================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended June 30, 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 July 31, 2000, there were outstanding 224,306,990 shares of Common Stock,
$0.01 par value per share, of the registrant.
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<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
------------------------------
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Statements of Income - Second Quarter and Six Months
Ended June 30, 2000 and 1999 3
Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 4
Consolidated Statements of Changes in Stockholders' Equity - Six Months
Ended June 30, 2000 and 1999 5
Consolidated Statements of Cash Flows - Six Months Ended June 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 23
PART II. OTHER INFORMATION
---------------------------
ITEM 1. LEGAL PROCEEDINGS 24
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24
Signature 25
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Statements of Income
Second Quarter Ended Six Months Ended
June 30, June 30,
--------------------------- --------------------------
(In millions, except for per share data) 2000 1999 2000 1999
--------------------------------------------------------------------------------------------------------------------------
(Unaudited) (Unaudited)
REVENUES
<S> <C> <C> <C> <C>
Earned premiums, fee income and other $ 2,917 $ 2,688 $ 5,745 $ 5,293
Net investment income 643 652 1,297 1,317
Net realized capital gains (losses) (46) 9 (29) 38
--------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,514 3,349 7,013 6,648
===================================================================================================================
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 2,088 2,005 4,078 3,914
Amortization of deferred policy acquisition costs and present
value of future profits 540 490 1,084 948
Other expenses 628 547 1,249 1,135
--------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 3,256 3,042 6,411 5,997
===================================================================================================================
OPERATING INCOME 258 307 602 651
Income tax expense 19 71 97 157
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 239 236 505 494
Minority interest in consolidated subsidiary (26) (21) (54) (41)
--------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 213 $ 215 $ 451 $ 453
===================================================================================================================
Basic earnings per share $ 0.98 $ 0.95 $ 2.09 $ 2.00
Diluted earnings per share $ 0.97 $ 0.93 $ 2.07 $ 1.97
--------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 216.5 226.8 216.2 226.9
Weighted average common shares outstanding and dilutive potential
common shares 219.9 230.0 218.4 230.0
--------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 0.24 $ 0.23 $ 0.48 $ 0.45
==========================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Balance Sheets
June 30, December 31,
(In millions, except for share data) 2000 1999
-------------------------------------------------------------------------------------------------------------------------------
ASSETS (Unaudited)
Investments
-----------
Fixed maturities, available for sale, at fair value (amortized cost of $33,341 and
<S> <C> <C>
$33,653) $ 32,856 $ 32,875
Equity securities, available for sale, at fair value (cost of $997 and $937) 1,264 1,286
Policy loans, at outstanding balance 3,581 4,222
Other investments 1,316 758
-------------------------------------------------------------------------------------------------------------------------------
Total investments 39,017 39,141
Cash 212 182
Premiums receivable and agents' balances 2,171 2,071
Reinsurance recoverables 4,419 4,473
Deferred policy acquisition costs and present value of future profits 5,239 5,038
Deferred income tax 1,314 1,404
Other assets 3,857 3,075
Separate account assets 115,676 111,667
-------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 171,905 $ 167,051
=======================================================================================================================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 15,878 $ 16,014
Life 6,833 6,564
Other policy funds and benefits payable 15,560 16,884
Unearned premiums 2,973 2,777
Short-term debt 431 31
Long-term debt 2,061 1,548
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures 1,243 1,250
Other liabilities 4,962 4,421
Separate account liabilities 115,676 111,667
-------------------------------------------------------------------------------------------------------------------------------
165,617 161,156
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 1,686 1,551
Retained earnings 5,475 5,127
Treasury stock, at cost - 15,463,042 and 21,419,460 shares (627) (942)
Accumulated other comprehensive loss (248) (272)
-------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 6,288 5,466
=======================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 171,905 $ 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
SIX MONTHS ENDED JUNE 30, 2000
Accumulated Other Comprehensive (Loss)
---------------------------------------
Common Unrealized Minimum
Stock/ Gain (Loss) Pension Outstanding
Additional Treasury on Cumulative Liability Shares
Paid-in Retained Stock, Securities, Translation Adjustment, (In
(Dollars in millions) (Unaudited) Capital Earnings at Cost net of tax Adjustments net of tax Total 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 451 451
Other comprehensive income, net of
tax [1]
Unrealized gain on securities [2] 78 78
Cumulative translation adjustments (54) (54)
----------
Total other comprehensive income 24
----------
Total comprehensive income 475
----------
Issuance of shares under incentive and
stock purchase plans (8) 73 65 1,467
Issuance of common stock from treasury 56 342 398 7,250
Conversion of HLI employee options
and restricted shares 86 86 72
Tax benefit on employee stock options
and awards 1 1
Treasury stock acquired (100) (100) (2,832)
Dividends declared on common stock (103) (103)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $1,688 $5,475 $(627) $(120) $(117) $(11) $6,288 223,183
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SIX MONTHS ENDED JUNE 30, 1999
Accumulated Other Comprehensive Income
---------------------------------------
Common Unrealized
Stock/ Gain Outstanding
Additional Treasury on Cumulative Shares
Paid-in Retained Stock, Securities, Translation (In
(Dollars in millions) (Unaudited) Capital Earnings at Cost net of tax Adjustments Total thousands)
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $1,593 $4,474 $(455) $811 $-- $6,423 227,395
Comprehensive income
Net income 453 453
Other comprehensive income (loss), net
of tax [1]
Unrealized gain (loss) on securities (639) (639)
[2]
Cumulative translation adjustments (39) (39)
----------
Total other comprehensive income (loss) (678)
----------
Total comprehensive income (loss) (225)
----------
Issuance of shares under incentive and
stock purchase plans (47) 85 38 1,667
Tax benefit on employee stock options
and awards 15 15
Treasury stock acquired (3) (148) (151) (2,675)
Dividends declared on common stock (103) (103)
------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $1,558 $4,824 $(518) $172 $(39) $5,997 226,387
====================================================================================================================================
<FN>
[1] Unrealized gain (loss) on securities is net of tax expense (benefit) of $42
and $(344) for the six months ended June 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 $(14) and $24 for the six months ended June 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
Six Months Ended
June 30,
----------------------------------
(In millions) 2000 1999
------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 451 $ 453
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Change in receivables, payables and accruals (78) (118)
Decrease in reinsurance recoverables and other related assets 81 193
Increase in deferred policy acquisition costs and present value of future profits (209) (267)
Change in accrued and deferred income taxes 178 (12)
Increase (decrease) in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums 307 (132)
Minority interest in consolidated subsidiary 54 41
Net realized capital gains/losses 29 (38)
Depreciation and amortization 27 36
Other, net 57 (50)
------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 897 106
------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchase of investments (7,271) (7,756)
Sale of investments 6,667 9,212
Maturity of investments 976 1,103
Purchase of affiliate (1,108) --
Additions to plant, property and equipment (56) (46)
------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (792) 2,513
------------------------------------------------------------------------------------------------------------------------------
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 (1,215) (2,316)
Dividends paid (105) (104)
Acquisition of treasury stock (100) (151)
Proceeds from issuances under incentive and stock purchase plans 36 34
------------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (70) (2,537)
==============================================================================================================================
Foreign exchange rate effect on cash (5) (4)
------------------------------------------------------------------------------------------------------------------------------
Net increase in cash 30 78
Cash - beginning of period 182 123
------------------------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 212 $ 201
==============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
------------------------------------------------
NET CASH (RECEIVED) PAID DURING THE PERIOD FOR:
Income taxes $ (69) $ 110
Interest $ 107 $ 107
</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)
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 June 2000, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain
Derivative Instruments and Certain Hedging Activities", which amends SFAS No.
