================================================================================
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, 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 October 31, 1999, there were outstanding 221,620,486 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, 1999 and 1998 3
Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 4
Consolidated Statements of Changes in Stockholders' Equity - Nine Months
Ended September 30, 1999 and 1998 5
Consolidated Statements of Cash Flows - Nine Months Ended September 30,
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
Third Quarter Ended Nine Months Ended
September 30, September 30,
--------------------------- --------------------------
(In millions, except for per share data) 1999 1998 1999 1998
------------------------------------------------------------------- ------------- ------------- ------------ -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Earned premiums and other considerations $ 2,812 $ 2,934 $ 8,105 $ 8,612
Net investment income 640 691 1,957 2,060
Net realized capital gains (losses) (8) 15 30 189
------------------------------------------------------------------- ------------- ------------- ------------ -------------
TOTAL REVENUES 3,444 3,640 10,092 10,861
------------------------------------------------------------ ------------- ------------- ------------ -------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,025 2,125 5,939 6,271
Amortization of deferred policy acquisition costs 516 537 1,464 1,591
Other expenses 650 665 1,785 1,960
------------------------------------------------------------------- ------------- ------------- ------------ -------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 3,191 3,327 9,188 9,822
------------------------------------------------------------ ------------- ------------- ------------ -------------
OPERATING INCOME 253 313 904 1,039
Income tax expense 45 80 202 273
------------------------------------------------------------------- ------------- ------------- ------------ -------------
INCOME BEFORE MINORITY INTEREST 208 233 702 766
Minority interest in consolidated subsidiary (22) (19) (63) (52)
------------------------------------------------------------------- ------------- ------------- ------------ -------------
NET INCOME $ 186 $ 214 $ 639 $ 714
------------------------------------------------------------ ------------- ------------- ------------ -------------
Basic earnings per share $ 0.83 $ 0.92 $ 2.82 $ 3.04
Diluted earnings per share $ 0.82 $ 0.91 $ 2.79 $ 3.00
------------------------------------------------------------------- ------------- ------------- ------------ -------------
Weighted average common shares outstanding 225.3 232.2 226.4 234.5
Weighted average common shares outstanding and dilutive potential
common shares 227.8 235.6 229.3 238.0
------------------------------------------------------------------- ------------- ------------- ------------ -------------
Cash dividends declared per share $ 0.23 $ 0.21 $ 0.68 $ 0.63
=================================================================== ============= ============= ============ =============
</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) 1999 1998
- ------------------------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
ASSETS (UNAUDITED)
Investments
-----------
Fixed maturities, available for sale, at fair value (amortized cost of $33,672 and
$34,191) $ 33,282 $ 35,331
Equity securities, available for sale, at fair value (cost of $917 and $846) 1,156 1,066
Policy loans, at outstanding balance 4,283 6,687
Other investments 696 612
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total investments 39,417 43,696
Cash 135 123
Premiums receivable and agents' balances 2,131 1,833
Reinsurance recoverables 4,359 4,978
Deferred policy acquisition costs 4,922 4,579
Deferred income tax 1,380 1,085
Other assets 2,869 2,759
Separate account assets 98,340 91,579
- ------------------------------------------------------------------------------------------- ----------------- -----------------
TOTAL ASSETS $ 153,553 $ 150,632
=================================================================================== ================= =================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 16,013 $ 16,449
Life 6,325 6,088
Other policy claims and benefits payable 16,685 19,774
Unearned premiums 2,715 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 4,440 4,547
Separate account liabilities 98,340 91,579
- ------------------------------------------------------------------------------------------- ----------------- -----------------
147,347 143,744
COMMITMENTS AND CONTINGENCIES, NOTE 3
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 433 465
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 1,557 1,591
Retained earnings 4,957 4,474
Treasury stock, at cost - 15,070,593 and 11,310,598 shares (655) (455)
Accumulated other comprehensive income (loss) (88) 811
- ------------------------------------------------------------------------------------------- ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 5,773 6,423
----------------------------------------------------------------------------------- ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 153,553 $ 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
Nine Months Ended September 30, 1999
Accumulated Other
Comprehensive Income (Loss)
-----------------------------
Unrealized
Common Stock/ Treasury Gain (Loss) on Cumulative Outstanding
Additional Retained Stock, 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 639 639
Other comprehensive income (loss), net
of tax (1)
Unrealized gain (loss) on securities (2) (862) (862)
Cumulative translation adjustments (37) (37)
----------
Total other comprehensive income (loss) (899)
----------
Total comprehensive income (loss) (260)
----------
Issuance of shares under incentive and
stock purchase plans (46) 97 51 1,908
Tax benefit on employee stock options
and awards 15 15
Treasury stock acquired (3) (297) (300) (5,728)
Dividends declared on common stock (156) (156)
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $1,559 $4,957 $(655) $(51) $(37) $5,773 223,575
- ------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1998
Accumulated Other
Comprehensive Income (Loss)
-----------------------------
Unrealized
Common Stock/ Treasury Gain (Loss) on Cumulative Outstanding
Additional Retained Stock, 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 714 714
Other comprehensive income, net of tax (1)
Unrealized gain on securities (2) 69 69
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
====================================================================================================================================
<FN>
(1) Unrealized gain (loss) on securities is net of tax expense (benefit) of
$(464) and $38 for the nine months ended September 30, 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 $23
and $123 for the nine months ended September 30, 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.
