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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 September 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 October 31, 1998, there were outstanding 227,968,443 shares of Common
Stock, $0.01 par value per share, of the registrant.
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
- - ------------------------------
Item 1. Financial Statements Page
----
Consolidated Statements of Income - Third Quarter and Nine Months
Ended September 30, 1998 and 1997 3
Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 4
Consolidated Statements of Changes in Stockholders' Equity - Nine Months
Ended September 30, 1998 and 1997 5
Consolidated Statements of Cash Flows - Nine Months Ended September 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 10
Item 3. Quantitative and Qualitative Disclosures About Market Risk 22
PART II. OTHER INFORMATION
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Item 1. Legal Proceedings 22
Item 6. Exhibits and Reports on Form 8-K 22
Signature 23
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Income
Third Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
(In millions, except for per share data) 1998 1997 1998 1997
--------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
Revenues
Earned premiums and other considerations $ 2,934 $ 2,533 $ 8,612 $ 7,498
Net investment income 691 642 2,060 1,909
Net realized capital gains 15 179 189 252
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Total revenues 3,640 3,354 10,861 9,659
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Benefits, claims and expenses
Benefits, claims and claim adjustment expenses 2,125 1,929 6,271 5,815
Amortization of deferred policy acquisition costs 537 463 1,591 1,394
Other expenses 665 517 1,960 1,456
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Total benefits, claims and expenses 3,327 2,909 9,822 8,665
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Operating income 313 445 1,039 994
Equity gain on HLI initial public offering -- -- -- 368
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Income before income taxes and minority interest 313 445 1,039 1,362
Income tax expense 80 130 273 264
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Income before minority interest 233 315 766 1,098
Minority interest in consolidated subsidiary (19) (16) (52) (21)
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Net income $ 214 $ 299 $ 714 $ 1,077
===================================================================================================================
Basic earnings per share $ 0.92 $ 1.26 $ 3.04 $ 4.56
Diluted earnings per share $ 0.91 $ 1.25 $ 3.00 $ 4.51
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Weighted average common shares outstanding 232.2 236.5 234.5 236.0
Weighted average common shares outstanding and dilutive potential
common shares 235.6 239.5 238.0 238.8
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Cash dividends declared per share $ 0.21 $ 0.20 $ 0.63 $ 0.60
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</TABLE>
See Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Balance Sheets
September 30, December 31,
(In millions, except for share data) 1998 1997
- - ---------------------------------------------------------------------------------------------------------------------------------
Assets (Unaudited)
<S> <C> <C>
Investments
Fixed maturities, available for sale, at fair value (amortized cost of $34,295 and
$34,061) $ 35,734 $ 35,053
Equity securities, available for sale, at fair value (cost of $1,376 and $1,509) 1,522 1,922
Policy loans, at outstanding balance 3,745 3,759
Other investments, at cost 689 388
- - ---------------------------------------------------------------------------------------------------------------------------------
Total investments 41,690 41,122
Cash 135 140
Premiums receivable and agents' balances 2,222 1,873
Reinsurance recoverables 10,266 10,839
Deferred policy acquisition costs 4,658 4,181
Deferred income tax 974 955
Other assets 3,134 2,502
Separate account assets 77,985 70,131
- - ---------------------------------------------------------------------------------------------------------------------------------
Total assets $ 141,064 $ 131,743
=========================================================================================================================
Liabilities
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 18,216 $ 18,376
Life 5,825 5,271
Other policy claims and benefits payable 20,819 21,143
Unearned premiums 3,243 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 5,158 4,672
Separate account liabilities 77,985 70,131
- - ---------------------------------------------------------------------------------------------------------------------------------
134,209 125,261
Commitments and Contingencies, Note 6
Minority Interest in Consolidated Subsidiary 468 397
Stockholders' Equity
Common stock - authorized 400,000,000, issued 238,258,675 and 239,374,389
shares, par value $0.01 2 2
Additional paid-in capital 1,573 1,641
Retained earnings 4,224 3,658
Treasury stock, at cost - 8,936,418 and 3,421,949 shares (338) (48)
Accumulated other comprehensive income 926 832
- - ---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity 6,387 6,085
=========================================================================================================================
Total liabilities and stockholders' equity $ 141,064 $ 131,743
=========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Changes in Stockholders' Equity
<TABLE>
<CAPTION>
Nine Months Ended September 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)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of period
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 714 714
Other comprehensive income, net
of tax (2)
Unrealized gain on securities 69 69
(3)
Cumulative translation adjustments 25 25
-----------
Total other comprehensive income 94
-----------
Total comprehensive income 808
-----------
Issuance of shares under incentive
and stock purchase plans 12 40 52 1,606
Tax benefit on employee stock
options and awards 15 15
Treasury stock acquired (95) (330) (425) (8,236)
Dividends declared on common stock (148) (148)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $1,575 $4,224 $(338) $922 $4 $6,387 229,322
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Nine Months Ended September 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)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Balance, beginning of period
as previously reported $1,643 $2,515 $(30) $352 $40 $4,520 117,556
Two-for-one stock split (1) 117,557
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period
as adjusted $1,643 $2,515 $(30) $352 $40 $4,520 235,113
Comprehensive income
Net income 1,077 1,077
Other comprehensive income, net
of tax (2)
Unrealized gain on securities 415 415
(3)
Cumulative translation adjustments (72) (72)
-----------
Total other comprehensive income 343
-----------
Total comprehensive income 1,420
-----------
Issuance of shares under incentive
and stock purchase plans 26 26 1,503
Treasury stock acquired (8) (8) (16) (200)
Dividends declared on common stock (142) (142)
- - -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $1,661 $3,450 $(38) $767 $(32) $5,808 236,416
===================================================================================================================================
<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 $38 and $228 as of September
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 $123
and $165 for the nine months ended September 30, 1998 and 1997,
respectively.
</FN>
</TABLE>
See Notes to Consolidated Financial Statements.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
----------------------------------
(In millions) 1998 1997
- - ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
Operating Activities
Net income $ 714 $ 1,077
Adjustments to reconcile net income to net cash provided by operating activities
Increase in receivables, payables and accruals (242) (201)
(Increase) decrease in reinsurance recoverables and other related assets 289 (37)
Increase in deferred policy acquisition costs (460) (487)
Accrued and deferred income taxes (98) 282
Increase in liabilities for future policy benefits, unpaid claims and claim adjustment
expenses and unearned premiums 588 899
Minority interest in consolidated subsidiary 52 21
Equity gain on HLI initial public offering -- (368)
Net realized capital gains (189) (252)
Depreciation and amortization 78 59
Other, net 51 296
- - ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by operating activities 783 1,289
==============================================================================================================================
Investing Activities
Purchase of investments (27,143) (33,619)
Sale of investments 9,769 20,923
Maturity of investments 17,427 11,060
Purchase of affiliates (359) --
Additions to plant, property and equipment (88) (62)
- - ------------------------------------------------------------------------------------------------------------------------------
Net cash used for investing activities (394) (1,698)
==============================================================================================================================
Financing Activities
Short-term debt, net (60) (418)
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 disbursements for investment and universal life-type contracts charged from
policyholder accounts (52) (308)
Net proceeds from sale of minority interest in subsidiary -- 687
Dividends paid (146) (142)
Acquisition of treasury stock (425) (16)
Proceeds from issuances under incentive and stock purchase plans 37 26
- - ------------------------------------------------------------------------------------------------------------------------------
Net cash provided by (used for) financing activities (396) 479
- - ------------------------------------------------------------------------------------------------------------------------------
Foreign exchange rate effect on cash 2 (4)
- - ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash (5) 66
Cash - beginning of period 140 112
- - ------------------------------------------------------------------------------------------------------------------------------
Cash - end of period $ 135 $ 178
==============================================================================================================================
Supplemental Disclosure of Cash Flow Information:
- - -------------------------------------------------
Net Cash Paid (Refunds Received) During the Period For:
Income taxes $ 308 $ (45)
Interest $ 147 $ 141
</TABLE>
See Notes to Consolidated Financial Statements.
- 6 -
<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 October 1998, The American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-7, "Accounting for Insurance
and Reinsurance Contracts That Do Not Transfer Insurance Risk". This SOP
provides guidance on the method of accounting for insurance and reinsurance
contracts that do not transfer insurance risk, defined in the SOP as the deposit
method. The SOP classifies insurance and reinsurance contracts for which the
deposit method is appropriate into those that 1) transfer only significant
timing risk, 2) transfer only significant underwriting risk, 3) transfer neither
significant timing nor underwriting risk and 4) have an indeterminate risk. This
SOP is effective for financial statements for fiscal years beginning after June
15, 1999 and is not expected to have a material impact on the Company's
financial condition or results of operations.
In September 1998, the Securities and Exchange Commission stated that until the
Emerging Issues Task Force concludes its discussion regarding the accounting for
combined structured notes, affected companies that entered into these notes
prior to September 25, 1998 are required to either restate prior period
financial statements to conform with the recently prescribed unit accounting
model or disclose the related impact on earnings for all periods presented and
cumulatively over the life of the instruments had the registrant accounted for
the structure as a unit. Included in net income for the third quarter and nine
months ended September 30, 1998, were $26 and $58, respectively, of after-tax
net realized capital losses and approximately $2 of after-tax net investment
income related to combined structured note transactions, which were accounted
for in accordance with then current generally accepted accounting principles
("GAAP"). Had the transactions been accounted for as units, based upon recently
prescribed GAAP for such types of transactions entered into after September 24,
1998, net income would have been approximately $24 and $56 higher for the third
quarter and nine months ended September 30, 1998, respectively.
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 AICPA issued 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.
- 7 -
<PAGE>
NOTE 2. DEBT
On November 2, 1998, The Hartford issued and sold $200 of unsecured redeemable
long-term debt in the form of 6.375% notes due November 1, 2008. Interest on the
notes is payable semi-annually on May 1 and November 1 of each year, commencing
May 1, 1999. The Hartford used the net proceeds from the sale of the notes for
the repayment of $200 of outstanding commercial paper which was incurred to fund
the repayment of the Company's $200 8.20% Senior Notes due at their maturity on
October 15, 1998.
On June 8, 1998, Hartford Life, Inc. ("HLI"), a public company in which The
Hartford has an approximately 81% 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 September 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 for the retirement of its
outstanding commercial paper, for strategic acquisitions and for other general
corporate purposes.
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 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 September
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.
