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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended September 30, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No[ ]
As of October 31, 2000, there were outstanding 225,495,050 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 - Third Quarter and Nine Months
Ended September 30, 2000 and 1999 3
Consolidated Balance Sheets - September 30, 2000 and December 31, 1999 4
Consolidated Statements of Changes in Stockholders' Equity - Nine Months
Ended September 30, 2000 and 1999 5
Consolidated Statements of Cash Flows - Nine Months Ended September 30,
2000 and 1999 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 25
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS 25
ITEM 5. OTHER INFORMATION 25
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 25
Signature 26
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Income
Third Quarter Ended Nine Months Ended
September 30, September 30,
-------------------------- ---------------------------
(In millions, except for per share data) 2000 1999 2000 1999
-------------------------------------------------------------------- ------------- ------------ ------------- -------------
(Unaudited) (Unaudited)
<S> <C> <C> <C> <C>
REVENUES
Earned premiums, fee income and other $ 3,101 $ 2,812 $ 8,846 $ 8,105
Net investment income 683 640 1,980 1,957
Net realized capital gains (losses) 7 (8) (22) 30
-------------------------------------------------------------------- ------------- ------------ ------------- -------------
TOTAL REVENUES 3,791 3,444 10,804 10,092
------------------------------------------------------------ ------------- ------------ ------------- -------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,176 2,025 6,254 5,939
Amortization of deferred policy acquisition costs and present
value of future profits 569 516 1,653 1,464
Other expenses 727 650 1,976 1,785
-------------------------------------------------------------------- ------------- ------------ ------------- -------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 3,472 3,191 9,883 9,188
------------------------------------------------------------ ------------- ------------ ------------- -------------
OPERATING INCOME 319 253 921 904
Income tax expense 69 45 166 202
-------------------------------------------------------------------- ------------- ------------ ------------- -------------
INCOME BEFORE MINORITY INTEREST 250 208 755 702
Minority interest in consolidated subsidiary -- (22) (54) (63)
-------------------------------------------------------------------- ------------- ------------ ------------- -------------
NET INCOME $ 250 $ 186 $ 701 $ 639
============================================================ ============= ============ ============= =============
Basic earnings per share $ 1.11 $ 0.83 $ 3.20 $ 2.82
Diluted earnings per share $ 1.09 $ 0.82 $ 3.15 $ 2.79
-------------------------------------------------------------------- -- ---------- -- --------- -- ---------- -- ----------
Weighted average common shares outstanding 224.4 225.3 218.9 226.4
Weighted average common shares outstanding and dilutive potential
common shares 229.3 227.8 222.3 229.3
-------------------------------------------------------------------- ------------- ------------ ------------- -------------
Cash dividends declared per share $ 0.24 $ 0.23 $ 0.72 $ 0.68
-------------------------------------------------------------------- -- ---------- -- --------- -- ---------- -- ----------
</TABLE>
See Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Balance Sheets
September 30, December 31,
(In millions, except for share data) 2000 1999
------------------------------------------------------------------------------------------- ----------------- -----------------
<S> <C> <C>
ASSETS (UNAUDITED)
Investments
-----------
Fixed maturities, available for sale, at fair value (amortized cost of $33,721 and
$33,653) $ 33,584 $ 32,875
Equity securities, available for sale, at fair value (cost of $1,038 and $937) 1,291 1,286
Policy loans, at outstanding balance 3,598 4,222
Other investments 1,415 758
------------------------------------------------------------------------------------------- ----------------- -----------------
Total investments 39,888 39,141
Cash 235 182
Premiums receivable and agents' balances 2,267 2,071
Reinsurance recoverables 4,519 4,473
Deferred policy acquisition costs and present value of future profits 5,331 5,038
Deferred income tax 1,271 1,404
Other assets 4,124 3,075
Separate account assets 119,611 111,667
------------------------------------------------------------------------------------------- ----------------- -----------------
TOTAL ASSETS $ 177,246 $ 167,051
=================================================================================== ================= =================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 15,957 $ 16,014
Life 7,023 6,564
Other policy funds and benefits payable 15,698 16,884
Unearned premiums 3,081 2,777
Short-term debt 430 31
Long-term debt 2,062 1,548
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures 1,243 1,250
Other liabilities 5,397 4,421
Separate account liabilities 119,611 111,667
------------------------------------------------------------------------------------------- ----------------- -----------------
170,502 161,156
COMMITMENTS AND CONTINGENCIES, NOTE 6
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -- 429
STOCKHOLDERS' EQUITY
Common stock - authorized 400,000,000, issued 238,645,675 and 238,645,675
shares, par value $0.01 2 2
Additional paid-in capital 1,680 1,551
Retained earnings 5,671 5,127
Treasury stock, at cost - 13,479,839 and 21,419,460 shares (533) (942)
Accumulated other comprehensive loss (76) (272)
------------------------------------------------------------------------------------------- ----------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 6,744 5,466
=================================================================================== ================= =================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 177,246 $ 167,051
=================================================================================== ================= =================
</TABLE>
See Notes to Consolidated Financial Statements.
- 4 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 2000
Accumulated Other Comprehensive (Loss)
---------------------------------------
Common Minimum
Stock/ Unrealized Pension
Additional Treasury Gain (Loss) Cumulative Liability Outstanding
Paid-in Retained Stock, on Securities, Translation Adjustment, Shares
(In millions) (Unaudited) Capital Earnings at Cost net of tax Adjustments net of tax Total (In thousands)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $1,553 $5,127 $(942) $(198) $(63) $(11) $5,466 217,226
Comprehensive income
Net income 701 701
Other comprehensive income, net of
tax [1]
Unrealized gain on securities [2] 282 282
Cumulative translation adjustments (86) (86)
----------
Total other comprehensive income 196
----------
Total comprehensive income 897
----------
Issuance of shares under incentive and
stock purchase plans (44) 159 115 3,336
Issuance of common stock from treasury 56 342 398 7,250
Conversion of HLI employee stock
options and restricted shares 84 8 92 186
Tax benefit on employee stock options
and awards 33 33
Treasury stock acquired (100) (100) (2,832)
Dividends declared on common stock (157) (157)
------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $1,682 $5,671 $(533) $84 $(149) $(11) $6,744 225,166
------------------------------------------------------------------------------------------------------------------------------------
Nine Months Ended September 30, 1999
Accumulated Other
Comprehensive (Loss)
-----------------------------
Unrealized
Common Stock/ Treasury Gain (Loss) on Cumulative Outstanding
Additional Retained Stock, Securities, Translation Shares
(In millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands)
------------------------------------------------------------------------------------------------------------------------------------
Balance, beginning of period $1,593 $4,474 $(455) $811 $-- $6,423 227,395
Comprehensive income
Net income 639 639
Other comprehensive income (loss), net
of tax [1]
Unrealized gain (loss) on securities [2] (862) (862)
Cumulative translation adjustments (37) (37)
----------
Total other comprehensive income (loss) (899)
----------
Total comprehensive income (loss) (260)
----------
Issuance of shares under incentive and
stock purchase plans (46) 97 51 1,908
Tax benefit on employee stock options
and awards 15 15
Treasury stock acquired (3) (297) (300) (5,728)
Dividends declared on common stock (156) (156)
------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period $1,559 $4,957 $(655) $(51) $(37) $5,773 223,575
------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Unrealized gain (loss) on securities is net of tax expense (benefit) of $152 and $(464) for the nine months ended September 30,
2000 and 1999, respectively. There is no tax effect on cumulative translation adjustments.
[2] Net of reclassification adjustment for gains (losses) realized in net income of $(9) and $23 for the nine months ended
September 30, 2000 and 1999, respectively.
</FN>
</TABLE>
See Notes to Consolidated Financial Statements.
- 5 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Cash Flows
Nine Months Ended
September 30,
----------------------------------
(In millions) 2000 1999
--------------------------------------------------------------------------------------------- ----------------------------------
(Unaudited)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 701 $ 639
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Change in receivables, payables and accruals (146) (43)
(Increase) decrease in reinsurance recoverables and other related assets (32) 338
Increase in deferred policy acquisition costs and present value of future profits (310) (356)
Change in accrued and deferred income taxes 263 29
Increase (decrease) in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums 709 (16)
Minority interest in consolidated subsidiary 54 63
Net realized capital losses (gains) 22 (30)
Depreciation and amortization 46 48
Other, net 283 (237)
--------------------------------------------------------------------------------------------- ----------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,590 435
============================================================================================= ==================================
INVESTING ACTIVITIES
Purchase of investments (11,182) (10,785)
Sale of investments 9,621 11,930
Maturity of investments 1,409 1,536
Purchase of minority interest in HLI (1,328) --
(Purchase) sale of other affiliates (65) 21
Additions to plant, property and equipment (80) (79)
--------------------------------------------------------------------------------------------- ----------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (1,625) 2,623
============================================================================================= ==================================
FINANCING ACTIVITIES
Short-term debt, net 400 --
Issuance of long-term debt 516 --
Issuance of common stock from treasury 398 --
Net disbursements for investment and universal life-type contracts charged against
policyholder accounts (1,050) (2,649)
Dividends paid (156) (156)
Acquisition of treasury stock (100) (287)
Proceeds from issuances under incentive and stock purchase plans 92 50
--------------------------------------------------------------------------------------------- ----------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 100 (3,042)
============================================================================================= ==================================
Foreign exchange rate effect on cash (12) (4)
--------------------------------------------------------------------------------------------- ----------------------------------
Net increase in cash 53 12
Cash - beginning of period 182 123
--------------------------------------------------------------------------------------------- ----------------------------------
CASH - END OF PERIOD $ 235 $ 135
============================================================================================= ==================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
------------------------------------------------
NET CASH PAID DURING THE PERIOD FOR:
Income taxes $ 8 $ 110
Interest $ 151 $ 145
</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 per share data unless otherwise stated)
(unaudited)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Hartford
Financial Services Group, Inc. and its consolidated subsidiaries (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 1999 Form 10-K Annual Report.