</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) 1999 1998
- ------------------------------------------------------------------------------------------- ----------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 639 $ 714
Adjustments to reconcile net income to net cash provided by operating activities
Change in receivables, payables and accruals (43) (242)
Decrease in reinsurance recoverables and other related assets 338 289
Increase in deferred policy acquisition costs (356) (460)
Change in accrued and deferred income taxes 29 (98)
(Decrease) increase in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums (16) 588
Minority interest in consolidated subsidiary 63 52
Net realized capital gains (30) (189)
Depreciation and amortization 48 78
Other, net (237) 26
- ------------------------------------------------------------------------------------------- ----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 435 758
- ------------------------------------------------------------------------------------------- ----------------------------------
INVESTING ACTIVITIES
Purchase of investments (10,785) (11,443)
Sale of investments 11,930 9,769
Maturity of investments 1,536 1,727
Sale (purchase) of affiliate 21 (359)
Additions to plant, property and equipment (79) (88)
- ------------------------------------------------------------------------------------------- ----------------------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 2,623 (394)
- ------------------------------------------------------------------------------------------- ----------------------------------
FINANCING ACTIVITIES
Short-term debt, net -- (60)
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 against
policyholder accounts (2,649) (52)
Dividends paid (156) (146)
Acquisition of treasury stock (287) (400)
Proceeds from issuances under incentive and stock purchase plans 50 37
- ------------------------------------------------------------------------------------------- ----------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (3,042) (371)
- ------------------------------------------------------------------------------------------- ----------------------------------
Foreign exchange rate effect on cash (4) 2
- ------------------------------------------------------------------------------------------- ----------------------------------
Net increase in cash 12 (5)
Cash - beginning of period 123 140
- ------------------------------------------------------------------------------------------- ----------------------------------
CASH - END OF PERIOD $ 135 $ 135
- ------------------------------------------------------------------------------------------- ----------------------------------
Supplemental Disclosure of Cash Flow Information:
- ------------------------------------------------
Net Cash Paid During the Period For:
Income taxes $ 110 $ 308
Interest $ 145 $ 147
</TABLE>
See Notes to Consolidated Financial Statements.
- 6 -
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Amounts in millions except per share data unless otherwise stated)
<PAGE>
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.
(b) Changes in Accounting Principles
In June 1999, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". This statement amends SFAS No. 133 to defer its effective
date for one year, to fiscal years beginning after June 15, 2000. Initial
application for The Hartford will begin for the first quarter of the year 2001.
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 and nine months ended
September 30, 1999 would have been approximately $1 and $2 lower, respectively,
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>
Third Quarter Ended Nine Months Ended
------------------------------------- -------------------------------------
Per Share Per Share
September 30, 1999 Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per Share
Income available to common shareholders $ 186 225.3 $ 0.83 $ 639 226.4 $ 2.82
------------- ------------
Diluted Earnings per Share
Options and contingently issuable shares -- 2.5 -- 2.9
------------------------ -------------------------
Income available to common shareholders plus assumed
conversions $ 186 227.8 $ 0.82 $ 639 229.3 $ 2.79
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 7 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2. EARNINGS PER SHARE (continued)
<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
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Basic earnings per share are computed based on the weighted average number of
shares outstanding during the period. Diluted earnings per share include the
dilutive effect of outstanding options, using the treasury stock method, and
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
In October 1998, the Company became aware of allegations of improper activities
at Commercial Financial Services Inc. ("CFS") a securitizer and servicer of
asset backed securities, and in December 1998, CFS filed for protection under
Chapter 11 of the Bankruptcy Code. As a result, the Company recognized a $36,
after-tax, writedown related to the asset backed securities during the fourth
quarter of 1998.
In June 1999, CFS ceased operations at which time the Company recognized an
additional $42, after-tax, writedown. In August 1999, the Company sold all of
its CFS holdings at a nominal gain, recovering its June 30, 1999 amortized cost
of $34.
(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. Included in core earnings for Other Operations is the
effect of an approximate 19% minority interest in Hartford Life, Inc.'s
operating results.
- 8 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 4. SEGMENT INFORMATION (continued)
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 the Commercial, Personal and Reinsurance segments,
while core earnings are presented for North American Property & Casualty and the
segments of Life, International and Other Operations.
<TABLE>
<CAPTION>
Revenues
Third Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Earned premiums and other considerations
Commercial $ 852 $ 851 $ 2,456 $ 2,569
Personal 634 572 1,859 1,667
Reinsurance 179 215 516 527
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty earned premiums and other
considerations 1,665 1,638 4,831 4,763
Net investment income 209 210 636 618
Net realized capital gains -- -- 22 121
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty 1,874 1,848 5,489 5,502
Life 1,420 1,287 4,112 3,846
International 114 465 382 1,389
Other Operations 36 40 109 124
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,444 $ 3,640 $ 10,092 $ 10,861
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Core Earnings
Third Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Underwriting results
Commercial $ (32) $ (51) $ (127) $ (207)
Personal (14) 32 31 78
Reinsurance (35) (18) (44) (30)
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty underwriting results (81) (37) (140) (159)
Net investment income 209 210 636 618
Income taxes and other expenses (42) (61) (175) (132)
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty 86 112 321 327
Life 119 100 339 278
International 4 9 16 35
Other Operations (22) (17) (60) (49)
- ------------------------------------------------------------------------------------------------------------------------------------
Total core earnings 187 204 616 591
Net realized capital gains (losses), after-tax (1) 10 23 123
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 186 $ 214 $ 639 $ 714
====================================================================================================================================
</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
September 30, 1999, compared with December 31, 1998, and its results of
operations for the third quarter and nine months ended September 30, 1999
compared with the equivalent 1998 periods. 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 12
Commercial 12
Personal 12
Reinsurance 13
Life 13
International 14
Other Operations 14
Environmental and Asbestos Claims 15
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 Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 3,444 $ 3,640 $ 10,092 $ 10,861
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 186 $ 214 $ 639 $ 714
Less: Net realized capital gains (losses), after-tax (1) 10 23 123
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 187 $ 204 $ 616 $ 591
====================================================================================================================================
</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 third quarter and nine months ended September 30, 1999
decreased $196, or 5%, and $769, or 7%, respectively, over the comparable prior
year periods, 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 (losses), partially offset by premium growth in North
American Property & Casualty and Life. (For an analysis of net realized capital
gains (losses), see the Investments section.)