- 8 -
<PAGE>
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
------------------------------------- -----------------------------------
Per Share Per Share
September 30, 1998 Income Shares Amount Income Shares Amount
---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per Share
Income available to common shareholders $ 214 232.2 $ 0.92 $ 714 234.5 $ 3.04
------------- ----------
Diluted Earnings per Share
Options and contingently issuable shares -- 3.4 -- 3.5
------------------------ -------------------------
Income available to common shareholders plus assumed
conversions $ 214 235.6 $ 0.91 $ 714 238.0 $ 3.00
---------------------------------------------------------------------------------------------------------------------------------
September 30, 1997
---------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share
Income available to common shareholders $ 299 236.5 $ 1.26 $ 1,077 236.0 $ 4.56
------------- ----------
Diluted Earnings per Share
Options and contingently issuable shares -- 3.0 -- 2.8
------------------------ -------------------------
Income available to common shareholders plus assumed
conversions $ 299 239.5 $ 1.25 $ 1,077 238.8 $ 4.51
---------------------------------------------------------------------------------------------------------------------------------
</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.
(c) Investments
As of September 30, 1998, The Hartford held $162 million of asset-backed
securities securitized and serviced by Commercial Financial Services Inc.
("CFS"). In October 1998, the Company became aware of allegations of improper
activities at CFS. CFS has engaged an independent accounting firm and outside
legal counsel to investigate these allegations. Currently, these securities are
performing in line with expectations. Based upon information available at this
time, the Company is presently unable to determine the amount of potential loss,
if any, related to the securities.
NOTE 7. SUBSEQUENT EVENT
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh")
subsidiary to Norwich Union, a leading provider of general and life insurance
sold through intermediaries in the United Kingdom. The Hartford received
approximately $525, before costs of sale, for the ongoing operations of London &
Edinburgh. The Hartford retained ownership of Excess Insurance Co. Ltd., London
& Edinburgh's property and casualty insurance and reinsurance subsidiary, which
has discontinued writing new business.
- 9 -
<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
September 30, 1998, compared with December 31, 1997, and its results of
operations for the third quarter and nine months ended September 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 10
North American Property & Casualty 11
Life 12
International 13
Other Operations 14
Environmental and Asbestos Claims 14
Investments 16
Capital Markets Risk Management 18
Capital Resources and Liquidity 19
Regulatory Initiatives and Contingencies 20
Accounting Standards 22
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
<TABLE>
<CAPTION>
Operating Summary Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1998 1997 1998 1997
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 3,640 $ 3,354 $ 10,861 $ 9,659
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 214 $ 299 $ 714 $ 1,077
Less: Net realized capital gains, after-tax 10 116 123 165
Equity gain on HLI initial public offering -- -- -- 368
- - ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 204 $ 183 $ 591 $ 544
====================================================================================================================================
</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 third quarter and nine months ended September 30, 1998
increased $286, or 9%, and $1,202, or 12%, respectively, over the comparable
prior year periods. Contributing to the improvement in both periods were
increases in the aggregate fees earned on separate account assets and fees
associated with new variable corporate owned life insurance ("COLI") sales, an
increase in earned premiums and service fee revenue and higher net investment
income, partially offset by lower net realized capital gains. In addition,
revenues for the nine month period also increased as the result of 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 $21, or 11%, and $47, or 9%, for the third quarter and
nine months ended September 30, 1998, respectively, 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 the
North American Property & Casualty segment totaling $40 and $125,
- 10 -
<PAGE>
after-tax, for the third quarter and nine months ended September 30, 1998,
respectively, compared to $16 and $35, after-tax, for the same periods in 1997.
In addition, core earnings for the nine 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 third quarter and nine months ended September
30, 1998, excluding the equity gain on Hartford Life, Inc. ("HLI"), were 26% and
26%, respectively, compared to 29% and 27% 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 the nine months ended September 30, 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.
For a discussion of the impact to net income of combined structured note
transactions, see Note 1(b) of Notes to the Consolidated Financial Statements.
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 approximately 19% minority interest in HLI's operating results.
The following is a summary of core earnings and net income by segment.
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------
Core earnings 1998 1997 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
North American Property & Casualty $ 112 $ 109 $ 327 $ 313
Life 100 83 278 219
International 9 8 35 35
Other Operations (17) (17) (49) (23)
- - -----------------------------------------------------------------------------------------------------------------------------------
Total $ 204 $ 183 $ 591 $ 544
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income
- - -----------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty $ 112 $ 214 $ 405 $ 429
Life 100 83 278 219
International 18 19 78 84
Other Operations (16) (17) (47) 345
- - -----------------------------------------------------------------------------------------------------------------------------------
Total $ 214 $ 299 $ 714 $ 1,077
===================================================================================================================================
</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.
NORTH AMERICAN PROPERTY & CASUALTY
Operating Summary
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Total revenues $ 1,848 $ 1,836 $ 5,502 $ 5,142
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 112 $ 214 $ 405 $ 429
Less: Net realized capital gains, after-tax -- 105 78 116
- - -----------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 112 $ 109 $ 327 $ 313
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues for the North American Property & Casualty segment increased $12, or
1%, for the third quarter and $360, or 7%, for the nine months ended September
30, 1998, compared with the same periods in 1997. The increase for the quarter
resulted from a $140 increase in earned premiums, a $22 increase in servicing
revenues and a $12 increase in net investment income before-tax, offset by a
decrease in before-tax net realized capital gains of $162. The increase for the
nine months resulted from a $183 increase in earned premiums, a $130 increase in
servicing revenues, proceeds of $55 from the IRI transaction and an increase of
$50 in net investment income, partially offset by a $58 decrease in before-tax
net realized capital gains. 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 $20 of the revenue
increase for the quarter and $120 of the increase for the nine month period.
- 11 -
<PAGE>
Core earnings were up $3, or 3%, for the quarter and increased $14, or 4%, for
the first nine months of 1998, compared to the same periods in 1997. The
increase for the quarter was primarily due to an increase in after-tax net
investment income, partially offset by increases in adjusted underwriting losses
and other expenses. The increase for the nine month period 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 property
catastrophe losses and additional reserves associated with the IRI transaction.
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>
Third Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------
1998 1997 1998 1997
--------------------------------------------------------
<S> <C> <C> <C> <C>
Written premiums $ 1,585 $ 1,449 $ 4,616 $ 4,376
Underwriting results, before-tax $ (37) $ (32) $ (159) $ (92)
Combined ratio [1] 102.5 102.4 103.4 101.9
- - -----------------------------------------------------------------------------------------------------------------------------------
<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
$136, or 9%, for the third quarter and $240, or 5%, for the nine months ended
September 30, 1998, compared to the same prior year periods. The improvement for
both periods resulted from increases in Personal and Reinsurance operations,
partially offset by a slight decrease in Commercial operations.
Personal written premiums increased $97, or 20%, for the quarter and $234, or
16%, for the nine months ended September 30, 1998. This contributed 7% and 5% of
growth to the North American Property & Casualty segment for the third quarter
and nine months ended September 30, 1998, respectively. All three customer
divisions within Personal (AARP, Agency and Affinity) produced premium growth
for both 1998 periods over 1997. In addition, the acquisition of Omni Insurance
Group, Inc., completed on February 12, 1998, contributed $46 and $106,
respectively, to the written premium increase for the quarter and nine months
ended September 30, 1998.
Reinsurance written premiums increased $47, or 28%, for the third quarter and
$23, or 4%, for the nine months ended September 30, 1998. This contributed 3%
and 1% of growth to the North American Property & Casualty segment for the third
quarter and nine months ended September 30, 1998, respectively. A single
finite-risk account written in the third quarter in excess of $70 generated the
premium increases for both 1998 periods over 1997. Absent this transaction,
Reinsurance premiums decreased primarily due to continued softening in
reinsurance pricing and increased customer risk retentions.
Commercial written premiums decreased $8, or 1%, for the third quarter and $17,
or 1%, for the nine months ended September 30, 1998, resulting in a 1% decrease
to the North American Property & Casualty segment for both periods. For the
quarter, 8% growth in Select Customers and 21% growth in Affinity were offset by
declines in Key Accounts of 6%, Major/National of 7% and Other Specialty of 18%.
For the nine months, growth in Select Customers of 8%, Affinity of 16% and
Marine/Agriculture of 9% were offset by decreases in Major/National Accounts of
12% and Other Specialty of 31%. 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.
For the third quarter and nine months ended September 30, 1998, underwriting
results, before-tax, deteriorated over the comparable prior year periods by $5,
or 0.1 combined ratio points and $67, or 1.5 combined ratio points,
respectively. The deterioration in both 1998 periods was due to significantly
increased property catastrophe losses, partially offset by increased earned
premiums. Also contributing to the nine 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.
LIFE
Operating Summary [1]
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Total revenues $ 1,287 $ 1,058 $ 3,846 $ 3,155
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income/Core earnings $ 100 $ 83 $ 278 $ 219
===================================================================================================================================
<FN>
[1] Life results are presented before the effect of the approximately 19%
minority interest in HLI, which is reflected in Other Operations.
</FN>
</TABLE>
- 12 -
<PAGE>
Revenues increased $229, or 22%, and $691, or 22%, for the third quarter and
nine months ended September 30, 1998, compared to the third quarter and nine
months ended September 30, 1997, respectively. This increase was primarily
attributable to the Annuity division which experienced a substantial increase in
the aggregate fees earned which was driven by the division's increased level of
assets under management. Despite the fact that the equity market did not
experience significant appreciation during the third quarter of 1998, the
division's assets under management have increased from prior year levels.
Average total annuity account values increased $12.5 billion, or 20%, compared
to the third quarter of 1997 and $12.0 billion, or 21%, compared to the nine
months ended September 30, 1997. The increase in average annuity account values
resulted in an increase in fee revenue of $66, or 36%, and $225, or 46%,
compared to the third quarter and nine months ended September 30, 1997,
respectively. The increase in account values was driven primarily by sales of
individual variable annuities which remained strong at $2.4 billion and $7.6
billion for the third quarter and nine months ended September 30, 1998,
respectively, compared to sales of $2.5 billion and $7.2 billion for the third
quarter and nine months ended September 30, 1997, respectively. In addition,
revenues in the Employee Benefits division increased $142, or 27%, and $404, or
25%, respectively, for the third quarter and nine months ended September 30,
1998 compared to the equivalent 1997 periods. This improvement was partially due
to revenues related to the Group Insurance Operation which increased $47, or
12%, and $158, or 13%, respectively, for the third quarter and nine months ended
September 30, 1998 compared to the equivalent 1997 periods, as a result of
strong sales. Additionally, COLI revenues increased $55, or 34%, and $209, or
43%, for the third quarter and nine months ended September 30, 1998,
respectively, as compared to the same periods in 1997, due to renewal premiums
on leveraged COLI and increased fee income related to new sales of variable
COLI.
