
$202 compared to $177 in 1997, an increase of 14%, while after-tax net
investment income increased 13% to $162. The increase in both before- and
after-tax net investment income was primarily due to an increase in invested
assets as a result of increased operating cash flow and the impact of the 1997
repayment of allocated advances by HLI. The increase in before-tax and after-tax
yields was due to an increased allocation to fixed maturities, specifically
higher yielding ABS and commercial MBS, along with an increase in below
investment grade securities.
Net realized capital gains increased to $79 in March 31, 1998 resulting
primarily from opportunities in a strong equity market.
LIFE
Invested assets, excluding separate accounts, totaled $21.7 billion at March 31,
1998 and were comprised of $17.4 billion of fixed maturities, $3.8 billion of
policy loans, and other investments of $562. Policy loans, which had a
weighted-average interest rate of 11.1% as of March 31, 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
- - ----------------------------------------------------------------
MARCH 31, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
Corporate $ 7,927 45.6% $ 7,970 47.3%
ABS 3,224 18.6% 3,199 19.0%
Commercial MBS 1,776 10.2% 1,606 9.5%
CMO 937 5.4% 978 5.8%
Gov't/Gov't agencies - For. 619 3.6% 502 3.0%
MBS - agency 484 2.8% 514 3.1%
Municipal - tax-exempt 400 2.3% 171 1.0%
Municipal - taxable 263 1.5% 267 1.6%
Gov't/Gov't agencies - U.S. 142 0.8% 241 1.4%
Short-term 1,607 9.2% 1,395 8.3%
Redeemable preferred stock 5 -- 5 --
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 17,384 100.0% $ 16,848 100.0%
- - ----------------------------------------------------------------
The Life segment continued its objective of managing exposure to securities that
"underperform" in a falling interest rate environment. The segment reduced
exposure to the collateralized
- 13 -
<PAGE>
mortgage obligations ("CMO") asset sector, and allocated funds into various
other sectors. At March 31, 1998, holdings in CMO securities were $937, or 5%,
of total invested assets excluding policy loans compared to $978, or 6%, at
December 31, 1997 and $2.2 billion, or 13%, at December 31, 1996.
INVESTMENT RESULTS
The table below summarizes the Life segment's results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
(before-tax) 1998 1997
- - ------------------------------------------------------- ---------
Net investment income $400 $375
Yield on average
invested assets [1] 7.6% 7.6%
Net realized capital gains -- $1
- - -----------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the quarter ended March 31, 1998, before-tax net investment income totaled
$400, compared to $375 in 1997, an increase of 7% as a result of higher average
invested assets. Before-tax yields on average invested assets remained at 7.6%.
There were no net realized capital gains for the quarter ended March 31, 1998.
INTERNATIONAL
Invested assets, excluding separate accounts, were $2.7 billion at March 31,
1998 and were comprised of fixed maturities of $2.3 billion and other
investments of $434, primarily equity securities.
FIXED MATURITIES BY TYPE
- - ----------------------------------------------------------------
MARCH 31, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
Gov't/Gov't agencies - For. $ 858 37.7% $ 829 36.5%
Corporate 391 17.2% 414 18.3%
Gov't/Gov't agencies - U.S. 11 0.5% 19 0.8%
Short-term 1,013 44.6% 1,007 44.4%
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 2,273 100.0% $ 2,269 100.0%
- - ----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the International segment's results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
(before-tax) 1998 1997
- - -----------------------------------------------------------------
Net investment income $43 $41
Yield on average
invested assets [1] 6.7% 6.4%
Net realized capital gains $16 $33
- - -----------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the first quarter ended March 31, 1998, before-tax net investment income
increased $2, or 5%, as compared to the same period in 1997. Yields on average
invested assets increased to 6.7% as of March 31, 1998 from 6.4% in 1997. Due to
continued strengthening in the U.S. dollar against the Netherlands guilder,
there was a negative foreign exchange impact on net investment income of $1 for
the quarter ended March 31, 1998 compared to a negligible impact for the first
quarter of 1997.