Core earnings decreased $17, or 8%, for the third quarter and increased $25, or
4%, for the nine months ended September 30, 1999, compared with the same prior
year periods. The decrease for the quarter was due primarily to increased
underwriting losses, primarily the result of higher catastrophe losses in North
American Property & Casualty, partially offset by higher fee income in the
Investment Products operation of the Life segment as a result of increasing
account values. The increase for the nine month period was the result of higher
fee income in the Investment Products operation and lower catastrophe losses,
- 10 -
<PAGE>
partially offset by a decrease in International earnings as a result of the sale
of London & Edinburgh.
The effective tax rates for the third quarter and nine months ended September
30, 1999 were 18% and 22%, respectively, compared to 26% for both comparable
periods in 1998. The decrease in the effective tax rates for the 1999 periods
was primarily due to an increase in the proportionate share of tax-exempt net
investment income to total pre-tax income for the third quarter and nine months
ended September 30, 1999 compared with the same prior year periods. Tax-exempt
interest earned on invested assets was the principal cause of effective tax
rates lower than the 35% U.S.
statutory rate.
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. 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.
<TABLE>
<CAPTION>
Underwriting Results Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Commercial $ (32) $ (51) $ (127) $ (207)
Personal (14) 32 31 78
Reinsurance (35) (18) (44) (30)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ (81) $ (37) $ (140) $ (159)
====================================================================================================================================
</TABLE>
The following is a summary of core earnings and net income.
<TABLE>
<CAPTION>
Core earnings Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
North American Property & Casualty $ 86 $ 112 $ 321 $ 327
Life 119 100 339 278
International 4 9 16 35
Other Operations (22) (17) (60) (49)
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 187 $ 204 $ 616 $ 591
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Net income Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
North American Property & Casualty $ 86 $ 112 $ 335 $ 405
Life 119 100 339 278
International 3 18 26 78
Other Operations (22) (16) (61) (47)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 186 $ 214 $ 639 $ 714
====================================================================================================================================
</TABLE>
An analysis of the operating results summarized above, is included on the
following pages. Environmental and Asbestos Claims and Investments are discussed
in separate sections.
- 11 -
<PAGE>
NORTH AMERICAN PROPERTY & CASUALTY
<TABLE>
<CAPTION>
Operating Summary Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 1,874 $ 1,848 $ 5,489 $ 5,502
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 86 $ 112 $ 335 $ 405
Less: Net realized capital gains, after-tax -- -- 14 78
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 86 $ 112 $ 321 $ 327
====================================================================================================================================
</TABLE>
Revenues for North American Property & Casualty increased $26 for the third
quarter and decreased $13 for the nine months ended September 30, 1999 compared
with the same prior year periods. The increase for the third quarter was
primarily due to a $27 increase in earned premiums and other considerations. For
the nine month period, the decrease was due to a $99 decline in pre-tax net
realized capital gains, $55 of proceeds in the first quarter of 1998 from the
sale of renewal rights and other considerations related to the Industrial Risk
Insurance pool ("IRI transaction"), partially offset by a $123 increase in
earned premiums and other considerations and higher net investment income of
$18. Core earnings decreased $26, or 23%, for the third quarter and $6, or 2%,
for the nine months ended September 30, 1999 compared with the same periods in
1998. The decrease for the quarter was primarily due to adverse catastrophe
losses totaling $61, after-tax, for the quarter ended September 30, 1999
compared to $40, after-tax, for the same period in 1998. For the nine month
period, the decrease was primarily the result of proceeds received in 1998
related to the IRI transaction and an increase in non-underwriting expenses,
partially offset by higher net investment income and changes in underwriting
results as discussed below.
COMMERCIAL
<TABLE>
<CAPTION>
Operating Summary Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
- --------------------------------------------------------------------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Written premiums $ 808 $ 795 $ 2,369 $ 2,421
Underwriting results $ (32) $ (51) $ (127) $ (207)
Combined ratio 104.7 106.6 105.5 108.1
====================================================================================================================================
</TABLE>
Commercial written premiums increased $13, or 2%, for the third quarter and
decreased $52, or 2%, for the nine months ended September 30, 1999 compared with
the same periods in 1998. The increase for the third quarter was primarily due
to continued solid growth in the small commercial businesses, with Select
Customer up 15% and Commercial Affinity up 22%. Partially offsetting this growth
were decreases in mid-market standard commercial business (Key Accounts) of 11%
and Major/National Accounts of 2%. For the nine month period, increases in
Select Customer of 13% and Commercial Affinity of 22% were more than offset by
decreases in Key Accounts of 11%, Major/National Accounts of 15% and Other of
7%. Enhanced product offerings, targeted geographic strategies and partnerships
with other entities continued to be the primary drivers of the growth
businesses. The declines in middle and large commercial markets continued to be
attributable to the highly competitive marketplace and reaction to price
increases by The Hartford.