Core earnings increased $17, or 20%, and $59, or 27%, for the third quarter and
nine months ended September 30, 1998, respectively, compared to the equivalent
prior year periods, primarily due to growth in the Annuity, Individual Life and
Employee Benefits divisions. Annuity earnings increased $14, or 26%, and $49, or
34%, 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 $2, or 13%, and $7, or 18%, respectively,
compared to the prior year periods, primarily as a result of continued growth in
variable life account values. Employee Benefits' earnings increased $1, or 4%,
for the third quarter of 1998 and decreased $1, or 2%, for the nine months ended
1998, compared to the respective prior year periods. Earnings in the Group
Insurance operation increased $3, or 19%, and $9, or 21%, respectively, compared
to the prior year periods, as a result of increased premium revenues and the
benefit of favorable mortality and morbidity experience. Partially offsetting
these increases was an operating loss from the Life segment's international
operation of ($1) and ($5) for the third quarter and nine months ended September
30, 1998, respectively, compared to no earnings for the third quarter of 1997
and $3 for the nine months ended September 30, 1997. In addition, Employee
Benefits' earnings related to COLI decreased $1 and $2, for the third quarter
and nine months ended September 30, 1998, respectively, compared to the prior
year periods.
INTERNATIONAL
Operating Summary
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Total revenues $ 465 $ 419 $ 1,389 $ 1,243
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 18 $ 19 $ 78 $ 84
Less: Net realized capital gains, after-tax 9 11 43 49
- - -----------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 9 $ 8 $ 35 $ 35
===================================================================================================================================
</TABLE>
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh")
subsidiary to Norwich Union, a leading provider of general and life insurance
sold through intermediaries in the United Kingdom. The Hartford received
approximately $525, before costs of sale, for the ongoing operations of London &
Edinburgh. The Hartford retained ownership of Excess Insurance Co. Ltd., London
& Edinburgh's property and casualty insurance and reinsurance subsidiary, which
has discontinued writing new business.
Revenues for the third quarter and nine months ended September 30, 1998
increased $46, or 11%, and $146, or 12%, over the comparable periods in 1997.
This increase was primarily due to earned premium growth of $44, or 12%, and
$145, or 14%, respectively, for the third quarter and nine month periods,
principally at London & Edinburgh, as a result of growth in creditor and
property lines, partially offset by reductions in the motor business. In
addition, for the nine month period, earned premiums increased $12, or 26%, at
ITT Ercos primarily due to growth in the motor business. Net investment income
increased $4, or 9%, and $9, or 7%, for the third quarter and nine month
periods, respectively, as compared to the equivalent 1997 periods. Net realized
capital gains decreased $2, or 13%, and $8, or 11% for the third quarter and
nine month periods, respectively, as compared to the equivalent 1997 periods.
(For an analysis of net investment income and net realized capital gains, see
the Investments section.)
Core earnings for the third quarter increased by $1, or 13%, and were flat for
the nine months ended September 30, 1998, compared to the equivalent 1997
periods. For both the quarter and nine month periods, core earnings increases of
$1 at London & Edinburgh were offset by decreases at Zwolsche Algemeene
- 13 -
<PAGE>
and ITT Ercos of $2 and $1, respectively. The decreases were primarily due to
deterioration in property and casualty underwriting results, slightly offset by
improved life results at Zwolsche Algemeene. Underwriting results for London &
Edinburgh, for the nine month period ended September 30, 1998, remained flat
over prior year results due to January storms, the effect of April floods and
reserve deterioration in motor and professional indemnity, offset in part by
improved underwriting results in other lines including creditor and property
lines.
There was a negligible foreign exchange impact on total revenues and core
earnings for the third quarter. For the nine months ended September 30, 1998,
there was an overall negative foreign exchange impact on total revenues and core
earnings of $7 and $1, respectively. The negative core earnings impact was due
primarily to weakness in the Dutch guilder and Spanish peseta.
OTHER OPERATIONS
Operating Summary
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
----------------------------- -------------------------
1998 1997 1998 1997
-------------- -------------- -------------- ----------
<S> <C> <C> <C> <C>
Total revenues $ 40 $ 41 $ 124 $ 119
- - -----------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (16) $ (17) $ (47) $ 345
Less: Net realized capital gains (losses), after-tax 1 -- 2 --
Equity gain on HLI initial public offering -- -- -- 368
- - -----------------------------------------------------------------------------------------------------------------------------------
Core earnings $ (17) $ (17) $ (49) $ (23)
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other Operations consist of property and casualty operations of The Hartford
which have discontinued writing new business, as well as the effect of an
approximately 19% minority interest in HLI's operating results.
For the third quarter and nine months ended September 30, 1998, core earnings
included $(19) and $(52) minority interest in HLI's operating results,
respectively, while 1997 included $(16) and $(21), respectively, for the
comparable prior year periods. (For additional information regarding HLI's
results, see the Life section.) Excluding minority interest, core earnings
increased $3 and $5 over the third quarter and nine months ended September 30,
1997, respectively.
The equity gain consisted of a $368 non-taxable gain related to the increased
value of The Hartford's 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 nine months ended
September 30, 1998 and the year ended December 31, 1997, was as follows (net of
reinsurance):
- 14 -
<PAGE>
<TABLE>
<CAPTION>
Environmental and Asbestos Claims
Claims and Claim Adjustment Expenses
Nine Months Ended Year Ended
September 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 4 4 8 -- 2 2
Claims and claim adjustment expenses paid (117) (33) (150) (113) (45) (158)
Other [1] -- -- -- (14) 14 --
----------------------------------------------------------------------------------------------------------------------------------
Ending liability [2] $ 1,199 $ 659 $ 1,858 $ 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 $1,678 and $1,853 for September 30, 1998 and December 31, 1997,
respectively. Gross of reinsurance, as of September 30, 1998 and December
31, 1997 reserves for environmental and asbestos were $1,919 and $1,617 and
$2,165 and $1,688, respectively.
</FN>
</TABLE>
The Hartford believes that the environmental and asbestos reserves recorded at
September 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.
- 15 -
<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 $ 14.9 billion at September 30, 1998 and were
comprised of fixed maturities of $13.6 billion and other investments of $1.3
billion, primarily equity securities.
Fixed Maturities by Type
- - -----------------------------------------------------------------
September 30, 1998 December 31, 1997
- - -----------------------------------------------------------------
Fair Fair
Type Value Percent Value Percent
- - -----------------------------------------------------------------
Municipal - tax-exempt $ 8,030 58.9% $ 7,873 58.5%
Corporate 2,104 15.4% 2,257 16.8%
Commercial MBS 668 4.9% 687 5.1%
Gov't/Gov't agencies - For. 492 3.6% 459 3.4%
ABS 477 3.5% 559 4.2%
CMO 457 3.4% 483 3.6%
MBS - agency 361 2.6% 540 4.0%
Gov't/Gov't agencies - U.S. 54 0.4% 32 0.2%
Municipal - taxable 25 0.2% 31 0.2%
Short-term 895 6.6% 479 3.6%
Redeemable pref'd stock 66 0.5% 56 0.4%
- - -----------------------------------------------------------------
Total fixed maturities $ 13,629 100.0% $ 13,456 100.0%
- - -----------------------------------------------------------------
The taxable equivalent duration of the September 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.
Third Quarter Nine Months Ended
Ended September 30, September 30,
----------------------------------------
1998 1997 1998 1997
- - ------------------------------------------------------------------
Net investment income,
before-tax $ 210 $ 198 $ 618 $ 568
Net investment income,
after-tax [1] $ 166 $ 157 $ 492 $ 454
Yield on average
invested assets,
before-tax [2] 5.9% 5.6% 5.8% 5.7%
Yield on average
invested assets,
after-tax [1] [2] 4.7% 4.5% 4.6% 4.5%
Net realized capital
gains, before-tax $ -- $ 162 $ 121 $ 179
- - ------------------------------------------------------------------
[1] Due to the significant holdings in tax-exempt investments, after-tax net
investment income and after-tax yield are also included.
[2] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed maturities
at amortized cost).
For the third quarter ended September 30, 1998, before-tax net investment income
was $210 compared to $198 in 1997, an increase of 6%, while after-tax net
investment income also increased 6% to $166. Before-tax yields on average
invested assets for the third quarter increased to 5.9% from 5.6% in 1997. For
the nine months ended September 30, 1998, before-tax net investment income was
$618 compared to $568 in 1997, an increase of 9%, while after-tax net investment
income increased 8% to $492. Before-tax yields for the nine month period
increased to 5.8% from 5.7% in 1997. The increase in net investment income for
both periods was the result of higher invested assets. The increase in yields on
average invested assets was due primarily to the reallocation from equities to
higher yielding fixed maturities.
There were no net realized capital gains for the third quarter ended September
30, 1998, compared to $162 for the same period in 1997, and year to date gains
decreased to $121 from $179 in 1997. During the quarter, write downs related to
certain below investment grade bonds were offset by gains from the sale of fixed
maturity and equity securities.
LIFE
Invested assets, excluding separate accounts, totaled $21.4 billion at September
30, 1998 and were comprised of $17.1 billion of fixed maturities, $3.7 billion
of policy loans, and other investments of $575. Policy loans, which had a
weighted-average interest rate of 11.0% as of September 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
- - ------------------------------------------------------------------
September 30, 1998 December 31, 1997
- - -----------------------------------------------------------------
Fair Fair
Type Value Percent Value Percent
- - -----------------------------------------------------------------
Corporate $ 7,942 46.4% $ 7,970 47.3%
ABS 2,890 16.9% 3,199 19.0%
Commercial MBS 2,097 12.2% 1,606 9.5%
CMO 935 5.5% 978 5.8%
Municipal - tax-exempt 838 4.9% 171 1.0%
Gov't/Gov't agencies - For. 576 3.4% 502 3.0%
MBS - agency 494 2.9% 514 3.1%
Municipal - taxable 234 1.4% 267 1.6%
Gov't/Gov't agencies - U.S. 105 0.6% 241 1.4%
Short-term 996 5.8% 1,395 8.3%
Redeemable preferred stock 5 -- 5 --
- - -----------------------------------------------------------------
Total fixed maturities $ 17,112 100.0% $ 16,848 100.0%
- - -----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Life segment's results.
