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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended June 30, 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 July 31, 1999, there were outstanding 226,006,205 shares of Common Stock,
$0.01 par value per share, of the registrant.
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
- ------------------------------
Item 1. Financial Statements Page
----
Consolidated Statements of Income - Second Quarter and Six Months
Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 4
Consolidated Statements of Changes in Stockholders' Equity - Six Months
Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows - Six Months Ended June 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 4. Submission of Matters to a Vote of Security Holders 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
Second Quarter Ended Six Months Ended
June 30, June 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 $ 2,688 $ 2,730 $ 5,293 $ 5,678
Net investment income 652 685 1,317 1,369
Net realized capital gains 9 78 38 174
------------------------------------------------------------------- ------------- ------------- ------------ -------------
TOTAL REVENUES 3,349 3,493 6,648 7,221
------------------------------------------------------------ ------------- ------------- ------------ -------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,005 2,035 3,914 4,146
Amortization of deferred policy acquisition costs 490 567 948 1,054
Other expenses 547 551 1,135 1,295
------------------------------------------------------------------- ------------- ------------- ------------ -------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 3,042 3,153 5,997 6,495
------------------------------------------------------------ ------------- ------------- ------------ -------------
OPERATING INCOME 307 340 651 726
Income tax expense 71 87 157 193
------------------------------------------------------------------- ------------- ------------- ------------ -------------
INCOME BEFORE MINORITY INTEREST 236 253 494 533
Minority interest in consolidated subsidiary (21) (17) (41) (33)
------------------------------------------------------------------- ------------- ------------- ------------ -------------
NET INCOME $ 215 $ 236 $ 453 $ 500
------------------------------------------------------------ ------------- ------------- ------------ -------------
Basic earnings per share $ 0.95 $ 1.00 $ 2.00 $ 2.12
Diluted earnings per share $ 0.93 $ 0.99 $ 1.97 $ 2.09
------------------------------------------------------------------- ------------- ------------- ------------ -------------
Weighted average common shares outstanding 226.8 235.4 226.9 235.6
Weighted average common shares outstanding and dilutive potential
common shares 230.0 239.1 230.0 239.1
------------------------------------------------------------------- ------------- ------------- ------------ -------------
Cash dividends declared per share $ 0.23 $ 0.21 $ 0.45 $ 0.42
=================================================================== ============= ============= ============ =============
</TABLE>
See Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Balance Sheets
June 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 $33,767 and
$34,191) $ 33,738 $ 35,331
Equity securities, available for sale, at fair value (cost of $863 and $846) 1,131 1,066
Policy loans, at outstanding balance 4,529 6,687
Other investments 608 612
- ------------------------------------------------------------------------------------------- ----------------- -----------------
Total investments 40,006 43,696
Cash 201 123
Premiums receivable and agents' balances 2,058 1,833
Reinsurance recoverables 4,512 4,978
Deferred policy acquisition costs 4,832 4,579
Deferred income tax 1,327 1,085
Other assets 3,045 2,759
Separate account assets 101,282 91,579
- ------------------------------------------------------------------------------------------- ----------------- -----------------
TOTAL ASSETS $ 157,263 $ 150,632
----------------------------------------------------------------------------------- ----------------- -----------------
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 16,093 $ 16,449
Life 6,142 6,088
Other policy claims and benefits payable 17,074 19,774
Unearned premiums 2,651 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 4,762 4,547
Separate account liabilities 101,282 91,579
- ------------------------------------------------------------------------------------------- ----------------- -----------------
150,833 143,744
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 1,556 1,591
Retained earnings 4,824 4,474
Treasury stock, at cost - 12,258,859 and 11,310,598 shares (518) (455)
Accumulated other comprehensive income 133 811
- ------------------------------------------------------------------------------------------- ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 5,997 6,423
----------------------------------------------------------------------------------- ----------------- -----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 157,263 $ 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
Six Months Ended June 30, 1999
Accumulated Other
Comprehensive Income
-------------------------------
Common Stock/ Treasury Unrealized Gain Cumulative Outstanding
Additional Retained Stock, on Securities, Translation Shares
(Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $1,593 $4,474 $(455) $811 $-- $6,423 227,395
Comprehensive income
Net income 453 453
Other comprehensive income (loss), net
of tax (1)
Unrealized gain (loss) on securities (639) (639)
(2)
Cumulative translation adjustments (39) (39)
----------
Total other comprehensive income (loss) (678)
----------
Total comprehensive income (loss) (225)
----------
Issuance of shares under incentive and
stock purchase plans (47) 85 38 1,667
Tax benefit on employee stock options
and awards 15 15
Treasury stock acquired (3) (148) (151) (2,675)
Dividends declared on common stock (103) (103)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $1,558 $4,824 $(518) $172 $(39) $5,997 226,387
===================================================================================================================================
Six Months Ended June 30, 1998
Accumulated Other
Comprehensive Income
-------------------------------
Common Stock/ Treasury Unrealized Gain Cumulative Outstanding
Additional Retained Stock, on Securities, Translation Shares
(Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands)
- -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD 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 500 500
Other comprehensive income, net of tax
(1)
Unrealized gain on securities (2) 61 61
Cumulative translation adjustments (2) (2)
-----------
Total other comprehensive income 59
-----------
Total comprehensive income 559
-----------
Issuance of shares under incentive and
stock purchase plans 23 26 49 1,324
Tax benefit on employee stock options