Underwriting results improved $19, or 1.9 combined ratio points, for the third
quarter and $80, or 2.6 combined ratio points, for the nine months ended
September 30, 1999 compared with the same prior year periods. The improvement in
underwriting results for both periods was primarily the result of favorable loss
and loss expense due to continued underwriting discipline across the Commercial
segment. Partially offsetting the improvement for the quarter were increased
catastrophe related losses of $22, or 2.6 combined ratio points. For the nine
month period, loss reserves established in the first quarter of 1998 as part of
the sale of IRI also contributed to the increase.
PERSONAL
<TABLE>
<CAPTION>
Operating Summary Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
- --------------------------------------------------------------------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Written premiums $ 651 $ 578 $ 1,846 $ 1,658
Underwriting results $ (14) $ 32 $ 31 $ 78
Combined ratio 102.5 94.4 99.9 95.3
====================================================================================================================================
</TABLE>
Personal written premiums increased $73, or 13%, for the third quarter and $188,
or 11%, for the nine months ended September 30, 1999 over the comparable prior
year periods. Written premiums for Agency, including Omni and Affinity,
increased $57 for the quarter and $139 for the nine month period, contributing
10% and 8%, respectively, to the segment's growth.
- 12 -
<PAGE>
In the third quarter of 1999, non-standard automobile coverage through Omni was
introduced in three additional states and is now available in 27 states, up from
13 at the time of Omni's acquisition in 1998. Also, AARP written premiums
increased $16, or 5%, for the quarter and $49, or 5%, for the nine month period
contributing 3% to the segments growth in both periods.
Underwriting results decreased $46, or 144%, for the third quarter and $47, or
60%, for the nine months ended September 30, 1999 with a corresponding 8.1 point
increase in the combined ratio for the quarter and a 4.6 point increase for the
nine month period compared with 1998. The decrease in underwriting results and
related increase in the combined ratio was principally driven by expenses, up
4.2 points for the quarter and 2.9 points for the nine months ended September
30, 1999 compared to 1998 and catastrophe experience which contributed 3.0
points to the increase in combined ratio for the quarter and 0.1 points to the
increase for the nine month period compared to 1998. Underwriting expenses
increased due to investments in alternative distribution channels and growth
initiatives, in addition to increased commission expense related to the premium
growth from independent agents. Loss adjustment expense increased due to
investments in claim initiatives to lower overall loss costs.
REINSURANCE
<TABLE>
<CAPTION>
Operating Summary Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
- --------------------------------------------------------------------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Written premiums $ 169 $ 212 $ 561 $ 537
Underwriting results $ (35) $ (18) $ (44) $ (30)
Combined ratio 119.8 108.3 108.1 106.6
====================================================================================================================================
</TABLE>
Reinsurance written premiums decreased $43, or 20%, for the third quarter and
increased $24, or 4%, for the nine months ended September 30, 1999 compared with
the same prior year periods. The decrease was primarily due to a single
finite-risk account in excess of $70 written in the third quarter of 1998.
Excluding this transaction, premiums increased $27, or 19%, for the third
quarter and $94, or 20%, for the nine months ended September 30, 1999 compared
with the same periods in 1998. This increase was primarily due to the first
quarter 1999 acquisition of renewal rights to the ongoing reinsurance business
of Vesta Fire Insurance Corp., a subsidiary of Vesta Insurance Group Inc.
Underwriting results decreased $17, or 94%, for the third quarter and $14, or
47%, for the nine months ended September 30, 1999 with a corresponding 11.5
point increase in the combined ratio for the quarter and a 1.5 point increase
for the nine month period compared with 1998. The decrease in underwriting
results for both periods was due primarily to unfavorable development in prior
underwriting year losses concentrated in a few classes of business. The increase
in the combined ratio for both periods reflected the unfavorable development in
addition to an increase in commissions due to a shift to pro rata business as a
result of the Vesta acquisition.
LIFE
<TABLE>
<CAPTION>
Operating Summary [1] Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 1,420 $ 1,287 $ 4,112 $ 3,846
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 119 $ 100 $ 339 $ 278
Less: Net realized capital gains, after-tax -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 119 $ 100 $ 339 $ 278
====================================================================================================================================
<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 increased $133, or 10%, and $266, or 7%, for the
third quarter and nine months ended September 30, 1999, as compared to the third
quarter and nine months ended September 30, 1998, respectively. This increase
was primarily attributable to the Investment Products operation where revenues
increased $70, or 16%, and $162, or 12%, respectively, over the comparable 1998
periods due to a substantial increase in the aggregate fees earned as a result
of increased assets under management. Investment Products' average assets under
management increased $18.5 billion, or 25%, to $92.7 billion as of September 30,
1999 from $74.2 billion as of September 30, 1998 due to strong net cash flow
(new sales less surrenders) related primarily to the individual variable annuity
and mutual fund operations, as well as equity market appreciation. In addition,
revenues in the Employee Benefits operation, excluding buyouts, increased $52,
or 12%, and $122, or 9%, for the third quarter and nine months ended September
30, 1999, as compared to the third quarter and nine months ended September 30,
1998, respectively, as a result of strong sales and persistency. However,
Corporate Owned Life Insurance ("COLI") revenues for the nine months ended
September 30, 1999 compared to the equivalent 1998 period decreased $32, or 5%,
primarily due to revenues associated with significant sales in the first quarter
of 1998.