133, "Accounting for Derivative Instruments and Hedging Activities".
Specifically, it amends SFAS No. 133 so that in 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. For companies that have not
adopted SFAS No. 133 before June 15, 2000, SFAS No. 138 must be adopted
concurrently with the company's adoption of SFAS No. 133. Initial application of
both SFAS No. 133 and SFAS No. 138 for The Hartford will begin January 1, 2001.
The Company has reviewed its derivative holdings and is in the process of
quantifying the impact of SFAS No. 133, as amended by SFAS No. 138. The Company
is also assessing what actions, if any, need to be taken to minimize potential
volatility, while at the same time maintaining the economic protection needed to
support the goals of its business.
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 Emerging Issues Task Force (EITF) reached consensus on
Issue 98-15, "Structured Notes Acquired for a Specific Investment Strategy".
This pronouncement requires companies to account for structured notes acquired
for a specific investment strategy as a unit. Affected companies that entered
into these notes prior to September 25, 1998 are required to either restate
prior period financial statements to conform with the prescribed unit accounting
model, or disclose the related impact on earnings for all periods presented and
cumulatively over the life of the instruments had the registrant accounted for
the structure as a unit. Net income for both the second quarter and six months
ended June 30, 1999 would have been $1 lower, while net income for the second
quarter and six months ended June 30, 2000, would have been $7 and $8 lower,
respectively, and cumulatively over the life of the instrument would have been
$14 higher, had the Company accounted for its structured note transaction as a
unit, based upon the consensus reached in EITF 98-15.
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. Of the total purchase price, $226 was
outstanding and payable as of June 30, 2000, related to non-tendered shares, the
majority of which was subsequently paid in July 2000.
Purchase accounting for this transaction resulted in adjustments to the cost
basis of certain assets and liabilities acquired based on preliminary
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. Goodwill amortization and other purchase price adjustments
did not have a material impact on second quarter 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 options
and restricted shares 102
-----------------------------------------------------------------
Total consideration $1,416
-----------------------------------------------------------------
- 7 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
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.
After the long-term debt issuance and the issuance of common stock (described
below in Note 4, Stockholders Equity), The Hartford had $127 remaining on its
shelf registration at June 30, 2000.
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>
Second Quarter Ended Six Months Ended
------------------------------------- ------------------------------------
Per Share Per Share
June 30, 2000 Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Income available to common shareholders $ 213 216.5 $ 0.98 $ 451 216.2 $ 2.09
------------ -------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 3.4 -- 2.2
------------------------- ------------------------
Income available to common shareholders plus assumed
conversions $ 213 219.9 $ 0.97 $ 451 218.4 $ 2.07
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Second Quarter Ended Six Months Ended
------------------------------------- -------------------------------------
Per Share Per Share
June 30, 1999 Income Shares Amount Income Shares Amount
-----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
<S> <C> <C> <C> <C> <C> <C>
Income available to common shareholders $ 215 226.8 $ 0.95 $ 453 226.9 $ 2.00
------------- ------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 3.2 -- 3.1
------------------------ -------------------------
Income available to common shareholders plus assumed
conversions $ 215 230.0 $ 0.93 $ 453 230.0 $ 1.97
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
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 May 2000, an agreement in principle was reached providing for a settlement of
the Delaware Chancery Court (the Court) actions reported in the Company's March
31, 2000 Form 10-Q concerning The HLI Repurchase. On May 17, 2000, a Memorandum
of
- 8 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED)
(A) LITIGATION (CONTINUED)
Understanding was executed by all parties taking into account the final price
paid for the public shares and providing for a full release by all class members
and named plaintiffs of all claims that were or could have been brought
concerning The HLI Repurchase. The settlement is subject to the execution of a
definitive stipulation of settlement after confirmatory discovery and approval
by the Court after notice to the members of the proposed settlement class. The
Memorandum of Understanding also provides that upon final approval of the
settlement, the Company will pay plaintiffs' attorneys' fees and costs of up to
$2. As of July 31, 2000, the discovery contemplated by the Memorandum of
Understanding was completed, but the stipulation of settlement had not been
finalized and executed.
(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 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 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, 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.
