================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended March 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
Hartford Plaza, Hartford, Connecticut 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
As of April 30, 1999, there were outstanding 226,935,423 shares of Common Stock,
$0.01 par value per share, of the registrant.
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
- ------------------------------
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Statements of Income - First Quarter Ended March 31,
1999 and 1998 3
Consolidated Balance Sheets - March 31, 1999 and December 31, 1998 4
Consolidated Statements of Changes in Stockholders' Equity - First Quarter
Ended March 31, 1999 and 1998 5
Consolidated Statements of Cash Flows - First Quarter Ended March 31,
1999 and 1998 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 21
PART II. OTHER INFORMATION
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
First Quarter Ended
March 31,
--------------------------
(In millions, except for per share data) 1999 1998
--------------------------------------------------------------------------------------------------------------------------
(Unaudited)
REVENUES
<S> <C> <C>
Earned premiums and other considerations $ 2,605 $ 2,948
Net investment income 665 684
Net realized capital gains 29 96
--------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,299 3,728
===================================================================================================================
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 1,909 2,111
Amortization of deferred policy acquisition costs 458 487
Other expenses 588 744
--------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,955 3,342
===================================================================================================================
OPERATING INCOME 344 386
Income tax expense 86 106
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INCOME BEFORE MINORITY INTEREST 258 280
Minority interest in consolidated subsidiary (20) (16)
------------------------------------------------------------------- ------------- ------------- ------------ -------------
NET INCOME $ 238 $ 264
===================================================================================================================
Basic earnings per share $ 1.05 $ 1.12
Diluted earnings per share $ 1.04 $ 1.10
--------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 227.0 235.8
Weighted average common shares outstanding and dilutive potential
common shares 229.9 239.1
--------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 0.22 $ 0.21
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
See Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Balance Sheets
March 31, December 31,
(In millions, except for share data) 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS (Unaudited)
Investments
-----------
Fixed maturities, available for sale, at fair value (amortized cost of $33,678 and
$34,191) $ 34,483 $ 35,331
Equity securities, available for sale, at fair value (cost of $855 and $846) 1,076 1,066
Policy loans, at outstanding balance 4,701 6,687
Other investments 599 612
- -------------------------------------------------------------------------------------------------------------------------------
Total investments 40,859 43,696
Cash 108 123
Premiums receivable and agents' balances 1,985 1,833
Reinsurance recoverables 4,564 4,978
Deferred policy acquisition costs 4,718 4,579
Deferred income tax 1,158 1,085
Other assets 2,903 2,759
Separate account assets 94,665 91,579
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 150,960 $ 150,632
=======================================================================================================================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 16,232 $ 16,449
Life 6,193 6,088
Other policy claims and benefits payable 17,127 19,774
Unearned premiums 2,587 2,478
Short-term debt 31 31
Long-term debt 1,548 1,548
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures 1,250 1,250
Other liabilities 4,538 4,547
Separate account liabilities 94,665 91,579
- -------------------------------------------------------------------------------------------------------------------------------
144,171 143,744
COMMITMENTS AND CONTINGENCIES, NOTE 3
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 459 465
STOCKHOLDERS' EQUITY
Common stock - authorized 400,000,000, issued 238,645,675 and 238,705,675
shares, par value $0.01 2 2
Additional paid-in capital 1,567 1,591
Retained earnings 4,661 4,474
Treasury stock, at cost - 11,799,606 and 11,310,598 shares (483) (455)
Accumulated other comprehensive income 583 811
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,330 6,423
=======================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 150,960 $ 150,632
=======================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Changes in Stockholders' Equity
First Quarter Ended March 31, 1999
Accumulated Other
Comprehensive Income
-------------------------------
Common Stock/ Treasury Unrealized Gain Cumulative Outstanding
Additional Retained Stock, on Securities, Translation Shares
(Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $1,593 $4,474 $(455) $811 $-- $6,423 227,395
Comprehensive income
Net income 238 238
Other comprehensive income, net of
tax (1)
Unrealized gain (loss) on
securities (2) (187) (187)
Cumulative translation adjustments (41) (41)
-----------
Total other comprehensive income (loss) (228)
-----------
Total comprehensive income 10
===========
Issuance of shares under incentive and
stock purchase plans (27) 45 18 899
Tax benefit on employee stock options
and awards 6 6
Treasury stock acquired (3) (73) (76) (1,448)
Dividends declared on common stock (51) (51)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $1,569 $4,661 $(483) $624 $(41) $6,330 226,846
===================================================================================================================================
FIRST QUARTER ENDED MARCH 31, 1998
Accumulated Other
Comprehensive Income
-------------------------------
Common Stock/ Treasury Unrealized Gain Cumulative Outstanding
Additional Retained Stock, on Securities, Translation Shares
(Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD AS
PREVIOUSLY REPORTED $1,660 $3,658 $(65) $853 $(21) $6,085 117,976
Two-for-one stock split (3) (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 264 264
Other comprehensive income, net of tax
(1)
Unrealized gain on securities (2) 40 40
Cumulative translation adjustments (3) (3)
-----------
Total other comprehensive income 37
-----------
Total comprehensive income 301
===========
Issuance of shares under incentive and
stock purchase plans 24 11 35 611
Tax benefit on employee stock options
and awards 15 15
Treasury stock acquired (23) (23) (46) (946)
Dividends declared on common stock (49) (49)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $1,659 $3,873 $(60) $893 $(24) $6,341 235,617
===================================================================================================================================
<FN>
(1) Unrealized gain (loss) on securities is net of tax of $(101) and $22 for
the first quarter ended March 31, 1999 and 1998, respectively. There is no
tax effect on cumulative translation adjustments.
(2) Net of reclassification adjustment for gains realized in net income of $20
and $63 for the first quarter ended March 31, 1999 and 1998, respectively.
(3) 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.