On June 27, 2000, The Hartford acquired all of the outstanding shares of
Hartford Life, Inc. (HLI) that it did not already own (The HLI Repurchase). The
accompanying unaudited consolidated financial statements reflect the minority
interest in HLI of approximately 19% prior to the acquisition date. For a
further discussion on The HLI Repurchase, see Note 2.
Certain reclassifications have been made to prior year financial information to
conform to the current year classification of transactions and accounts.
(B) NEW ACCOUNTING STANDARDS
In October 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a Replacement of FASB Statement No. 125". SFAS No. 140 carries forward most of
SFAS No. 125's provisions without amendment. However, it revises criteria for
accounting for certain transfers of financial assets and the reporting and
disclosure requirements for collateral arrangements. SFAS No. 140's disclosure
requirements must be applied for fiscal years ending after December 15, 2000.
The other provisions of SFAS No. 140 apply prospectively to transactions and
commitments occurring after March 31, 2001. Implementation of the accounting
provisions of SFAS No. 140 is not expected to have a material impact on the
Company's financial condition or results of operations.
In July 2000, the Emerging Issues Task Force (EITF) reached consensus on Issue
No. 99-20, "Recognition of Interest Income and Impairment on Certain
Investments". This pronouncement requires investors in certain asset-backed
securities to record changes in their estimated yield on a prospective basis and
to evaluate these securities for an other-than-temporary decline in value. This
consensus is effective for financial statements with fiscal quarters beginning
after December 15, 2000. While the Company is currently in the process of
quantifying the impact of EITF No. 99-20, the provisions of the consensus are
not expected to have a material impact on the Company's financial condition or
results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amended SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
established accounting and reporting requirements for derivative instruments,
including certain derivative instruments embedded in other contracts. SFAS No.
133 requires, among other things, that all derivatives be carried on the balance
sheet at fair value. SFAS No. 133 also specifies hedge accounting criteria under
which a derivative can qualify for special accounting. SFAS No. 138 amended SFAS
No. 133 so that for interest rate hedges, a company may designate as the hedged
risk, the risk of changes only in a benchmark interest rate. Also, credit risk
is newly defined as the company-specific spread over the benchmark interest rate
and may be hedged separately from, or in combination with, the benchmark
interest rate. Initial application of SFAS No. 133, as amended, for The Hartford
will begin January 1, 2001. Implementation of SFAS No. 133, as amended, is not
expected to have a material impact on the Company's financial condition or
results of operations. However, the FASB's Derivative Implementation Group
continues to deliberate on multiple issues, the resolution of which could have a
significant impact on the Company's expectations.
Effective January 1, 2000, The Hartford adopted Statement of Position (SOP) No.
98-7, "Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk". This SOP provides guidance on the method of accounting for
insurance and reinsurance contracts that do not transfer insurance risk, defined
in the SOP as the deposit method. Adoption of this SOP did not have a material
impact on the Company's financial condition or results of operations.
In November 1998, the EITF reached consensus on Issue No. 98-15, "Structured
Notes Acquired for a Specific Investment Strategy". This pronouncement requires
companies to account for structured notes acquired for a specific investment
strategy as a unit. Affected companies that entered into these notes prior to
September 25, 1998 are required to either restate prior period financial
statements to conform with the prescribed unit accounting model, or disclose the
related impact on earnings for all periods presented and cumulatively over the
life of the instruments had the registrant accounted for the structure as a
unit. Net income for the third quarter and nine months ended September 30, 1999
would have been $1 and $2 lower respectively, while net income for the third
quarter and nine months ended September 30, 2000, would have been $14 and $22
lower, respectively, had the Company accounted for its structured note
transaction as a unit. Cumulatively, over the period that the Company held the
instrument, net income would have been unchanged as the Company disposed of its
remaining structured note in September 2000.
- 7 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 2. THE HLI REPURCHASE
On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI
that it did not already own (The HLI Repurchase). The HLI Repurchase has been
recorded as a purchase transaction. Consideration totaled $1.4 billion and
resulted in recognition of goodwill (excess of the purchase price over the fair
values of the net assets acquired) of $862, which is being amortized on a
straight-line basis over a 25 year period.
Purchase accounting for this transaction resulted in adjustments to the cost
basis of certain assets and liabilities acquired based on assessments of fair
value, including the recognition of the present value of future gross profits to
be earned (PVP) and a reduction of deferred policy acquisition costs.
Amortization of fair value adjustments, excluding goodwill, will not have a
material impact on the Company's ongoing results of operations.
Purchase consideration for the transaction was as follows:
Issuance of:
-----------
Common stock from treasury (7.25 million shares
@ $54.90 per share) $ 398
Long-term notes:
$250 7.75% notes due June 15, 2005 244
$275 7.90% notes due June 15, 2010 272
Commercial paper 400
------------------------------------------------------------------
Consideration raised 1,314
Other including conversion of HLI employee stock options
and restricted shares 102
------------------------------------------------------------------
Total consideration $1,416
------------------------------------------------------------------
NOTE 3. DEBT
(A) SHORT-TERM DEBT
On June 23, 2000, The Hartford borrowed $400 under its existing commercial paper
program, the proceeds of which were used to partially fund The HLI Repurchase.
(B) LONG-TERM DEBT
On June 16, 2000, The Hartford issued and sold $525 of unsecured redeemable
long-term debt under its existing shelf registration (for a description of the
shelf registration, see Note 6 of Notes to Consolidated Financial Statements
included in The Hartford's 1999 Form 10-K Annual Report). The long-term debt was
issued in the form of $250 7.75% five-year notes due June 15, 2005, and $275
7.90% ten-year notes due June 15, 2010. Interest on the notes is payable
semi-annually on June 15 and December 15, commencing on December 15, 2000. The
Hartford used the net proceeds from the issuance of the notes to partially fund
The HLI Repurchase.
(C) SHELF REGISTRATION STATEMENT
On November 9, 2000, The Hartford filed with the Securities and Exchange
Commission a shelf registration statement and a prospectus for the potential
offering and sale of up to $1.127 billion in debt and equity securities.
Specifically, the registration statement allows for the following types of
securities to be offered: debt securities, preferred stock, common stock,
depositary shares, warrants, stock purchase contracts, stock purchase units and
junior subordinated deferrable interest debentures of the Company, preferred
securities of any of one or more capital trusts organized by The Hartford (The
Hartford Trusts) and guarantees by the Company with respect to the preferred
securities of any of The Hartford Trusts. This registration statement includes
an aggregate of $127 of The Hartford securities remaining under a shelf
registration statement filed by The Hartford with the Securities and Exchange
Commission on October 11, 1995 and subsequently amended on October 2, 1996. For
a further discussion of the securities previously offered under The Hartford's
October 11, 1995 shelf registration, as amended, along with a discussion of The
Hartford Trusts, see Note 6 of Notes to Consolidated Financial Statements
included in The Hartford's 1999 Form 10-K Annual Report.
NOTE 4. STOCKHOLDERS' EQUITY
On June 8, 2000, The Hartford issued 7.25 million shares of common stock, under
its existing shelf registration, to Goldman, Sachs & Co. for $398. The shares,
which were issued out of treasury, were re-offered by Goldman, Sachs & Co. to
investors. The Hartford used the net proceeds from the issuance of the shares to
partially fund The HLI Repurchase.
NOTE 5. EARNINGS PER SHARE
The following tables present a reconciliation of income and shares used in
calculating basic earnings per share to those used in calculating diluted
earnings per share.