The increase in core earnings of $19, or 19%, and $61, or 22%, for the third
quarter and nine months ended September 30, 1999,
- 13 -
<PAGE>
respectively, compared to the equivalent prior year periods was primarily
related to growth in Investment Products, as well as increased earnings in
Individual Life, Employee Benefits and COLI. Investment Products' core earnings
increased $16, or 24%, and $48, or 25%, for the third quarter and nine months
ended September 30, 1999, respectively, compared to the equivalent prior year
periods, as a result of higher fee income earned on increased assets under
management due to strong net cash flow and equity market appreciation.
Individual Life's core earnings increased $2, or 12%, and $6, or 13%,
respectively, compared to the prior year periods, primarily due to continued
growth in variable life account values. Employee Benefits' core earnings
increased $2, or 11%, and $6, or 12%, respectively, compared to the prior year
periods as a result of increased premium revenues, excluding buyouts, and
increased after-tax net investment income. Core earnings for COLI increased $2,
or 33%, for the third quarter and $4, or 22%, for the nine months ended
September 30, 1999 over the comparable prior year periods due to increased fee
income associated with growth in variable COLI account values and earnings
associated with MBL business. (For a discussion of the MBL Recapture, see
"Acquisitions" under the Capital Resources and Liquidity section in The
Hartford's 1998 Form 10-K Annual Report.)
INTERNATIONAL
<TABLE>
<CAPTION>
Operating Summary Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 114 $ 465 $ 382 $ 1,389
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 3 $ 18 $ 26 $ 78
Less: Net realized capital gains (losses), after-tax (1) 9 10 43
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 4 $ 9 $ 16 $ 35
====================================================================================================================================
</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 decreased $9, or 7%, for the third quarter and
$16, or 4%, for the nine months ended September 30, 1999 over the comparable
periods in 1998. The decrease was primarily due to a decline in net realized
capital gains of $11, or 137%, for the third quarter and $38, or 73%, for the
nine months ended September 30, 1999 compared with the prior year periods. (For
an analysis of net realized capital gains (losses), see the Investments
section.) Also contributing to the decrease for the third quarter was a negative
foreign exchange impact on revenues of $6, primarily due to weakness in the
Dutch guilder and Spanish peseta versus the prior year. Partially offsetting the
decrease in both periods was an increase in earned premiums of $5, or 5%, for
the third quarter and $24, or 8%, for the nine months ended September 30, 1999
due to continued growth in automobile business at Hartford Seguros (formerly
Ercos) in Spain and, for the nine month period, growth in health and life
business at Zwolsche in the Netherlands. Foreign exchange impacts on total
revenues were not material for the nine months ended September 30, 1999 compared
to the same period in 1998.
Excluding London & Edinburgh, core earnings for the third quarter ended
September 30, 1999 decreased $3, or 43%, compared to the same period of 1998,
primarily due to a higher loss ratio in Spain, higher non-underwriting expenses
and costs associated with implementing the Euro currency requirements in the
Netherlands. For the nine month period ended September 30, 1999, core earnings,
excluding London & Edinburgh, decreased $5, or 24%, over the comparable 1998
period. The decrease was due to higher loss ratios in automobile in each
operating location and lower net investment income in the European operations as
a result of a decrease in interest rates. Foreign exchange impacts on core
earnings for the third quarter and nine months ended September 30, 1999 were not
material when compared to the same periods in 1998.
OTHER OPERATIONS
<TABLE>
<CAPTION>
Operating Summary Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------- -------------- -------------- -----------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 36 $ 40 $ 109 $ 124
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (22) $ (16) $ (61) $ (47)
Less: Net realized capital gains (losses), after-tax -- 1 (1) 2
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ (22) $ (17) $ (60) $ (49)
====================================================================================================================================
</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
approximate 19% minority interest in HLI's operating results.
Revenues decreased $4, or 10%, for the third quarter and $15, or 12%, for the
nine months ended September 30, 1999 compared to the same prior year periods.
The decrease in revenues is consistent with the runoff nature of these
operations. Excluding minority interest, year to date core earnings were flat
compared to earnings from the prior year.
- 14 -
<PAGE>
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 nine months ended
September 30, 1999 and the year ended December 31, 1998, was as follows (net of
reinsurance):
<TABLE>
<CAPTION>
Environmental and Asbestos Claims
Claims and Claim Adjustment Expenses
Nine Months Ended Year Ended
September 30, 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 9 4 13 -- 6 6
Claims and claim adjustment expenses paid (142) (37) (179) (150) (64) (214)
Other [1] -- -- -- (18) 18 --
-------------------------------------------------- -- -------------- - -------- -- -------- -- -------------- -- ------- -- -------
Ending liability [2] $ 1,011 $ 615 $ 1,626 $ 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 $1,519 and $1,711 for September 30, 1999 and December 31, 1998,
respectively. Gross of reinsurance as of September 30, 1999 and December
31, 1998, reserves for environmental and asbestos were $1,635 and $1,510
and $1,850 and $1,653, respectively.
</FN>
</TABLE>
The Hartford believes that the environmental and asbestos reserves recorded at
September 30, 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 $14.6 billion at September 30, 1999 and were
comprised of fixed maturities of $13.6 billion and other investments of $963,
primarily equity securities.