</FN>
</TABLE>
See Notes to Consolidated Financial Statements.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
First Quarter Ended
March 31,
----------------------------------
(In millions) 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 238 $ 264
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES
Change in receivables, payables and accruals (151) (310)
Decrease in reinsurance recoverables and other related assets 77 232
Increase in deferred policy acquisition costs (146) (157)
Change in accrued and deferred income taxes 5 (23)
Increase (decrease) in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums (3) 146
Minority interest in consolidated subsidiary 20 16
Net realized capital gains (29) (96)
Depreciation and amortization 15 30
Other, net (144) 74
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES (118) 176
==============================================================================================================================
INVESTING ACTIVITIES
Purchase of investments (4,871) (8,490)
Sale of investments 5,170 3,225
Maturity of investments 2,185 5,028
Purchase of affiliate -- (189)
Additions to plant, property and equipment (14) (38)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 2,470 (464)
==============================================================================================================================
FINANCING ACTIVITIES
Short-term debt, net -- (10)
Net receipts from (disbursements for) investment and universal life-type contracts
credited to (charged against) policyholder accounts (2,250) 312
Dividends paid (53) (47)
Acquisition of treasury stock (76) (46)
Proceeds from issuances under incentive and stock purchase plans 15 13
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (2,364) 222
- ------------------------------------------------------------------------------------------------------------------------------
Foreign exchange rate effect on cash (3) 2
- ------------------------------------------------------------------------------------------------------------------------------
Net decrease in cash (15) (64)
Cash - beginning of period 123 140
- ------------------------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 108 $ 76
- ------------------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- -------------------------------------------------
NET CASH PAID DURING THE PERIOD FOR:
Income taxes $ 88 $ 93
Interest $ 38 $ 24
</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 1998 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
July 1998 two-for-one stock split effected in the form of a stock dividend.
Accordingly, all issued, outstanding and weighted average shares, as well as per
share amounts, have been adjusted.
(B) CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1999, The Hartford adopted Statement of Position ("SOP")
No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained
for Internal Use". This SOP provides guidance on accounting for costs of
internal use software and in determining whether software is for internal use.
The SOP defines internal use software as software that is acquired, internally
developed, or modified solely to meet internal needs and identifies stages of
software development and accounting for the related costs incurred during the
stages. Adoption of this SOP did not have a material impact on the Company's
financial condition or results of operations.
Effective January 1, 1999, The Hartford adopted SOP No. 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments". This SOP
addresses accounting by insurance and other enterprises for assessments related
to insurance activities including recognition, measurement and disclosure of
guaranty fund or other assessments. Adoption of this SOP did not have a material
impact on the Company's financial condition or results of operations.
In November 1998, the Emerging Issues Task Force ("EITF") reached consensus on
issue 98-15, "Structured Notes Acquired for a Specific Investment Strategy".
This pronouncement requires companies to account for structured notes acquired
for a specific investment strategy, as a unit. 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 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. Net income for the quarter ended March 31, 1999 would
have been approximately $1 lower and cumulatively over the life of the
instrument would have been $24 higher had the Company accounted for its
structured note transaction as a unit, based upon the consensus reached in EITF
98-15.
NOTE 2. EARNINGS PER SHARE
The following tables present a reconciliation of income and shares used in
calculating basic earnings per share to those used in calculating diluted
earnings per share.
<TABLE>
<CAPTION>
March 31, 1999 Income Shares Per Share Amount
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings per Share
Income available to common shareholders $ 238 227.0 $ 1.05
------------------
Diluted Earnings per Share
Options and contingently issuable shares -- 2.9
-----------------------------
Income available to common shareholders plus assumed conversions $ 238 229.9 $ 1.04
- -----------------------------------------------------------------------------------------------------------------------------------
March 31, 1998 Income Shares Per Share Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share
Income available to common shareholders $ 264 235.8 $ 1.12
------------------
Diluted Earnings per Share
Options and contingently issuable shares -- 3.3
-----------------------------
Income available to common shareholders plus assumed conversions $ 264 239.1 $ 1.10
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 7 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2. EARNINGS PER SHARE (CONTINUED)
Basic earnings per share are computed based on the weighted average number of
shares outstanding during the period. Diluted earnings per share include the
dilutive effect of outstanding options, using the treasury stock method, and
contingently issuable shares. Under the treasury stock method, exercise of
options is assumed with the proceeds used to purchase common stock at the
average market price for the period. The difference between the number of shares
assumed issued and number of shares purchased represents the dilutive shares.
Contingently issuable shares are included upon satisfaction of certain
conditions related to the contingency.
NOTE 3. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
The Hartford is involved in various legal actions, some of which involve claims
for substantial amounts. In the opinion of management, the ultimate liability
with respect to such lawsuits, after consideration of provisions made for
potential losses and costs of defense, 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 Management's Discussion and
Analysis of Financial Condition and Results of Operations.
(C) INVESTMENTS
As of March 31, 1999, The Hartford held $103 of asset backed securities
securitized and serviced by Commercial Financial Services Inc. ("CFS"), of which
$21 was included in the Company's guaranteed separate accounts. In October 1998,
the Company became aware of allegations of improper activities at CFS. On
December 11, 1998, CFS filed for protection under Chapter 11 of the Bankruptcy
Code. CFS announced in March 1999, that it is in active negotiations with
several potential purchasers.
CFS continues to service the asset backed securities, which remain current on
payments of principal and interest; however, the Company does not expect to
recover all of its principal investment. Based upon information available, the
Company recognized a $36, after-tax, writedown of its holdings in CFS in the
fourth quarter of 1998 of which $8 was related to guaranteed separate accounts.
The ultimate realizable amount depends on the outcome of the bankruptcy of CFS,
and the Company's estimates are therefore subject to material change, as new
information becomes available. The Company is presently unable to determine the
amount of further potential loss, if any, related to the securities.
(D) TAX MATTERS
The Hartford's federal income tax returns are routinely audited by the Internal
Revenue Service. Management believes that adequate provision has been made in
the financial statements for items that may result from tax examinations and
other tax related matters.