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
------------------------------------- ------------------------------------
Per Share Per Share
September 30, 2000 Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 250 224.4 $ 1.11 $ 701 218.9 $ 3.20
------------ -------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 4.9 -- 3.4
------------------------- ------------------------
Income available to common shareholders plus assumed
conversions $ 250 229.3 $ 1.09 $ 701 222.3 $ 3.15
====================================================================================================================================
</TABLE>
- 8 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. EARNINGS PER SHARE (CONTINUED)
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
------------------------------------- -------------------------------------
Per Share Per Share
September 30, 1999 Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 186 225.3 $ 0.83 $ 639 226.4 $ 2.82
------------- ------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 2.5 -- 2.9
------------------------ -------------------------
Income available to common shareholders plus assumed
conversions $ 186 227.8 $ 0.82 $ 639 229.3 $ 2.79
===================================================================================================================================
</TABLE>
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 6. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
The Hartford is involved in various legal actions, some of which involve claims
for substantial amounts. In the opinion of management, final outcome of these
matters 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.
In October 2000, the definitive terms of a stipulation of settlement were agreed
by the parties in the Delaware Chancery Court (the Court) actions reported in
the Company's March 31 and June 30, 2000 Form 10-Q's concerning The HLI
Repurchase. The stipulation of settlement takes into account the increased
compensation paid for the HLI public shares and provides for a release by all
class members and named plaintiffs of all claims that were or could have been
brought concerning The HLI Repurchase. The stipulation of settlement is subject
to preliminary approval by the Court, after which notice will be given to the
members of the proposed settlement class of their right to appear in court and
contest final court approval of the settlement. Upon the Court's final approval,
the settlement provides that the Company will pay plaintiffs' attorneys' fees
and costs of up to $2 as awarded by the Court.
(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) 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.
During the second quarter of 2000, the Company reached a settlement with the
Internal Revenue Service with respect to certain tax matters for the 1993-1995
tax years. The settlement resulted in a $24 tax benefit being recorded in the
Company's second quarter results of operations.
NOTE 7. SEGMENT INFORMATION
During the second quarter of 2000, The Hartford's reportable segments changed in
connection with the establishment of two major operating entities: Worldwide
Life and Worldwide Property & Casualty. Within these entities, The Hartford
conducts business principally in eight operating segments. The Company also
includes in Corporate all activities related to The HLI Repurchase (see Note 2),
along with the minority interest for pre-acquisition periods.
Worldwide Life is organized into four reportable operating segments: Investment
Products, Individual Life, Group Benefits (formerly Employee Benefits) and
Corporate Owned Life Insurance (COLI). Investment Products offers individual
fixed and variable annuities, mutual funds, retirement plan services and other
investment products. Individual Life sells a variety of life insurance products,
including variable life, universal life, interest sensitive whole life and term
life insurance. Group Benefits sells group insurance products, including group
life and group disability insurance as well as other products, including stop
loss and supplementary medical coverage to employers and employer sponsored
plans, accidental death and dismemberment, travel accident, long-term care
insurance and other special risk coverages to employers and associations. COLI
primarily offers variable products used by employers to fund non-qualified
benefits or other postemployment benefit obligations as well as leveraged COLI.
Worldwide Life also includes in "Other" its international operations as well as
corporate items not directly allocable to any of its reportable operating
segments, principally interest expense.
Worldwide Property & Casualty is organized into four reportable operating
segments: the underwriting segments of Commercial, Personal and Reinsurance, and
an International and Other
- 9 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7. SEGMENT INFORMATION (CONTINUED)
Operations segment. Also reported within Worldwide Property & Casualty is North
American, which includes the combined underwriting results of Commercial,
Personal and Reinsurance along with income and expense items not directly
allocable to these segments, such as net investment income. The Commercial
segment provides primarily workers' compensation, property, automobile,
liability, marine, agricultural and bond coverages to commercial accounts
throughout the United States and Canada. Excess and surplus lines business not
normally written by standard lines insurers is also provided. The Personal
segment provides automobile, homeowners, home-based business and fire coverages
to individuals throughout the United States. The Reinsurance segment assumes
reinsurance worldwide through its thirteen HartRe offices located in the United
States, Canada, the United Kingdom, France, Italy, Germany, Spain, Hong Kong and
Taiwan. HartRe primarily writes treaty reinsurance through professional
reinsurance brokers covering various property, casualty, specialty and marine
classes of business. International consists of European companies offering a
variety of insurance products (primarily property and casualty products)
designed to meet the needs of local customers (see Note 9 for Subsequent Event)
and Other Operations consists of operations which have ceased writing new
business.
While the measure of profit or loss used by The Hartford's management in
evaluating performance is core earnings for its non-underwriting 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 1999 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 segments, the Company also reports and evaluates core earnings
results for Worldwide Life and Worldwide Property & Casualty, including North
American. Worldwide Property & Casualty includes core earnings for North
American and the International and Other Operations segment.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided and capital contributions. Certain reinsurance stop loss agreements
exist between the segments which specify that one segment will reimburse another
for losses incurred in excess of a predetermined limit. Also, one segment may
purchase group annuity contracts from another to fund pension costs and claim
annuities to settle casualty claims.
The following tables present revenues and core earnings. Underwriting results
are presented for the Commercial, Personal and Reinsurance segments while core
earnings are presented for the non-underwriting segments, along with Worldwide
Life and Worldwide Property & Casualty, including North American.
<TABLE>
<CAPTION>
REVENUES
Third Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------
<S> <C> <C> <C> <C>
Worldwide Life
Investment Products $ 605 $ 517 $ 1,777 $ 1,499
Individual Life 164 148 475 421
Group Benefits 553 529 1,630 1,493
COLI 239 220 574 659
Other 26 6 18 40
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 1,587 1,420 4,474 4,112
------------------------------------------------------------------------------------------------------------------------------------
Worldwide Property & Casualty
North American
Earned premiums, service fees and other from underwriting segments
Commercial 934 852 2,611 2,456
Personal 695 634 2,020 1,859
Reinsurance 202 179 585 516
------------------------------------------------------------------------------------------------------------------------------------
Total underwriting segments earned premiums, service fees and other 1,831 1,665 5,216 4,831
Net investment income 219 209 647 636
Net realized capital gains 7 -- 6 22
------------------------------------------------------------------------------------------------------------------------------------
Total North American 2,057 1,874 5,869 5,489
------------------------------------------------------------------------------------------------------------------------------------
International and Other Operations 143 150 458 491
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 2,200 2,024 6,327 5,980
------------------------------------------------------------------------------------------------------------------------------------
Corporate 4 -- 3 --
------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 3,791 $ 3,444 $ 10,804 $ 10,092
====================================================================================================================================
</TABLE>
- 10 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CORE EARNINGS
Third Quarter Ended Nine Months Ended
September 30, September 30,
---------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------
<S> <C> <C> <C> <C>
Worldwide Life
Investment Products $ 105 $ 83 $ 317 $ 242
Individual Life 19 19 57 51
Group Benefits 23 21 63 57
COLI 9 8 25 22
Other (4) (12) 14 (33)
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 152 119 476 339
------------------------------------------------------------------------------------------------------------------------------------
Worldwide Property & Casualty
North American
Underwriting results
Commercial (30) (32) (125) (127)
Personal 5 (14) (10) 31
Reinsurance (28) (35) (52) (44)
------------------------------------------------------------------------------------------------------------------------------------
Total underwriting results (53) (81) (187) (140)
Net service fee and other income [1] 4 8 6 15
Net investment income 219 209 647 636
Other expenses (55) (53) (157) (164)
Income tax (expense) benefit (7) 3 (9) (26)
------------------------------------------------------------------------------------------------------------------------------------
Total North American 108 86 300 321
International and Other Operations 5 4 14 19
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 113 90 314 340
------------------------------------------------------------------------------------------------------------------------------------
Corporate (20) (22) (80) (63)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE EARNINGS 245 187 710 616
Net realized capital gains (losses), after-tax 5 (1) (9) 23
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 250 $ 186 $ 701 $ 639
------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Net of expenses related to service business.
</FN>
</TABLE>
NOTE 8. STOCK COMPENSATION PLANS
On May 18, 2000, the shareholders of The Hartford approved The Hartford 2000
Incentive Stock Plan (the 2000 Stock Plan) which replaced The Hartford 1995
Incentive Stock Plan (the 1995 Stock Plan). For further discussion of the 1995
Stock Plan, see Note 10 of Notes to Consolidated Financial Statements included
in The Hartford's 1999 Form 10-K Annual Report. The terms of the 2000 Stock Plan
are substantially similar to the terms of the 1995 Stock Plan, except that the
maximum limit applicable to all share awards for the ten year duration of the
2000 Stock Plan has been reduced to 8% of the outstanding shares as of the date
the 2000 Stock Plan was approved by shareholders (approximately 17 million
shares). Also, under the 2000 Stock Plan, there is no applicable annual limit,
while the 1995 Stock Plan had an annual limit of 1.65% of the prior year end's
outstanding shares.
NOTE 9. SUBSEQUENT EVENT
On October 6, 2000, The Hartford reached an agreement in principle to sell its
Netherlands based Zwolsche Algemeene NV (Zwolsche) subsidiary to Assurances
Generales de France (AGF), a subsidiary of Allianz AG. The Company expects to
receive proceeds of approximately $550, before costs of sale. Management plans
to use the proceeds from the sale to reduce outstanding commercial paper which
was issued to partially fund The HLI Repurchase.