- 9 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7. SEGMENT INFORMATION (CONTINUED)
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
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------
Worldwide Life
<S> <C> <C> <C> <C>
Investment Products $ 587 $ 499 $ 1,172 $ 982
Individual Life 154 140 311 273
Group Benefits 557 489 1,077 964
COLI 170 215 335 439
Other (27) 14 (8) 34
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 1,441 1,357 2,887 2,692
------------------------------------------------------------------------------------------------------------------------------------
Worldwide Property & Casualty
North American
Earned premiums, service fees and other from underwriting segments
Commercial 848 808 1,677 1,603
Personal 674 617 1,325 1,226
Reinsurance 200 186 383 337
------------------------------------------------------------------------------------------------------------------------------------
Total underwriting segments earned premiums, service fees and other 1,722 1,611 3,385 3,166
Net investment income 207 216 428 427
Net realized capital gains (losses) (8) 6 (1) 22
------------------------------------------------------------------------------------------------------------------------------------
Total North American 1,921 1,833 3,812 3,615
------------------------------------------------------------------------------------------------------------------------------------
International and Other Operations 153 159 315 341
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 2,074 1,992 4,127 3,956
------------------------------------------------------------------------------------------------------------------------------------
Corporate (1) -- (1) --
------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 3,514 $ 3,349 $ 7,013 $ 6,648
====================================================================================================================================
</TABLE>
- 10 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 7. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
CORE EARNINGS
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
2000 1999 2000 1999
---------------------------------------------------------
Worldwide Life
<S> <C> <C> <C> <C>
Investment Products $ 110 $ 81 $ 212 $ 159
Individual Life 20 17 38 32
Group Benefits 21 19 40 36
COLI 8 8 16 14
Other 15 (11) 18 (21)
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 174 114 324 220
------------------------------------------------------------------------------------------------------------------------------------
Worldwide Property & Casualty
North American
Underwriting results
Commercial (34) (43) (95) (95)
Personal (19) 2 (15) 45
Reinsurance (11) (6) (24) (9)
------------------------------------------------------------------------------------------------------------------------------------
Total underwriting results (64) (47) (134) (59)
Net service fee and other income [1] -- 5 2 7
Net investment income 207 216 428 427
Other expenses (53) (55) (102) (111)
Income tax (expense) benefit 2 (9) (2) (29)
------------------------------------------------------------------------------------------------------------------------------------
Total North American 92 110 192 235
International and Other Operations 5 8 9 15
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 97 118 201 250
------------------------------------------------------------------------------------------------------------------------------------
Corporate (32) (21) (60) (41)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE EARNINGS 239 211 465 429
Net realized capital gains (losses), after-tax (26) 4 (14) 24
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 213 $ 215 $ 451 $ 453
====================================================================================================================================
<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.
- 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 June 30, 2000, compared with December 31, 1999, and its results
of operations for the second quarter and six months ended June 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.
<PAGE>
--------------------------------------------------------------------------------
INDEX
--------------------------------------------------------------------------------
Consolidated Results of Operations: Operating Summary 12
Worldwide Life 14
Investment Products 15
Individual Life 15
Group Benefits 16
Corporate Owned Life Insurance (COLI) 16
Worldwide Property & Casualty 17
Commercial 17
Personal 17
Reinsurance 18
International and Other Operations 18
Environmental and Asbestos Claims 19
Investments 20
Capital Markets Risk Management 21
Capital Resources and Liquidity 22
Regulatory Matters and Contingencies 23
Accounting Standards 23
--------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- -------------- -------------- -----------
2000 1999 2000 1999
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 3,514 $ 3,349 $ 7,013 $ 6,648
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 213 $ 215 $ 451 $ 453
Less: Net realized capital gains (losses), after-tax (26) 4 (14) 24
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 239 $ 211 $ 465 $ 429
====================================================================================================================================
</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 second quarter and six months ended June 30, 2000 increased
$165, or 5%, and $365, or 5%, respectively, over the comparable prior year
periods, primarily as a result of continued growth in fee income in Worldwide
Life and growth in personal lines and small commercial within Worldwide Property
& Casualty operations.
Core earnings increased $28, or 13%, and $36, or 8%, for the second quarter and
six months ended June 30, 2000, respectively, from the comparable prior year
periods as continued strong performance in Worldwide Life operations, primarily
due to higher fee income, was partially offset by a decline in Worldwide
Property & Casualty results, primarily due to personal lines automobile loss
costs.
The effective tax rates for the second quarter and six months ended June 30,
2000 were 7% and 16%, respectively, compared to 23% and 24%, 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
- 12 -
<PAGE>
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. This benefit, along with tax-exempt interest earned on invested
assets, were the principal causes 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 SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
---------------------------------------------------------
North American 2000 1999 2000 1999
---------------------------------------------------------
<S> <C> <C> <C> <C>
Commercial $ (34) $ (43) $ (95) $ (95)
Personal (19) 2 (15) 45
Reinsurance (11) (6) (24) (9)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (64) $ (47) $ (134) $ (59)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following is a summary of core earnings and net income (loss).
<TABLE>
<CAPTION>
CORE EARNINGS SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- -------------- -------------- -----------
2000 1999 2000 1999
-------------- -------------- -------------- -----------
Worldwide Life
<S> <C> <C> <C> <C>
Investment Products $ 110 $ 81 $ 212 $ 159
Individual Life 20 17 38 32
Group Benefits 21 19 40 36
COLI 8 8 16 14
Other 15 (11) 18 (21)
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 174 114 324 220
Worldwide Property & Casualty
North American 92 110 192 235
International and Other Operations 5 8 9 15
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 97 118 201 250
Corporate (32) (21) (60) (41)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE EARNINGS $ 239 $ 211 $ 465 $ 429
====================================================================================================================================
</TABLE>
- 13 -
<PAGE>
<TABLE>
<CAPTION>
NET INCOME (LOSS) SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- -------------- -------------- -----------
2000 1999 2000 1999
-------------- -------------- -------------- -----------
Worldwide Life
<S> <C> <C> <C> <C>
Investment Products $ 110 $ 81 $ 212 $ 159
Individual Life 20 17 38 32
Group Benefits 21 19 40 36
COLI 8 8 16 14
Other (13) (11) (10) (21)
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Life 146 114 296 220
Worldwide Property & Casualty
North American 86 113 191 249
International and Other Operations 9 9 20 25
------------------------------------------------------------------------------------------------------------------------------------
Total Worldwide Property & Casualty 95 122 211 274
Corporate (28) (21) (56) (41)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL NET INCOME $ 213 $ 215 $ 451 $ 453
====================================================================================================================================
</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] SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------- -------------- -------------- -----------
2000 1999 2000 1999
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
Revenues $ 1,441 $ 1,357 $ 2,887 $ 2,692
Expenses 1,295 1,243 2,591 2,472
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 146 $ 114 $ 296 $ 220
Less: Net realized capital losses, after-tax (28) -- (28) --
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 174 $ 114 $ 324 $ 220
====================================================================================================================================
<FN>
[1] Worldwide Life results are presented before the effect of the approximately
19% minority interest in HLI prior to The HLI Repurchase on June 27, 2000,
which is reflected in Corporate.