and awards 15 15
Treasury stock acquired (86) (86) (172) (3,262)
Dividends declared on common stock (99) (99)
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $1,595 $4,059 $(108) $914 $(23) $6,437 234,014
===================================================================================================================================
<FN>
(1) Unrealized gain (loss) on securities is net of tax expense (benefit) of
$(344) and $34 for the six months ended June 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 $25
and $113 for the six months ended June 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
Six Months Ended
June 30,
----------------------------------
(In millions) 1999 1998
- ------------------------------------------------------------------------------------------- ----------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 453 $ 500
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Change in receivables, payables and accruals (118) (277)
Decrease in reinsurance recoverables and other related assets 193 265
Increase in deferred policy acquisition costs (267) (346)
Change in accrued and deferred income taxes (12) (53)
(Decrease) increase in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums (132) 338
Minority interest in consolidated subsidiary 41 33
Net realized capital gains (38) (174)
Depreciation and amortization 36 64
Other, net (50) (47)
- ------------------------------------------------------------------------------------------- ----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 106 303
=========================================================================================== ==================================
INVESTING ACTIVITIES
Purchase of investments (10,322) (16,061)
Sale of investments 9,212 6,245
Maturity of investments 3,669 9,575
Purchase of affiliate -- (189)
Additions to plant, property and equipment (46) (63)
- ------------------------------------------------------------------------------------------- ----------------------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 2,513 (493)
- ------------------------------------------------------------------------------------------- ----------------------------------
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) receipts from investment and universal life-type contracts
credited to (charged against) policyholder accounts (2,316) 223
Dividends paid (104) (97)
Acquisition of treasury stock (151) (152)
Proceeds from issuances under incentive and stock purchase plans 34 28
- ------------------------------------------------------------------------------------------- ----------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (2,537) 192
- ------------------------------------------------------------------------------------------- ----------------------------------
Foreign exchange rate effect on cash (4) 1
- ------------------------------------------------------------------------------------------- ----------------------------------
Net increase in cash 78 3
Cash - beginning of period 123 140
- ------------------------------------------------------------------------------------------- ----------------------------------
CASH - END OF PERIOD $ 201 $ 143
- ------------------------------------------------------------------------------------------- ----------------------------------
Supplemental Disclosure of Cash Flow Information:
- ------------------------------------------------
Net Cash Paid During the Period For:
Income taxes $ 110 $ 191
Interest $ 107 $ 106
</TABLE>
See Notes to Consolidated Financial Statements.
- 6 -
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions except for share data unless otherwise stated)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
(a) Basis of Presentation
The accompanying unaudited consolidated financial statements of The Hartford
Financial Services Group, Inc. ("The Hartford" or the "Company") have been
prepared in accordance with generally accepted accounting principles for interim
periods. Less than majority-owned entities in which The Hartford has at least a
20% interest are reported on an equity basis. In the opinion of management,
these statements include all normal recurring adjustments necessary to present
fairly the financial position, results of operations and cash flows for the
periods presented. For a description of accounting policies, see Note 1 of Notes
to Consolidated Financial Statements included in The Hartford's 1998 Form 10-K
Annual Report.
Certain reclassifications have been made to prior year financial information to
conform to the current year classification of transactions and accounts.
(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 both the quarter and six months ended
June 30, 1999 would have been approximately $1 lower and cumulatively over the
life of the instrument would have been $24 higher had the Company accounted for
its structured note transaction as a unit, based upon the consensus reached in
EITF 98-15.
NOTE 2. EARNINGS PER SHARE
The following tables present a reconciliation of income and shares used in
calculating basic earnings per share to those used in calculating diluted
earnings per share.
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
------------------------------------- -------------------------------------
Per Share Per Share
June 30, 1999 Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per Share
Income available to common shareholders $ 215 226.8 $ 0.95 $ 453 226.9 $ 2.00
------------- ------------
Diluted Earnings per Share
Options and contingently issuable shares -- 3.2 -- 3.1
------------------------ -------------------------
Income available to common shareholders plus assumed
conversions $ 215 230.0 $ 0.93 $ 453 230.0 $ 1.97
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 7 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
------------------------------------- -------------------------------------
Per Share Per Share
June 30, 1998 Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Basic Earnings per Share
Income available to common shareholders $ 236 235.4 $ 1.00 $ 500 235.6 $ 2.12
------------- ------------
Diluted Earnings per Share
Options and contingently issuable shares -- 3.7 -- 3.5
------------------------ -------------------------
Income available to common shareholders plus assumed
conversions $ 236 239.1 $ 0.99 $ 500 239.1 $ 2.09
===================================================================================================================================
</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 on December 11, 1998, CFS filed for protection
under Chapter 11 of the Bankruptcy Code. As a result, the Company recognized a
$36, after-tax, writedown on its asset backed securities securitized and
serviced by CFS, during the fourth quarter of 1998. (For a further discussion of
CFS, see Note 15 (e) of Notes to Consolidated Financial Statements included in
The Hartford's 1998 Form 10-K Annual Report.)