- 11 -
<PAGE>
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in millions except 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 Financial
Services Group, Inc. and its consolidated subsidiaries (The Hartford or the
Company) as of September 30, 2000, compared with December 31, 1999, and its
results of operations for the third quarter and nine months ended September 30,
2000 compared with the equivalent 1999 periods. This discussion should be read
in conjunction with the MD&A included in The Hartford's 1999 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 the possibility of general economic
and business conditions that are less favorable than anticipated, changes in
interest rates or the stock markets, stronger than anticipated competitive
activity, more frequent or severe natural catastrophes than anticipated and
those described in 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 12
Worldwide Life 14
Investment Products 15
Individual Life 16
Group Benefits 16
Corporate Owned Life Insurance (COLI) 17
Worldwide Property & Casualty 17
Commercial 18
Personal 18
Reinsurance 18
International and Other Operations 19
Environmental and Asbestos Claims 19
Investments 21
Capital Markets Risk Management 22
Capital Resources and Liquidity 23
Regulatory Matters and Contingencies 24
Accounting Standards 25
--------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------- -------------- -------------- -----------
2000 1999 2000 1999
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 3,791 $ 3,444 $ 10,804 $ 10,092
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 250 $ 186 $ 701 $ 639
Less: Net realized capital gains (losses), after-tax 5 (1) (9) 23
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 245 $ 187 $ 710 $ 616
====================================================================================================================================
</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 1999 Form 10-K Annual Report) and certain other items. Core earnings
is an internal performance measure used by the Company in the management of its
operations. Management believes that this performance measure delineates the
results of operations of the Company's ongoing businesses in a manner that
allows for a better understanding of the underlying trends in the Company's
current business. However, core earnings should only be analyzed in conjunction
with, and not in lieu of, net income and may not be comparable to other
performance measures used by the Company's competitors.
Revenues for the third quarter and nine months ended September 30, 2000
increased $347, or 10%, and $712, or 7%, respectively, over the comparable prior
year periods, primarily as a result of continued strong growth in fee income in
the Investment Products and Individual Life segments, along with premium growth
in Group Benefits, Personal, small commercial and Reinsurance.
Core earnings increased $58, or 31%, and $94, or 15%, for the third quarter and
nine months ended September 30, 2000, respectively, from the comparable prior
year periods. The increase for the quarter was due to higher fee income at
Worldwide Life and a favorable pricing environment and lower level of
catastrophe losses at Worldwide Property & Casualty. The increase for the nine
month period was due to double-digit earnings growth across all segments in
Worldwide Life partially
- 12 -
<PAGE>
offset by a decline in Worldwide Property & Casualty, primarily due to an
increase in personal automobile loss costs, adverse loss development in
reinsurance and expenses related to the commercial field office and claim
reorganizations.
The effective tax rates for the third quarter and nine months ended September
30, 2000 were 22% and 18%, respectively, compared to 18% and 22%, respectively,
for the comparable periods in 1999. During the second quarter of 2000, the
Company reached a settlement with the Internal Revenue Service with respect to
certain tax matters for the 1993-1995 tax years. The settlement resulted in a
$24 tax benefit being recorded in the Company's second quarter results of
operations. Tax-exempt interest earned on invested assets was the principal
cause of the effective tax rates being lower than the 35% U.S. statutory rate.
SEGMENT RESULTS
During the second quarter of 2000, The Hartford's reportable segments changed in
connection with the establishment of two major operating entities: Worldwide
Life and Worldwide Property & Casualty. Within these entities, The Hartford
conducts business principally in eight operating segments. The Company also
includes in Corporate all activities related to The HLI Repurchase (see Note 2
of Notes to Consolidated Financial Statements and the Capital Resources and
Liquidity section under The HLI Repurchase), along with the minority interest
for pre-acquisition periods.
Worldwide Life is organized into four reportable operating segments: Investment
Products, Individual Life, Group Benefits (formerly Employee Benefits) and
Corporate Owned Life Insurance (COLI). Worldwide Life also includes in "Other"
its international operations as well as corporate items not directly allocable
to any of its reportable operating segments, principally interest expense.
Worldwide Property & Casualty is organized into four reportable operating
segments: the underwriting segments of Commercial, Personal and Reinsurance, and
an International and Other Operations segment. Also reported within Worldwide
Property & Casualty is North American, which includes the combined underwriting
results of Commercial, Personal and Reinsurance along with income and expense
items not directly allocable to these segments, such as net investment income.
While the measure of profit or loss used by The Hartford's management in
evaluating performance is core earnings for its non-underwriting segments, the
Commercial, Personal and Reinsurance segments are evaluated by The Hartford's
management primarily based upon underwriting results. While not considered
segments, the Company also reports and evaluates core earnings results for
Worldwide Life and Worldwide Property & Casualty, including North American.
Worldwide Property & Casualty includes core earnings for North American and the
International and Other Operations segment.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided and capital contributions. Certain reinsurance stop loss agreements
exist between the segments which specify that one segment will reimburse another
for losses incurred in excess of a predetermined limit. Also, one segment may
purchase group annuity contracts from another to fund pension costs and claim
annuities to settle casualty claims.
The following is a summary of North American underwriting results by
underwriting segment within Worldwide Property & Casualty. Underwriting results
represent premiums earned less incurred claims, claim adjustment expenses and
underwriting expenses.
<TABLE>
<CAPTION>
UNDERWRITING RESULTS THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------------
North American 2000 1999 2000 1999
---------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ (30) $ (32) $ (125) $ (127)
Personal 5 (14) (10) 31
Reinsurance (28) (35) (52) (44)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (53) $ (81) $ (187) $ (140)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 13 -
<PAGE>
The following is a summary of core earnings and net income (loss).
<TABLE>
<CAPTION>
CORE EARNINGS THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Worldwide Life
Investment Products $ 105 $ 83 $ 317 $ 242
Individual Life 19 19 57 51
Group Benefits 23 21 63 57
COLI 9 8 25 22
Other (4) (12) 14 (33)
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 152 119 476 339
Worldwide Property & Casualty
North American 108 86 300 321
International and Other Operations 5 4 14 19
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 113 90 314 340
Corporate (20) (22) (80) (63)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE EARNINGS $ 245 $ 187 $ 710 $ 616
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
NET INCOME (LOSS) THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Worldwide Life
Investment Products $ 105 $ 83 $ 317 $ 242
Individual Life 19 19 57 51
Group Benefits 23 21 63 57
COLI 9 8 25 22
Other (4) (12) (14) (33)
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 152 119 448 339
Worldwide Property & Casualty
North American 113 86 304 335
International and Other Operations 5 3 25 28
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 118 89 329 363
Corporate (20) (22) (76) (63)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL NET INCOME $ 250 $ 186 $ 701 $ 639
====================================================================================================================================
</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.
--------------------------------------------------------------------------------
WORLDWIDE LIFE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY [1] THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,587 $ 1,420 $ 4,474 $ 4,112
Expenses 1,435 1,301 4,026 3,773
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 152 $ 119 $ 448 $ 339
Less: Net realized capital losses, after-tax -- -- (28) --
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 152 $ 119 $ 476 $ 339
====================================================================================================================================
<FN>
[1] Worldwide Life excludes the effect of activities related to The HLI Repurchase, along with minority interest for
pre-acquisition periods, both of which are reflected in Corporate.
</FN>
</TABLE>
Revenues increased $167, or 12%, and $362, or 9%, for the third quarter and nine
months ended September 30, 2000, respectively, as compared to the equivalent
1999 periods. The increases in revenues were attributable to growth across each
of Worldwide Life's primary operating segments, particularly the Investment
Products segment, where related assets under management, which include mutual
funds, grew 23% from this time last year to $119.2 billion. The revenue growth
in the Investment Products segment was primarily due to higher fee income
related to the individual annuity and mutual fund operations resulting from the
increase in assets under management described above. Group Benefits and
Individual Life also contributed to the increased revenues as a
- 14 -
<PAGE>
result of favorable persistency and strong sales. Additionally, for the third
quarter the COLI segment's revenues increased primarily due to fees generated
from strong sales. Partially offsetting the growth in the nine month period was
a decline in the COLI segment's revenues primarily due to the declining block of
leveraged COLI business.
Expenses increased $134, or 10%, and $253, or 7%, for the third quarter and nine
months ended September 30, 2000, respectively, as compared to the equivalent
1999 periods. These increases in expenses were primarily related to growth in
Worldwide Life's principal operating segments.