Net realized capital gains decreased to $16 in 1998 compared to $33 in 1997, the
result of higher equity gains taken in 1997.
OTHER OPERATIONS
Invested assets were $2.5 billion at March 31, 1998 and were substantially
comprised of fixed maturities.
FIXED MATURITIES BY TYPE
- - -----------------------------------------------------------------
MARCH 31, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
Corporate $ 1,556 62.4% $ 1,530 61.7%
Commercial MBS 150 6.0% 149 6.0%
ABS 122 4.9% 142 5.7%
Gov't/Gov't agencies - U.S. 102 4.1% 88 3.5%
Gov't/Gov't agencies - For. 63 2.5% 83 3.3%
MBS - agency 53 2.1% 56 2.3%
Municipal - taxable 39 1.6% 39 1.6%
CMO 24 1.0% 27 1.1%
Short-term 377 15.1% 357 14.4%
Redeemable preferred stock 9 0.3% 9 0.4%
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 2,495 100.0% $ 2,480 100.0%
- - ----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Other Operations segment's results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
(before-tax) 1998 1997
- - -----------------------------------------------------------------
Net investment income $39 $36
Yield on average
invested assets [1] 6.4% 6.4%
Net realized capital gains $1 $3
- - -----------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the quarter ended March 31, 1998, before-tax net investment income totaled
$39 compared to $36 in 1997, an increase of 8%, while before-tax yields remained
unchanged at 6.4%.
Net realized capital gains were $1 in 1998 compared to $3 in 1997.
- 14 -
<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 March 31, 1998, over 95% of the fixed maturity portfolio was invested in
investment-grade securities.
FIXED MATURITIES BY CREDIT QUALITY
- - ----------------------------------------------------------------
MARCH 31, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
U.S. Gov't/Gov't agencies$ 1,060 5.8% $ 1,083 6.1%
AAA 6,473 35.6% 6,337 35.4%
AA 3,298 18.2% 3,426 19.1%
A 3,078 16.9% 3,096 17.3%
BBB 1,590 8.8% 1,352 7.6%
BB & below 796 4.4% 767 4.3%
Short-term 1,878 10.3% 1,832 10.2%
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 18,173 100.0% $ 17,893 100.0%
- - ----------------------------------------------------------------
LIFE OPERATIONS
As of March 31, 1998, over 98% of the fixed maturity portfolio was invested in
investment-grade securities.
FIXED MATURITIES BY CREDIT QUALITY
- - ---------------------------------------------------------------
MARCH 31, 1998 DECEMBER 31, 1997
- - ----------------------------------------------------------------
CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- - ----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,838 10.1% $ 2,907 10.6%
AAA 4,158 14.8% 4,252 15.4%
AA 2,621 9.4% 2,990 10.9%
A 8,875 31.7% 9,351 33.9%
BBB 7,069 25.2% 5,966 21.7%
BB & below 346 1.2% 205 0.7%
Short-term 2,118 7.6% 1,880 6.8%
- - ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 28,025 100.0% $ 27,551 100.0%
- - ----------------------------------------------------------------
MARKET RISK
The Hartford has material exposure to both interest rate and equity market risk.
The Company analyzes interest rate risk using various models including
multi-scenario cash flow projection models that forecast cash flows of the
liabilities and their supporting investments, including derivative instruments.
There have been no material changes in market risk exposures from December 31,
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.
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 $9.7 billion and $11.1 billion at March 31,
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.
- 15 -
<PAGE>
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>
MARCH 31, 1998 DECEMBER 31, 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term debt $ 281 $ 291
Long-term debt 1,482 1,482
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely parent junior subordinated debentures (QUIPS) 1,000 1,000
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 2,763 $ 2,773
----------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ 365 $ 351
----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities, net of tax $ 5,448 $ 5,232
Unrealized gain on securities, net of tax 893 853
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 6,341 $ 6,085
----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 8,576 $ 8,356
----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] 51% 53%
Debt to capitalization [2] 32% 33%
- - -----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Excludes unrealized gain on securities, net of tax, of $46 for both March
31, 1998 and December 31, 1997.