Third Quarter Nine Months Ended
Ended September 30, September 30,
----------------------------------------
(before-tax) 1998 1997 1998 1997
- - ------------------------------------------------------------------
Net investment income $ 393 $ 360 $ 1,185 $ 1,097
Yield on average
invested assets [1] 7.5% 7.1% 7.6% 7.3%
Net realized capital $ -- $ 1 $ -- $ --
gains
- - ------------------------------------------------------------------
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed maturities
at amortized cost).
- 16 -
<PAGE>
For the third quarter ended September 30, 1998, before-tax net investment income
was $393 compared to $360 in 1997, an increase of 9% as a result of higher
average invested assets and increased yields on average invested assets.
Before-tax yields on average invested assets for the third quarter increased to
7.5% from 7.1% in 1997. For the nine months ended September 30, 1998, before-tax
net investment income was $1,185 compared to $1,097 in 1997, an increase of $88,
or 8%. Before-tax yields for the nine month period increased to 7.6% from 7.3%
in 1997. The increase in yields on average invested assets for both periods was
due, in part, to an increase in the allocation to assets rated BBB (see Capital
Markets Risk Management section below) when compared to the prior year periods.
The Life segment also continued its objective of increasing the allocation to
municipal tax-exempt securities in order to increase after-tax yields.
There were no net realized capital gains for the quarter and nine months ended
September 30, 1998. During the quarter, write downs related to certain below
investment grade bonds were offset by gains from the sale of fixed maturity and
equity securities.
INTERNATIONAL
Invested assets, excluding separate accounts, were $2.9 billion at September 30,
1998 and were comprised of fixed maturities of $2.5 billion and other
investments of $371, primarily equity securities.
Fixed Maturities by Type
- - ------------------------------------------------------------------
September 30, 1998 December 31, 1997
- - -----------------------------------------------------------------
Fair Fair
Type Value Percent Value percent
- - -----------------------------------------------------------------
Gov't/Gov't agencies - For. $ 967 38.4% $ 829 36.5%
Corporate 522 20.8% 414 18.3%
Gov't/Gov't agencies - U.S. 11 0.4% 19 0.8%
Short-term 1,015 40.4% 1,007 44.4%
- - -----------------------------------------------------------------
Total fixed maturities $ 2,515 100.0% $ 2,269 100.0%
- - -----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the International segment's results.
Third Quarter Nine Months Ended
Ended September 30, September 30,
----------------------------------------
(before-tax) 1998 1997 1998 1997
- - ------------------------------------------------------------------
Net investment income $ 48 $ 44 $ 137 $ 128
Yield on average
invested assets [1] 7.0% 6.9% 6.8% 6.8%
Net realized capital $ 14 $ 16 $ 65 $ 73
gains
- - ------------------------------------------------------------------
[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 third quarter ended September 30, 1998, before-tax net investment income
was $48 compared to $44 in 1997, an increase of 9%. Before-tax yields on average
invested assets for the third quarter increased to 7.0% from 6.9% in 1997. For
the nine months ended September 30, 1998, before-tax net investment income was
$137 compared to $128 in 1997, an increase of 7%. Before-tax yields for the nine
month period remained unchanged from 1997 at 6.8%. The increase in yields on
average invested assets for the quarter was primarily due to an increase in
short-term interest rates in the United Kingdom. The increase in net investment
income for the quarter and nine months was primarily the result of a higher
invested asset base.
Net realized capital gains for the third quarter ended September 30, 1998
decreased to $14 compared to $16 for the same period in 1997, and year to date
gains decreased to $65 from $73 in 1997.
OTHER OPERATIONS
Invested assets were $2.5 billion at September 30, 1998 and were substantially
comprised of fixed maturities.
Fixed Maturities by Type
- - ------------------------------------------------------------------
September 30, 1998 December 31, 1997
- - -----------------------------------------------------------------
Fair Fair
Type Value Percent Value Percent
- - -----------------------------------------------------------------
Corporate $ 1,656 66.8% $ 1,530 61.7%
Commercial MBS 147 5.9% 149 6.0%
ABS 228 9.2% 142 5.7%
Gov't/Gov't agencies - U.S. 82 3.3% 88 3.5%
Gov't/Gov't agencies - For. 55 2.2% 83 3.3%
MBS - agency 46 1.9% 56 2.3%
Municipal - taxable 41 1.7% 39 1.6%
CMO 17 0.7% 27 1.1%
Short-term 197 7.9% 357 14.4%
Redeemable preferred stock 9 0.4% 9 0.4%
- - -----------------------------------------------------------------
Total fixed maturities $ 2,478 100.0% $ 2,480 100.0%
- - -----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Other Operations segment's results.
Third Quarter Nine Months Ended
Ended September 30, September 30,
----------------------------------------
(before-tax) 1998 1997 1998 1997
- - ------------------------------------------------------------------
Net investment income $ 40 $ 40 $ 120 $ 116
Yield on average
invested assets [1] 6.7% 7.0% 6.6% 6.8%
Net realized capital $ 1 $ -- $ 3 $ --
gains
- - ------------------------------------------------------------------
[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 third quarter ended September 30, 1998, before-tax net investment income
remained unchanged from 1997 at $40. Before-tax yields on average invested
assets for the third quarter decreased to 6.7% from 7.0% in 1997. For the nine
months ended September 30, 1998, before-tax net investment income was $120
compared to $116 in 1997, an increase of 3%. Before-tax yields for the nine
month period decreased to 6.6% from 6.8% in 1997.
- 17 -
<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. For a discussion of investment
contingencies, see Note 6 (c) of Notes to Consolidated Financial Statements.
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 September 30, 1998, over 96% of the fixed maturity portfolio was invested
in investment-grade securities.
Fixed Maturities by Credit Quality
- - -----------------------------------------------------------------
September 30, 1998 December 31, 1997
- - -----------------------------------------------------------------
Fair Fair
Credit Quality Value Percent Value Percent
- - -----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 871 4.8% $ 1,083 6.1%
AAA 6,566 36.1% 6,337 35.4%
AA 3,204 17.6% 3,426 19.1%
A 3,326 18.3% 3,096 17.3%
BBB 1,521 8.3% 1,352 7.6%
BB & below 643 3.5% 767 4.3%
Short-term 2,079 11.4% 1,832 10.2%
- - -----------------------------------------------------------------
Total fixed maturities $ 18,210 100.0% $ 17,893 100.0%
- - -----------------------------------------------------------------
LIFE OPERATIONS
As of September 30, 1998, over 98% of the fixed maturity portfolio was invested
in investment-grade securities.
Fixed Maturities by Credit Quality
- - -----------------------------------------------------------------
September 30, 1998 December 31, 1997
- - -----------------------------------------------------------------
Fair Fair
Credit Quality Value Percent Value Percent
- - -----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,624 9.5% $ 2,907 10.6%
AAA 4,238 15.4% 4,252 15.4%
AA 2,901 10.6% 2,990 10.9%
A 9,043 32.9% 9,351 33.9%
BBB 7,146 26.0% 5,966 21.7%
BB & below 401 1.5% 205 0.7%
Short-term 1,122 4.1% 1,880 6.8%
- - -----------------------------------------------------------------
Total fixed maturities $ 27,475 100.0% $ 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. As of September
30, 1998, The Hartford had reduced its holdings in equity securities by 9%, on a
cost basis, from December 31, 1997, reallocating from equities to higher
yielding fixed maturities. There have been no other 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.
- 18 -
<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
September 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>
September 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] $ 396 $ 351
----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities, net of tax $ 5,465 $ 5,232
Unrealized gain on securities, net of tax 922 853
- - -----------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 6,387 $ 6,085
----------------------------------------------------------------------------------------------------------------------------
Total capitalization [2] $ 8,824 $ 8,356
----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 54% 53%
Debt to capitalization [2] [3] 34% 33%
- - -----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Excludes unrealized gain on securities, net of tax, of $72 and $46 as of
September 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 September 30, 1998 and December 31, 1997, respectively, and the debt to
capital ratios were 19% and 21% as of September 30, 1998 and December 31,
1997, respectively.
</FN>
</TABLE>
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain on securities,
net of tax, increased $468 as of September 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
For a discussion of Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures
issued in 1998, see Note 3 of Notes to Consolidated Financial Statements.
STOCKHOLDERS' EQUITY
Stock Split in the Form of a Stock Dividend - For a discussion of the 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). On
July 16, 1998, The Hartford declared a dividend on its common stock of $0.21 per
share payable October 1, 1998 to shareholders of record as of September 1, 1998.
On October 15, 1998, The Hartford's Board of Directors approved an additional 5%
increase in the quarterly dividend to $0.22 per share, payable January 4, 1999
to shareholders of record as of December 1, 1998. The Hartford expects to
continue to pay quarterly dividends on its common stock of $0.22 per share
throughout 1999.
Treasury Stock - During the nine months of 1998, The Hartford repurchased
8,235,500 shares of its common stock in the open market at a total cost of $425
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.
- 19 -
<PAGE>
RATINGS
As of October 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 Afrom Standard & Poor's.
CASH FLOWS
Nine Months Ended
September 30,
--------------------------
1998 1997
- - ------------------------------------------------------------------
Cash provided by operating activities $ 783 $ 1,289
Cash used for investing activities $ (394) $ (1,698)
Cash provided by (used for) financing
activities $ (396) $ 479
Cash - end of period $ 135 $ 178
- - ------------------------------------------------------------------
The change in cash provided by operating activities was primarily the result of
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
1997 and 1998 treasury stock purchases in accordance with the Company's share
repurchase program, 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 adequate to meet
liquidity requirements.
ACQUISITIONS
On August 26, 1998, HLI completed the purchase of all outstanding shares of
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. The acquisition has been accounted for as a purchase and accordingly,
the results of PLANCO's operations have been included in The Hartford's
consolidated financial statements from the closing date of the transaction.
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
For a discussion of The Hartford's sale of its London & Edinburgh Insurance
Group, Ltd. subsidiary on November 16, 1998, see the International section.