Core earnings increased $33, or 28%, and $137, or 40%, for the third quarter and
nine months ended September 30, 2000, respectively, as compared to the
equivalent 1999 periods. These increases were led by the Investment Products
segment where core earnings increased $22, or 27%, and $75, or 31%, for the
respective third quarter and nine month periods. Additionally, the remaining
three operating segments each reported earnings growth in excess of 10% for the
nine month period. Worldwide Life also reported a benefit related to the
settlement of certain federal tax matters of $24 for the second quarter of 2000
(see Note 6 (c) of Notes to Consolidated Financial Statements). This benefit,
along with an $8 benefit related to state income taxes in the first quarter of
2000, resulted in $32 of tax benefits for the nine months ended September 30,
2000. Excluding the tax items, core earnings increased $105, or 31%, for the
nine months ended September 30, 2000.
--------------------------------------------------------------------------------
INVESTMENT PRODUCTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------- --------------------------
2000 1999 2000 1999
--------------------------------------------------------------------------- -------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues $ 605 $ 517 $ 1,777 $ 1,499
Expenses 500 434 1,460 1,257
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 105 $ 83 $ 317 $ 242
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Individual variable annuity account values $ 83,009 $ 68,848
Other individual annuity account values 8,955 8,419
Other investment products account values 17,368 14,858
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 109,332 92,125
Mutual fund assets under management 9,868 4,584
------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 119,200 $ 96,709
====================================================================================================================================
</TABLE>
Revenues in the Investment Products segment increased $88, or 17%, and $278, or
19%, for the third quarter and nine months ended September 30, 2000,
respectively, as compared to the equivalent 1999 periods, primarily due to
higher fee income in the individual annuity and mutual fund operations. Fee
income generated by individual annuities increased $62, or 22%, and $198, or
24%, for the respective third quarter and nine month periods, as related account
values grew $14.7 billion, or 19%, from September 30, 1999. The growth in
individual annuity account values was mostly due to strong individual annuity
sales (including $8.5 billion for the first nine months of 2000) and equity
market appreciation. In addition, fee income from other investment products
increased $27, or 59%, and $76, or 58%, for the respective third quarter and
nine month periods, primarily driven by the Company's mutual fund operation,
where assets under management increased $5.3 billion, or 115%, from September
30, 1999. This substantial growth was mostly due to strong sales (including $3.9
billion for the first nine months of 2000) and equity market appreciation.
Due to the continued growth in this segment, particularly the individual annuity
and mutual fund operations, expenses increased $66, or 15%, and $203, or 16%,
for the third quarter and nine months ended September 30, 2000, respectively, as
compared to the equivalent 1999 periods. These increases were primarily driven
by amortization of deferred policy acquisition costs, which grew $30, or 27%,
and $74, or 23%, for the respective third quarter and nine month periods and
other expenses which increased $26, or 23%, and $92, or 29%, over the respective
prior year levels. The segment's operating expenses as a percentage of average
assets under management declined slightly for the third quarter and nine months
ended versus the respective prior year periods.
Core earnings increased $22, or 27%, and $75, or 31%, for the third quarter and
nine months ended September 30, 2000, respectively, as compared to the
respective prior year periods, primarily due to the growth in revenues
associated with the increase in assets under management across the entire
segment. Additionally, the Investment Products segment continued to maintain its
profit margins related to its primary businesses, thus contributing to the
segment's earnings growth.
- 15 -
<PAGE>
--------------------------------------------------------------------------------
INDIVIDUAL LIFE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 164 $ 148 $ 475 $ 421
Expenses 145 129 418 370
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 19 $ 19 $ 57 $ 51
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
As of September 30,
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Variable life account values $ 3,019 $ 2,101
Total account values $ 5,879 $ 4,925
------------------------------------------------------------------------------------------------------------------------------------
Variable life insurance in force $ 30,787 $ 21,122
Total life insurance in force $ 72,651 $ 64,655
====================================================================================================================================
</TABLE>
Revenues in the Individual Life segment increased $16, or 11%, and $54, or 13%,
for the third quarter and nine months ended September 30, 2000, respectively, as
compared to the equivalent 1999 periods, resulting primarily from higher fee
income associated with the growing block of variable life insurance. Fee income
increased $15, or 15%, and $56, or 20%, for the respective third quarter and
nine month periods, as variable life account values increased $918, or 44%, and
variable life insurance in force increased $9.7 billion, or 46%, from September
30, 1999.
Expenses increased $16, or 12%, and $48, or 13%, for the third quarter and nine
months ended September 30, 2000, respectively, as compared to the equivalent
1999 periods. The increases in expenses were primarily due to a $9, or 14%, and
$10, or 5%, increase in benefits, claims and claim adjustment expenses for the
respective third quarter and nine month periods and other expenses which
increased $8, or 40%, and $17, or 27%, over the respective prior year levels.
These increases were associated with the growth in this segment as indicated
above. Additionally, for the nine month period, amortization of deferred policy
acquisition costs increased $20, or 22%, primarily associated with the growth in
this segment's variable business.
Core earnings for the third quarter were consistent with the equivalent prior
year period, as increased fee income was offset by higher mortality costs. Core
earnings for the nine month period increased $6, or 12%, primarily due to higher
fee income as year-to-date mortality experience was essentially in line with
prior year.
--------------------------------------------------------------------------------
GROUP BENEFITS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 553 $ 529 $ 1,630 $ 1,493
Expenses 530 508 1,567 1,436
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 23 $ 21 $ 63 $ 57
====================================================================================================================================
</TABLE>
Revenues in the Group Benefits segment increased $24, or 5%, and $137, or 9%,
for the third quarter and nine months ended September 30, 2000, respectively, as
compared to the equivalent prior year periods. The increase was primarily driven
by growth in fully insured premiums, excluding buyouts, which increased $45, or
10%, and $149, or 12%, for the respective third quarter and nine month periods,
due primarily to favorable persistency of the in force block of business, as
well as new sales.
Expenses increased $22, or 4%, and $131, or 9%, for the third quarter and nine
months ended September 30, 2000, respectively, as compared to the equivalent
prior year periods. The increase was primarily due to higher benefits, claims
and claim adjustment expenses which, excluding buyouts, increased $49, or 14%,
and $140, or 13%, for the respective third quarter and nine month periods due to
growth in this segment.
Core earnings increased $2, or 10%, and $6, or 11%, for the respective third
quarter and nine month periods. These increases were driven by higher revenues
and improved expense ratios (expenses as a percentage of earned premiums)
excluding buyouts, which were partially offset by a slightly higher loss ratio
(loss costs as a percentage of earned premiums).
- 16 -
<PAGE>
--------------------------------------------------------------------------------
CORPORATE OWNED LIFE INSURANCE (COLI)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 239 $ 220 $ 574 $ 659
Expenses 230 212 549 637
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 9 $ 8 $ 25 $ 22
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
AS OF SEPTEMBER 30,
2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Variable COLI account values $ 15,497 $ 11,980
Leveraged COLI account values 4,998 5,784
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 20,495 $ 17,764
====================================================================================================================================
</TABLE>
COLI revenues increased $19, or 9%, for the third quarter ended September 30,
2000, from the respective prior year period, while for the nine month period,
revenues decreased $85, or 13%. The revenue increase in the third quarter was
primarily due to an increase in fee income of $22, or 19%, associated with
strong sales of $2.5 billion in the third quarter 2000. For the nine month
period, revenues decreased primarily due to a decline in net investment income
of $56, or 17%. This decline was primarily due to the leveraged COLI block of
business, as related account values decreased $786, or 14%, as a result of the
downsizing caused by the Health Insurance Portability and Accountability Act of
1996.
Expenses increased $18, or 8%, for the third quarter, while expenses for the
nine month period decreased $88, or 14%, respectively, as compared to the
equivalent prior year periods due to the factors described above.
Core earnings increased $1, or 13%, and $3, or 14%, for the third quarter and
nine months ended September 30, 2000, respectively, as compared to the
equivalent prior year periods. The increase was primarily attributable to the
variable COLI business where account values increased $3.5 billion, or 29%, as
well as increased earnings associated with a block of leveraged COLI business
recaptured in 1998.
--------------------------------------------------------------------------------
WORLDWIDE PROPERTY & CASUALTY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 2,200 $ 2,024 $ 6,327 $ 5,980
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 118 $ 89 $ 329 $ 363
Less: Net realized capital gains (losses), after-tax 5 (1) 15 23
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 113 $ 90 $ 314 $ 340
====================================================================================================================================
</TABLE>
Revenues for Worldwide Property & Casualty increased $176, or 9%, for the third
quarter and $347, or 6%, for the nine months ended September 30, 2000 compared
with the same prior year periods. The increases for the quarter and nine month
periods were primarily the result of an increase in earned premiums of $142 and
$329, respectively, due to growth in small commercial, specialty, Personal and
Reinsurance. Also contributing to these increases was The Hartford's purchase
during the quarter of the in force, new and renewal financial products business
of Reliance Group Holdings, Inc. (Reliance). Contributing to the increase in
earned premiums in Commercial and Reinsurance were improvements in the pricing
environment as those markets continued to firm. For the quarter, an increase of
$12 in net investment income and $10 in pre-tax net realized capital gains also
contributed to the revenue increase.