In June 1999, CFS ceased operations and bankruptcy trustees began the process of
transitioning servicing accounts over to back up servicers. As a result, the
Company recognized a $42, after-tax, writedown related to the asset backed
securities, during the second quarter of 1999. As of June 30, 1999, The
Hartford's amortized cost and estimated fair value of these securities was $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
Second Quarter Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Earned premiums and other considerations
Commercial $ 808 $ 855 $ 1,603 $ 1,718
Personal 617 554 1,226 1,095
Reinsurance 186 160 337 312
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty earned premiums and other
considerations 1,611 1,569 3,166 3,125
Net investment income 216 206 427 408
Net realized capital gains 6 42 22 121
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty 1,833 1,817 3,615 3,654
Life 1,357 1,155 2,692 2,559
International 123 478 268 924
Other Operations 36 43 73 84
- ------------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 3,349 $ 3,493 $ 6,648 $ 7,221
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
CORE EARNINGS
Second Quarter Ended Six Months Ended
June 30, June 30,
---------------------------------------------------------
1999 1998 1999 1998
---------------------------------------------------------
<S> <C> <C> <C> <C>
Underwriting results
Commercial $ (43) $ (58) $ (95) $ (156)
Personal 2 8 45 46
Reinsurance (6) (9) (9) (12)
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty underwriting results (47) (59) (59) (122)
Net investment income 216 206 427 408
Other expense (59) (47) (133) (71)
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty 110 100 235 215
Life 114 94 220 178
International 6 9 12 26
Other Operations (19) (17) (38) (32)
- ------------------------------------------------------------------------------------------------------------------------------------
Total core earnings 211 186 429 387
Net realized capital gains, after-tax 4 50 24 113
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 215 $ 236 $ 453 $ 500
====================================================================================================================================
</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 June
30, 1999, compared with December 31, 1998, and its results of operations for the
second quarter and six months ended June 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 11
Commercial 12
Personal 12
Reinsurance 13
Life 13
International 14
Other Operations 14
Environmental and Asbestos Claims 14
Investments 16
Capital Markets Risk Management 18
Capital Resources and Liquidity 19
Regulatory Initiatives and Contingencies 20
Accounting Standards 21
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
<TABLE>
<CAPTION>
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
June 30, June 30,
----------------------------- --------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 3,349 $ 3,493 $ 6,648 $ 7,221
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 215 $ 236 $ 453 $ 500
Less: Net realized capital gains, after-tax 4 50 24 113
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 211 $ 186 $ 429 $ 387
====================================================================================================================================
</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 second quarter and six months ended June 30, 1999 decreased
$144, or 4%, and $573, or 8%, 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, partially offset by premium growth in North American Property & Casualty
and Life. (For an analysis of net realized capital gains, see the Investments
section.)
Core earnings increased $25, or 13%, and $42, or 11%, for the second quarter and
six months ended June 30, 1999, respectively, from the comparable prior year
periods due primarily to higher fee income in the Investment Products operation
as a result of increasing account values, and a reduction in underwriting losses
in the Commercial segment of North American Property & Casualty, partially
offset by a decrease in International earnings as a result of the sale of London
& Edinburgh.
The effective tax rates for the second quarter and six months ended June 30,
1999 were 23% and 24%, respectively, compared
- 10 -
<PAGE>
to 26% and 27% for the comparable periods in 1998. Tax-exempt interest earned on
invested assets was the principal cause of effective tax rates lower than the
35% U.S. statutory rate.
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>
Second Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Commercial $ (43) $ (58) $ (95) $ (156)
Personal 2 8 45 46
Reinsurance (6) (9) (9) (12)
- ------------------------------------------------------------------------------------------------------------------------------------
Total $ (47) $ (59) $ (59) $ (122)
====================================================================================================================================
</TABLE>
The following is a summary of core earnings and net income (loss).
<TABLE>
<CAPTION>
Core earnings Second Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- -------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
North American Property & Casualty $ 110 $ 100 $ 235 $ 215
Life 114 94 220 178
International 6 9 12 26
Other Operations (19) (17) (38) (32)
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 211 $ 186 $ 429 $ 387
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Net income (loss) Second Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- --------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
North American Property & Casualty $ 113 $ 127 $ 249 $ 293
Life 114 94 220 178
International 8 32 23 60
Other Operations (20) (17) (39) (31)
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 215 $ 236 $ 453 $ 500
====================================================================================================================================
</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.
NORTH AMERICAN PROPERTY & CASUALTY
<TABLE>
<CAPTION>
Operating Summary Second Quarter Ended Six Months Ended
June 30, June 30,
----------------------------- --------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 1,833 $ 1,817 $ 3,615 $ 3,654
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 113 $ 127 $ 249 $ 293
Less: Net realized capital gains, after-tax 3 27 14 78
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 110 $ 100 $ 235 $ 215
====================================================================================================================================
</TABLE>
Revenues for North American Property & Casualty increased $16, or 1%, for the
second quarter and decreased $39, or 1%, for the six months ended June 30, 1999
compared with the same prior year periods. The increase for the second quarter
was due to a
- 11 -
<PAGE>
$42 increase in earned premiums and other considerations and higher net
investment income of $10, partially offset by a $36 decrease in pre-tax net
realized capital gains. For the six 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
$96 increase in earned premiums and other considerations and higher net
investment income of $19.
Core earnings increased $10, or 10%, for the second quarter and $20, or 9%, for
the six months ended June 30, 1999 compared to the same periods in 1998. These
increases were primarily due to higher after-tax net investment income, a
decrease in underwriting losses primarily due to lower catastrophe related
experience and, for the six month period, as a result of 1998 reserves
associated with the IRI transaction. Partially offsetting the increase for the
six month period were 1998 proceeds related to the IRI transaction.
