================================================================================
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------------------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended March 31, 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 April 30, 2000, there were outstanding 214,899,119 shares of Common Stock,
$0.01 par value per share, of the registrant.
================================================================================
<PAGE>
INDEX
PART I. FINANCIAL INFORMATION
- -----------------------------
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Statements of Income - First Quarter Ended March 31,
2000 and 1999 3
Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 4
Consolidated Statements of Changes in Stockholders' Equity - First Quarter
Ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows - First Quarter Ended March 31,
2000 and 1999 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 19
PART II. OTHER INFORMATION
- --------------------------
ITEM 1. LEGAL PROCEEDINGS 20
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 20
Signature 21
- 2 -
<PAGE>
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
First Quarter Ended
March 31,
--------------------------
(In millions, except for per share data) 2000 1999
==========================================================================================================================
(Unaudited)
<S> <C> <C>
REVENUES
Earned premiums, fee income and other $ 2,828 $ 2,605
Net investment income 654 665
Net realized capital gains 17 29
--------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 3,499 3,299
===================================================================================================================
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 1,990 1,909
Amortization of deferred policy acquisition costs 544 458
Other expenses 621 588
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TOTAL BENEFITS, CLAIMS AND EXPENSES 3,155 2,955
===================================================================================================================
OPERATING INCOME 344 344
Income tax expense 78 86
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INCOME BEFORE MINORITY INTEREST 266 258
Minority interest in consolidated subsidiary (28) (20)
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NET INCOME $ 238 $ 238
===================================================================================================================
Basic earnings per share $ 1.10 $ 1.05
Diluted earnings per share $ 1.10 $ 1.04
--------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 215.8 227.0
Weighted average common shares outstanding and dilutive potential
common shares 217.3 229.9
--------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 0.24 $ 0.22
==========================================================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 3 -
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
Consolidated Balance Sheets
March 31, December 31,
(In millions, except for share data) 2000 1999
===============================================================================================================================
<S> <C> <C>
ASSETS (UNAUDITED)
Investments
-----------
Fixed maturities, available for sale, at fair value (amortized cost of $33,596 and
$33,653) $ 32,983 $ 32,875
Equity securities, available for sale, at fair value (cost of $925 and $937) 1,257 1,286
Policy loans, at outstanding balance 3,549 4,222
Other investments 952 758
- -------------------------------------------------------------------------------------------------------------------------------
Total investments 38,741 39,141
Cash 216 182
Premiums receivable and agents' balances 2,119 2,071
Reinsurance recoverables 4,537 4,473
Deferred policy acquisition costs 5,140 5,038
Deferred income tax 1,257 1,404
Other assets 2,771 3,075
Separate account assets 117,620 111,667
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 172,401 $ 167,051
=======================================================================================================================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 15,933 $ 16,014
Life 6,699 6,564
Other policy claims and benefits payable 15,678 16,884
Unearned premiums 2,915 2,777
Short-term debt 31 31
Long-term debt 1,548 1,548
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures 1,250 1,250
Other liabilities 4,595 4,421
Separate account liabilities 117,620 111,667
- -------------------------------------------------------------------------------------------------------------------------------
166,269 161,156
COMMITMENTS AND CONTINGENCIES, NOTE 4
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 457 429
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 1,556 1,551
Retained earnings 5,313 5,127
Treasury stock, at cost - 23,890,286 and 21,419,460 shares (1,024) (942)
Accumulated other comprehensive income (loss) (172) (272)
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 5,675 5,466
=======================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 172,401 $ 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
FIRST QUARTER ENDED MARCH 31, 2000
Accumulated Other Comprehensive
Income (Loss)
---------------------------------------
Common Unrealized Minimum
Stock/ Gain (Loss) Pension
Additional Treasury on Cumulative Liability Outstanding
Paid-in Retained Stock, Securities, Translation Adjustment, Shares