Core earnings increased $23, or 26%, for the third quarter and decreased $26, or
8%, for the nine months ended September 30, 2000 compared to the same periods in
1999. The increase for the quarter was primarily the result of improved
underwriting results due to lower catastrophe losses, favorable impacts of
Commercial pricing increases and improvement in the expense ratio. Partially
offsetting these increases were adverse prior underwriting year loss development
in Reinsurance and Commercial field and claim reorganization expenses in 2000.
For the nine month period, the decrease was primarily due to an increase in
Personal automobile loss costs, adverse loss development in Reinsurance and
expenses related to the Commercial field office and claim reorganizations.
- 17 -
<PAGE>
--------------------------------------------------------------------------------
COMMERCIAL
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Written premiums $ 973 $ 808 $ 2,661 $ 2,369
Underwriting results $ (30) $ (32) $ (125) $ (127)
Combined ratio 101.7 104.7 103.1 105.5
====================================================================================================================================
</TABLE>
Commercial written premiums increased $165, or 20%, for the third quarter and
$292, or 12%, for the nine months ended September 30, 2000 compared with the
same periods in 1999, as a result of new business and sales growth coupled with
price increases in an improved commercial marketplace. The Hartford's purchase
of the in force, new and renewal financial products business of Reliance during
the quarter resulted in $93 of additional premium for the third quarter and nine
months ended September 30, 2000. Select Customer, within small commercial, was
up 17% and 19%, respectively, for the third quarter and nine months ended
September 30, 2000. Enhanced product offerings, targeted geographic strategies
and partnerships with other entities continued to be the primary drivers of the
small commercial growth. For the nine months ended September 30, 2000, these
increases were slightly offset by a 5% decrease in mid-market standard
commercial business. The year-to-date decline in mid-market continues to reflect
the effective execution of our underwriting initiatives. For the third quarter,
mid-market experienced growth due to pricing strategies coupled with improved
renewal retention.
Underwriting results improved $2, or 3.0 combined ratio points, for the third
quarter, and improved $2, or 2.4 combined ratio points, for the nine months
ended September 30, 2000 compared with the same prior year periods. The
improvements were primarily the result of reduced loss ratios due to the
continued effective execution of pricing actions and lower catastrophe losses
compared to the prior year. A decrease in the other underwriting expense ratio,
despite field and claim reorganization costs, also contributed to the lower
combined ratio.
--------------------------------------------------------------------------------
PERSONAL
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Written premiums $ 686 $ 651 $ 1,991 $ 1,846
Underwriting results $ 5 $ (14) $ (10) $ 31
Combined ratio 99.0 102.5 100.4 99.9
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Personal written premiums increased $35, or 5%, for the third quarter and $145,
or 8%, for the nine months ended September 30, 2000 over the comparable prior
year periods. Written premiums increased $24, or 7%, in the AARP program for the
quarter, and $67, or 6%, for the nine month period. Standard agency written
premiums increased $8, or 4%, for the quarter and $52, or 10%, for the nine
months ended September 30, 2000. Affinity growth of $6, or 19%, for the quarter
and $41, or 50%, for the nine month period included the Ford Motor Company and
Ford Motor Credit Company account as well as the Sears, Roebuck & Co. account.
Non-standard automobile written premiums through Omni decreased $3, or 4%, for
the quarter and $15, or 7%, for the nine month period compared to prior year as
a result of an expected reaction to rate increases in certain states.
Underwriting results increased $19 for the third quarter and decreased $41 for
the nine month period, with a corresponding 3.5 point improvement in the
combined ratio for the quarter and a 0.5 point increase for the nine months
ended September 30, 2000 compared with 1999. The increase in underwriting
results and related decrease in the combined ratio for the quarter were
primarily due to lower catastrophe losses and improved loss cost trends. The
decrease in underwriting results and related increase in the combined ratio for
the nine month period were primarily due to increased Agency automobile loss
costs. A 1.2 point decrease in the expense ratio for the nine months ended
September 30, 2000 compared to 1999 reflects the continued trend of productivity
gains from prior investments.
--------------------------------------------------------------------------------
REINSURANCE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Written premiums $ 190 $ 169 $ 645 $ 561
Underwriting results $ (28) $ (35) $ (52) $ (44)
Combined ratio 116.4 119.8 108.7 108.1
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 18 -
<PAGE>
Reinsurance written premiums increased $21, or 12%, for the third quarter and
$84, or 15%, for the nine months ended September 30, 2000 compared with the same
prior year periods. The third quarter increase was primarily due to successful
pricing increases in a firming pricing environment in North America, as well as
growth in new casualty programs business. The nine month increase was primarily
due to continued execution of new business development strategies in the
Alternative Risk Transfer line and in Europe, along with successful pricing
increases in North America. Underwriting results improved $7, or 3.4 combined
ratio points, for the third quarter primarily due to lower property catastrophe
losses. For the nine months ended September 30, 2000, underwriting results
decreased $8, with a corresponding 0.6 point increase in the combined ratio.
This decrease was primarily due to continued adverse prior underwriting year
loss development concentrated in a few classes of business, partially offset by
lower property catastrophe losses.
--------------------------------------------------------------------------------
INTERNATIONAL AND OTHER OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------------------
2000 1999 2000 1999
--------------------------------------------------------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 143 $ 150 $ 458 $ 491
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 5 $ 3 $ 25 $ 28
Less: Net realized capital gains (losses), after-tax -- (1) 11 9
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 5 $ 4 $ 14 $ 19
====================================================================================================================================
</TABLE>
INTERNATIONAL
International revenues were flat for the third quarter and down $26, or 7%, for
the nine months ended September 30, 2000 over the comparable periods in 1999.
Core earnings were flat for the third quarter and down $6, or 38%, compared to
the same period in 1999, primarily due to a higher calendar year loss ratio in
automobile business in Spain and unfavorable foreign exchange impacts. Overall,
there was a negative foreign exchange impact of $3 for the nine months ended
September 30, 2000.
In October 2000, The Hartford reached an agreement in principle to sell its
Netherlands based Zwolsche subsidiary. (For a further discussion see the Capital
Resources and Liquidity Section under Subsequent Events.)
OTHER OPERATIONS
Other Operations consist of property and casualty operations of The Hartford
which have discontinued writing new business.
Other Operations revenues decreased $7, or 19%, for the third quarter and $7, or
6%, for the nine months ended September 30, 2000 compared to the same prior year
periods. Core earnings were relatively flat for the third quarter and the nine
months ended September 30, 2000, compared to prior year.
--------------------------------------------------------------------------------
ENVIRONMENTAL AND ASBESTOS CLAIMS
--------------------------------------------------------------------------------
The Hartford continues to receive claims asserting damages from environmental
exposures and for injuries from asbestos and asbestos-related products, both of
which affect Worldwide Property & Casualty. Environmental claims relate
primarily to pollution and related clean-up costs. With regard to these claims,
uncertainty exists which impacts the ability of insurers and reinsurers to
estimate the ultimate reserves for unpaid losses and related settlement
expenses. The Hartford finds that conventional reserving techniques cannot
estimate the ultimate cost of these claims because of inadequate development
patterns and inconsistent emerging legal doctrine. For the majority of
environmental claims and many types of asbestos claims, unlike any other type of
contractual claim, there is almost no agreement or consistent precedent to
determine what, if any, coverage exists or which, if any, policy years and
insurers or reinsurers may be liable. Further uncertainty arises with
environmental claims since claims are often made under policies, the existence
of which may be in dispute, the terms of which may have changed over many years,
which may or may not provide for legal defense costs, and which may or may not
contain environmental exclusion clauses that may be absolute or allow for
fortuitous events. Courts in different jurisdictions have reached disparate
conclusions on similar issues and in certain situations have broadened the
interpretation of policy coverage and liability issues. In light of the
extensive claim settlement process for environmental and asbestos claims,
involving comprehensive fact gathering, subject matter expertise and intensive
litigation, The Hartford established an environmental claims facility in 1992 to
defend itself aggressively against unwarranted claims and to minimize costs.
Within the property and casualty insurance industry in the mid-1990's, progress
was 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 initiated in April 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 1999 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
September 30, 2000 and the year ended December 31, 1999, was as follows (net of
reinsurance):
- 19 -
<PAGE>
<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
NINE MONTHS ENDED YEAR ENDED
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------------------ -------------------------------------
Environmental Asbestos Total Environmental Asbestos Total
---------------- ----------- ------------- ---------------- ----------- --------
<S> <C> <C> <C> <C> <C> <C>
Beginning liability $ 995 $ 607 $ 1,602 $ 1,144 $ 648 $ 1,792
Claims and claim adjustment expenses incurred 5 5 10 7 4 11
Claims and claim adjustment expenses paid (59) (39) (98) (156) (45) (201)
-----------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY [1] $ 941 $ 573 $ 1,514 $ 995 $ 607 $ 1,602
===================================================================================================================================
<FN>
[1] The ending liabilities are net of reinsurance on reported and unreported claims of $1,334 and $1,506 for September 30, 2000
and December 31, 1999, respectively. Gross of reinsurance as of September 30, 2000 and December 31, 1999, reserves for
environmental and asbestos were $1,522 and $1,326 and $1,609 and $1,499, respectively.