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
In General
The Year 2000 issue relates to the ability or inability of computer hardware,
software and other information technology ("IT") systems, as well as non-IT
systems, such as equipment and machinery with imbedded chips and
microprocessors, 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 IT and non-IT systems that are in use today were
developed years ago when a year was identified using a two-digit date field
rather than a four-digit date field. As information and data containing or
related to the century date are introduced to date sensitive systems, these
systems may recognize the year 2000 as "1900", or not at all, which may result
in systems processing information incorrectly. This, in turn, may significantly
and adversely affect the integrity and reliability of information databases of
IT systems, may cause the malfunctioning of certain non-IT systems, 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.
The integrity and reliability of The Hartford's IT systems, as well as the
reliability of its non-IT systems, are integral aspects of The Hartford's
business. 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, various IT systems support communications and other
systems that integrate The Hartford's various business segments and field
offices, including The Hartford's foreign operations. The Hartford also has
business relationships with numerous third parties that affect
- 20 -
<PAGE>
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, many of
which provide date sensitive data to The Hartford, and whose operations are
important to The Hartford's business.
Internal Year 2000 Efforts and Timetable
Beginning in 1990, The Hartford began working on making its IT systems Year 2000
ready, either through installing new programs or replacing systems. Since
January 1998, The Hartford's Year 2000 efforts have focused on the remaining
Year 2000 issues related to IT and non-IT systems in all of The Hartford's
business segments. These Year 2000 efforts include the following five main
initiatives: (1) identifying and assessing Year 2000 issues; (2) taking actions
to remediate IT and non-IT systems so that they are Year 2000 ready; (3) testing
and certifying IT and non-IT systems as Year 2000 ready; (4) deploying such
remediated and tested systems back into their respective production environments
and (5) conducting internal and external integrated testing of such systems. The
Hartford currently anticipates that initiatives (1) through (4) of its internal
Year 2000 efforts will be substantially complete by the end of 1998, and that
initiative (5) testing will begin in early 1999 and continue through the end of
1999.
Third Party Year 2000 Efforts and Timetable
The Hartford's Year 2000 efforts include assessing the potential impact on The
Hartford of third parties' Year 2000 readiness. The Hartford's third party Year
2000 efforts include the following three main initiatives: (1) identifying third
parties which have significant business relationships with The Hartford and
inquiring of such third parties regarding their Year 2000 readiness; (2)
evaluating such third parties' responses to The Hartford's inquiries; and (3)
based on the evaluation of third party responses and the significance of the
business relationship, conducting additional activities with third parties as
determined to be necessary in each case, which activities may include integrated
IT systems testing. The Hartford has completed the first third party initiative
and is in the process of evaluating third party responses received. The Hartford
currently anticipates that it will substantially complete the response
evaluation in early 1999 and that it will conduct the additional activities
described in initiative (3) beginning in early 1999 and continue through the end
of 1999 as necessary. However, notwithstanding these third party Year 2000
efforts, 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
adequately address their Year 2000 issues.
Year 2000 Costs
The costs of The Hartford's Year 2000 program that have been incurred 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 the Year 2000 program to be incurred in 1998 and 1999
will be from $40 to $50 in total, of which approximately $20 has been incurred
as of September 30, 1998. These costs are being expensed as incurred and have
not had, and are not currently expected to have, a material impact on The
Hartford's financial condition or results of operations.
Risks and Contingency Plans
If significant Year 2000 problems arise, including problems arising with third
parties, failures of IT and non-IT systems could occur, which in turn could
result in substantial interruptions in The Hartford's business. Given the
uncertain nature of Year 2000 problems that may arise, especially those related
to the readiness of third parties discussed above, The Hartford cannot determine
at this time whether the consequences of Year 2000 related problems that could
arise will have a material impact on The Hartford's financial condition or
results of operations.
The Hartford is in the process of developing certain contingency plans so that
if, despite its Year 2000 efforts, Year 2000 problems ultimately arise, the
impact of such problems may be minimized. These contingency plans are being
developed based on, among other things, known or reasonably anticipated
circumstances and potential vulnerabilities. The contingency planning also
includes assessing the dependency of The Hartford's business on third parties
and their Year 2000 readiness. The Hartford currently anticipates that internal
and external contingency plans will be substantially complete by the end of the
second quarter of 1999. However, in many contexts, Year 2000 issues are dynamic,
and ongoing assessments of business functions, vulnerabilities and risks must be
made. As such, new contingency plans may be needed in the future and/or existing
plans may need to be modified as circumstances warrant.
Insurance Claims
In addition, as an insurer, The Hartford may receive claims from insureds who
may incur losses as a result of Year 2000 problems. Accordingly, The Hartford
may incur losses and loss adjustment expenses, including attorneys' fees and
other legal expenses. 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.
- 21 -
<PAGE>
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Consolidated
Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
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
- 22 -
<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)
November 13, 1998
- 23 -
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHBITS INDEX
Exhibit #
10.1 The Hartford 1995 Incentive Stock Plan, as amended, is filed as exhibit
10.1 herewith.
10.2 The 1997 Hartford Life, Inc. Incentive Stock Plan, as amended, was filed
as exhibit 10.1 to the Hartford Life, Inc. Form 10-Q filed for the quarter
ended September 30, 1998, and is incorporated herein by reference.
27 Financial Data Schedule is filed herewith.
- 24 -
<PAGE>
THE HARTFORD 1995 1NCENTIVE STOCK PLAN
1. Purpose
The purpose of the The Hartford 1995 Incentive Stock Plan is to motivate
and reward superior performance on the part of employees of The Hartford
Financial Services Group, Inc. and its subsidiaries ("The Hartford") and to
thereby attract and retain employees of superior ability. In addition, the Plan
is intended to further opportunities for stock ownership by such employees and
Directors (as defined below) in order to increase their proprietary interest in
The Hartford and, as a result, their interest in the success of the Company.
Awards will be made, in the discretion of the Committee, to Key Employees
(including officers and directors who are also employees) whose responsibilities
and decisions directly affect the performance of any Participating Company and
its subsidiaries, and also to Directors. Such incentive awards may consist of
stock options and stock appreciation rights payable in stock or cash for Key
Employees or Directors, and performance shares, restricted stock or any
combination of the foregoing for Key Employees, as the Committee may determine.
2. Definitions
When used herein, the following terms shall have the following meanings:
"Change of Control" means the occurrence of an event defined in Section
9 of the Plan.
"Act" means the Securities Exchange Act of 1934.
"Annual Limit" means the maximum number of shares of Stock for which
Awards may be granted under the Plan in each Plan Year as provided in Section 3
of the Plan.
"Award" means an award granted to any Key Employee or Director in
accordance with the provisions of the Plan in the form of Options, Rights,
Performance Shares or Restricted Stock, or any combination of the foregoing, as
applicable.
"Award Agreement" means the written agreement evidencing each Award
granted under the Plan.
"Beneficial Owner" means any Person who, directly or indirectly, has the
right to vote or dispose of or has "beneficial ownership" (within the meaning of
Rule 13d-3
- 1 -
<PAGE>
under the Act) of any securities of a company, including any such right pursuant
to any agreement, arrangement or understanding (whether or not in writing),
provided that: (i) a Person shall not be deemed the Beneficial Owner of any
security as a result of an agreement, arrangement or understanding to vote such
security (A) arising solely from a revocable proxy or consent given in response
to a public proxy or consent solicitation made pursuant to, and in accordance
with, the Act and the applicable rules and regulations thereunder, or (B) made
in connection with, or to otherwise participate in, a proxy or consent
solicitation made, or to be made, pursuant to, and in accordance with, the
applicable provisions of the Act and the applicable rules and regulations
thereunder, in either case described in clause (A) or (B) above, whether or not
such agreement, arrangement or understanding is also then reportable by such
Person on Schedule 13D under the Act (or any comparable or successor report);
and (ii) a Person engaged in business as an underwriter of securities shall not
be deemed to be the Beneficial Owner of any security acquired through such
Person's participation in good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.
"Beneficiary" means the beneficiary or beneficiaries designated pursuant
to Section 10 to receive the amount, if any, payable under the Plan upon the
death of an Award Recipient.
"Board" means the Board of Directors of the Company.
"Code" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. (All citations to sections of the Code are to such sections
as they may from time to time be amended or renumbered.)
"Committee" means the Compensation and Personnel Committee of the Board
or such other committee as may be designated by the Board to administer the
Plan.
"Company" means The Hartford and its successors and assigns.
"Director" means a member of the Board of The Hartford Financial
Services Group, Inc. who is not an employee of any Participating Company.
"Fair Market Value", unless otherwise indicated in the provisions of
this Plan, means, as of any date, the composite closing price for one share of
Stock on the New York Stock Exchange or, if no sales of Stock have taken place
on such date, the composite closing price on the most recent date on which
selling prices were quoted, the determination to be made in the discretion of
the Committee.
"Incentive Stock Option" means a stock option qualified under Section
422 of the Code.
"Key Employee" means an employee (including any officer or director who
is
- 2 -
<PAGE>
also an employee) of any Participating Company whose responsibilities and
decisions, in the judgment of the Committee, directly affect the performance of
the Company and its subsidiaries.
"Limited Stock Appreciation Right" means a stock appreciation right
which shall become exercisable automatically upon the occurrence of a Change of
Control as described in Section 9 of the Plan.
"Option" means an option awarded under Section 5 of the Plan to purchase
Stock of the Company, which option may be an Incentive Stock Option or a
non-qualified stock option.
"Participating Company" means the Company or any subsidiary or other
affiliate of the Company; provided, however, for Incentive Stock Options only,
"Participating Company" means the Company or any corporation which at the time
such Option is granted qualifies as a "subsidiary" of the Company under Section
424(f) of the Code.
"Performance Share" means a performance share awarded under Section 6 of
the Plan.
"Person" has the meaning ascribed to such term in Section 3(a)(9) of the
Act, as supplemented by Section 13(d)(3) of the Act; provided, however, that
Person shall not include (i) the Company, any subsidiary of the Company or any
other Person controlled by the Company, (ii) any trustee or other fiduciary
holding securities under any employee benefit plan of the Company or of any
subsidiary of the Company, or (iii) a corporation owned, directly or indirectly,
by the stockholders of the Company in substantially the same proportions as
their ownership of securities of the Company.
"Plan" means The Hartford 1995 Incentive Stock Plan, as the same may be
amended, administered or interpreted from time to time.
"Plan Year" means the calendar year.
"Retirement" means eligibility to receive immediate retirement benefits
under a Participating Company pension plan.