NOTE 4. SEGMENT INFORMATION
The Hartford's reporting segments consist of Commercial, Personal, Reinsurance,
Life, International and Other Operations. While the measure of profit or loss,
used by The Hartford's management in evaluating performance, is core earnings
for the Life, International and Other Operations segments, the Commercial,
Personal and Reinsurance segments are evaluated by The Hartford's management
primarily based upon underwriting results. 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 (for additional information, see Note 16 of Notes to
Consolidated Financial Statements included in The Hartford's 1998 Form 10-K
Annual Report) and certain other items. Core earnings is an internal performance
measure used by the Company in the management of its operations. While not
considered a segment, the Company also reports and evaluates core earnings
results for North American Property & Casualty, which includes the combined
underwriting results of the Commercial, Personal and Reinsurance segments, along
with income and expense items not directly allocable to these segments such as
net investment income.
The following tables present revenues and core earnings. Revenues are presented
by segment and for total North American Property & Casualty. Underwriting
results are presented for Commercial, Personal and Reinsurance segments while
core earnings is presented for North American Property & Casualty and the
segments of Life, International and Other Operations.
- 8 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
REVENUES
First Quarter Ended
March 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Earned premiums and other considerations
Commercial $ 795 $ 863
Personal 609 541
Reinsurance 151 152
- -----------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty earned premiums and other
considerations 1,555 1,556
Net investment income 211 202
Net realized capital gains 16 79
- -----------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty 1,782 1,837
Life 1,335 1,404
International 145 446
Other Operations 37 41
- -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,299 $ 3,728
===================================================================================================================================
CORE EARNINGS
First Quarter Ended
March 31,
----------------------------
1999 1998
----------------------------
Underwriting results
Commercial $ (52) $ (98)
Personal 43 38
Reinsurance (3) (3)
- -----------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty underwriting results (12) (63)
Net investment income 211 202
Other income (expense) (74) (24)
- -----------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty 125 115
Life 106 84
International 6 17
Other Operations (19) (15)
- -----------------------------------------------------------------------------------------------------------------------------------
Total core earnings 218 201
Net realized capital gains, after-tax 20 63
- -----------------------------------------------------------------------------------------------------------------------------------
Net income $ 238 $ 264
===================================================================================================================================
</TABLE>
- 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
March 31, 1999, compared with December 31, 1998, and its results of operations
for the first quarter ended March 31, 1999 compared with the equivalent 1998
period. This discussion should be read in conjunction with the MD&A included in
The Hartford's 1998 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
Commercial 12
Personal 12
Reinsurance 12
Life 13
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 21
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
<TABLE>
<CAPTION>
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1999 1998
-------------- ------------
<S> <C> <C>
TOTAL REVENUES $ 3,299 $ 3,728
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 238 $ 264
Less: Net realized capital gains, after-tax 20 63
- -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 218 $ 201
===================================================================================================================================
</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 (for additional information,
see Note 16 of Notes to Consolidated Financial Statements included in The
Hartford's 1998 Form 10-K Annual Report) 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 businesses in a manner that
allows for a better understanding of the underlying trends in the Company's
current business. However, core earnings should only be analyzed in conjunction
with, and not in lieu of, net income and may not be comparable to other
performance measures used by the Company's competitors.
Revenues for the first quarter ended March 31, 1999 decreased $429, or 12%, from
the first quarter of 1998, primarily as a result of the November 1998 sale of
United Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London &
Edinburgh"), which was The Hartford's largest international subsidiary, and
lower net realized capital gains. (For an analysis of net realized capital
gains, see the Investments section.)
Core earnings increased $17, or 8%, for the first quarter ended March 31, 1999
from the comparable prior year period due primarily to higher fee income in the
Investment Products operation as a result of increasing account values, and a
reduction in other expenses in North American Property & Casualty, partially
offset by a decrease in International earnings as a result of the sale of London
& Edinburgh.
The effective tax rate for the first quarter ended March 31, 1999 was 25%
compared to 27% for the comparable period in 1998. Tax-exempt interest earned on
invested assets was the principal cause of effective tax rates lower than the
35% U.S. statutory rate.
- 10 -
<PAGE>
SEGMENT RESULTS
The Hartford's reporting segments consist of Commercial, Personal, Reinsurance,
Life, International and Other Operations. While the measure of profit or loss
used by The Hartford's management in evaluating performance is core earnings for
the Life, International and Other Operations segments, the Commercial, Personal
and Reinsurance segments are evaluated by The Hartford's management primarily
based upon underwriting results. While not considered a segment, the Company
also reports and evaluates core earnings results for North American Property &
Casualty, which include the combined underwriting results of the Commercial,
Personal and Reinsurance segments, along with income and expense items not
directly allocable to these segments such as net investment income and net
realized capital gains and losses. Other Operations include operations which
have ceased writing new business. Also, included in Other Operations is the
effect of an approximate 19% minority interest in Hartford Life, Inc.'s ("HLI")
operating results.
The following is a summary of underwriting results by segment within North
American Property & Casualty. Underwriting results represent premiums earned
less incurred claims, claim adjustment expenses and underwriting expenses.
First Quarter Ended
March 31,
------------------------
1999 1998
------------------------
Commercial $ (52) $ (98)
Personal 43 38
Reinsurance (3) (3)
- -------------------------------------------------------------------
Total $ (12) $ (63)
===================================================================
The following is a summary of core earnings and net income (loss).
CORE EARNINGS
First Quarter Ended
March 31,
------------------------
1999 1998
------------------------
N. A. Property & Casualty $ 125 $ 115
Life 106 84
International 6 17
Other Operations (19) (15)
- -------------------------------------------------------------------
CORE EARNINGS $ 218 $ 201
===================================================================
NET INCOME (LOSS)
First Quarter Ended
March 31,
------------------------
1999 1998
------------------------
N. A. Property & Casualty $ 136 $ 166
Life 106 84
International 15 28
Other Operations (19) (14)
- -------------------------------------------------------------------
NET INCOME $ 238 $ 264
===================================================================
An analysis of the operating results summarized above, is included on the
following pages. Reserves, Environmental and Asbestos Claims, and Investments
are discussed in separate sections.