</FN>
</TABLE>
The Hartford believes that the environmental and asbestos reserves recorded at
September 30, 2000 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.
- 20 -
<PAGE>
--------------------------------------------------------------------------------
INVESTMENTS
--------------------------------------------------------------------------------
An important element of the financial results of The Hartford is return on
invested assets. The Hartford's investment portfolios are divided between
Worldwide Life and Worldwide Property & Casualty. 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 1999 Form 10-K Annual Report for a description of
the Company's investment objectives and policies.
WORLDWIDE LIFE
Invested assets, excluding separate accounts, totaled $22.1 billion at September
30, 2000 and were comprised of $17.5 billion of fixed maturities, $3.6 billion
of policy loans, and other investments of $1.0 billion. Invested assets,
excluding separate accounts, totaled $21.8 billion at December 31, 1999 and were
comprised of $17.0 billion of fixed maturities, $4.2 billion of policy loans,
and other investments of $529. 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.
FIXED MATURITIES BY TYPE
-----------------------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
-----------------------------------------------------------------
Corporate $ 7,456 42.5% $ 7,737 45.4%
ABS 2,948 16.8% 2,508 14.7%
Commercial MBS 2,492 14.2% 2,112 12.4%
Municipal - tax-exempt 1,338 7.6% 1,108 6.5%
MBS - agency 920 5.3% 853 5.0%
CMO 792 4.5% 592 3.5%
Gov't/Gov't agencies - For. 318 1.8% 339 2.0%
Gov't/Gov't agencies - U.S. 174 1.0% 229 1.3%
Municipal - taxable 79 0.5% 165 1.0%
Short-term 821 4.7% 1,346 7.9%
Redeemable preferred stock 190 1.1% 46 0.3%
-----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 17,528 100.0% $ 17,035 100.0%
=================================================================
Short-term securities declined primarily as a result of the funding of scheduled
liability maturities and reallocation into other asset sectors, particularly ABS
and Commercial MBS.
INVESTMENT RESULTS
The table below summarizes Worldwide Life's results.
THIRD QUARTER NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------
(before-tax) 2000 1999 2000 1999
------------------------------------------------------------------
Net investment income -
excluding policy loans $ 324 $ 291 $ 944 $ 865
Policy loan income 84 90 230 298
----------------------------------------
Net invest. income - $ 408 $ 381 $ 1,174 $ 1,163
total
Yield on average
invested assets [1] 7.4% 6.9% 7.0% 6.7%
Net realized capital $ -- $ (5) $ (43) $ (5)
losses
==================================================================
[1] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed maturities
at amortized cost).
Net investment income, excluding policy loans, for the third quarter and nine
months ended September 30, 2000 increased 11% and 9% compared to the respective
prior periods. The increases were primarily due to a higher interest rate
environment which also resulted in an increase in yields on invested assets.
Policy loan income decreased 7% and 23% over the same periods due to the
decrease in leveraged COLI business.
Net realized capital losses for the third quarter ended September 30, 2000
decreased $5 compared to the prior year period. For the nine months ended
September 30, 2000, net realized capital losses increased by $38 compared to the
prior year period, primarily as a result of portfolio rebalancing in prior
quarters.
WORLDWIDE PROPERTY & CASUALTY
Total invested assets were $17.8 billion at September 30, 2000 and were
comprised of fixed maturities of $16.1 billion and other investments of $1.7
billion, primarily equity securities and limited partnerships. Total invested
assets were $17.4 billion at December 31, 1999 and were comprised of fixed
maturities of $15.8 billion and other investments of $1.6 billion, primarily
equity securities and limited partnerships.
FIXED MATURITIES BY TYPE
----------------------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
----------------------------------------------------------------
Municipal - tax-exempt $ 8,316 51.8% $ 8,160 51.5%
Corporate 3,160 19.7% 3,104 19.6%
Commercial MBS 1,098 6.8% 881 5.6%
Gov't/Gov't agencies - For. 970 6.0% 1,140 7.2%
ABS 746 4.6% 596 3.8%
MBS - agency 375 2.3% 445 2.8%
CMO 202 1.3% 240 1.5%
Gov't/Gov't agencies - U.S. 75 0.5% 101 0.6%
Municipal - taxable 44 0.3% 54 0.4%
Short-term 829 5.2% 1,003 6.3%
Redeemable preferred stock 241 1.5% 116 0.7%
----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,056 100.0% $ 15,840 100.0%
================================================================
INVESTMENT RESULTS
The table below summarizes Worldwide Property & Casualty's results.
THIRD QUARTER NINE MONTHS ENDED
ENDED SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------
2000 1999 2000 1999
------------------------- --------- ---------- --------- ---------
Net investment income,
before-tax $ 271 $ 259 $ 802 $ 794
Net investment income,
after-tax [1] $ 212 $ 203 $ 626 $ 618
Yield on average
invested assets, 6.2% 5.9% 6.2% 6.0%
before-tax [2]
Yield on average
invested assets, 4.9% 4.6% 4.8% 4.6%
after-tax [1] [2]
Net realized capital
gains (losses), $ 7 $ (3) $ 22 $ 35
before-tax
==================================================================
[1] Due to the significant holdings in tax-exempt investments, after-tax net
investment income and after-tax yield are also included.
[2] Represents annualized net investment income (excluding net realized capital
gains (losses)) divided by average invested assets at cost (fixed maturities
at amortized cost).
For the third quarter ended September 30, 2000, before- and after-tax net
investment income increased by 5% and 4%, respectively. For the nine months
ended September 30, 2000, both before- and
- 21 -
<PAGE>
after-tax net investment income increased by 1%. The increases were primarily
due to an increase in partnership income, and to higher yields earned on
reinvestment of cash flow in a higher interest rate environment.
Net realized capital gains for the third quarter ended September 30, 2000
increased by $10 and net realized capital gains for the nine months ended
September 30, 2000 decreased by $13 compared to the respective prior year
periods.
Increased equity gains were partially offset by fixed maturity losses for the
third quarter ended September 30, 2000, and more than offset by fixed maturity
losses for the nine months ended September 30, 2000.
--------------------------------------------------------------------------------
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 1999 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 are monitored on a
regular interval. The Hartford is not exposed to any significant credit
concentration risk of a single issuer.
The following tables identify fixed maturity securities for Worldwide Life,
including guaranteed separate accounts, and Worldwide Property & Casualty, 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.
WORLDWIDE LIFE
As of September 30, 2000 and December 31, 1999, over 97% of the fixed maturity
portfolio was invested in securities rated investment grade.
FIXED MATURITIES BY CREDIT QUALITY
-----------------------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------------------------------------------
CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
------------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,303 8.5% $ 2,404 9.3%
AAA 4,589 17.0% 3,535 13.6%
AA 3,511 13.0% 3,199 12.3%
A 8,839 32.7% 8,731 33.6%
BBB 5,791 21.5% 5,816 22.4%
BB & below 745 2.8% 559 2.2%
Short-term 1,225 4.5% 1,728 6.6%
------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 27,003 100.0% $ 25,972 100.0%
==================================================================
WORLDWIDE PROPERTY AND CASUALTY
As of September 30, 2000 and December 31, 1999, over 95% of the fixed maturity
portfolio was invested in securities rated investment grade.
FIXED MATURITIES BY CREDIT QUALITY
-----------------------------------------------------------------
SEPTEMBER 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------
CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
-----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 544 3.4% $ 650 4.1%
AAA 6,672 41.5% 6,378 40.3%
AA 3,370 21.0% 3,298 20.8%
A 2,543 15.8% 2,613 16.5%
BBB 1,407 8.8% 1,240 7.8%
BB & below 691 4.3% 658 4.2%
Short-term 829 5.2% 1,003 6.3%
-----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,056 100.0% $ 15,840 100.0%
=================================================================
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,
1999.
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.
- 22 -
<PAGE>
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the Company's Finance Committee.
The notional amounts of derivative contracts represent the basis upon which pay
or receive amounts are calculated and are not reflective of credit risk.
Notional amounts pertaining to derivative instruments for both general and
guaranteed separate accounts totaled $9.1 billion and $9.8 billion at September
30, 2000 and December 31, 1999, respectively.
For a further discussion of market risk exposure, including derivative
instruments, please refer to The Hartford's 1999 Form 10-K Annual Report.