(Dollars in millions) (Unaudited) Capital Earnings at Cost net of tax Adjustments net of tax Total (In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF PERIOD $1,553 $5,127 $(942) $(198) $(63) $(11) $5,466 217,226
Comprehensive income
Net income 238 238
Other comprehensive income, net of
tax [1]
Unrealized gain on securities [2] 93 93
Cumulative translation
adjustments 7 7
-----------
Total other comprehensive income 100
-----------
Total comprehensive income 338
===========
Issuance of shares under incentive
and stock purchase plans 4 18 22 362
Tax benefit on employee stock options
and awards 1 1
Treasury stock acquired (100) (100) (2,833)
Dividends declared on common stock (52) (52)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $1,558 $5,313 $(1,024) $(105) $(56) $(11) $5,675 214,755
====================================================================================================================================
FIRST QUARTER ENDED MARCH 31, 1999
Accumulated Other
Comprehensive Income
------------------------------
Unrealized
Common Stock/ Treasury Gain (Loss) on Cumulative Outstanding
Additional Retained Stock, Securities, Translation Shares
(Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF PERIOD $1,593 $4,474 $(455) $811 $-- $6,423 227,395
Comprehensive income
Net income 238 238
Other comprehensive income, net of tax
[1]
Unrealized gain (loss) on securities (187) (187)
[2]
Cumulative translation adjustments (41) (41)
-----------
Total other comprehensive income (loss) (228)
-----------
Total comprehensive income 10
===========
Issuance of shares under incentive and
stock purchase plans (27) 45 18 899
Tax benefit on employee stock options and
awards 6 6
Treasury stock acquired (3) (73) (76) (1,448)
Dividends declared on common stock (51) (51)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF PERIOD $1,569 $4,661 $(483) $624 $(41) $6,330 226,846
====================================================================================================================================
<FN>
[1] Unrealized gain (loss) on securities is net of tax of $50 and $(101) for
the first quarter ended March 31, 2000 and 1999, respectively. There is no
tax effect on cumulative translation adjustments.
[2] Net of reclassification adjustment for gains realized in net income of $12
and $20 for the first quarter ended March 31, 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
First Quarter Ended
March 31,
----------------------------------
(In millions) 2000 1999
- ------------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 238 $ 238
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY (USED FOR) OPERATING
ACTIVITIES
Change in receivables, payables and accruals (92) (151)
(Increase) decrease in reinsurance recoverables (35) 77
Increase in deferred policy acquisition costs (108) (146)
Change in accrued and deferred income taxes 135 5
Increase (decrease) in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums 116 (3)
Minority interest in consolidated subsidiary 28 20
Net realized capital gains (17) (29)
Depreciation and amortization 20 15
Other, net 34 (144)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 319 (118)
==============================================================================================================================
INVESTING ACTIVITIES
Purchase of investments (3,643) (3,283)
Sale of investments 4,232 5,170
Maturity of investments 408 597
Additions to plant, property and equipment (35) (14)
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY INVESTING ACTIVITIES 962 2,470
==============================================================================================================================
FINANCING ACTIVITIES
Net disbursements for investment and universal life-type contracts charged against
policyholder accounts (1,107) (2,250)
Dividends paid (53) (53)
Acquisition of treasury stock (100) (76)
Proceeds from issuances under incentive and stock purchase plans 16 15
- ------------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (1,244) (2,364)
==============================================================================================================================
Foreign exchange rate effect on cash (3) (3)
- ------------------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 34 (15)
Cash - beginning of period 182 123
- ------------------------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 216 $ 108
==============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
-------------------------------------------------
NET CASH PAID (RECEIVED) DURING THE PERIOD FOR:
Income taxes $ (79) $ 88
Interest $ 38 $ 38
</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 share data unless otherwise stated)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of The Hartford
Financial Services Group, Inc. (The Hartford or the Company) have been prepared
in accordance with generally accepted accounting principles for interim periods.
Less than majority-owned entities in which The Hartford has at least a 20%
interest are reported on an equity basis. In the opinion of management, these
statements include all normal recurring adjustments necessary to present fairly
the financial position, results of operations and cash flows for the periods
presented. For a description of accounting policies, see Note 1 of Notes to
Consolidated Financial Statements included in The Hartford's 1999 Form 10-K
Annual Report.