NORTH AMERICAN PROPERTY & CASUALTY
<TABLE>
<CAPTION>
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
TOTAL REVENUES $ 1,782 $ 1,837
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 136 $ 166
Less: Net realized capital gains, after-tax 11 51
- -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 125 $ 115
===================================================================================================================================
</TABLE>
Revenues for North American Property & Casualty decreased $55, or 3%, for the
first quarter ended March 31, 1999 compared with the first quarter of 1998. This
decrease was primarily due to a $63 decline in pre-tax net realized capital
gains, $55 of proceeds in the first quarter 1998 from the sale of renewal rights
and other considerations related to the Industrial Risk Insurance pool ("IRI
transaction"), partially offset by a $61 increase in earned premiums and higher
net investment income.
Core earnings increased $10, or 9%, for the first quarter of 1999 compared to
the same period in 1998. This increase was primarily due to increased after-tax
net investment income, a decrease in underwriting losses primarily as a result
of 1998 reserves associated with the IRI transaction and a reduction in other
expenses, primarily employee benefits, partially offset by 1998 proceeds related
to the IRI transaction.
- 11 -
<PAGE>
COMMERCIAL
<TABLE>
<CAPTION>
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Written premiums $ 767 $ 820
- -----------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (52) $ (98)
Combined ratio 106.9 111.1
===================================================================================================================================
</TABLE>
Commercial written premiums decreased $53, or 6%, from the comparable prior year
period. Continued solid growth in the small commercial businesses, including
Select Customer of 10% and Commercial Affinity of 20%, in addition to growth in
Bond and Marine business, were more than offset by decreases in Key Accounts of
14%, Major/National Accounts of 21% and Other of 35%. Enhanced product
offerings, targeted geographic expansion strategies and partnerships with other
entities were the primary drivers of the growth businesses. The declines in
middle and large commercial markets were attributable to the highly competitive
marketplace reacting to price increases.
Underwriting results improved $46, or 4.2 combined ratio points, for the quarter
as compared with 1998. The improvement was primarily related to loss reserves
that were established in the first quarter last year as part of the sale of IRI.
Catastrophes in the first quarter of 1999 were $6 less than the comparable prior
year period also contributing to the improved underwriting results.
PERSONAL
<TABLE>
<CAPTION>
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Written premiums $ 560 $ 491
- -----------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ 43 $ 38
Combined ratio 95.3 93.5
===================================================================================================================================
</TABLE>
Personal written premiums increased $69, or 14%, in the first quarter over the
comparable prior year period. The increase was primarily the result of growth in
AARP premiums which increased $18, or 6%, for the quarter contributing 4% to the
segment's growth and Omni which increased $49 for the quarter contributing 10%
to the segment's growth. As of March 31, 1999, non-standard automobile coverage
through Omni was available in 23 states up from 11 states at the time of Omni's
acquisition in 1998.
Underwriting results improved by $5, with a corresponding 1.8 point increase in
the combined ratio, for the quarter compared with 1998. The improvement in
underwriting results was primarily due to loss cost trends, which continued to
remain favorable in automobile and homeowners from internal cost containment
initiatives and favorable catastrophe experience. The increase in combined ratio
was principally driven by expenses, up 1.3 points for the quarter compared to
1998, due to investments in alternative distribution channels and growth
initiatives, in addition to increased commission expense related to the growth
of Omni.
REINSURANCE
<TABLE>
<CAPTION>
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
----------------------------
1999 1998
----------------------------
<S> <C> <C>
Written premiums $ 218 $ 151
- -----------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (3) $ (3)
Combined ratio 102.2 103.2
===================================================================================================================================
</TABLE>
Reinsurance written premiums increased $67, or 44%, in the first quarter over
the comparable prior year period. This increase was primarily due to the 1999
acquisition of renewal rights to the ongoing reinsurance business of Vesta Fire
Insurance Corp., a subsidiary of Vesta Insurance Group Inc., and increases in
North American excess of loss premiums.
Underwriting results remained flat for the quarter, while the combined ratio
improved by 1.0 points, due primarily to a favorable expense ratio.
- 12 -
<PAGE>
LIFE
<TABLE>
<CAPTION>
Operating Summary (1) First Quarter Ended
March 31,
--------------------------
1999 1998
------------- ------------
<S> <C> <C>
TOTAL REVENUES $ 1,335 $ 1,404
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 106 $ 84
Less: Net realized capital gains, after-tax -- --
- -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 106 $ 84
- -----------------------------------------------------------------------------------------------------------------------------------
<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>
Revenues in the Life segment decreased $69, or 5%, for the first quarter ended
March 31, 1999, as compared to the first quarter of 1998, primarily due to the
declining block of leveraged Corporate Owned Life Insurance ("COLI") business.
Excluding COLI, total Life revenues increased $48, or 5%. This increase was
primarily attributable to the Investment Products operation where revenues
increased $49, or 11%, over the first quarter of 1998 due to a substantial
increase in the aggregate fees earned on growth in account values. Investment
Products' average account values, including mutual fund assets, increased $15.5
billion, or 21%, to $90.4 billion as of March 31, 1999 from $74.9 billion as of
March 31, 1998 due to strong sales of individual variable annuities and mutual
funds, as well as equity market appreciation. Partially offsetting this increase
was a decline in revenues in the Employee Benefits operation of $14, or 3%, for
the first quarter of 1999 as compared to 1998, primarily due to decreased
revenues associated with buyouts.
Core earnings increased $22, or 26%, for the first quarter ended March 31, 1999
compared to the equivalent prior period, primarily due to growth in Investment
Products, as well as increased earnings in Individual Life and Employee
Benefits. Investment Products' core earnings increased $17, or 28%, compared to
the prior year, as a result of higher fee income earned on increasing account
values due to strong sales and equity market appreciation. Individual Life's
core earnings increased $2, or 15%, as compared to the first quarter of 1998,
primarily due to continued growth in variable life account values. Employee
Benefits' core earnings increased $2, or 13%, compared to prior year as a result
of increased premium revenues, excluding buyouts and increased after-tax net
investment income.