"Restricted Stock" means Stock awarded under Section 7 of the Plan
subject to such restrictions as the Committee deems appropriate or desirable.
"Right" means a stock appreciation right awarded in connection with an
Option under Section 5 of the Plan.
"Stock" means the common stock ($.01 par value) of the Company.
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"Total Disability" means the complete and permanent inability of a Key
Employee to perform all of his or her duties under the terms of his or her
employment with any Participating Company, as determined by the Committee upon
the basis of such evidence, including independent medical reports and data, as
the Committee deems appropriate or necessary.
"Transferee" means any person or entity to whom or to which a
non-qualified stock option has been transferred and assigned in accordance with
Section 5(h) of the Plan.
3. Shares Subject to the Plan
The aggregate number of shares of Stock which may be awarded under the
Plan shall be subject to a maximum limit applicable to all Awards for the
duration of the Plan (the "Maximum Limit"), and an annual limit applicable to
all Awards for any Plan Year (the "Annual Limit"). The Maximum Limit shall be
fifteen percent (15%) of the total of the issued and outstanding shares of Stock
and treasury Stock as reported in the Annual Report on Form 10-K of the Company
for the fiscal year ended December 31, 1997, such issued and outstanding shares
being adjusted for the two-for-one stock split on the Stock that occurred
effective July 15, 1998. The Annual Limit shall be 1.65 percent (1.65%) of the
total of the issued and outstanding shares of the Stock and treasury Stock as
reported in the Annual Report on Form 10-K of the Company for the fiscal year
ending immediately prior to any Plan Year (the "Reported Shares"). Any unused
portion of the Annual Limit for any Plan Year shall be carried forward and be
made available for awards in succeeding Plan Years.
In addition to the foregoing, in no event shall more than ten million
(10,000,000) shares of Stock be cumulatively available for Awards of Incentive
Stock Options under the Plan, and provided further, that no more than twenty
percent (20%) of the total number of shares on a cumulative basis shall be
available for Restricted Stock and Performance Share Awards. For any Plan Year,
no individual employee may receive an Award of Options for more than the lesser
of (i) ten percent (10%) of one and a half percent (1.5%) (i.e., .15%) of the
Reported Shares and (ii) 1,000,000 shares; except that, for the Plan Year that
follows the Distribution Date, each individual employee may receive in addition
to the foregoing limit that number of stock options equal to the lesser of (x)
1,050,000 and (y) the number of substitute stock options required to replace ITT
Corporation stock options surrendered by such employee in connection with the
spin-off by ITT Corporation of the shares of The Hartford to ITT Corporation
shareholders.
Subject to the above limitations, shares of Stock to be issued under the
Plan may be made available from the authorized but unissued shares, or shares
held by the Company in treasury or from shares purchased in the open market.
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For the purpose of computing the total number of shares of Stock
available for Awards under the Plan, there shall be counted against the
foregoing limitations the number of shares of Stock subject to issuance upon
exercise or settlement of Awards and the number of shares of Stock which equal
the value of performance share Awards, in each case determined as at the dates
on which such Awards are granted. If any Awards under the Plan are forfeited,
terminated, expire unexercised, are settled in cash in lieu of Stock or are
exchanged for other Awards, the shares of Stock which were theretofore subject
to such Awards shall again be available for Awards under the Plan to the extent
of such forfeiture, termination, expiration cash settlement or exchange of such
Awards. Further, any shares that are exchanged (either actually or
constructively) by optionees as full or partial payment to the Company of the
purchase price of shares being acquired through the exercise of a stock option
granted under the Plan may be available for subsequent Awards.
4. Grant of Awards and Award Agreements
(a) Subject to the provisions of the Plan, the Committee shall (i)
determine and designate from time to time those Key Employees or groups of Key
Employees to whom Awards are to be granted, and those Directors to whom Options
and Rights may be granted; (ii) determine the form or forms of Award to be
granted to any Key Employee and any Director; (iii) determine the amount or
number of shares of Stock subject to each Award; and (iv) determine the terms
and conditions of each Award.
(b) Each Award granted under the Plan shall be evidenced by a written
Award Agreement. Such agreement shall be subject to and incorporate the express
terms and conditions, if any, required under the Plan or required by the
Committee.
5. Stock Options and Rights
(a) With respect to Options and Rights, the Committee shall (i)
authorize the granting of Incentive Stock Options, non-qualified stock options,
or a combination of Incentive Stock Options and non-qualified stock options;
(ii) authorize the granting of Rights which may be granted in connection with
all or part of any Option granted under this Plan, either concurrently with the
grant of the Option or at any time thereafter during the term of the Option;
(iii) determine the number of shares of Stock subject to each Option or the
number of shares of Stock that shall be used to determine the value of a Right;
and (iv) determine the time or times when and the manner in which each Option or
Right shall be exercisable and the duration of the exercise period.
(b) Any option issued hereunder which is intended to qualify as an
Incentive Stock Option shall be subject to such limitations or requirements as
may be necessary for the purposes of Section 422 of the Code or any regulations
and rulings thereunder to the extent and in such form as determined by the
Committee in its discretion.
(c) The exercise period for a non-qualified stock option and any related
Right
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shall not exceed ten years and two days from the date of grant, and the exercise
period for an Incentive Stock Option and any related Right shall not exceed ten
years from the date of grant.
(d) The Option price per share shall be determined by the Committee at
the time any Option is granted and shall be not less than the Fair Market Value
of one share of Stock on the date the Option is granted.
(e) No part of any Option or Right may be exercised until the Key
Employee who has been granted the Award shall have remained in the employ of a
Participating Company for such period after the date of grant as the Committee
may specify, if any, and the Committee may further require exercisability in
installments.
(f) The purchase price of the shares as to which an Option shall be
exercised shall be paid to the Company at the time of exercise either in cash or
Stock already owned by the optionee having a total Fair Market Value equal to
the purchase price, or a combination of cash and Stock having a total fair
market value, as so determined, equal to the purchase price. The Committee shall
determine acceptable methods for tendering Stock as payment upon exercise of an
Option and may impose such limitations and prohibitions on the use of Stock to
exercise an Option as it deems appropriate.
(g) In case of a Key Employee's termination of employment, the following
provisions shall apply:
(A) If a Key Employee who has been granted an Option shall die
before such Option has expired, his or her Option may be exercised in full by
(i) the person or persons to whom the Key Employee's rights under the Option
pass by will, or if no such person has such right, by his or her executors or
administrators; (ii) his or her Transferee(s) (with respect to non-qualified
stock options); or (iii) his or her Beneficiary designated pursuant to Section
10, at any time, or from time to time, within five years after the date of the
Key Employee's death or within such other period, and subject to such terms and
conditions as the Committee may specify, but not later than the expiration date
specified in Section 5(c) above.
(B) If the Key Employee's employment by any Participating Company
terminates because of his or her Retirement or Total Disability, he or she may
exercise his or her Options in full at any time, or from time to time, within
five years after the date of the termination of his or her employment, or within
such other period, and subject to such terms and conditions as the Committee may
specify, but not later than the expiration date specified in Section 5(c) above.
Any such Options not fully exercisable immediately prior to such optionee's
retirement shall become fully exercisable upon such retirement unless the
Committee, in its sole discretion, shall otherwise determine.
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<PAGE>
(C) Except as provided in Section 9, if the Key Employee shall
voluntarily resign before eligibility for Retirement or he or she is terminated
for cause as determined by the Committee, the Options or Rights shall be
canceled coincident with the effective date of the termination of employment.
(D) If a Key Employee's employment terminates for any other reason,
he or she may exercise his or her Options, to the extent that he or she shall
have been entitled to do so at the date of the termination of his or her
employment at any time, or from time to time, within three months after the date
of the termination of his or her employment, or within such other period, and
subject to such terms and conditions as the Committee may specify, but not later
than the expiration date specified in Section 5(c) above.
(h) Except as provided in this Section 5(h), no Option or Right granted
under the Plan shall be transferable other than by will or by the laws of
descent and distribution. During the lifetime of the optionee, an Option or
Right shall be exercisable only by the Key Employee or Director, to whom the
Option or Right is granted (or his or her estate or designated Beneficiary).
Notwithstanding the foregoing, all or a portion of a non-qualified stock option
may be transferred and assigned by such persons designated by the Committee, to
such persons designated by the Committee, and upon such terms and conditions as
the Committee may from time to time authorize and determine in its sole
discretion.
(i) If a Director's service on the Board terminates for any reason,
including without limitation, termination due to death, disability or
retirement, such Director may exercise any Option or Right granted to him or her
only to the extent determined by the Committee as set forth in such Director's
Award Agreement and/or any administrative rules or other terms and conditions
adopted by the Committee from time to time applicable to such Option or Right
granted to such Director.
(j) With respect to an Incentive Stock Option, the Committee shall
specify such terms and provisions as the Committee may determine to be necessary
or desirable in order to qualify such Option as an "incentive stock option"
within the meaning of Section 422 of the Code.
(k) With respect to the exercisability and settlement of Rights:
(i) Upon exercise of a Right, a Key Employee or Director shall be
entitled, subject to such terms and conditions the Committee may specify, to
receive upon exercise thereof all or a portion of the excess of (A) the Fair
Market Value of a specified number of shares of Stock at the time of exercise,
as determined by the Committee, over (B) a specified amount which shall not,
subject to Section 5(d), be less than the Fair Market Value of such specified
number of shares of Stock at the time the Right is granted. Upon exercise of a
Right, payment of such excess shall be made as the Committee shall specify in
cash, the issuance or transfer to the Key Employee or Director
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<PAGE>
of whole shares of Stock with a Fair Market Value at such time equal to any
excess, or a combination of cash and shares of Stock with a combined Fair Market
Value at such time equal to any such excess, all as determined by the Committee.
The Company will not issue a fractional share of Stock and, if a fractional
share would otherwise be issuable, the Company shall pay cash equal to the Fair
Market Value of the fractional share of Stock at such time.
(ii) In the event of the exercise of such Right, the Company's
obligation in respect of any related Option or such portion thereof will be
discharged by payment of the Right so exercised.