COMMERCIAL
<TABLE>
<CAPTION>
Operating Summary Second Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Written premiums $ 794 $ 806 $ 1,561 $ 1,626
Underwriting results $ (43) $ (58) $ (95) $ (156)
Combined ratio 105.1 106.9 106.0 108.9
====================================================================================================================================
</TABLE>
Commercial written premiums decreased $12, or 1%, for the second quarter and
$65, or 4%, for the six months ended June 30, 1999 compared with the same
periods in 1998. Continued solid growth in the small commercial businesses, with
Select Customer up 12% and 11%, and Commercial Affinity up 22% and 21% for the
second quarter and six months ended June 30, 1999, respectively, were more than
offset by decreases in mid-market standard commercial business (Key Accounts) of
9% and 11%, Major/National Accounts of 18% and 20%, and Other of 7% and 10%,
respectively. 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 $15, or 1.8 combined ratio points, for the second
quarter and $61, or 2.9 combined ratio points, for the six months ended June 30,
1999 compared with the same prior year periods. The improvement for the quarter
was primarily the result of a decrease in catastrophe related losses of $29, or
3.4 combined ratio points, partially offset by an increase in other underwriting
expenses. For the six month period, the improvement was due primarily to lower
catastrophe related losses of $35, or 2.1 combined ratio points, loss reserves
established in the first quarter of 1998 as part of the sale of IRI and a
decrease in underwriting expenses.
PERSONAL
<TABLE>
<CAPTION>
Operating Summary Second Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Written premiums $ 635 $ 589 $ 1,195 $ 1,080
Underwriting results $ 2 $ 8 $ 45 $ 46
Combined ratio 101.8 98.0 98.6 95.7
====================================================================================================================================
</TABLE>
Personal written premiums increased $46, or 8%, for the second quarter and $115,
or 11%, for the six months ended June 30, 1999 over the comparable prior year
periods. The increase was primarily the result of an increase in written
premiums at Omni of $25 for the quarter and $74 for the six month period
contributing 4% and 7%, respectively, to the segment's growth. As of June 30,
1999, non-standard automobile coverage through Omni was available in 24 states
up from 13 states at the time of Omni's acquisition in 1998. Also, growth in
AARP premiums increased $15, or 4%, for the quarter and $33, or 5%, for the six
month period contributing 3% to the segment's growth in both periods.
Underwriting results decreased $6, or 75%, for the second quarter and $1, or 2%,
for the six months ended June 30, 1999 with a corresponding 3.8 point increase
in the combined ratio for the quarter and a 2.9 point increase for the six month
period compared with 1998. The decrease in underwriting results and related
increase in the combined ratio was principally driven by expenses, up 2.7 points
for the quarter and 2.2 points for the six months ended June 30, 1999 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 growth of Omni. Loss adjustment expense
increased due to investments in claim initiatives to lower overall loss costs.
Partially offsetting the increase in expenses for the second quarter and six
months ended June 30, 1999 compared with 1998 was lower catastrophe experience.
- 12 -
<PAGE>
REINSURANCE
<TABLE>
<CAPTION>
Operating Summary Second Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
- --------------------------------------------------------------------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Written premiums $ 174 $ 174 $ 392 $ 325
Underwriting results $ (6) $ (9) $ (9) $ (12)
Combined ratio 102.7 107.0 102.4 105.3
====================================================================================================================================
</TABLE>
Reinsurance written premiums were flat for the second quarter and increased $67,
or 21%, for the six months ended June 30, 1999, compared with the same prior
year periods. The 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., and increases in
North American excess of loss premiums.
Underwriting results increased $3, or 33%, for the second quarter and $3, or
25%, for the six months ended June 30, 1999 with a corresponding 4.3 point
improvement in the combined ratio for the quarter and a 2.9 point improvement
for the six month period compared with 1998. The increase in underwriting
results was due primarily to lower catastrophe experience for both periods of
1999 compared with 1998. The improvement in the combined ratio for both periods
reflected lower catastrophes in addition to a reduction in commissions resulting
from a shift to excess of loss business.
LIFE
<TABLE>
<CAPTION>
Operating Summary [1] Second Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 1,357 $ 1,155 $ 2,692 $ 2,559
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 114 $ 94 $ 220 $ 178
Less: Net realized capital gaines, after-tax -- -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 114 $ 94 $ 220 $ 178
====================================================================================================================================
<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 $202, or 17%, and $133, or 5%, for the
second quarter and six months ended June 30, 1999, as compared to the second
quarter and six months ended June 30, 1998, respectively. This increase was
primarily attributable to the Investment Products operation where revenues
increased $43, or 9%, and $92, or 10%, 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 $17.1 billion, or 22%, to $93.6 billion as of June 30, 1999
from $76.5 billion as of June 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 $59, or 14%, and
$70, or 8%, for the second quarter and six months ended June 30, 1999, as
compared to the second quarter and six months ended June 30, 1998, respectively,
as a result of strong sales and persistency. Also, Corporate Owned Life
Insurance ("COLI") revenues increased $83, or 63%, for the second quarter of
1999 as compared to the second quarter of 1998, primarily due to cost of
insurance charges associated with the MBL business which was recaptured in
November 1998. (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.) However, COLI revenues for the six months ended June 30, 1999
compared to the equivalent 1998 period decreased $34, or 7%, primarily due to
revenues associated with significant sales in the first quarter of 1998.
The increase in core earnings of $20, or 21%, and $42, or 24%, for the second
quarter and six months ended June 30, 1999, 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 $15, or 23%, and $32, or
25%, for the second quarter and six months ended June 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
13%, and $4, or 14%, respectively, compared to the prior year periods, primarily
due to continued growth in variable life account values. Employee Benefits' core
earnings increased $2, or 12%, and $4, or 13%, 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 second quarter and $2, or 17%, for the six months ended June
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.