INTERNATIONAL
<TABLE>
<CAPTION>
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1999 1998
------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 145 $ 446
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 15 $ 28
Less: Net realized capital gains, after-tax 9 11
- -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 6 $ 17
===================================================================================================================================
</TABLE>
International segment operating results for 1998 included operating activity
from London & Edinburgh, which was sold on November 16, 1998. Excluding London &
Edinburgh, International revenues for the first quarter ended March 31, 1999
increased $21, or 17%, over the comparable period in 1998. The increase was due
to earned premium growth of $17, or 18%, and an increase in net realized capital
gains of $4, or 44%. (For an analysis of net realized capital gains, see the
Investments section.) Earned premium increased due to Zwolsche's life business
in the Netherlands and Ercos's automobile business in Spain. There was a
positive foreign exchange impact on total revenues of $7 for the first quarter
ended March 31, 1999, mainly due to strengthening of the Netherlands Guilder
against the U.S. dollar compared to a negative impact on total revenues of $10
for the first quarter of 1998.
Excluding London & Edinburgh, core earnings in the International segment for the
first quarter ended March 31, 1999 decreased $2, or 25%, compared to the same
period in 1998, primarily due to a decrease in automobile underwriting results
at Zwolsche and Ercos, offset partially by an 11% increase in Zwolsche's life
business. There were minimal foreign exchange impacts on core earnings in both
quarters.
- 13 -
<PAGE>
OTHER OPERATIONS
<TABLE>
<CAPTION>
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
1999 1998
------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 37 $ 41
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ (19) $ (14)
Less: Net realized capital gains, after-tax -- 1
- -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ (19) $ (15)
===================================================================================================================================
</TABLE>
Other Operations consist of property and casualty operations of The Hartford
which have discontinued writing new and renewal business as well as the effect
of an approximately 19% minority interest in HLI's operating results.
Other Operations' first quarter revenues decreased $4, or 10%, in comparison to
first quarter 1998. For the first quarter of 1999 and 1998, core earnings
included minority interest in HLI's operating results of $(20) and $(16),
respectively. Excluding minority interest, core earnings were flat compared to
the prior year.
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 North American Property & Casualty along with the 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 1998 Form 10-K Annual Report.)
Reserve activity for both reported and unreported environmental and asbestos
claims, including reserves for legal defense costs, for the first quarter ended
March 31, 1999 and the year ended December 31, 1998, was as follows (net of
reinsurance):
- 14 -
<PAGE>
<TABLE>
<CAPTION>
Environmental and Asbestos Claims
Claims and Claim Adjustment Expenses
First Quarter Ended Year Ended
March 31, 1999 December 31, 1998
-------------------------------------------------------------------------------
Environmental Asbestos Total Environmental Asbestos Total
-------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Beginning liability $ 1,144 $ 648 $ 1,792 $ 1,312 $ 688 $ 2,000
Claims and claim adjustment expenses incurred -- -- -- -- 6 6
Claims and claim adjustment expenses paid (61) (5) (66) (150) (64) (214)
Other [1] -- -- -- (18) 18 --
----------------------------------------------------------------------------------------------------------------------------------
Ending liability [2] $ 1,083 $ 643 $ 1,726 $ 1,144 $ 648 $ 1,792
==================================================================================================================================
<FN>
[1] Other represents reclassifications of beginning reserves between
environmental and asbestos for December 31, 1998.
[2] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,612 and $1,711 for March 31, 1999 and December 31, 1998,
respectively. Gross of reinsurance, as of March 31, 1999 and December 31,
1998 reserves for environmental and asbestos were $1,738 and $1,600 and
$1,850 and $1,653, respectively.
</FN>
</TABLE>
The Hartford believes that the environmental and asbestos reserves recorded at
March 31, 1999 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 North
American Property & Casualty, Life, International and Other Operations. The
investment portfolios are managed based on the underlying characteristics and
nature of each operation's respective liabilities and managed within established
risk parameters. (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 1998 Form 10-K Annual Report for a description of
the Company's investment objectives and policies.
NORTH AMERICAN PROPERTY & CASUALTY
Total invested assets were $15.1 billion at March 31, 1999 and were comprised of
fixed maturities of $14.2 billion and other investments of $856, primarily
equity securities.
Fixed Maturities by Type
- ------------------------------------------------------------------
March 31, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Municipal - tax-exempt $ 8,718 61.3% $ 8,804 61.5%
Corporate 2,067 14.5% 2,119 14.8%
Commercial MBS 803 5.7% 834 5.8%
Gov't/Gov't agencies - For. 562 4.0% 501 3.5%
ABS 490 3.4% 500 3.5%
MBS - agency 461 3.2% 348 2.4%
CMO 324 2.3% 415 2.9%
Gov't/Gov't agencies - U.S. 64 0.4% 46 0.3%
Municipal - taxable 18 0.1% 24 0.2%
Short-term 605 4.3% 663 4.6%
Redeemable preferred stock 107 0.8% 65 0.5%
- -----------------------------------------------------------------
Total fixed maturities $ 14,219 100.0% $ 14,319 100.0%
- -----------------------------------------------------------------
The taxable equivalent duration of the March 31, 1999 fixed maturity portfolio
was 4.7 years compared to 4.8 years at December 31, 1998. Duration is defined as
the market price sensitivity of the portfolio to parallel shifts in the yield
curve.
INVESTMENT RESULTS
The table below summarizes North American Property & Casualty's results.
First Quarter
Ended March 31,
-------------------
1999 1998
- --------------------------- --------- --------- --------- ---------
Net investment income,
before-tax $211 $202
Net investment income,
after-tax [1] $170 $162
Yield on average invested
assets, before-tax [2] 5.9% 5.7%
Yield on average
invested assets, 4.7% 4.6%
after-tax [1] [2]
Net realized capital
gains, before-tax $16 $79
- ------------------------------------------------------------------
[1] Due to the significant holdings in tax-exempt investments an after-tax net
investment income and after-tax yield are also included.