Fixed Maturities by Type
- -----------------------------------------------------------------
September 30, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Municipal - tax-exempt $ 8,249 60.6% $ 8,804 61.5%
Corporate 2,043 15.0% 2,119 14.8%
Commercial MBS 857 6.3% 834 5.8%
Gov't/Gov't agencies - For. 596 4.4% 501 3.5%
MBS - agency 493 3.6% 348 2.4%
ABS 445 3.3% 500 3.5%
CMO 279 2.0% 415 2.9%
Gov't/Gov't agencies - U.S. 37 0.3% 46 0.3%
Municipal - taxable 18 0.1% 24 0.2%
Short-term 495 3.6% 663 4.6%
Redeemable preferred stock 104 0.8% 65 0.5%
- -----------------------------------------------------------------
Total fixed maturities $ 13,616 100.0% $ 14,319 100.0%
- -----------------------------------------------------------------
The taxable equivalent duration of the September 30, 1999 fixed maturity
portfolio was 5.2 years compared to 4.8 years at December 31, 1998. The change
in taxable equivalent duration was primarily due to the purchase of longer
duration securities and an increase in interest rates. 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.
Third Quarter Nine Months Ended
Ended September 30, September 30,
------------------- -------------------
1999 1998 1999 1998
- ------------------------- --------- ---------- --------- ---------
Net investment income,
before-tax $ 209 $ 210 $ 636 $ 618
Net investment income,
after-tax [1] $ 169 $ 166 $ 512 $ 492
Yield on average
invested assets, 5.8% 5.9% 5.9% 5.8%
before-tax [2]
Yield on average
invested assets, 4.7% 4.7% 4.7% 4.6%
after-tax [1] [2]
Net realized capital
gains, before-tax $ -- $ -- $ 22 $ 121
- ------------------------------------------------------------------
[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, 1999, before-tax income was relatively
flat compared to the same period in 1998, while after-tax net investment income
increased 2% to $169. For the nine months ended September 30, 1999, before-tax
income increased 3% to $636 while after-tax income increased 4% to $512. These
increases were primarily due to an increase in income from limited partnership
investments, as well as the reallocation of assets in the fourth quarter of 1998
from equities to fixed maturities, which also positively impacted both before
and after-tax yields. After-tax net investment income for the quarter and nine
months was also favorably impacted by the fourth quarter 1998 reallocation of
assets from taxable bonds to tax-exempt bonds.
For the nine months ended September 30, 1999, net realized capital gains
included a $9, after-tax, impairment of asset backed securities securitized and
serviced by Commercial Financial Services Inc. ("CFS"). The CFS securities were
sold in August of 1999 at a nominal gain. (For additional information on CFS,
see Note 3 of Notes to Consolidated Financial Statements under "Investments".)
Net realized capital gains for the nine month period decreased from the
respective prior year period, primarily as a result of opportunities taken in
1998 as a result of a strong equity market.
LIFE
Invested assets, excluding separate accounts, totaled $21.6 billion at September
30, 1999 and were comprised of $16.8 billion of fixed maturities, $4.3 billion
of policy loans, and other investments of $542. 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 $2.4 billion from December 31, 1998, as a result of the declining
block of leveraged COLI business.
Fixed Maturities by Type
- -----------------------------------------------------------------
September 30, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Corporate $ 8,000 47.6% $ 7,898 44.6%
ABS 2,514 15.0% 2,465 13.9%
Commercial MBS 2,048 12.2% 2,036 11.5%
Municipal - tax-exempt 1,027 6.1% 916 5.2%
MBS - agency 876 5.2% 503 2.9%
CMO 645 3.8% 831 4.7%
Gov't/Gov't agencies - For. 401 2.4% 530 3.0%
Gov't/Gov't agencies - U.S. 241 1.4% 166 0.9%
Municipal - taxable 166 1.0% 223 1.3%
Short-term 837 5.0% 2,119 12.0%
Redeemable preferred stock 47 0.3% 5 --
- -----------------------------------------------------------------
Total fixed maturities $ 16,802 100.0% $ 17,692 100.0%
- -----------------------------------------------------------------
Short-term securities declined primarily as a result of the funding of scheduled
liability maturities and reallocation into other asset sectors.
INVESTMENT RESULTS
The table below summarizes the Life segment's results.
- 16 -
<PAGE>
Third Quarter Nine Months Ended
Ended September 30, September 30,
------------------- -------------------
(before-tax) 1999 1998 1999 1998
- ------------------------- --------- ---------- --------- ---------
Net investment income -
Excluding policy loans $ 291 $ 294 $ 865 $ 876
Policy loan income 90 99 298 309
---------------------------------------
Net investment income -
total 381 393 1,163 1,185
Yield on average
invested assets [1] 6.9% 7.5% 6.7% 7.6%
Net realized capital $ (5) $ -- $ (5) $ --
(losses)
- ------------------------------------------------------------------
[1] Represents annualized net investment income (excluding net realized
capital gains (losses)) divided by average invested assets at cost (fixed
maturities at amortized cost).
Net investment income for the third quarter and nine months ended September 30,
1999 decreased 3% and 2%, respectively, compared to the equivalent prior year
periods. Yield on average invested assets declined 0.6% and 0.9% for the third
quarter and nine months ended September 30, 1999, respectively. This decline was
the result of a decrease in policy loan weighted-average interest rates, which
declined to 7.9% as of September 30, 1999 from 11.0% as of September 30, 1998,
combined with an increase in average policy loan balances.
For the nine months ended September 30, 1999, net realized capital gains on the
sale of equity securities and fixed maturities partially offset a $32,
after-tax, impairment of asset-backed securities securitized and serviced by
CFS. The CFS securities were sold in August of 1999 at a nominal gain. (For
additional information on CFS, see Note 3 of Notes to the Consolidated Financial
Statements under "Investments".)