[2] Excludes unrealized gain on securities, net of tax.
</FN>
</TABLE>
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain on securities,
net of tax, increased by $220 as of March 31, 1998 compared to December 31,
1997. This change primarily was the result of earnings, partially offset by
dividends declared on The Hartford's common stock. The Company's debt to equity
and debt to capitalization ratios (both excluding unrealized gain on securities,
net of tax) improved at March 31, 1998 as compared to December 31, 1997
primarily as a result of earnings.
DEBT
On February 9, 1998, HLI converted its short-term credit facility to a five year
facility with five banks.
DIVIDENDS
On February 19, 1998, The Hartford's Board of Directors approved a 5% increase
in its quarterly dividend to $0.42 per share. The dividend was paid on April 1,
1998 to shareholders of record as of March 2, 1998. The Hartford expects to
continue paying quarterly dividends on its common stock of $0.42 per share
throughout 1998.
TREASURY STOCK
During the first quarter of 1998, The Hartford repurchased 473,000 shares of its
common stock in the open market at a total cost of $46 under the Company's $1.0
billion repurchase program announced in December 1997. Certain of these
repurchased shares were reissued pursuant to certain stock-based benefit plans.
CASH FLOWS
FIRST QUARTER ENDED
MARCH 31,
--------------------------
1998 1997
- - ------------------------------------------------------------------
Cash provided by operating activities $ 173 $ 346
Cash used for investing activities $ (464) $ (595)
Cash provided by financing activities $ 225 $ 285
Cash - end of period $ 76 $ 146
- - ------------------------------------------------------------------
The change in cash provided by financing activities was primarily due to a
decrease in borrowing activity offset by declines in reinsurance recoverables
related to 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.
- 16 -
<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.
The Hartford will continue to incur costs related to its Year 2000 efforts and
is in the process of attempting to determine the approximate total costs to be
incurred in the future, which costs are not currently anticipated to be material
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.
- 17 -
<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 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index.
(b) Reports on Form 8-K - None.
- 18 -
<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)
MAY 14, 1998
- 19 -
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHBITS INDEX
EXHIBIT #
- - ---------
10.01 Amended and restated Credit Agreement dated as of February 9, 1998
among Hartford Life, Inc., the lenders named therein and Citibank,
N.A. as administrative agent, was filed as Exhibit 10.01 to Hartford
Life, Inc.'s Form 10-Q filed for the quarterly period ended March 31,
1998 and is incorporated herein by reference.
27 Financial Data Schedule is filed herewith.
- 20 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> MAR-31-1998
<DEBT-HELD-FOR-SALE> 35,891
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,795
<MORTGAGE> 204
<REAL-ESTATE> 26
<TOTAL-INVEST> 42,040
<CASH> 76
<RECOVER-REINSURE> 10,340
<DEFERRED-ACQUISITION> 4,358
<TOTAL-ASSETS> 141,411
<POLICY-LOSSES> 23,692
<UNEARNED-PREMIUMS> 3,117
<POLICY-OTHER> 21,100
<POLICY-HOLDER-FUNDS> 78,625
<NOTES-PAYABLE> 1,763
1,000 <F1>
0
<COMMON> 1
<OTHER-SE> 6,340
<TOTAL-LIABILITY-AND-EQUITY> 141,411
2,948
<INVESTMENT-INCOME> 684
<INVESTMENT-GAINS> 96
<OTHER-INCOME> 0
<BENEFITS> 2,111
<UNDERWRITING-AMORTIZATION> 487
<UNDERWRITING-OTHER> 660
<INCOME-PRETAX> 386
<INCOME-TAX> 106
<INCOME-CONTINUING> 264
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 264
<EPS-PRIMARY> 2.24
<EPS-DILUTED> 2.21
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUSTS HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES.
</FN>
</TABLE>