Certain reclassifications have been made to prior year financial information to
conform to the current year classification of transactions and accounts.
(B) ADOPTION OF NEW ACCOUNTING STANDARDS
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 the quarter ended March 31, 2000 would
have been approximately $1 lower and cumulatively over the life of the
instrument would have been $22 higher had the Company accounted for its
structured note transaction as a unit, based upon the consensus reached in EITF
98-15.
NOTE 2. PROPOSED ACQUISITION OF MINORITY INTEREST OF HARTFORD LIFE, INC.
On March 27, 2000, The Hartford offered to acquire all of the approximately 26
million outstanding common shares of Hartford Life, Inc. (HLI) not already owned
by The Hartford at a price of $44 per share in cash. As of March 31, 2000, The
Hartford owned approximately 81.5 percent of the outstanding shares of HLI
common stock.
A special committee consisting of HLI directors not affiliated with The Hartford
has been appointed by the HLI board of directors to consider the offer. As of
May 12, 2000, the committee was considering the offer.
NOTE 3. EARNINGS PER SHARE
The following tables present a reconciliation of income and shares used in
calculating basic earnings per share to those used in calculating diluted
earnings per share.
<TABLE>
<CAPTION>
MARCH 31, 2000 Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 238 215.8 $ 1.10
-------------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 1.5
-----------------------------
Income available to common shareholders plus assumed conversions $ 238 217.3 $ 1.10
- ------------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1999 Income Shares Per Share Amount
- ------------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ 238 227.0 $ 1.05
-------------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 2.9
-----------------------------
Income available to common shareholders plus assumed conversions $ 238 229.9 $ 1.04
====================================================================================================================================
</TABLE>
- 7 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 3. EARNINGS PER SHARE (CONTINUED)
Basic earnings per share are computed based on the weighted average number of
shares outstanding during the period. Diluted earnings per share include the
dilutive effect of outstanding options, using the treasury stock method, and
contingently issuable shares. Under the treasury stock method, exercise of
options is assumed with the proceeds used to purchase common stock at the
average market price for the period. The difference between the number of shares
assumed issued and number of shares purchased represents the dilutive shares.
Contingently issuable shares are included upon satisfaction of certain
conditions related to the contingency.
NOTE 4. 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.
Subsequent to the announcement of the Company's proposal to acquire all of the
outstanding common shares of HLI which the Company does not already own, the
Company and certain members of its Board of Directors, and HLI and the members
of its board of directors were named as defendants in six similar actions filed
in the Chancery Court of Delaware. The plaintiffs in these actions assert, on
behalf of themselves and a purported class of other public shareholders of HLI,
that the Company and the individual director defendants are breaching fiduciary
obligations to the public shareholders of HLI, and that the Company is engaging
in unfair dealing by seeking to acquire the publicly held shares of HLI at an
inadequate price. The plaintiffs seek to enjoin the defendants from proceeding
with or implementing the proposed transaction or, if it is consummated, to
rescind it, as well as compensatory damages and other relief. No motion for
preliminary relief has been made by the plaintiffs and the cases are still in a
preliminary stage.
(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.
NOTE 5. SEGMENT INFORMATION
The Hartford's reporting segments consist of Commercial, Personal, Reinsurance,
Life, International and Other Operations. While the measure of profit or loss
used by The Hartford's management in evaluating performance is core earnings for
the Life, International and Other Operations segments, the Commercial, Personal
and Reinsurance segments are evaluated by The Hartford's management primarily
based upon underwriting results. The Hartford defines "core earnings" as
after-tax operational results excluding, as applicable, net realized capital
gains or losses, the cumulative effect of accounting changes, allocated
Distribution items (for additional information, see Note 16 of Notes to
Consolidated Financial Statements included in The Hartford's 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 a segment, the Company also reports and evaluates core earnings
results for North American Property & Casualty, which include the combined
underwriting results of the Commercial, Personal and Reinsurance segments, along
with income and expense items not directly allocable to these segments such as
net investment income. 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. Other Operations include operations
which have ceased writing new business. Also included in Other Operations is the
effect of an approximate 19% minority interest in HLI's operating results.