INTERNATIONAL
Invested assets, excluding separate accounts, were $1.1 billion at September 30,
1999 and were comprised of fixed maturities of $738 and other investments of
$345, primarily equity securities.
Fixed Maturities by Type
- ------------------------------------------------------------------
September 30, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Gov't/Gov't agencies - For. $ 503 68.1% $ 611 72.4%
Corporate 146 19.8% 109 12.9%
Short-term 89 12.1% 124 14.7%
- -----------------------------------------------------------------
Total fixed maturities $ 738 100.0% $ 844 100.0%
- -----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the International segment's results.
Third Quarter Nine Months Ended
Ended September 30, September 30,
------------------- -------------------
(before-tax) 1999 1998 1999 1998
- ------------------------- --------- ---------- --------- ---------
Net investment income $ 15 $ 48 $ 49 $ 137
Yield on average
invested assets [1] 5.9% 7.0% 6.1% 6.8%
Net realized capital
gains (losses) $ (3) $ 14 $ 14 $ 65
- ------------------------------------------------------------------
[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 and nine months ended September 30, 1999, before-tax net
investment income decreased from the respective prior year periods, primarily
due to the effects of the London & Edinburgh sale in November 1998. Excluding
the London & Edinburgh results, investment income remained relatively flat to
the prior year periods. Yield on average invested assets for the third quarter
and nine months ended September 30, 1999, decreased 1.1% and 0.7%, respectively,
primarily due to lower short-term interest rates in certain international
markets.
Net realized capital gains (losses) for the third quarter and nine months ended
September 30, 1999 decreased from the respective prior year periods, primarily
due to opportunities taken in 1998 as a result of a favorable equity market in
the Netherlands.
OTHER OPERATIONS
Invested assets were $2.1 billion at September 30, 1999 and were substantially
comprised of fixed maturities.
Fixed Maturities by Type
- ------------------------------------------------------------------
September 30, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Corporate $ 1,379 64.9% $ 1,603 64.7%
Commercial MBS 190 8.9% 145 5.9%
ABS 158 7.4% 224 9.0%
Gov't/Gov't agencies - U.S. 68 3.2% 82 3.3%
Gov't/Gov't agencies - For. 63 3.0% 50 2.0%
Municipal - taxable 38 1.8% 40 1.6%
MBS - agency 33 1.5% 41 1.7%
CMO 12 0.6% 20 0.8%
Short-term 177 8.3% 262 10.6%
Redeemable preferred stock 8 0.4% 9 0.4%
- -----------------------------------------------------------------
Total fixed maturities $ 2,126 100.0% $ 2,476 100.0%
- -----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Other Operations segment's results.
Third Quarter Nine Months Ended
Ended September 30, September 30,
------------------- -------------------
(before-tax) 1999 1998 1999 1998
- ------------------------- --------- ---------- --------- ---------
Net investment income $ 35 $ 40 $ 109 $ 120
Yield on average
invested assets [1] 6.4% 6.7% 6.4% 6.6%
Net realized capital
gains (losses) $ -- $ 1 $ (1) $ 3
- ------------------------------------------------------------------
[1] Represents annualized net investment income (excluding net realized
capital gains (losses)) divided by average invested assets at cost (fixed
maturities at amortized cost).
Net investment income for the quarter ended September 30, 1999 decreased 12% to
$35. For the nine months ended September 30, 1999, net investment income
decreased 9% to $109. The decreases in net investment income in both the third
quarter and nine month periods were primarily due to the reduction in invested
assets as a result of the funding of runoff liabilities. In addition, yields for
the third quarter and nine months ended September 30, 1999 decreased 0.3% and
0.2%, respectively, compared to the equivalent prior year periods.
- 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 September 30, 1999, over 95% of the fixed maturity portfolio was invested
in securities rated investment grade.
Fixed Maturities by Credit Quality
- -----------------------------------------------------------------
September 30, 1999 December 31, 1998
- -----------------------------------------------------------------
Credit Quality Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 761 4.7% $ 805 4.7%
AAA 6,258 38.9% 6,570 38.2%
AA 3,456 21.5% 3,209 18.7%
A 2,791 17.4% 3,409 19.8%
BBB 1,423 8.8% 1,508 8.8%
BB & below 674 4.2% 682 3.9%
Short-term 716 4.5% 1,016 5.9%
- -----------------------------------------------------------------
Total fixed maturities $ 16,079 100.0% $ 17,199 100.0%
- -----------------------------------------------------------------
LIFE OPERATIONS
As of September 30, 1999, over 97% of the fixed maturity portfolio was invested
in securities rated investment grade.
Fixed Maturities by Credit Quality
- -----------------------------------------------------------------
September 30, 1999 December 31, 1998
- ------------------------------------------------------------------
Credit Quality Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,595 9.9% $ 2,596 9.3%
AAA 3,943 15.0% 3,907 14.0%
AA 3,313 12.6% 2,716 9.7%
A 8,546 32.5% 8,878 31.8%
BBB 6,118 23.3% 7,019 25.2%
BB & below 579 2.2% 492 1.8%
Short-term 1,180 4.5% 2,298 8.2%
- -----------------------------------------------------------------
Total fixed maturities $ 26,274 100.0% $ 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 $10.0 billion and $11.3 billion at
September 30, 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>
September 30, 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] $ 470 $ 414
-----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain (loss) on securities, net of tax $ 5,824 $ 5,612
Unrealized gain (loss) on securities, net of tax (51) 811
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 5,773 $ 6,423
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 9,123 $ 8,855
-----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 49% 50%
Debt to capitalization [2] [3] 31% 32%
====================================================================================================================================
<FN>
[1] Excludes unrealized gain (loss) on securities, net of tax, of $(37) and
$51 for September 30, 1999 and December 31, 1998, respectively.