</FN>
</TABLE>
Revenues increased $84, or 6%, and $195, or 7%, for the second quarter and six
months ended June 30, 2000, respectively, as compared to the equivalent 1999
periods. Excluding net realized capital losses and the COLI segment, where
revenues decreased primarily due to the declining block of leveraged COLI
business, revenues increased $172, or 15%, and $342, or 15%, for the respective
second quarter and six month periods. The increase in revenues was attributable
to growth across each of Worldwide Life's other operating segments, particularly
the Investment Products segment, where related assets under management, which
include mutual funds, grew 18% to $116.5 billion from a year ago. 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
aforementioned increase in assets under management. In addition, Group Benefits
and Individual Life contributed to the increased revenues as a result of strong
sales and favorable persistency.
Expenses increased $52, or 4%, and $119, or 5%, for the second quarter and six
months ended June 30, 2000, respectively, as compared to the equivalent 1999
periods. Excluding tax benefits (described below) and the COLI segment, where
expenses decreased primarily due to the declining block of leveraged COLI
business, expenses increased $121, or 12%, and $257, or 13%, for the respective
second quarter and six month periods. The increase in expenses was lower than
the growth in revenues as Worldwide Life continues to create operating leverage
by expanding its distribution platform to accelerate sales volume while
utilizing technology and prudent expense management to increase productivity.
Core earnings increased $60, or 53%, and $104, or 47%, for the second quarter
and six months ended June 30, 2000, respectively, as compared to the equivalent
1999 periods. This increase was led by the Investment Products segment where
core earnings increased $29, or 36%, and $53, or 33%, for the respective second
quarter and six month periods. Additionally, the remaining three operating
segments each reported a double digit percentage increase for the six months
ended June 30, 2000 as compared to the respective prior year period. Worldwide
Life also reported a benefit related to the settlement of a federal tax matter
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 six months ended June 30, 2000. Excluding the tax items, core earnings were
up $36, or 32%, and $72, or 33%, for the respective second quarter and six month
periods.
- 14 -
<PAGE>
--------------------------------------------------------------------------------
INVESTMENT PRODUCTS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 587 $ 499 $ 1,172 $ 982
Expenses 477 418 960 823
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 110 $ 81 $ 212 $ 159
------------------------------------------------------------------------------------------------------------------------------------
Individual variable annuity account values $ 82,264 $ 70,741
Other individual annuity account values 8,624 8,371
Other investment products account values 16,862 15,206
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 107,750 94,318
Retail mutual fund assets under management 8,729 4,119
------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 116,479 $ 98,437
====================================================================================================================================
</TABLE>
Revenues in the Investment Products segment increased $88, or 18%, and $190, or
19%, for the second quarter and six months ended June 30, 2000, respectively, as
compared to the equivalent 1999 periods, primarily due to higher fee income in
the individual annuity and retail mutual fund operations. Fee income generated
by individual annuities increased $60, or 22%, and $136, or 26%, for the
respective second quarter and six month periods, as related account values grew
$11.8 billion, or 15%, from June 30, 1999. The growth in individual annuity
account values was mostly due to strong individual annuity sales (including $5.8
billion for the first six months of 2000) and equity market appreciation. In
addition, fee income from other investment products increased $25, or 60%, and
$49, or 57%, for the respective second quarter and six month periods of 2000,
primarily driven by the Company's retail mutual fund operation, where assets
under management increased $4.6 billion, or 112%, from June 30, 1999. This
substantial growth was mostly due to strong sales (including $2.6 billion for
the first six 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 $59, or 14%, and $137, or 17%,
for the second quarter and six months ended June 30, 2000, respectively, as
compared to the equivalent 1999 periods. These increases were primarily driven
by amortization of deferred policy acquisition costs, which grew $17, or 16%,
and $44, or 21%, for the respective second quarter and six month periods and
other expenses which increased $41, or 41%, and $66, or 33%, over the respective
prior year levels. The segment's operating expenses as a percentage of average
assets under management were relatively consistent for the second quarter and
six month periods versus the equivalent prior year periods.
Core earnings increased $29, or 36%, and $53, or 33%, for the second quarter and
six months ended June 30, 2000, respectively, as compared to the comparable 1999
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.
--------------------------------------------------------------------------------
INDIVIDUAL LIFE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 154 $ 140 $ 311 $ 273
Expenses 134 123 273 241
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 20 $ 17 $ 38 $ 32
------------------------------------------------------------------------------------------------------------------------------------
Variable life account values $ 2,848 $ 2,021
Total account values $ 5,695 $ 4,834
------------------------------------------------------------------------------------------------------------------------------------
Variable life insurance in force $ 28,503 $ 19,410
Total life insurance in force $ 70,613 $ 63,297
====================================================================================================================================
</TABLE>
Revenues in the Individual Life segment increased $14, or 10%, and $38, or 14%,
for the second quarter and six months ended June 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 $14, or 15%, and $41, or 23%, for the respective second quarter and
six month periods, as variable life account values increased $827, or 41%, and
variable life insurance in force increased $9.1 billion, or 47%, from June 30,
1999.
Expenses increased $11, or 9%, and $32, or 13%, for the second quarter and six
months ended June 30, 2000, respectively, as compared to the equivalent 1999
periods. The increase in expenses for the second quarter was principally due to
an $8 increase in benefits, claims and claim adjustment expenses related
- 15 -
<PAGE>
to the growing block of business. The increase in expenses for the six month
period was primarily due to a $21, or 40%, increase in amortization of deferred
policy acquisition costs which was also associated with the growth in this
segment's variable business.