The following tables present revenues and core earnings. Revenues are presented
by segment and for total North American Property & Casualty. Underwriting
results are presented for Commercial, Personal and Reinsurance segments while
core earnings is presented for North American Property & Casualty and the
segments of Life, International and Other Operations.
- 8 -
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 5. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
REVENUES
FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2000 1999
-----------------------------
<S> <C> <C>
Earned premiums, service fees and other
Commercial $ 829 $ 795
Personal 651 609
Reinsurance 183 151
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty earned premiums, service fees and
other 1,663 1,555
Net investment income 221 211
Net realized capital gains 7 16
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty 1,891 1,782
Life 1,446 1,335
International 127 145
Other Operations 35 37
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 3,499 $ 3,299
====================================================================================================================================
CORE EARNINGS AND NET INCOME
FIRST QUARTER ENDED
MARCH 31,
-----------------------------
2000 1999
-----------------------------
Underwriting results
Commercial $ (61) $ (52)
Personal 4 43
Reinsurance (13) (3)
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty underwriting results (70) (12)
Net service fee and other income [1] 2 2
Net investment income 221 211
Other non-underwriting expenses (49) (56)
Income taxes (4) (20)
- ------------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty 100 125
Life 150 106
International 3 6
Other Operations (27) (19)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE EARNINGS 226 218
Net realized capital gains, after-tax 12 20
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 238 $ 238
====================================================================================================================================
<FN>
[1] Net of expenses related to service business.
</FN>
</TABLE>
- 9 -
<PAGE>
Item 2. . MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(Dollar amounts in millions except per share data unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) addresses the financial condition of The Hartford Financial
Services Group, Inc. (The Hartford or the Company) as of March 31, 2000,
compared with December 31, 1999, and its results of operations for the first
quarter ended March 31, 2000 compared with the equivalent 1999 period. This
discussion should be read in conjunction with the MD&A included in The
Hartford's 1999 Form 10-K Annual Report.
Certain of the statements contained herein (other than statements of historical
fact) are forward-looking statements. Such forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
Company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect upon The
Hartford. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on The Hartford will be those anticipated by management. Actual
results could differ materially from those expected by The Hartford, depending
on the outcome of certain factors, including the possibility of general economic
and business conditions that are less favorable than anticipated, changes in
interest rates or the stock markets, stronger than anticipated competitive
activity, more frequent or severe natural catastrophes than anticipated and
those described in the forward-looking statements herein.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Consolidated Results of Operations: Operating Summary 10
North American Property & Casualty 11
Commercial 12
Personal 12
Reinsurance 12
Life 13
International 13
Other Operations 13
Environmental and Asbestos Claims 14
Investments 15
Capital Markets Risk Management 17
Capital Resources and Liquidity 18
Regulatory Matters and Contingencies 19
Accounting Standards 19
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
<TABLE>
<CAPTION>
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
----------------------------
2000 1999
-------------- -------------
<S> <C> <C>
TOTAL REVENUES $ 3,499 $ 3,299
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 238 $ 238
Less: Net realized capital gains, after-tax 12 20
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 226 $ 218
====================================================================================================================================
</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 first quarter ended March 31, 2000 increased $200, or 6% from
the first quarter of 1999, primarily as a result of growth in all North American
property and casualty segments and continued growth in Life.
Core earnings increased $8, or 4%, for the first quarter ended March 31, 2000
from the comparable prior year period, as strong performance in Life Operations
was partially offset by a decline in North American Property & Casualty results.
The effective tax rate for the first quarter ended March 31, 2000 was 23%
compared to 25% for the comparable period in 1999. Tax-exempt interest earned on
invested assets was the principal cause of effective tax rates lower than the
35% U.S. statutory rate.