[2] Excludes unrealized gain (loss) on securities, net of tax.
[3] Excluding QUIPS and TruPS, the debt to equity ratios were 27% and 28% as
of September 30, 1999 and December 31, 1998, respectively, and the debt to
capitalization ratios were 17% and 18%, respectively.
</FN>
</TABLE>
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain (loss) on
securities, net of tax, increased by $268 as of September 30, 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.
STOCKHOLDERS' EQUITY
Dividends - On May 20, 1999, The Hartford's Board of Directors approved a 5%
increase in the quarterly dividend to $0.23 per share, payable on July 1, 1999
to shareholders of record as of June 1, 1999. On July 15, 1999, The Hartford
declared a dividend on its common stock of $0.23 per share, payable October 1,
1999 to shareholders of record as of September 1, 1999. An additional 4%
increase in the quarterly dividend to $0.24 per share, payable on January 3,
2000 to shareholders of record as of December 1, 1999, was approved by The
Hartford's Board of Directors on October 21, 1999.
Treasury Stock - During the nine months ended September 30, 1999, The Hartford
repurchased 5.7 million shares of its common stock in the open market at a total
cost of $300 under the Company's $1.0 billion repurchase program authorized in
December 1997. Since the inception of the repurchase program, The Hartford has
repurchased 16.5 million shares at a total cost of $847. Some of these
repurchased shares have been reissued pursuant to certain stock-based benefit
plans. In October 1999, The Hartford's Board of Directors authorized the
repurchase of up to $1 billion of the Company's outstanding common stock. This
repurchase authorization will be initiated when the prior repurchase
authorization granted in December 1997 is complete, and will cover a three-year
period.
Unrealized Gain (Loss) - Unrealized gain (loss) on securities, net of tax,
decreased by $862 as of September 30, 1999 compared to December 31, 1998. The
change resulted primarily from the impact of increased interest rates on the
fixed maturity portfolio.
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
Nine Months Ended
September 30,
--------------------------
1999 1998
- ------------------------------------------------------------------
Cash provided by operating activities $ 435 $ 758
Cash provided by (used for)
investing activities $ 2,623 $ (394)
Cash used for financing activities $ (3,042) $ (371)
Cash - end of period $ 135 $ 135
- ------------------------------------------------------------------
The decrease in cash provided by operating activities was primarily the result
of higher claim payments, partially offset by a decrease in income taxes paid.
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. Operating cash flows in both periods have been
more than adequate to meet liquidity requirements.
- 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
("Codification") in September 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 Codification and the Company will
make the necessary changes required for implementation. The Company has not yet
determined the impact that Codification will have 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 existing,
exclusive 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 market
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,
third party administrators, securities broker-dealers, banks, and other
distributors and servicers 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 has completed internal
integrated testing related to initiative (5) and will continue external
integrated testing 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
- 20 -
<PAGE>
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, including, without limitation, suppliers,
computer hardware and software vendors, insurance agents and brokers, third
party administrators, securities broker-dealers, 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 $18 to $20, of which approximately $13 were
incurred for the nine months ended September 30, 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 has substantially completed the development of 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 involved 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 has developed
plans to respond to such problems so that critical business functions may
continue to operate with minimal disruption. Contingency planning also included
assessing the dependency of The Hartford's critical business functions on
critical third parties and their Year 2000 readiness. These plans were reviewed
and simulated on an integrated basis, where appropriate, and will continue to be
evaluated 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.
Rollover and Event Management
A Corporate Event Management Team has been established to monitor the
corporate-wide rollover from 1999 to 2000. In addition, each business unit has
developed detailed rollover plans that will be managed and coordinated by its
individual Business Unit Event Management Centers.
Insurance Claims
As an insurer, The Hartford expects to 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.
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 will 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 will 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.
- 21 -
<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.
- 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/ John N. Giamalis
------------------------------------
John N. Giamalis
Senior Vice President and Controller
November 12, 1999
- 23 -
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHBITS INDEX
Exhibit #
---------
27 Financial Data Schedule is filed herewith.
- 24 -
<PAGE>
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> SEP-30-1999
<DEBT-HELD-FOR-SALE> 33,282
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,156
<MORTGAGE> 207
<REAL-ESTATE> 9
<TOTAL-INVEST> 39,417
<CASH> 135
<RECOVER-REINSURE> 4,359
<DEFERRED-ACQUISITION> 4,922
<TOTAL-ASSETS> 153,553
<POLICY-LOSSES> 22,338
<UNEARNED-PREMIUMS> 2,715
<POLICY-OTHER> 16,685
<POLICY-HOLDER-FUNDS> 98,340
<NOTES-PAYABLE> 1,579
<COMMON> 2
1,250 <F1>
0
<OTHER-SE> 5,771
<TOTAL-LIABILITY-AND-EQUITY> 153,553
8,105
<INVESTMENT-INCOME> 1,957
<INVESTMENT-GAINS> 30
<OTHER-INCOME> 0
<BENEFITS> 5,939
<UNDERWRITING-AMORTIZATION> 1,464
<UNDERWRITING-OTHER> 1,785
<INCOME-PRETAX> 904
<INCOME-TAX> 202
<INCOME-CONTINUING> 639
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 639
<EPS-BASIC> 2.82
<EPS-DILUTED> 2.79
<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>