- 13 -
<PAGE>
INTERNATIONAL
<TABLE>
<CAPTION>
Operating Summary Second Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 123 $ 478 $ 268 $ 924
- ------------------------------------------------------------------------------------------------------------------------------------
Net income $ 8 $ 32 $ 23 $ 60
Less: Net realized capital gains, after-tax 2 23 11 34
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 6 $ 9 $ 12 $ 26
====================================================================================================================================
</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 $28, or 19%, for the second quarter
and $7, or 3%, for the six months ended June 30, 1999 over the comparable
periods in 1998. The decrease was primarily due to a decline in net realized
capital gains of $31, or 89%, for the second quarter and $27, or 61%, for the
six months ended June 30, 1999 compared with the prior year periods. (For an
analysis of net realized capital gains, see the Investments section.) Partially
offsetting the decrease was an increase in earned premiums of $1, or 1%, for the
second quarter and $19, or 10%, for the six months ended June 30, 1999 due to
continued growth in automobile business at Hartford Seguros (formerly Ercos) in
Spain and, for the six month period, growth in health and life business at
Zwolsche in the Netherlands. Foreign exchange impacts on total revenues were not
material for the second quarter and six months ended June 30, 1999 compared to
the same periods in 1998.
Excluding London & Edinburgh, core earnings were at the same level for the
second quarter ended June 30, 1999 compared to the second quarter of 1998. For
the six month period, core earnings decreased $2, or 14%, over the comparable
1998 period. The decrease was due to higher loss ratios in automobile in each
operating location and lower margins in life business in Hartford Seguros.
Automobile business in the Netherlands, Spain and Singapore is experiencing
increased competition in pricing. Life business in Spain had reduced margins due
to lower interest rates. Foreign exchange impacts on core earnings for the
second quarter and six months ended June 30, 1999 were not material when
compared to the same periods in 1998.
OTHER OPERATIONS
<TABLE>
<CAPTION>
Operating Summary Second Quarter Ended Six Months Ended
June 30, June 30,
--------------------------------------------------------
1999 1998 1999 1998
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Total revenues $ 36 $ 43 $ 73 $ 84
- ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (20) $ (17) $ (39) $ (31)
Less: Net realized capital gains (losses), after-tax (1) -- (1) 1
- ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ (19) $ (17) $ (38) $ (32)
====================================================================================================================================
</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.
Other Operations' revenues decreased $7, or 16%, for the second quarter and $11,
or 13%, for the six months ended June 30, 1999 compared to the same prior year
periods. The decrease in revenues is consistent with the runoff nature of these
operations. For the second quarter and six months ended June 30, 1999, core
earnings included $(21) and $(41) minority interest in HLI's operating results,
respectively, while 1998 included $(17) and $(33), respectively. Excluding
minority interest, core earnings increased $2 for the second quarter and six
months ended June 30, 1999 compared with the same periods in 1998.
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
- 14 -
<PAGE>
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 six months ended
June 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
Six Months Ended Year Ended
June 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 3 1 4 -- 6 6
Claims and claim adjustment expenses paid (113) (23) (136) (150) (64) (214)
Other [1] -- -- -- (18) 18 --
-----------------------------------------------------------------------------------------------------------------------------------
Ending liability [2] $ 1,034 $ 626 $ 1,660 $ 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 $1,577 and $1,711 for June 30, 1999 and December 31, 1998,
respectively. Gross of reinsurance as of June 30, 1999 and December 31,
1998, reserves for environmental and asbestos were $1,677 and $1,560 and
$1,850 and $1,653, respectively.
</FN>
</TABLE>
The Hartford believes that the environmental and asbestos reserves recorded at
June 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 $14.7 billion at June 30, 1999 and were comprised of
fixed maturities of $13.8 billion and other investments of $921, primarily
equity securities.
Fixed Maturities by Type
- ------------------------------------------------------------------
June 30, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Municipal - tax-exempt $ 8,432 61.3% $ 8,804 61.5%
Corporate 2,075 15.1% 2,119 14.8%
Commercial MBS 847 6.2% 834 5.8%
Gov't/Gov't agencies - For. 617 4.5% 501 3.5%
MBS - agency 515 3.7% 348 2.4%
ABS 459 3.3% 500 3.5%
CMO 282 2.0% 415 2.9%
Gov't/Gov't agencies - U.S. 40 0.3% 46 0.3%
Municipal - taxable 18 0.1% 24 0.2%
Short-term 374 2.7% 663 4.6%
Redeemable preferred stock 106 0.8% 65 0.5%
- -----------------------------------------------------------------
Total fixed maturities $ 13,765 100.0% $ 14,319 100.0%
- -----------------------------------------------------------------
The taxable equivalent duration of the June 30, 1999 fixed maturity portfolio
was 5.0 years compared to 4.8 years at December 31, 1998. Duration is defined as
the market price sensitivity of the portfolio to parallel shifts in the yield
curve.
INVESTMENT RESULTS
The table below summarizes North American Property & Casualty's results.