Core earnings increased $3, or 18%, and $6, or 19%, primarily due to the higher
fee income described above, and favorable mortality experience as death benefits
through six months remained level with 1999, while life insurance in force
increased 12%.
--------------------------------------------------------------------------------
GROUP BENEFITS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 557 $ 489 $ 1,077 $ 964
Expenses 536 470 1,037 928
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 21 $ 19 $ 40 $ 36
====================================================================================================================================
</TABLE>
Revenues in the Group Benefits segment increased $68, or 14%, and $113, or 12%,
for the second quarter and six months ended June 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 $54, or
13%, and $104, or 12%, for the respective second quarter and six month periods,
due primarily to favorable persistency of the in force block of business.
Expenses increased $66, or 14%, and $109, or 12%, for the second quarter and six
months ended June 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 $45, or 13%, and
$91, or 13% for the respective second quarter and six month periods. However,
the loss ratio (defined as benefits, claims and claim adjustment expenses as a
percentage of premiums and other considerations excluding buyouts) of 82.4% for
the second quarter and 83.2% for the six months ended June 30, 2000, remained
relatively consistent with the comparable prior year periods.
The revenue growth described above, coupled with the segment's stable loss
ratio, resulted in an increase in core earnings of $2, or 11% and $4, or 11% for
the respective second quarter and six month periods.
--------------------------------------------------------------------------------
CORPORATE OWNED LIFE INSURANCE (COLI)
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 170 $ 215 $ 335 $ 439
Expenses 162 207 319 425
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 8 $ 8 $ 16 $ 14
------------------------------------------------------------------------------------------------------------------------------------
Variable COLI account values $ 12,925 $ 11,833
Leveraged COLI account values 4,975 6,197
------------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 17,900 $ 18,030
====================================================================================================================================
</TABLE>
COLI revenues decreased $45, or 21%, and $104, or 24%, for the second quarter
and six months ended June 30, 2000, respectively, as compared to the equivalent
prior year periods. Net investment income decreased $19, or 18%, and $53, or
23%, for the respective second quarter and six month periods primarily due to
the leveraged COLI block of business, as related account values decreased $1.2
billion, or 20%, as a result of the downsizing caused by the Health Insurance
Portability and Accountability Act of 1996. Revenues also decreased due to lower
sales in 2000 as compared to 1999.
Expenses decreased $45, or 22%, and $106, or 25%, for the second quarter and six
months ended June 30, 2000, respectively, as compared to the equivalent prior
year periods due to the factors described above.
Core earnings was consistent for the second quarters ended June 30, 2000 and
1999, however, core earnings for the six months ended June 30, 2000 as compared
to the equivalent period of 1999 increased $2, or 14%. The increase for the six
month period was primarily attributable to the variable COLI business where
account values increased $1.1 billion, or 9%, as well as increased earnings
associated with a block of leveraged COLI business recaptured in 1998.
- 16 -
<PAGE>
--------------------------------------------------------------------------------
WORLDWIDE PROPERTY & CASUALTY
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2000 1999 2000 1999
-------------- -------------- -------------- -----------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 2,074 $ 1,992 $ 4,127 $ 3,956
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 95 $ 122 $ 211 $ 274
Less: Net realized capital gains (losses), after-tax (2) 4 10 24
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 97 $ 118 $ 201 $ 250
====================================================================================================================================
</TABLE>
Revenues for Worldwide Property & Casualty increased $82, or 4%, for the second
quarter and increased $171, or 4%, for the six months ended June 30, 2000,
compared with the same prior year periods. The increase for the second quarter
was due to a $105 increase in earned premiums primarily in Personal, small
commercial and Reinsurance, partially offset by decreases of $12 in net
investment income and $11 in pre-tax net realized capital gains. For the six
month period, the increase in earned premiums of $198 was partially offset by a
decrease of $4 in net investment income and $23 in pre-tax net realized capital
gains.
Core earnings decreased $21, or 18%, for the second quarter and $49, or 20%, for
the six months ended June 30, 2000 compared to the same periods in 1999. These
decreases for the quarter were primarily due to increases in Personal automobile
loss costs partially offset by favorable impacts of Commercial pricing increases
and lower other underwriting expense (OUE) ratios. In addition, International
and Other Operations decreased as a result of adverse loss reserve development
in International's automobile business. For the six month period, the decreases
were due to an increase in Personal automobile loss costs, higher catastrophe
losses and expenses related to the Commercial field office reorganization.
International and Other Operations' decrease was due to continued adverse prior
year reserve development on International's automobile business.
--------------------------------------------------------------------------------
COMMERCIAL
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Written premiums $ 858 $ 794 $ 1,688 $ 1,561
Underwriting results $ (34) $ (43) $ (95) $ (95)
Combined ratio 101.9 105.1 103.9 106.0
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Commercial written premiums increased $64, or 8%, for the second quarter and
$127, or 8%, for the six months ended June 30, 2000 compared with the same
periods in 1999. Continued solid growth in the small commercial businesses, with
Select Customer up 18% and 20%, respectively, and the small commercial portion
of Affinity up 26% and 30%, respectively, for the second quarter and six months
ended June 30, 2000, respectively, was slightly offset by decreases in
mid-market standard commercial business, Key Accounts, of 5% and 9%,
respectively. Enhanced product offerings, targeted geographic strategies and
partnerships with other entities continued to be the primary drivers of the
growth businesses. The decline in mid-market continues to be attributable to a
highly competitive, but firming, marketplace, aggressive underwriting actions
and reaction to price increases by The Hartford.
Underwriting results improved $9, or 3.2 combined ratio points, for the second
quarter, but were flat for the six months ended June 30, 2000 compared with the
same prior year periods. The combined ratio improved by 2.1 points for the six
month period. The improvement for the second quarter was primarily the result of
improvements in the loss ratio due to the continued effective execution of
pricing actions and a decrease in the OUE ratio. For the six month period, the
improvement noted in the second quarter was offset by first quarter
reorganization costs and catastrophe results adverse to the prior year.