6. Performance Shares
(a) Subject to the provisions of the Plan, the Committee shall (i)
determine and designate from time to time those Key Employees or groups of Key
Employees to whom Awards of Performance Shares are to be made, (ii) determine
the Performance Period (the "Performance Period") and Performance Objectives
(the "Performance Objectives") applicable to such Awards, (iii) determine the
form of settlement of a Performance Share and (iv) generally determine the terms
and conditions of each such Award. At any date, each Performance Share shall
have a value equal to the Fair Market Value of a share of Stock at such date;
provided that the Committee may limit the aggregate amount payable upon the
settlement of any Award. The maximum award for any individual employee in any
given year shall be 200,000 Performance Shares.
(b) The Committee shall determine a Performance Period of not less than
two nor more than five years. Performance Periods may overlap and Key Employees
may participate simultaneously with respect to Performance Shares for which
different Performance Periods are prescribed.
(c) The Committee shall determine the Performance Objectives of Awards
of Performance Shares. Performance Objectives may vary from Key Employee to Key
Employee and between groups of Key Employees and shall be based upon one or more
of the following objective criteria, as the Committee deems appropriate, which
may be (i) determined solely by reference to the performance of the Company, any
subsidiary or affiliate of the Company or any division or unit of any of the
foregoing, or (ii) based on comparative performance of any one or more of the
following relative to other entities: (A) earnings per share, (B) return on
equity, (C) cash flow, (D) return on total capital, (E) return on assets, (F)
economic value added, (G) increase in surplus, (H) reductions in operating
expenses, (I) increases in operating margins (J) earnings before income taxes
and depreciation, (K) total shareholder return (L) return on invested capital,
(M) cost reductions and savings, (N) earnings before interest, taxes,
depreciation and amortization ("EDITDA"), (O) pre-tax operating income, (P)
productivity improvements, or (Q) a Key Employee's attainment of personal
objectives with respect to any of the foregoing criteria or other criteria such
as growth and profitability, customer satisfaction, leadership effectiveness,
business development, negotiating transactions and sales or developing
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<PAGE>
long term business goals. If during the course of a Performance Period there
shall occur significant events which the Committee expects to have a substantial
effect on the applicable Performance Objectives during such period, the
Committee may revise such Performance Objectives.
(d) At the beginning of a Performance Period, the Committee shall
determine for each Key Employee or group of Key Employees the number of
Performance Shares or the percentage of Performance Shares which shall be paid
to the Key Employee or member of the group of Key Employees if the applicable
Performance Objectives are met in whole or in part.
(e) If a Key Employee terminates service with all Participating
Companies during a Performance Period because of death, Total Disability,
Retirement, or under other circumstances where the Committee in its sole
discretion finds that a waiver would be in the best interests of the Company,
that Key Employee may, as determined by the Committee, be entitled to payment in
settlement of such Performance Shares at the end of the Performance Period based
upon the extent to which the Performance Objectives were satisfied at the end of
such period and prorated for the portion of the Performance Period during which
the Key Employee was employed by any Participating Company; provided, however,
the Committee may provide for an earlier payment in settlement of such
Performance Shares in such amount and under such terms and conditions as the
Committee deems appropriate or desirable. If a Key Employee terminates service
with all Participating Companies during a Performance Period for any other
reason, then such Key Employee shall not be entitled to any Award with respect
to that Performance Period unless the Committee shall otherwise determine.
(f) Each Award of a Performance Share shall be paid in whole shares of
Stock, or cash, or a combination of Stock and cash either as a lump sum payment
or in annual installments, all as the Committee shall determine, with payment to
commence as soon as practicable after the end of the relevant Performance
Period.
7. Restricted Stock
(a) Restricted Stock shall be subject to a restriction period (after
which restrictions will lapse) which shall mean a period commencing on the date
the Award is granted and ending on such date as the Committee shall determine
(the "Restriction Period"). The Committee may provide for the lapse of
restrictions in installments where deemed appropriate and it may also require
the achievement of predetermined performance objectives in order for such shares
to vest.
(b) Except when the Committee determines otherwise pursuant to Section
7(d), if a Key Employee terminates employment with all Participating Companies
for any reason before the expiration of the Restriction Period, all shares of
Restricted Stock still subject to restriction shall be forfeited by the Key
Employee and shall be reacquired by the Company.
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<PAGE>
(c) Except as otherwise provided in this Section 7, no shares of
Restricted Stock received by a Key Employee shall be sold, exchanged,
transferred, pledged, hypothecated or otherwise disposed of during the
Restriction Period.
(d) In cases of death, Total Disability or Retirement or in cases of
special circumstances, the Committee may, in its sole discretion when it finds
that a waiver would be in the best interests of the Company, elect to waive any
or all remaining restrictions with respect to such Key Employee's Restricted
Stock.
(e) The Committee may require, under such terms and conditions as it
deems appropriate or desirable, that the certificates for Stock delivered under
the Plan may be held in custody by a bank or other institution, or that the
Company may itself hold such shares in custody until the Restriction Period
expires or until restrictions thereon otherwise lapse, and may require, as a
condition of any Award of Restricted Stock that the Key Employee shall have
delivered a stock power endorsed in blank relating to the Restricted Stock.
(f) Nothing in this Section 7 shall preclude a Key Employee from
exchanging any shares of Restricted Stock subject to the restrictions contained
herein for any other shares of Stock that are similarly restricted.
(g) Subject to Section 7(e) and Section 8, each Key Employee entitled to
receive Restricted Stock under the Plan shall be issued a certificate for the
shares of Stock. Such certificate shall be registered in the name of the Key
Employee, and shall bear an appropriate legend reciting the terms, conditions
and restrictions, if any, applicable to such Award and shall be subject to
appropriate stop-transfer orders.
8. Certificates for Awards of Stock
(a) The Company shall not be required to issue or deliver any
certificates for shares of Stock prior to (i) the listing of such shares on any
stock exchange on which the Stock may then be listed and (ii) the completion of
any registration or qualification of such shares under any federal or state law,
or any ruling or regulation of any government body which the Company shall, in
its sole discretion, determine to be necessary or advisable.
(b) All certificates for shares of Stock delivered under the Plan shall
also be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed and any applicable federal or state securities
laws, and the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions. In making such
determination, the Committee may rely upon an opinion of counsel for the
Company.
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<PAGE>
(c) Except for the restrictions on Restricted Stock under Section 7,
each Key Employee who receives Stock in settlement of an Award of Stock, shall
have all of the rights of a shareholder with respect to such shares, including
the right to vote the shares and receive dividends and other distributions. No
Key Employee awarded an Option, a Right or Performance Share, and no Director
awarded an Option or Right, shall have any right as a shareholder with respect
to any shares covered by his or her Option, Right or Performance Share prior to
the date of issuance to him or her of a certificate or certificates for such
shares.
9. Change of Control
(a) For purposes of this Plan, a Change of Control shall occur if:
(i) a report on Schedule 13D shall be filed with the Securities and
Exchange Commission pursuant to Section 13(d) of the Act disclosing that any
Person, other than the Company or a subsidiary of the Company or any employee
benefit plan sponsored by the Company or a subsidiary of the Company is the
Beneficial Owner of twenty percent or more of the outstanding stock of the
Company entitled to vote in the election of directors of the Company;
(ii) any Person other than the Company or a subsidiary of the
Company or any employee benefit plan sponsored by the Company or a subsidiary of
the Company shall purchase shares pursuant to a tender offer or exchange offer
to acquire any stock of the Company (or securities convertible into stock) for
cash, securities or any other consideration, provided that after consummation of
the offer, the Person in question is the Beneficial Owner of fifteen percent or
more of the outstanding stock of the Company entitled to vote in the election of
directors of the Company (calculated as provided in paragraph (d) of Rule 13d-3
under the Act in the case of rights to acquire stock);
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger in which the Company is not the continuing or surviving
corporation or pursuant to which shares of stock of the Company entitled to vote
in the election of directors of the Company would be converted into cash,
securities or other property, other than a merger of the Company in which
holders of such stock of the Company immediately prior to the merger have the
same proportionate ownership of common stock entitled to vote in the election of
directors of the surviving corporation immediately after the merger as
immediately before, or (B) any sale, lease, exchange or other transfer (in one
transaction or a series of related transactions) of all or substantially all the
assets of the Company; or
(iv) within any 12 month period, the persons who were directors of
the Company immediately before the beginning of such period (the "Incumbent
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<PAGE>
Directors") shall cease (for any reason other than death) to constitute at least
a majority of the Board or the board of directors of any successor to the
Company, provided that any director who was not a director at the beginning of
such period shall be deemed to be an Incumbent Director if such director (A) was
elected to the Board by, or on the recommendation of or with the approval of, at
least two-thirds of the directors who then qualified as Incumbent Directors
either actually or by prior operation of this clause (iv), and (B) was not
designated by a Person who has entered into an agreement with the Company to
effect a transaction described in the immediately preceding paragraph (iii).
(b) Notwithstanding any provisions in this Plan to the contrary:
(i) Each outstanding Option granted under the Plan shall become
immediately exercisable in full for the aggregate number of shares covered
thereby and all related Rights shall also become exercisable upon the occurrence
of a Change of Control described in this Section 9 and shall continue to be
exercisable in full for cash for a period of 60 calendar days beginning on the
date that such Change of Control occurs and ending on the 60th calendar day
following that date; provided, however, that no Option or Right shall be
exercisable beyond the expiration date of its original term.
(ii) Options and Rights shall not terminate and shall continue to
be fully exercisable for a period of seven months following the occurrence of a
Change of Control in the case of an employee who is terminated other than for
just cause or who voluntarily terminates his employment because he in good faith
believes that as a result of such Change of Control he is unable effectively to
discharge his present duties or the duties of the position he occupied just
prior to the occurrence of such Change of Control. For purposes of Section 9
only, termination shall be for "just cause" only if such termination is based on
fraud, misappropriation or embezzlement on the part of the employee which
results in a final conviction of a felony. Under no circumstances, however,
shall any Option or Right be exercised beyond the expiration date of its
original term.
(iii) Any Right or portion thereof may be exercised for cash within
the 60 calendar day period following the occurrence of a Change of Control with
settlement, except in the case of a Right related to an Incentive Stock Option,
based on the "Formula Price" which shall be the highest of (A) the highest
composite daily closing price of the Stock during the period beginning on the
60th calendar day prior to the Change of Control and ending on the date of such
Change of Control, (B) the highest gross price paid for the Stock during the
same period of time, as reported in a report on Schedule 13D filed with the
Securities and Exchange Commission or (C) the highest gross price paid or to be
paid for a share of Stock (whether by way of exchange, conversion, distribution
upon merger, liquidation or otherwise) in any of the transactions set forth in
this Section 9 as constituting a Change of Control.