[2] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the first quarter ended March 31, 1999, before-tax net investment income was
$211 compared to $202 in 1998, an increase of 4%, while after-tax net investment
income increased 5% to $170. The increases were primarily due to the
reallocation of assets in the fourth quarter of 1998, from equities to fixed
maturities, which positively impacted both before and after-tax net investment
income and yields. After-tax net investment income was also favorably impacted
by the reallocation of assets from taxable bonds to tax-exempt bonds.
Net realized capital gains were $16 for the quarter ended March 31, 1999, down
from $79 during the same period in 1998, primarily as a result of opportunities
taken in 1998 as a result of a strong equity market.
LIFE
Invested assets, excluding separate accounts, totaled $22.3 billion at March 31,
1999 and were comprised of $17.2 billion of fixed maturities, $4.7 billion of
policy loans, and other investments of $481. Policy loans are secured by the
cash value of the life policy and do not mature in a conventional sense, but
expire in conjunction with the related policy liabilities. Policy loans
decreased by $2.0 billion from December 31, 1998, as a result of the declining
block of leveraged COLI business.
Fixed Maturities by Type
- ------------------------------------------------------------------
March 31, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Corporate $ 8,013 46.7% $ 7,898 44.6%
ABS 2,335 13.6% 2,465 13.9%
Commercial MBS 2,070 12.1% 2,036 11.5%
Municipal - tax-exempt 983 5.7% 916 5.2%
CMO 719 4.2% 831 4.7%
MBS - agency 705 4.1% 503 2.9%
Gov't/Gov't agencies - For. 482 2.8% 530 3.0%
Municipal - taxable 192 1.1% 223 1.3%
Gov't/Gov't agencies - U.S. 184 1.1% 166 0.9%
Short-term 1,422 8.3% 2,119 12.0%
Redeemable preferred stock 48 0.3% 5 --
- -----------------------------------------------------------------
Total fixed maturities $ 17,153 100.0% $ 17,692 100.0%
- -----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Life segment's results.
First Quarter
Ended March 31,
-------------------
(before-tax) 1999 1998
- --------------------------- --------- -------- --------- ---------
Net investment income - ex. policy loans $290 $296
Policy loan income 111 104
--------- ---------
Net investment income - total $401 $400
Yield on average invested assets [1] 6.9% 7.6%
Net realized capital gains -- --
- ------------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
Net investment income remained relatively flat from the prior year. Yield on
average invested assets declined as a result of a decrease in policy loan
weighted-average interest rates, which declined to 8.0% as of March 31, 1999
from 11.1% as of March
- 16 -
<PAGE>
31, 1998, combined with an increase in average policy loan balances.
There were no net realized capital gains for the quarters ended March 31, 1999
and 1998.
INTERNATIONAL
Invested assets, excluding separate accounts, were $1.1 billion at March 31,
1999 and were comprised of fixed maturities of $793 and other investments of
$336, primarily equity securities.
Fixed Maturities by Type
- ------------------------------------------------------------------
March 31, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Gov't/Gov't agencies - For. $ 598 75.4% $ 611 72.4%
Corporate 109 13.7% 109 12.9%
Short-term 86 10.9% 124 14.7%
- -----------------------------------------------------------------
Total fixed maturities $ 793 100.0% $ 844 100.0%
- -----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the International segment's results.
First Quarter
Ended March 31,
-------------------
(before-tax) 1999 1998
- --------------------------- --------- --------- --------- ---------
Net investment income $16 $43
Yield on average invested
assets [1] 5.9% 6.7%
Net realized capital gains $13 $16
- ------------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the first quarter ended March 31, 1999, before-tax net investment income
decreased to $16 from $43 in the same period in 1998, primarily due to the
effects of the London & Edinburgh sale in November 1998. Excluding London &
Edinburgh, net investment income was relatively flat to the prior year. Yields
on average invested assets decreased to 5.9% as of March 31, 1999 from 6.7% in
1998 mainly due to a continued trend of lower yields in Europe.
Net realized capital gains decreased to $13 in 1999 compared to $16 in 1998
primarily due to the inclusion of London & Edinburgh results in 1998. Excluding
London & Edinburgh, realized capital gains increased 44% as a result of
opportunities in a favorable Netherlands equity market.
OTHER OPERATIONS
Invested assets were $2.3 billion at March 31, 1999 and were substantially
comprised of fixed maturities.
Fixed Maturities by Type
- ------------------------------------------------------------------
March 31, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Corporate $ 1,522 65.7% $ 1,603 64.7%
ABS 228 9.8% 224 9.0%
Commercial MBS 142 6.1% 145 5.9%
Gov't/Gov't agencies - U.S. 69 3.0% 82 3.3%
Gov't/Gov't agencies - For. 47 2.0% 50 2.0%
Municipal - taxable 40 1.7% 40 1.6%
MBS - agency 37 1.6% 41 1.7%
CMO 14 0.6% 20 0.8%
Short-term 210 9.1% 262 10.6%
Redeemable preferred stock 9 0.4% 9 0.4%
- -----------------------------------------------------------------
Total fixed maturities $ 2,318 100.0% $ 2,476 100.0%
- -----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Other Operations segment's results.
First Quarter
Ended March 31,
-------------------
(before-tax) 1999 1998
- -------------------------------------------------------------------
Net investment income $37 $39
Yield on average invested
assets [1] 6.4% 6.4%
Net realized capital gains -- $1
- ------------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the quarter ended March 31, 1999, before-tax net investment income and
yields on average invested assets remained relatively flat compared to the same
prior year period.
- 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 purchased for trading purposes.
Please refer to The Hartford's 1998 Form 10-K Annual Report for a description of
the Company's objectives, policies and strategies.
CREDIT RISK
The Company invests primarily in securities rated investment grade and has
established exposure limits, diversification standards and review procedures for
all credit risks including borrower, issuer or counterparty. Creditworthiness of
specific obligors is determined by an internal credit assessment and ratings
assigned by nationally recognized ratings agencies. Obligor, asset sector and
industry concentrations are subject to established limits and monitored on a
regular interval. The Hartford is not exposed to any significant credit
concentration risk of a single issuer.