--------------------------------------------------------------------------------
PERSONAL
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Written premiums $ 692 $ 635 $ 1,305 $ 1,195
Underwriting results $ (19) $ 2 $ (15) $ 45
Combined ratio 102.5 101.8 101.1 98.6
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Personal written premiums increased $57, or 9%, for the second quarter and $110,
or 9%, for the six months ended June 30, 2000 over the comparable prior year
periods. Written premiums increased $24, or 6%, in the AARP program for the
quarter, and $43, or 6%, for the six month period. Standard agency written
premiums increased $20, or 12% for the quarter and $43, or 14%, for the six
months ended June 30, 2000. Affinity growth of $14, or 53%, for the quarter, and
$35, or 71%, for the six month
- 17 -
<PAGE>
period included the Ford Motor Company and Ford Motor Credit Company account as
well as financial institutions. In June 2000, the company announced another
affinity marketing arrangement with Sears that will begin July 1, 2000.
Non-standard automobile written premiums through Omni were essentially flat for
the quarter compared to prior year, but declined $12, or 9%, for the six month
period compared to prior year due to decreased business as a result of rate
increases not matched by competitors.
Underwriting results decreased $21 for the second quarter and $60 for the six
months ended June 30, 2000 with a corresponding 0.7 point increase in the
combined ratio for the quarter and a 2.5 point increase for the six month period
compared with 1999. The decrease in underwriting results and related increase in
the combined ratio were driven principally by loss and loss adjustment expense,
up 1.5 points for the quarter and 3.6 points for the six months ended June 30,
2000 compared to 1999. The frequency and severity of automobile losses are
running at increased levels from 1999. The 2000 OUE ratio was below 1999 for
both the quarter and six months, reflecting the continuing trend of productivity
gains from prior investments, and fixed cost growth lower than written premiums
growth.
--------------------------------------------------------------------------------
REINSURANCE
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2000 1999 2000 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Written premiums $ 188 $ 174 $ 455 $ 392
Underwriting results $ (11) $ (6) $ (24) $ (9)
Combined ratio 108.1 102.7 104.9 102.4
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Reinsurance written premiums increased $14, or 8%, for the second quarter and
$63, or 16%, for the six months ended June 30, 2000, compared with the same
prior year periods. These increases were 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 decreased $5 for the second quarter and $15 for the six
months ended June 30, 2000 with corresponding 5.4 point and 2.5 point increases
in the combined ratio for the second quarter and six month periods compared with
1999. The decrease in underwriting results and increase in combined ratios for
both periods was primarily due to continued adverse prior underwriting year loss
development concentrated in a few classes of business along with increased
commissions. In addition, 2.2 of the 5.4 point increase in the second quarter
combined ratio was due to the commuting of a significant treaty written in the
first quarter.
--------------------------------------------------------------------------------
INTERNATIONAL AND OTHER OPERATIONS
--------------------------------------------------------------------------------
<TABLE>
<CAPTION>
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
----------------------------- --------------------------
2000 1999 2000 1999
----------------------------- --------------------------
<S> <C> <C> <C> <C>
TOTAL REVENUES $ 153 $ 159 $ 315 $ 341
------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 9 $ 9 $ 20 $ 25
Less: Net realized capital gains, after-tax 4 1 11 10
------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 5 $ 8 $ 9 $ 15
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
International
International revenues decreased $8, or 7%, for the second quarter and $26, or
10%, for the six months ended June 30, 2000 over the comparable periods in 1999.
The decreases were mainly due to a continued negative foreign exchange impact as
the Euro deteriorated against the U.S. dollar during the second quarter and for
the six months ended June 30, 2000. Excluding the effect of foreign exchange,
total revenues increased $10 for the second quarter and $9 for the six months
ended June 30, 2000 primarily due to an increase in automobile earned premiums.
Core earnings for the second quarter ended June 30, 2000, decreased $3, or 50%,
compared to the same period in 1999, primarily due to adverse automobile loss
reserve development and unfavorable foreign exchange impacts. For the six month
period, core earnings decreased $6, or 50%, over the comparable 1999 period due
mainly to a higher calendar year loss ratio in automobile business and
unfavorable foreign exchange impacts. Overall, there was a negative foreign
exchange impact of $1 for the second quarter and $2 for the six months ended
June 30, 2000.
Other Operations
Other Operations revenues increased $2, or 6%, for the second quarter and were
flat for the six months ended June 30, 2000 compared to the same prior year
periods. Core earnings were flat for the second quarter and the six months ended
June 30, 2000, compared to prior year.
- 18 -
<PAGE>
--------------------------------------------------------------------------------
ENVIRONMENTAL AND ASBESTOS CLAIMS
--------------------------------------------------------------------------------
The Hartford continues to receive claims asserting damages from environmental
exposures and for injuries from asbestos and asbestos-related products, both of
which affect 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
June 30, 2000 and the year ended December 31, 1999, was as follows (net of
reinsurance):
<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
SIX MONTHS ENDED YEAR ENDED
JUNE 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 4 3 7 7 4 11
Claims and claim adjustment expenses paid (47) (24) (71) (156) (45) (201)
-----------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY [1] $ 952 $ 586 $ 1,538 $ 995 $ 607 $ 1,602
===================================================================================================================================
<FN>
[1] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,399 and $1,506 for June 30, 2000 and December 31, 1999,
respectively. Gross of reinsurance as of June 30, 2000 and December 31,
1999, reserves for environmental and asbestos were $1,555 and $1,382 and
$1,609 and $1,499, respectively.
</FN>
</TABLE>
The Hartford believes that the environmental and asbestos reserves recorded at
June 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.
- 19 -
<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 $21.5 billion at June 30,
2000 and were comprised of $17.0 billion of fixed maturities, $3.6 billion of
policy loans, and other investments of $877. 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
------------------------------------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
-----------------------------------------------------------------
Corporate $ 7,333 43.1% $ 7,737 45.4%
ABS 2,818 16.6% 2,508 14.7%
Commercial MBS 2,393 14.1% 2,112 12.4%
Municipal - tax-exempt 1,320 7.8% 1,108 6.5%
MBS - agency 909 5.3% 853 5.0%
CMO 676 4.0% 592 3.5%
Gov't/Gov't agencies - For. 314 1.8% 339 2.0%
Gov't/Gov't agencies - U.S. 122 0.7% 229 1.3%
Municipal - taxable 69 0.4% 165 1.0%
Short-term 967 5.7% 1,346 7.9%
Redeemable preferred stock 78 0.5% 46 0.3%
-----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,999 100.0% $ 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.