Second Quarter Six Months Ended
Ended June 30, June 30,
----------------------------------------
1999 1998 1999 1998
- ------------------------- --------- ---------- --------- ---------
Net investment income,
before-tax $ 216 $ 206 $ 427 $ 408
Net investment income,
after-tax [1] $ 173 $ 164 $ 343 $ 326
Yield on average
invested assets,
before-tax [2] 6.0% 5.8% 5.9% 5.8%
Yield on average
invested assets,
after-tax [1] [2] 4.8% 4.6% 4.8% 4.6%
Net realized capital
gains, before-tax $ 6 $ 42 $ 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 second quarter and six months ended June 30, 1999, both before and
after-tax net investment income increased 5%. The 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 positively impacted both before and after-tax net investment
income and yields. After-tax net investment income was also favorably impacted
by the fourth quarter 1998 reallocation of assets from taxable bonds to
tax-exempt bonds.
Net realized capital gains for the second quarter and six months ended June 30,
1999 decreased from the respective prior year periods, primarily as a result of
opportunities taken in 1998 as a result of a strong equity market. During the
second quarter of 1999, net gains from the sale of fixed maturities and equity
securities were partially offset by a $9 after-tax impairment of asset backed
securities securitized and serviced by Commercial Financial Services Inc.
("CFS"). (For additional information on CFS, see Note 3 of Notes to Consolidated
Financial Statements under "Investments".)
LIFE
Invested assets, excluding separate accounts, totaled $22.1 billion at June 30,
1999 and were comprised of $17.1 billion of fixed maturities, $4.5 billion of
policy loans, and other investments of $487. 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 $2.2 billion from December 31, 1998, as a result of the declining
block of leveraged COLI business.
Fixed Maturities by Type
- ------------------------------------------------------------------
June 30, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Corporate $ 8,128 47.7% $ 7,898 44.6%
ABS 2,554 15.0% 2,465 13.9%
Commercial MBS 1,996 11.7% 2,036 11.5%
Municipal - tax-exempt 1,008 5.9% 916 5.2%
MBS - agency 844 4.9% 503 2.9%
CMO 661 3.9% 831 4.7%
Gov't/Gov't agencies - For. 493 2.9% 530 3.0%
Gov't/Gov't agencies - U.S. 228 1.3% 166 0.9%
Municipal - taxable 172 1.0% 223 1.3%
Short-term 926 5.4% 2,119 12.0%
Redeemable preferred stock 48 0.3% 5 --
- -----------------------------------------------------------------
Total fixed maturities $ 17,058 100.0% $ 17,692 100.0%
- -----------------------------------------------------------------
Short-term securities declined primarily as a result of the funding of scheduled
liability maturities and the reallocation of short-term assets into other asset
sectors.
- 16 -
<PAGE>
INVESTMENT RESULTS
The table below summarizes the Life segment's results.
Second Quarter Six Months Ended
Ended June 30, June 30,
----------------------------------------
(before-tax) 1999 1998 1999 1998
- ------------------------- --------- ---------- --------- ---------
Net investment income -
Excluding policy loans $ 284 $ 286 $ 574 $ 582
Policy loan income 97 106 208 210
---------------------------------------
Net invest. Income -
total 381 392 782 792
Yield on average
invested assets [1] 6.9% 7.4% 6.7% 7.6%
Net realized capital
gains $ -- $ -- $ -- $ --
- ------------------------------------------------------------------
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed maturities
at amortized cost).
Net investment income for the second quarter and six months ended June 30, 1999
decreased slightly compared to the respective prior year periods. Yield on
average invested assets declined to 6.9% and 6.7% for the second quarter and six
months ended June 30, 1999, respectively. This decline was a result of a
decrease in policy loan weighted-average interest rates, which declined to 7.8%
as of June 30, 1999 from 11.1% as of June 30, 1998, combined with an increase in
average policy loan balances.
There were no net realized capital gains or losses for the second quarter and
six months ended June 30, 1999 and 1998. During the second quarter of 1999, net
gains from the sale of fixed maturities and equity securities were offset by a
$32 after-tax impairment of asset backed securities securitized and serviced by
CFS. (For additional information on CFS, see Note 3 of Notes to Consolidated
Financial Statements under "Investments".)
INTERNATIONAL
Invested assets, excluding separate accounts, were $1.1 billion at June 30, 1999
and were comprised of fixed maturities of $750 and other investments of $329,
primarily equity securities.
Fixed Maturities by Type
- ------------------------------------------------------------------
June 30, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Gov't/Gov't agencies - For. $ 521 69.5% $ 611 72.4%
Corporate 120 16.0% 109 12.9%
Short-term 109 14.5% 124 14.7%
- -----------------------------------------------------------------
Total fixed maturities $ 750 100.0% $ 844 100.0%
- -----------------------------------------------------------------
Investment Results
The table below summarizes the International segment's results.
Second Quarter Six Months Ended
Ended June 30, June 30,
----------------------------------------
(before-tax) 1999 1998 1999 1998
- ------------------------- --------- ---------- --------- ---------
Net investment income $ 18 $ 46 $ 34 $ 89
Yield on average
invested assets [1] 7.0% 7.0% 6.5% 6.8%
Net realized capital
gains $ 4 $ 35 $ 17 $ 51
- ------------------------------------------------------------------
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the second quarter and six months ended June 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. Yield on average invested assets for the quarter ended June 30,
1999 was flat compared to 1998. For the six months ended June 30, 1999, yield on
average invested assets decreased slightly primarily due to a continued lower
interest rate environment in Europe.
Net realized capital gains for the second quarter and six months ended June 30,
1999 decreased from the respective prior year periods, primarily due to
opportunities taken in 1998 as a result of a strong equity market in the
Netherlands.