The following tables identify fixed maturity securities for the property and
casualty operations, including international and other operations, and the life
operations, including international operations and guaranteed separate accounts,
by credit quality. The ratings referenced in the tables are based on the ratings
of a nationally recognized rating organization or, if not rated, assigned based
on the Company's internal analysis of such securities.
PROPERTY AND CASUALTY OPERATIONS
As of March 31, 1999, 96% of the fixed maturity portfolio was invested in
securities rated investment grade.
Fixed Maturities by Credit Quality
- -----------------------------------------------------------------
March 31, 1999 December 31, 1998
- -----------------------------------------------------------------
Credit Quality Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 844 5.0% $ 805 4.7%
AAA 6,573 38.9% 6,570 38.2%
AA 3,183 18.8% 3,209 18.7%
A 3,360 19.9% 3,409 19.8%
BBB 1,413 8.3% 1,508 8.8%
BB & below 673 4.0% 682 3.9%
Short-term 865 5.1% 1,016 5.9%
- -----------------------------------------------------------------
Total fixed maturities $ 16,911 100.0% $ 17,199 100.0%
- -----------------------------------------------------------------
LIFE OPERATIONS
As of March 31, 1999, over 97% of the fixed maturity portfolio was invested in
securities rated investment grade.
Fixed Maturities by Credit Quality
- -----------------------------------------------------------------
March 31, 1999 December 31, 1998
- ------------------------------------------------------------------
Credit Quality Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,638 9.8% $ 2,596 9.3%
AAA 3,796 14.0% 3,907 14.0%
AA 2,654 9.8% 2,716 9.7%
A 8,825 32.6% 8,878 31.8%
BBB 6,908 25.5% 7,019 25.2%
BB & below 624 2.3% 492 1.8%
Short-term 1,628 6.0% 2,298 8.2%
- -----------------------------------------------------------------
Total fixed maturities $ 27,073 100.0% $ 27,906 100.0%
- -----------------------------------------------------------------
MARKET RISK
The Hartford has material exposure to both interest rate and equity market risk.
The Company analyzes interest rate risk using various models including
multi-scenario cash flow projection models that forecast cash flows of the
liabilities and their supporting investments, including derivative instruments.
There have been no material changes in market risk exposures from December 31,
1998.
DERIVATIVE INSTRUMENTS
The Hartford utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or to control transaction costs. The
Company does not make a market or trade derivatives for the express purpose of
earning trading profits.
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the Company's Finance Committee.
The notional amounts of derivative contracts represent the basis upon which pay
or receive amounts are calculated and are not reflective of credit risk.
Notional amounts pertaining to derivative instruments for both general and
guaranteed separate accounts totaled $11.4 billion and $11.3 billion at March
31, 1999 and December 31, 1998, respectively.
For a further discussion of market risk exposure, including derivative
instruments, please refer to The Hartford's 1998 Form 10-K Annual Report.
- 18 -
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of The
Hartford and its ability to generate strong cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The capital structure of The Hartford consists of debt, minority interest
and equity, summarized as follows:
<TABLE>
<CAPTION>
March 31, 1999 December 31, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term debt $ 31 $ 31
Long-term debt 1,548 1,548
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures (QUIPS and TruPS) 1,250 1,250
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 2,829 $ 2,829
----------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ 432 $ 414
----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities, net of tax $ 5,706 $ 5,612
Unrealized gain on securities, net of tax 624 811
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 6,330 $ 6,423
----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 8,967 $ 8,855
----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 50% 50%
Debt to capitalization [2] [3] 32% 32%
===================================================================================================================================
<FN>
[1] Excludes unrealized gain on securities, net of tax, of $27 and $51 for
March 31, 1999 and December 31, 1998, respectively.
[2] Excludes unrealized gain on securities, net of tax.
[3] Excluding QUIPS and TruPS, the debt to equity ratio was 28% and the debt
to capitalization ratio was 18%, both as of March 31, 1999 and December
31, 1998.
</FN>
</TABLE>
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain on securities,
net of tax, increased by $112 as of March 31, 1999 compared to December 31,
1998. This change primarily was the result of earnings, partially offset by
dividends declared on The Hartford's common stock and the net effect of treasury
stock acquired. The Company's debt to equity and debt to capitalization ratios
(both excluding unrealized gain on securities, net of tax) remained the same at
March 31, 1999 as compared to December 31, 1998.
STOCKHOLDERS' EQUITY
Dividends - On February 18, 1999, The Hartford declared a dividend on its common
stock of $0.22 per share payable on April 1, 1999 to shareholders of record as
of March 1, 1999.
Treasury Stock - During the first quarter 1999, The Hartford repurchased
1,448,058 shares of its common stock in the open market at a total cost of $76
under the Company's $1.0 billion repurchase program. Since the inception of the
repurchase program, The Hartford has repurchased 12,207,831 shares at a total
cost of $623. Some of these repurchased shares have been reissued pursuant to
certain stock-based benefit plans.
RATINGS
On February 8, 1999, A.M. Best assigned first time ratings of a+ ("strong") to
The Hartford Financial Services Group, Inc.'s senior debt, Hartford Capital I
and II quarterly income preferred securities, HLI's senior debt and HLI's
Capital I trust preferred securities.
CASH FLOWS
First Quarter Ended
March 31,
--------------------------
1999 1998
- ------------------------------------------------------------------
Cash provided by (used for) operating
activities $ (118) $ 176
Cash provided by (used for)
investing activities $ 2,470 $ (464)
Cash provided by (used for) financing
activities $ (2,364) $ 222
Cash - end of period $ 108 $ 76
- ------------------------------------------------------------------
The change in operating cash flow was primarily the result of the timing of
claim payments in Other Operations and the timing in the settlement of other
receivables and payables in the Life segment. The change in both investing and
financing cash flow was primarily the result of an increase in disbursements for
investment type contracts related to the leveraged COLI block of business.