INVESTMENT RESULTS
The table below summarizes Worldwide Life's results.
SECOND QUARTER SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
----------------------------------------
(before-tax) 2000 1999 2000 1999
------------------------- --------- ---------- --------- ---------
Net investment income -
excluding policy loans $ 312 $ 284 $ 620 $ 574
Policy loan income 72 97 146 208
---------------------------------------
Net invest. income -
total $ 384 $ 381 $ 766 $ 782
Yield on average
invested assets [1] 7.0% 6.9% 6.9% 6.7%
Net realized capital
losses $ (43) $ -- $ (43) $ --
------------------------------------------------------------------
[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 second quarter and six
months ended June 30, 2000 increased approximately 10% and 8% compared to the
respective prior periods. The increases were primarily due to higher yields
earned on new investments. Policy loan income decreased approximately 26% and
30% over the same periods due to the decrease in leveraged COLI business.
Net realized capital losses for the second quarter and six months ended June 30,
2000 increased by $43 compared to the respective prior year periods, primarily
as a result of portfolio rebalancing.
WORLDWIDE PROPERTY & CASUALTY
Total invested assets were $17.6 billion at June 30, 2000 and were comprised of
fixed maturities of $15.9 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
----------------------------------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
-----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
-----------------------------------------------------------------
Municipal - tax-exempt $ 8,379 52.8% $ 8,160 51.5%
Corporate 3,121 19.7% 3,104 19.6%
Gov't/Gov't agencies - For. 1,050 6.6% 1,140 7.2%
Commercial MBS 987 6.2% 881 5.6%
ABS 631 4.0% 596 3.8%
MBS - agency 405 2.6% 445 2.8%
CMO 181 1.1% 240 1.5%
Gov't/Gov't agencies - U.S. 67 0.4% 101 0.6%
Municipal - taxable 43 0.3% 54 0.4%
Short-term 826 5.2% 1,003 6.3%
Redeemable preferred stock 167 1.1% 116 0.7%
----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 15,857 100.0% $ 15,840 100.0%
================================================================
INVESTMENT RESULTS
The table below summarizes Worldwide Property & Casualty's results.
SECOND QUARTER SIX MONTHS ENDED
ENDED JUNE 30, JUNE 30,
----------------------------------------
2000 1999 2000 1999
------------------------------------------------------------------
Net investment income,
before-tax $ 259 $ 271 $ 531 $ 535
Net investment income,
after-tax [1] $ 204 $ 209 $ 414 $ 415
Yield on average
invested assets, 6.0% 6.1% 6.1% 6.0%
before-tax [2]
Yield on average
invested assets, 4.7% 4.7% 4.8% 4.7%
after-tax [1] [2]
Net realized capital
gains and losses, $ (2) $ 9 $ 15 $ 38
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 second quarter ended June 30, 2000, before- and after-tax net investment
income decreased by 4% and 2%, respectively. The decreases were primarily due to
a decrease in partnership income. For the six months ended June 30, 2000, both
before- and after-tax net investment income decreased slightly. The slight
decreases were primarily due to a decline in invested assets which was
- 20 -
<PAGE>
partially offset by increases in both dividend and partnership income.
Net realized capital gains for the second quarter and six months ended June 30,
2000 decreased from the respective prior year periods as increased equity gains
were more than offset by increased fixed maturity losses.
--------------------------------------------------------------------------------
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 June 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
-----------------------------------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
------------------------------------------------------------------
CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
-----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,164 8.2% $ 2,404 9.3%
AAA 4,278 16.3% 3,535 13.6%
AA 3,412 13.0% 3,199 12.3%
A 8,614 32.8% 8,731 33.6%
BBB 5,642 21.5% 5,816 22.4%
BB & below 650 2.5% 559 2.2%
Short-term 1,499 5.7% 1,728 6.6%
-----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 26,259 100.0% $ 25,972 100.0%
=================================================================
WORLDWIDE PROPERTY AND CASUALTY
As of June 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
-----------------------------------------------------------------
JUNE 30, 2000 DECEMBER 31, 1999
------------------------------------------------------------------
CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
-----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 545 3.4% $ 650 4.1%
AAA 6,651 42.0% 6,378 40.3%
AA 3,329 21.0% 3,298 20.8%
A 2,514 15.9% 2,613 16.5%
BBB 1,352 8.5% 1,240 7.8%
BB & below 640 4.0% 658 4.2%
Short-term 826 5.2% 1,003 6.3%
-----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 15,857 100.0% $ 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.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the
- 21 -
<PAGE>
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 $9.7 billion and $9.8
billion at June 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 June 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>
JUNE 30, 2000 DECEMBER 31, 1999
------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term debt $ 431 $ 31
Long-term debt 2,061 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 loss on securities, net of tax $ 6,408 $ 5,664
Unrealized loss on securities, net of tax (120) (198)
------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 6,288 $ 5,466
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 10,143 $ 8,984
-----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 58% 50%
Debt to capitalization [2] [3] 37% 31%
====================================================================================================================================
<FN>
[1] Excludes unrealized loss on securities, net of tax, of $(62) as of
December 31, 1999.
[2] Excludes unrealized loss on securities, net of tax.
[3] Excluding QUIPS and TruPS, the debt to equity ratio was 39% and 28% and
the debt to capitalization ratio was 25% and 18% as of June 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 will be amortized
straight-line over a 25 year period. Of the total purchase price, $226 was
outstanding and payable as of June 30, 2000, related to non-tendered shares, the
majority of which was subsequently paid in July 2000.
Purchase accounting for the transaction resulted in adjustments to the cost
basis of certain assets and liabilities acquired based on preliminary
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. Goodwill amortization and other purchase price adjustments
did not have a material impact on second quarter 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 options
and restricted shares 102
------------------------------------------------------------------
Total consideration $1,416
------------------------------------------------------------------
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized loss on securities,
net of tax, increased by $1.2 billion as of June 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 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.