(iv) Upon the occurrence of a Change of Control, Limited Stock
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Appreciation Rights shall automatically be granted as to any Option with respect
to which Rights are not then outstanding; provided, however, that Limited Stock
Appreciation Rights shall be provided at the time of grant of any Incentive
Stock Option subject to exercisability upon the occurrence of a Change of
Control. Limited Stock Appreciation Rights shall entitle the holder thereof,
upon exercise of such rights and surrender of the related Option or any portion
thereof, to receive, without payment to the Company (except for applicable
withholding taxes), an amount in cash equal to the excess, if any, of the
Formula Price as that term is defined in Section 9 over the option price of the
Stock as provided in such Option; provided that in the case of the exercise of
any such Limited Stock Appreciation Right or portion thereof related to an
Incentive Stock Option, the Fair Market Value of the Stock at the time of such
exercise shall be substituted for the Formula Price. Each such Limited Stock
Appreciation Right shall be exercisable only during the period beginning on the
first business day following the occurrence of such Change of Control and ending
on the 60th day following such date and only to the same extent the related
Option is exercisable. Upon exercise of a Limited Stock Appreciation Right and
surrender of the related Option, or portion thereof, such Option, to the extent
surrendered, shall not thereafter be exercisable.
(v) The restrictions applicable to shares of Restricted Stock held
by Key Employees pursuant to Section 7 shall lapse upon the occurrence of a
Change of Control, and such Key Employees shall be entitled to elect, at any
time during the 60 calendar days following such Change of Control, to receive
immediately after the date the Key Employee makes such election either of the
following: (A) unrestricted certificates for all of such shares, or (B) a lump
sum cash amount equal to the number of such shares multiplied by the Formula
Price. If a Key Employee does not make any election during the foregoing 60 day
period, such Key Employee shall be deemed to have made the election described in
Section 9(b)(v)(A) as of the 60th day of such period, and unrestricted
certificates shall be issued to such Key Employee immediately following such day
as described in Section 9(b)(v)(A) hereof.
(vi) If a Change of Control occurs during the course of a
Performance Period applicable to an Award of Performance Shares pursuant to
Section 6, then a Key Employee shall be deemed to have satisfied the Performance
Objectives effective on the date of such occurrence. Such Key Employee shall be
paid, immediately following the occurrence of such Change of Control, a lump sum
cash amount equal to the number of outstanding Performance Shares awarded to
such Key Employee multiplied by the Formula Price.
(c) In the event of a Change of Control, no amendment, suspension or
termination of the Plan thereafter shall impair or reduce the rights of any
person with respect to any award made under the Plan.
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<PAGE>
10. Beneficiary
(a) Each Key Employee, Director and/or his or her Transferee may file
with the Company a written designation of one or more persons as the Beneficiary
who shall be entitled to receive the Award, if any, payable under the Plan upon
his or her death. A Key Employee, Director or Transferee may from time to time
revoke or change his or her Beneficiary designation without the consent of any
prior Beneficiary by filing a new designation with the Company. The last such
designation received by the Company shall be controlling; provided, however,
that no designation, or change or revocation thereof, shall be effective unless
received by the Company prior to the Key Employee's, Director's or Transferee's
death, as the case may be, and in no event shall it be effective as of a date
prior to such receipt.
(b) If no such Beneficiary designation is in effect at the time of a Key
Employee's, Director's or Transferee's death, as the case may be, or if no
designated Beneficiary survives the Key Employee, Director or Transferee or if
such designation conflicts with law, the Key Employee's, Director's or
Transferee's estate, as the case may be, shall be entitled to receive the Award,
if any, payable under the Plan upon his or her death. If the Committee is in
doubt as to the right of any person to receive such Award, the Company may
retain such Award, without liability for any interest thereon, until the
Committee determines the rights thereto, or the Company may pay such Award into
any court of appropriate jurisdiction and such payment shall be a complete
discharge of the liability of the Company therefor.
11. Administration of the Plan
(a) Each member of the Committee shall be both a member of the Board and
both a "non-employee director" within the meaning of Rule 16b-3 under the Act or
successor rule or regulation and an "outside director" for purposes of Section
162(m) of the Internal Revenue Code.
(b) All decisions, determinations or actions of the Committee made or
taken pursuant to grants of authority under the Plan shall be made or taken in
the sole discretion of the Committee and shall be final, conclusive and binding
on all persons for all purposes.
(c) The Committee shall have full power, discretion and authority to
interpret, construe and administer the Plan and any part thereof, and its
interpretations and constructions thereof and actions taken thereunder shall be,
except as otherwise determined by the Board, final, conclusive and binding on
all persons for all purposes.
(d) The Committee's decisions and determinations under the Plan need not
be uniform and may be made selectively among Key Employees, whether or not such
Key Employees are similarly situated.
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<PAGE>
(e) The Committee may, in its sole discretion, delegate such of its
powers as it deems appropriate to the chief executive officer or other members
of senior management, except that Awards to executive officers shall be made
solely by the Committee or the Board of Directors.
(f) If a Change of Control has not occurred and if the Committee
determines that a Key Employee has taken action inimical to the best interests
of any Participating Company, the Committee may, in its sole discretion,
terminate in whole or in part such portion of any Option (including any related
Right) as has not yet become exercisable at the time of termination, terminate
any Performance Share Award for which the Performance Period has not been
completed or terminate any Award of Restricted Stock for which the Restriction
Period has not lapsed.
12. Amendment, Extension or Termination
The Board may, at any time, amend or terminate the Plan and,
specifically, may make such modifications to the Plan as it deems necessary to
avoid the application of Section 162(m) of the Code and the Treasury regulations
issued thereunder. However, no amendment applicable to Incentive Stock Options
shall, without approval by a majority of the Company's stockholders, (a) alter
the group of persons eligible to participate in the Plan, or (b) except as
provided in Section 13 increase the maximum number of shares of Stock which are
available for Awards under the Plan. If a Change of Control has occurred, no
amendment or termination shall impair the rights of any person with respect to a
prior Award.
13. Adjustments in Event of Change in Common Stock
In the event of any reorganization, merger, recapitalization,
consolidation, liquidation, stock dividend, stock split, reclassification,
combination of shares, rights offering, split-up or extraordinary dividend
(including a spin-off) or divestiture, or any other change in the corporate
structure or shares, the Committee may make such adjustment in the Stock subject
to Awards, including Stock subject to purchase by an Option, or the terms,
conditions or restrictions on Stock or Awards, including the price payable upon
the exercise of such Option and the number of shares subject to restricted stock
awards, as the Committee deems equitable.
- 15 -
<PAGE>
14. Substitute Awards
The Committee shall be authorized to issue substitute The Hartford stock
options and related rights to those key employees of Participating Companies who
surrender options to acquire stock in ITT Corporation. The Committee may make a
determination as to the exercise price and number of such substitute options as
it may determine in order to preserve the economic value of the surrendered ITT
options and related rights in the aggregate amount not to exceed 16,000,000
shares. Subject to this limitation, shares of The Hartford Common Stock to be
issued upon the exercise of substitute stock options may be made available from
authorized but unissued shares or from treasury or shares held by The Hartford
in shares purchased in the open market.
The maximum number of substitute The Hartford stock options and related
rights that may be granted to an individual employee is 1,050,000 or such lower
number as may be necessary to preserve the economic value of the surrendered ITT
options and related rights by any such individual employee.
The terms and conditions of each substitute stock award, including,
without limitation, the expiration date of the option, the time or times when,
and the manner in which, each substitute option shall be exercisable, the
duration of the exercise period, the method of exercise, settlement and payment,
and the rules in the event of termination, shall be the same as those of the
surrendered ITT award.
The Committee shall also be authorized to issue substitute grants of The
Hartford Restricted Stock to replace shares of ITT restricted stock surrendered
by employees of Participating Companies. Such substitute shares shall be subject
to the same terms and conditions as the surrendered shares of ITT restricted
stock, including, without limitation, the restriction period of such ITT shares.
15. Miscellaneous
(a) Except as provided in Section 9, nothing in this Plan or any Award
granted hereunder shall confer upon any employee any right to continue in the
employ of any Participating Company or interfere in any way with the right of
any Participating Company to terminate his or her employment at any time. No
Award payable under the Plan shall be deemed salary or compensation for the
purpose of computing benefits under any employee benefit plan or other
arrangement of any Participating Company for the benefit of its employees unless
the Company shall determine otherwise. No Key Employee shall have any claim to
an Award until it is actually granted under the Plan. To the extent that any
person acquires a right to receive payments from the Company under this Plan,
such right shall be no greater than the right of an unsecured general creditor
of the Company. All payments to be made hereunder shall be paid from the general
funds of the Company and no special or separate fund shall be established and no
segregation of assets shall be made to assure payment of such amounts except as
provided in Section 7(e) with respect to Restricted Stock.
- 16 -
<PAGE>
(b) The Committee may cause to be made, as a condition precedent to the
payment of any Award, or otherwise, appropriate arrangements with the Key
Employee or his or her Beneficiary, for the withholding of any federal, state,
local or foreign taxes.
(c) The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by any
government or regulatory agency as may be required.
(d) The terms of the Plan shall be binding upon the Company and its
successors and assigns.
(e) Captions preceding the sections hereof are inserted solely as a
matter of convenience and in no way define or limit the scope or intent of any
provision hereof.
16. Effective Date, Term of Plan and Shareholder Approval
The effective date of the Plan shall be December 19, 1995. No Award
shall be granted under this Plan after the Plan's termination date. The Plan's
termination date shall be the earlier of: (a) December 31, 2005, or (b) the date
on which the Maximum Limit is reached; provided, however, that the Plan will
continue in effect for existing Awards as long as any such Award is outstanding.
- 17 -
<PAGE>
WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
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<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>0
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 35,734
<DEBT-CARRYING-VALUE> 0
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<EQUITIES> 1,522
<MORTGAGE> 224
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1,250 <F1>
0
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<TOTAL-LIABILITY-AND-EQUITY> 141,064
8,612
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<INCOME-TAX> 264
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<PROVISION-CURRENT> 0 <F2>
<PROVISION-PRIOR> 0 <F2>
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<FN>
<F1> REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
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<F2> AMOUNTS FOR SECURITIES ACT INDUSTRY GUIDE 6 AND EXCHANGE ACT INDUSTRY
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</FN>
</TABLE>