- 19 -
<PAGE>
REGULATORY INITIATIVES AND CONTINGENCIES
NAIC PROPOSALS
The NAIC developed several model laws and regulations, including a Model
Investment Law and amendments to the Model Holding Company System Regulatory Act
(the "Holding Act Amendments"). The Model Investment Law defines the
investments, which are permissible for property and casualty and life insurers
to hold, and the Holding Act Amendments address the types of activities in which
subsidiaries and affiliates may engage. The NAIC adopted these models in 1997
and 1996, but the laws have not been enacted for insurance companies domiciled
in the State of Connecticut, such as Hartford Fire Insurance Company. Even if
enacted in Connecticut or other states in which The Hartford's subsidiaries are
domiciled, it is expected that these laws will neither significantly change The
Hartford's investment strategies nor have any material adverse effect on The
Hartford's liquidity or financial position.
The 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.
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
The Company distributes its annuity, life and certain property and casualty
insurance products through a variety of distribution channels, including
broker-dealers, banks, wholesalers, its own internal sales force and other third
party marketing organizations. The Company periodically negotiates provisions
and renewals of these relationships and there can be no assurance that such
terms will remain acceptable to the Company or such service providers. An
interruption in the Company's continuing relationship with certain of these
third parties could materially affect the Company's ability to market its
products. During the first quarter of 1999, the Company modified its contract
with one such third party, Putnam Mutual Funds Corp. ("Putnam") to eliminate the
exclusivity provision which will allow both parties to pursue new market
opportunities. Putnam is contractually obligated to support and service the
related annuity in force block of business and to market, support and service
new business. However, there can be no assurance that this contract modification
will not adversely impact the Company's ability to distribute Putnam related
products.
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 issues insurance policies, annuities, mutual funds and
other financial products to individual and business customers, nearly all of
which contain date sensitive data, such as policy expiration dates, birth dates
and premium payment dates. 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
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
IT and non-IT systems for Year 2000 readiness; (4) deploying such remediated and
tested systems back into their respective production environments; and (5)
conducting internal and external integrated testing of such systems. As of
December 31, 1998, The Hartford substantially completed initiatives (1) through
(4) of its internal Year 2000 efforts. The Hartford is currently performing
initiative (5) testing, and management currently anticipates that such activity
will continue into the fourth quarter 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
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<PAGE>
following three main initiatives: (1) identifying third parties which have
significant business relationships with The Hartford, including, without
limitation, insurance agents, brokers, third party administrators, banks and
other distributors and servicers of financial products, 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 (or a third party's failure to respond) and the
significance of the business relationship, conducting additional activities with
respect to third parties as determined to be necessary in each case. These
activities may include conducting additional inquiries, more in-depth
evaluations of Year 2000 readiness and plans, and integrated IT systems testing.
The Hartford has substantially completed third party initiatives (1) and (2).
The Hartford is currently conducting the additional activities described in
initiative (3) and management currently anticipates that it will continue to do
so through the end of 1999. 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 after-tax costs of The Hartford's Year 2000 efforts that were incurred prior
to the year ended December 31, 1998, were not material to The Hartford's
financial condition or results of operations. For the year ended December 31,
1998, the after-tax costs were approximately $23. Management currently estimates
that after-tax costs related to the Year 2000 program to be incurred in 1999
will be approximately $15 to $25, of which approximately $4 were incurred in the
quarter ended March 31, 1999. These costs are being expensed as incurred.
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. In addition, The
Hartford's investing activities are an important aspect of its business and The
Hartford may be exposed to the risk that issuers of investments held by it will
be adversely impacted by Year 2000 issues. Given the uncertain nature of Year
2000 problems that may arise, especially those related to the readiness of third
parties discussed above, management 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 avoided or minimized. The contingency planning
process involves identifying reasonably likely business disruption scenarios
that, if they were to occur, could create significant problems in the critical
functions of each business segment. Each business segment is developing plans to
respond to such problems so that critical business functions may continue to
operate with minimal disruption. Contingency planning also includes assessing
the dependency of such business functions on critical 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. These plans will then be reviewed and tested on an
integrated basis for the remainder of the year. Furthermore, 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
As an insurer, The Hartford may incur claim and claim adjustment expenses,
including attorneys' fees and other legal expenses, resulting from claims from
insureds who may incur losses as a result of Year 2000 problems. To the extent
claims are 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 claim and claim adjustment
expenses would have a material impact upon The Hartford's financial condition or
results of operations.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Consolidated
Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
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<PAGE>
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Hartford is a defendant in various lawsuits arising out of its business. In
the opinion of management, final outcome of these matters, after consideration
of provisions made for potential losses and costs of defense, 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.
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<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/ John N. Giamalis
-----------------------------------
John N. Giamalis
Senior Vice President and
Controller
May 14, 1999
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<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHBITS INDEX
EXHIBIT #
- ---------
27 Financial Data Schedule is filed herewith.
- 24 -
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> MAR-31-1999
<DEBT-HELD-FOR-SALE> 34,483
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,076
<MORTGAGE> 228
<REAL-ESTATE> 10
<TOTAL-INVEST> 40,859
<CASH> 108
<RECOVER-REINSURE> 4,564
<DEFERRED-ACQUISITION> 4,718
<TOTAL-ASSETS> 150,960
<POLICY-LOSSES> 22,425
<UNEARNED-PREMIUMS> 2,587
<POLICY-OTHER> 17,127
<POLICY-HOLDER-FUNDS> 94,665
<NOTES-PAYABLE> 1,579
<COMMON> 2
1,250 <F1>
0
<OTHER-SE> 6,328
<TOTAL-LIABILITY-AND-EQUITY> 150,960
2,605
<INVESTMENT-INCOME> 665
<INVESTMENT-GAINS> 29
<OTHER-INCOME> 0
<BENEFITS> 1,909
<UNDERWRITING-AMORTIZATION> 458
<UNDERWRITING-OTHER> 503
<INCOME-PRETAX> 344
<INCOME-TAX> 86
<INCOME-CONTINUING> 238
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 238
<EPS-PRIMARY> 1.05
<EPS-DILUTED> 1.04
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1> REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES.
</FN>
</TABLE>