--------------------------------------------------------------------------------
CAPITAL RESOURCES AND LIQUIDITY
--------------------------------------------------------------------------------
Capital resources and liquidity represent the overall financial strength of The
Hartford and its ability to generate strong cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. As of September 30, 2000, the capital structure of The Hartford consisted
of debt and equity, and as of December 31, 1999 also consisted of minority
interest, summarized as follows:
<TABLE>
<CAPTION>
SEPTEMBER 30, 2000 DECEMBER 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term debt $ 430 $ 31
Long-term debt 2,062 1,548
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures (QUIPS and TruPS) 1,243 1,250
------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 3,735 $ 2,829
-----------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ -- $ 491
-----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain (loss) on securities, net of tax $ 6,660 $ 5,664
Unrealized gain (loss) on securities, net of tax 84 (198)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 6,744 $ 5,466
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 10,395 $ 8,984
-----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 56% 50%
Debt to capitalization [2] [3] 36% 31%
------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Excludes unrealized gain (loss) on securities, net of tax, of $(62) as of December 31, 1999.
[2] Excludes unrealized gain (loss) on securities, net of tax.
[3] Excluding QUIPS and TruPS, the debt to equity ratio was 37% and 28% and the debt to capitalization ratio was 24% and 18% as
of September 30, 2000 and December 31, 1999, respectively.
</FN>
</TABLE>
THE HLI REPURCHASE
On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI
that it did not already own (The HLI Repurchase). The HLI Repurchase has been
recorded as a purchase transaction. Consideration totaled $1.4 billion and
resulted in recognition of goodwill (excess of the purchase price over the fair
values of the net assets acquired) of $862, which is being amortized on a
straight-line basis over a 25 year period.
Purchase accounting for this transaction resulted in adjustments to the cost
basis of certain assets and liabilities acquired based on assessments of fair
value, including the recognition of the present value of future gross profits to
be earned (PVP) and a reduction of deferred policy acquisition costs.
Amortization of fair value adjustments, excluding goodwill, will not have a
material impact on the Company's ongoing results of operations.
Purchase consideration for the transaction was as follows:
Issuance of:
-----------
Common stock from treasury (7.25 million shares
@ $54.90 per share) $ 398
Long-term notes:
$250 7.75% notes due June 15, 2005 244
$275 7.90% notes due June 15, 2010 272
Commercial paper 400
-------------------------------------------------------------------
Consideration raised 1,314
Other including conversion of HLI employee stock options
and restricted shares 102
-------------------------------------------------------------------
Total consideration $1,416
===================================================================
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain (loss) on
securities, net of tax, increased by $1.4 billion as of September 30, 2000
compared to December 31, 1999. This change was primarily the result of earnings
and financing activities related to The HLI Repurchase, partially offset by
dividends declared.
DEBT
On June 16, 2000, The Hartford issued and sold $525 of unsecured redeemable
long-term debt. On June 23, 2000, The Hartford issued $400 of commercial paper.
Proceeds on the debt
- 23 -
<PAGE>
issuances were used to partially fund The HLI Repurchase. For a further
discussion of the debt, see Note 3 of Notes to Consolidated Financial
Statements.
On November 9, 2000, The Hartford filed with the Securities and Exchange
Commission a shelf registration statement and a prospectus for the potential
offering and sale of up to $1.127 billion in debt and equity securities. For a
further discussion of the shelf registration, see Note 3(c) of Notes to
Consolidated Financial Statements.
STOCKHOLDERS' EQUITY
Issuance of common stock from treasury - On June 8, 2000, The Hartford issued
7.25 million shares of common stock under its existing shelf registration to
Goldman, Sachs & Co. for $398. The shares, which were issued out of treasury,
were re-offered by Goldman, Sachs & Co. to investors. The Hartford used the net
proceeds from the issuance of the shares to partially fund The HLI Repurchase.
Dividends - On July 20, 2000, The Hartford declared a dividend on its common
stock of $0.24 per share payable on October 2, 2000 to shareholders of record as
of September 1, 2000.
Treasury stock - For the nine months ended September 30, 2000, The Hartford
repurchased 2.8 million shares of its common stock in the open market at a total
cost of $100 under the Company's $1.0 billion repurchase program authorized in
October 1999. Since the inception of the repurchase program, The Hartford has
repurchased 5.9 million shares at a total cost of $243. Certain of these
repurchased shares have been reissued pursuant to certain stock-based benefit
plans and in the issuance of common stock described above. During the first
quarter of 2000 and in conjunction with The HLI Repurchase, management elected
to temporarily discontinue all repurchase activity indefinitely.
CASH FLOWS NINE MONTHS ENDED
SEPTEMBER 30,
--------------------------
2000 1999
------------------------------------------------------------------
Cash provided by operating activities $ 1,590 $ 435
Cash (used for) provided by investing
activities $ (1,625) $ 2,623
Cash provided by (used for) financing
activities $ 100 $ (3,042)
Cash - end of period $ 235 $ 135
------------------------------------------------------------------
The increase in operating cash flow was primarily the result of growth in
Worldwide Life business. The decrease in cash used for financing activities was
attributable to financing for The HLI Repurchase as well as a lower level of
disbursements for investment type contracts related to the leveraged block of
COLI business. The financing activities, along with the increase in cash
provided by operating activities, accounted for the change in cash from
investing activities.
SUBSEQUENT EVENT
On October 6, 2000, The Hartford reached an agreement in principle to sell its
Netherlands based Zwolsche subsidiary to Assurances Generales de France (AGF), a
subsidiary of Allianz AG. The Company expects to receive proceeds of
approximately $550, before costs of sale. Management plans to use the proceeds
from the sale to reduce outstanding commercial paper which was issued to
partially fund The HLI Repurchase.
--------------------------------------------------------------------------------
REGULATORY MATTERS AND CONTINGENCIES
--------------------------------------------------------------------------------
NAIC CODIFICATION
The NAIC adopted the Codification of Statutory Accounting Principles (SAP) in
March 1998. The effective date for the statutory accounting guidance is January
1, 2001. Each of The Hartford's domiciliary states has adopted the SAP and the
Company will make the necessary changes required for implementation. The Company
is in the process of determining the impact, if any, that the SAP will have on
the statutory financial statements of The Hartford's insurance subsidiaries.
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 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 third parties. 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.
YEAR 2000
Status and Contingency Plans
As of September 30, 2000, The Hartford had not experienced any Year 2000-related
business interruptions arising either from its own systems or those of third
parties. Nonetheless, The Hartford has developed certain contingency plans in
order to avoid or minimize any Year 2000-related problems should they occur in
the future. Each business segment has identified certain business disruption
scenarios that, if they were to occur, could create significant problems in its
respective critical functions. Each segment has developed a corresponding
contingency plan to respond to such problems. The Hartford will continue to
assess Year 2000 issues, if any, on its business functions and will review and
revise its contingency plans related thereto as circumstances warrant.
Year 2000 Costs
The Hartford did not incur, during the quarter and nine months ended September
30, 2000, any significant costs related to its Year 2000 efforts.
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Insurance Claims
As an insurer, The Hartford has received claims from insureds who have incurred
or may incur losses as a result of Year 2000 issues. Insurance coverage, if any,
will depend upon the provisions of the policies and the facts and circumstances
of each claim. The Hartford does not currently believe that the claim and claim
adjustment expenses related to such claims will have a material impact upon The
Hartford's financial condition or results of operations.
For further information on Year 2000, please refer to The Hartford's 1999 Form
10-K Annual Report.
--------------------------------------------------------------------------------
ACCOUNTING STANDARDS
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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.
Part II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Hartford is involved in various legal actions, some of which involve claims
for substantial amounts. In the opinion of management, final outcome of these
matters 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.
In October 2000, the definitive terms of a stipulation of settlement were agreed
by the parties in the Delaware Chancery Court (the Court) actions reported in
the Company's March 31 and June 30, 2000 Form 10-Q's concerning The HLI
Repurchase. The stipulation of settlement takes into account the increased
compensation paid for the HLI public shares and provides for a release by all
class members and named plaintiffs of all claims that were or could have been
brought concerning The HLI Repurchase. The stipulation of settlement is subject
to preliminary approval by the Court, after which notice will be given to the
members of the proposed settlement class of their right to appear in court and
contest final court approval of the settlement. Upon the Court's final approval,
the settlement provides that the Company will pay plaintiffs' attorneys' fees
and costs of up to $2 as awarded by the Court.
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 5. OTHER INFORMATION
The Hartford's 2001 Annual Meeting of Shareholders, previously scheduled to be
held on Thursday, May 17, 2001, has been rescheduled and will be held on
Thursday, April 19, 2001.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index.
(b) Reports on Form 8-K - None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Hartford Financial
Services Group, Inc.
(Registrant)
/s/ John N. Giamalis
----------------------------------------
John N. Giamalis
Senior Vice President and Controller
NOVEMBER 13, 2000
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHBITS INDEX
Exhibit #
---------
10.1 Employment Agreement dated July 1, 2000 between The
Hartford and Thomas M. Marra is filed herewith.
27 Financial Data Schedule is filed herewith.
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