OTHER OPERATIONS
Invested assets were $2.2 billion at June 30, 1999 and were substantially
comprised of fixed maturities.
Fixed Maturities by Type
- ------------------------------------------------------------------
June 30, 1999 December 31, 1998
- -----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
Corporate $ 1,409 65.1% $ 1,603 64.7%
Commercial MBS 193 8.9% 145 5.9%
ABS 163 7.5% 224 9.0%
Gov't/Gov't agencies - U.S. 69 3.2% 82 3.3%
Gov't/Gov't agencies - For. 68 3.1% 50 2.0%
Municipal - taxable 38 1.8% 40 1.6%
MBS - agency 34 1.6% 41 1.7%
CMO 13 0.6% 20 0.8%
Short-term 169 7.8% 262 10.6%
Redeemable preferred stock 9 0.4% 9 0.4%
- -----------------------------------------------------------------
Total fixed maturities $ 2,165 100.0% $ 2,476 100.0%
- -----------------------------------------------------------------
Investment Results
The table below summarizes the Other Operations segment's results.
Second Quarter Six Months Ended
Ended June 30, June 30,
----------------------------------------
(before-tax) 1999 1998 1999 1998
- ------------------------- --------- ---------- --------- ---------
Net investment income $ 37 $ 41 $ 74 $ 80
Yield on average
invested assets [1] 6.6% 6.8% 6.5% 6.6%
Net realized capital
gains (losses) $ (1) $ 1 $ (1) $ 2
- ------------------------------------------------------------------
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed
maturities at amortized cost).
Net investment income and yields for the second quarter and six months ended
June 30, 1999 decreased slightly compared to the respective prior year periods.
Net realized capital losses for the second quarter and six months ended June 30,
1999, included a $1, after-tax, impairment related to CFS.
- 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. For a discussion of investment
contingencies, see Note 3 (c) of Notes to Consolidated Financial Statements.
The following tables identify fixed maturity securities for the property and
casualty operations, including international and other operations, and the life
operations, including international operations and guaranteed separate accounts,
by credit quality. The ratings referenced in the tables are based on the ratings
of a nationally recognized rating organization or, if not rated, assigned based
on the Company's internal analysis of such securities.
PROPERTY AND CASUALTY OPERATIONS
As of June 30, 1999, over 96% of the fixed maturity portfolio was invested in
securities rated investment grade.
Fixed Maturities by Credit Quality
- -----------------------------------------------------------------
June 30, 1999 December 31, 1998
- -----------------------------------------------------------------
Credit Quality Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 831 5.1% $ 805 4.7%
AAA 6,473 39.8% 6,570 38.2%
AA 3,088 19.0% 3,209 18.7%
A 3,200 19.7% 3,409 19.8%
BBB 1,457 8.9% 1,508 8.8%
BB & below 621 3.8% 682 3.9%
Short-term 603 3.7% 1,016 5.9%
- -----------------------------------------------------------------
Total fixed maturities $ 16,273 100.0% $ 17,199 100.0%
- -----------------------------------------------------------------
Life Operations
As of June 30, 1999, over 98% of the fixed maturity portfolio was invested in
securities rated investment grade.
Fixed Maturities by Credit Quality
- -----------------------------------------------------------------
June 30, 1999 December 31, 1998
- ------------------------------------------------------------------
Credit Quality Fair Value Percent Fair Value Percent
- -----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,704 10.1% $ 2,596 9.3%
AAA 3,934 14.7% 3,907 14.0%
AA 2,721 10.2% 2,716 9.7%
A 9,028 33.7% 8,878 31.8%
BBB 6,749 25.2% 7,019 25.2%
BB & below 396 1.5% 492 1.8%
Short-term 1,219 4.6% 2,298 8.2%
- -----------------------------------------------------------------
Total fixed maturities $ 26,751 100.0% $ 27,906 100.0%
- -----------------------------------------------------------------
MARKET RISK
The Hartford has material exposure to both interest rate and equity market risk.
The Company analyzes interest rate risk using various models including
multi-scenario cash flow projection models that forecast cash flows of the
liabilities and their supporting investments, including derivative instruments.
There have been no material changes in market risk exposures from December 31,
1998.
DERIVATIVE INSTRUMENTS
The Hartford utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or to control transaction costs. The
Company does not make a market or trade derivatives for the express purpose of
earning trading profits.
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the Company's Finance Committee.
The notional amounts of derivative contracts represent the basis upon which pay
or receive amounts are calculated and are not reflective of credit risk.
Notional amounts pertaining to derivative instruments for both general and
guaranteed separate accounts totaled $11.4 billion and $11.3 billion at June 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>
June 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] $ 450 $ 414
-----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities, net of tax $ 5,825 $ 5,612
Unrealized gain on securities, net of tax 172 811
- ------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity $ 5,997 $ 6,423
-----------------------------------------------------------------------------------------------------------------------------
Total capitalization [2] $ 9,104 $ 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 $(17) and
$51 for June 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 June 30, 1999 and December 31, 1998, respectively, and the debt to
capitalization ratios were 19% and 18%, respectively.
</FN>
</TABLE>
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain on securities,
net of tax, increased by $249 as of June 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.
Treasury Stock - During the six months ended June 30, 1999, The Hartford
repurchased 2.7 million shares of its common stock in the open market at a total
cost of $151 under the Company's $1.0 billion repurchase program. Since the
inception of the repurchase program, The Hartford has repurchased 13.4 million
shares at a total cost of $698. Some of these repurchased shares have been
reissued pursuant to certain stock-based benefit plans.