- 22 -
<PAGE>
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 May 18, 2000, The Hartford declared a dividend on its common
stock of $0.24 per share payable on July 3, 2000 to shareholders of record as of
June 1, 2000.
Treasury stock - During the six months ended June 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. As a result of The
HLI Repurchase, management has elected to temporarily discontinue all repurchase
activity indefinitely.
CASH FLOWS SIX MONTHS ENDED
June 30,
--------------------------
2000 1999
------------------------------------------------------------------
Cash provided by operating activities $ 897 $ 106
Cash (used for) provided by investing
activities $ (792) $ 2,513
Cash used for financing activities $ (70) $ (2,537)
Cash - end of period $ 212 $ 201
==================================================================
The increase in operating cash flow was primarily the result of a decrease in
income taxes paid along with 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.
--------------------------------------------------------------------------------
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. It is expected that each of The Hartford's domiciliary states will
adopt 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 June 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 any significant costs related to its Year 2000
efforts during the six months ended June 30, 2000.
Insurance Claims
As an insurer, The Hartford has received and expects to receive 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
--------------------------------------------------------------------------------
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.
- 23 -
<PAGE>
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 May 2000, an agreement in principle was reached providing for a settlement of
the Delaware Chancery Court (the Court) actions reported in the Company's March
31, 2000, Form 10-Q concerning The HLI Repurchase. On May 17, 2000, a Memorandum
of Understanding was executed by all parties taking into account the final price
paid for the public shares and providing for a full release by all class members
and named plaintiffs of all claims that were or could have been brought
concerning The HLI Repurchase. The settlement is subject to the execution of a
definitive stipulation of settlement after confirmatory discovery and approval
by the Court after notice to the members of the proposed settlement class. The
Memorandum of Understanding also provides that upon final approval of the
settlement, the Company will pay plaintiffs' attorneys' fees and costs of up to
$2. As of July 31, 2000, the discovery contemplated by the Memorandum of
Understanding was completed, but the stipulation of settlement had not been
finalized and executed.
The Hartford is involved in claims litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed in the MD&A under the Environmental and Asbestos
Claims section, The Hartford continues to receive environmental and asbestos
claims which involve significant uncertainty regarding policy coverage issues.
Regarding these claims, The Hartford continually reviews its overall reserve
levels, reserving methodologies and reinsurance coverages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 18, 2000, The Hartford held its annual meeting of shareholders. The
following matters were considered and voted upon: (1) the election of directors
to serve for a one year term, (2) the ratification of the appointment of Arthur
Andersen LLP as independent auditors of the Company for the fiscal year ending
December 31, 2000, (3) the approval of certain material terms of The Hartford's
annual executive bonus program, (4) the approval of The Hartford's 2000
Incentive Stock Plan and (5) a shareholder proposal regarding The Hartford's
investment in tobacco equities.
Set forth below is the vote tabulation relating to the five items presented to
the shareholders at the annual meeting:
(1) The shareholders elected each of the eleven nominees to the Board of
Directors for a one-year term:
NAME OF DIRECTOR
NOMINEES SHARES FOR SHARES WITHHELD
--------------------------------------------------------------
Bette B. Anderson 174,488,242 2,542,455
Rand V. Araskog 173,561,180 3,469,517
Ramani Ayer 174,507,268 2,523,429
Dina Dublon 174,572,181 2,458,516
Donald R. Frahm 173,225,780 3,804,917
Paul G. Kirk, Jr. 174,558,662 2,472,035
Robert W. Selander 174,646,496 2,384,201
Lowndes A. Smith 174,650,103 2,380,594
H. Patrick Swygert 174,531,320 2,499,377
Gordon I. Ulmer 174,520,300 2,510,397
David K. Zwiener 174,256,605 2,414,924
==============================================================
(2) The shareholders ratified the appointment of Arthur Andersen LLP as
independent auditors of The Hartford:
Shares For 176,132,656
Shares Against 986,060
Shares Abstained 911,981
(3) The shareholders approved certain material terms of The Hartford's annual
executive bonus program:
For 163,798,196
Against 10,776,350
Abstain 2,456,151
(4) The shareholders approved the adoption of The Hartford 2000 Incentive Stock
Plan:
For 131,402,185
Against 25,366,352
Abstain 1,842,948
Broker Non-Vote 18,419,212
(5) The shareholders defeated a shareholder proposal regarding The Hartford's
investment in tobacco equities:
For 10,642,297
Against 140,924,427
Abstain 7,044,761
Broker Non-Vote 18,419,212
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index.
(b) Reports on Form 8-K
The Company filed a Form 8-K Current Report dated May 18, 2000 to report that
Hartford Fire Insurance Company, a wholly owned subsidiary of the Company,
intended to make a cash tender
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offer for all of the publicly-held shares of Hartford Life, Inc.'s Class A
Common Stock. Any shares of Hartford Life, Inc.'s Class A Common Stock not
purchased in the tender offer would be acquired by the Company in a subsequent
merger transaction. No financial statements were required to be or were filed
with this Form 8-K.
The Company filed a Form 8-K Current Report on June 23, 2000 to incorporate by
reference into Registration Statement No. 333-12617 on Form S-3 the Underwriting
Agreement dated June 5, 2000 between the Company and Goldman, Sachs & Co., and
the Underwriting Agreement dated June 13, 2000 among the Company and Credit
Suisse First Boston Corporation and Goldman, Sachs & Co. as Representatives of
the Several Underwriters named in Schedule 1 to the Applicable Pricing
Agreement. No financial statements were required to be or were filed with this
Form 8-K.
The Company filed a Form 8-K on June 27, 2000 to report that the merger of HLI
Acquisition, Inc., a wholly owned subsidiary of the Company, with and into
Hartford Life, Inc. had been completed. No financial statements were required to
be or were filed with this Form 8-K.
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Hartford Financial Services Group, Inc.
(Registrant)
/s/ John N. Giamalis
-------------------------------------------
John N. Giamalis
Senior Vice President and Controller
August 11, 2000
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THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHBITS INDEX
Exhibit #
---------
10.1 The Hartford 2000 Incentive Stock Plan dated as of May
18, 2000 is filed herewith.
27 Financial Data Schedule is filed herewith.
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