Unrealized Gain - Unrealized gain on securities, net of tax, decreased by $639
as of June 30, 1999 compared to December 31, 1998. The change resulted primarily
from an increase in interest rates as reflected in 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
Six Months Ended
June 30,
--------------------------
1999 1998
- ------------------------------------------------------------------
Cash provided by operating activities $ 106 $ 303
Cash provided by (used for)
investing activities $ 2,513 $ (493)
Cash (used for) provided by financing
activities $ (2,537) $ 192
Cash - end of period $ 201 $ 143
==================================================================
The decrease in cash provided by operating activities was primarily the result
of lower underwriting cash flows, due in part to higher claim payments. 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 ("SAP") in
June 1998. The proposed effective date for the statutory accounting guidance is
January 1, 2001. It is expected that each of The Hartford's domiciliary states
will adopt SAP and the Company will make the necessary changes required for
implementation. These changes are not anticipated to have a material impact on
the statutory financial statements of The Hartford.
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
The Company distributes its annuity, life and certain property and casualty
insurance products through a variety of distribution channels, including
broker-dealers, banks, wholesalers, its own internal sales force and other third
party marketing organizations. The Company periodically negotiates provisions
and renewals of these relationships and there can be no assurance that such
terms will remain acceptable to the Company or such service providers. An
interruption in the Company's continuing relationship with certain of these
third parties could materially affect the Company's ability to market its
products. During the first quarter of 1999, the Company modified its 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 is currently performing
initiative (5) testing, and management currently anticipates that such activity
will continue into the fourth quarter of 1999.
- 20 -
<PAGE>
Third Party Year 2000 Efforts and Timetable
The Hartford's Year 2000 efforts include assessing the potential impact on The
Hartford of third parties' Year 2000 readiness. The Hartford's third party Year
2000 efforts include the following three main initiatives: (1) identifying third
parties which have significant business relationships with The Hartford,
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 $20 to $25, of which approximately $11 were incurred for
the six months ended June 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 will be
reviewed and tested on an integrated basis, where appropriate, for the remainder
of the year. Furthermore, in many contexts, Year 2000 issues are dynamic, and
ongoing assessments of business functions, vulnerabilities and risks must be
made. As such, new contingency plans may be needed in the future and/or existing
plans may need to be modified as circumstances warrant.
Insurance Claims
As an insurer, The Hartford 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 4. Submission of Matters to a Vote of Security Holders
On May 20, 1999, The Hartford held its annual meeting of shareholders. The
following matters were considered and voted upon: (1) the election of directors
to serve for a one year term and (2) the ratification of the appointment of
Arthur Andersen LLP as independent auditors of the Company for the fiscal year
ending December 31, 1999.
Each of the nominees for election as directors was elected to the Board of
Directors, and the other item set forth above was approved. Set forth below is
the vote tabulation relating to the election of Directors and the ratification
of the appointment of Arthur Andersen LLP as auditors:
(1) Election of Directors
Name of Director
Nominees Shares For Shares Withheld*
------------------------ ---------------- ---------------------
Bette B. Anderson 196,488,526 1,162,633
Rand V. Araskog 195,679,627 1,971,532
Ramani Ayer 196,549,693 1,101,466
Robert A. Burnett 196,515,528 1,135,631
Donald R. Frahm 196,490,353 1,160,806
Paul G. Kirk, Jr. 196,628,107 1,023,052
Frederic V. Salerno 193,917,870 3,733,289
Robert W. Selander 196,689,567 961,592
Lowndes A. Smith 196,607,932 1,043,227
H. Patrick Swygert 196,662,278 988,881
Gordon I. Ulmer 196,551,009 1,100,150
David K. Zwiener 196,695,566 955,593
------------------------ ---------------- ---------------------
* Shares withheld include broker non-votes and abstentions.
(2) Ratification of the appointment of Arthur Andersen LLP
Shares For 196,071,927
Shares Against 801,953
Shares Abstained 777,279
Shareholders of record on March 22, 1999 were entitled to vote at the annual
meeting. As of that date, there were 226,826,658 shares of the Company's common
stock outstanding.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits - See Exhibits Index.
(b) Reports on Form 8-K - 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
August 13, 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> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 33,738
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 1,131
<MORTGAGE> 168
<REAL-ESTATE> 9
<TOTAL-INVEST> 40,006
<CASH> 201
<RECOVER-REINSURE> 4,512
<DEFERRED-ACQUISITION> 4,832
<TOTAL-ASSETS> 157,263
<POLICY-LOSSES> 22,235
<UNEARNED-PREMIUMS> 2,651
<POLICY-OTHER> 17,074
<POLICY-HOLDER-FUNDS> 101,282
<NOTES-PAYABLE> 1,579
<COMMON> 2
1,250 <F1>
0
<OTHER-SE> 5,995
<TOTAL-LIABILITY-AND-EQUITY> 157,263
5,293
<INVESTMENT-INCOME> 1,317
<INVESTMENT-GAINS> 38
<OTHER-INCOME> 0
<BENEFITS> 3,914
<UNDERWRITING-AMORTIZATION> 948
<UNDERWRITING-OTHER> 1,019
<INCOME-PRETAX> 651
<INCOME-TAX> 157
<INCOME-CONTINUING> 453
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 453
<EPS-BASIC> 2.00
<EPS-DILUTED> 1.97
<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>