- 10 -
<PAGE>
SEGMENT RESULTS
The Hartford's reporting segments consist of Commercial, Personal, Reinsurance,
Life, International and Other Operations. While the measure of profit or loss
used by The Hartford's management in evaluating performance is core earnings for
the Life, International and Other Operations segments, the Commercial, Personal
and Reinsurance segments are evaluated by The Hartford's management primarily
based upon underwriting results. While not considered a segment, the Company
also reports and evaluates core earnings results for North American Property &
Casualty, which include the combined underwriting results of the Commercial,
Personal and Reinsurance segments, along with income and expense items not
directly allocable to these segments such as net investment income. Other
Operations include operations which have ceased writing new business. Also,
included in Other Operations is the effect of an approximate 19% minority
interest in Hartford Life Inc.'s (HLI) operating results.
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 underwriting results by segment within North
American Property & Casualty. Underwriting results represent premiums earned
less incurred claims, claim adjustment expenses and underwriting expenses.
UNDERWRITING RESULTS
FIRST QUARTER ENDED
MARCH 31,
------------------------
2000 1999
------------------------
Commercial $ (61) $ (52)
Personal 4 43
Reinsurance (13) (3)
- -------------------------------------------------------------------
TOTAL $ (70) $ (12)
===================================================================
The following is a summary of core earnings and net income.
CORE EARNINGS
FIRST QUARTER ENDED
MARCH 31,
------------------------
2000 1999
------------------------
N. A. Property & Casualty $ 100 $ 125
Life 150 106
International 3 6
Other Operations (27) (19)
- -------------------------------------------------------------------
CORE EARNINGS $ 226 $ 218
===================================================================
NET INCOME
FIRST QUARTER ENDED
MARCH 31,
------------------------
2000 1999
------------------------
N. A. Property & Casualty $ 105 $ 136
Life 150 106
International 10 15
Other Operations (27) (19)
- -------------------------------------------------------------------
NET INCOME $ 238 $ 238
===================================================================
An analysis of the operating results summarized above, is included on the
following pages. Reserves, Environmental and Asbestos Claims, and Investments
are discussed in separate sections.
<TABLE>
<CAPTION>
NORTH AMERICAN PROPERTY & CASUALTY
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
----------------------------
2000 1999
----------------------------
<S> <C> <C>
TOTAL REVENUES $ 1,891 $ 1,782
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 105 $ 136
Less: Net realized capital gains, after-tax 5 11
- -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 100 $ 125
===================================================================================================================================
</TABLE>
Revenues for North American Property & Casualty increased $109, or 6%, for the
first quarter ended March 31, 2000 compared with the first quarter of 1999. This
increase was primarily due to increases in earned premiums in small commercial
businesses, Personal and Reinsurance.
Core earnings decreased $25, or 20%, for the first quarter of 2000 compared to
the same period in 1999. This decrease was primarily due to an increase in
Personal automobile loss costs, higher catastrophe losses and expenses related
to the Commercial field office reorganization.
- 11 -
<PAGE>
<TABLE>
<CAPTION>
COMMERCIAL
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
--------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Written premiums $ 830 $ 767
Underwriting results $ (61) $ (52)
Combined ratio 106.0 106.9
===================================================================================================================================
</TABLE>
Commercial written premiums increased $63, or 8%, from the comparable prior year
period. The increase for the first quarter was primarily due to continued solid
growth in Select Customer of 21% and Commercial Affinity of 17%, partially
offset by a decrease in Key Accounts of 13%. Enhanced product offerings,
targeted geographic strategies and partnerships with other entities continued to
be the primary drivers of the growth businesses. The further decline in Key
Accounts was a result of continued disciplined underwriting and pricing
strategies.
Underwriting results decreased $9, or 17%, while the combined ratio improved by
0.9 points, for the first quarter as compared with the same prior year period.
The decrease in underwriting results was primarily due to increased catastrophes
of $12, before-tax, and costs related to the field office reorganization,
partially offset by increases in earned premiums and improvements in mid-market
loss costs. The improvement in the combined ratio was primarily due to benefits
of continued disciplined underwriting in middle market commercial.
<TABLE>
<CAPTION>
PERSONAL
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
--------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Written premiums $ 613 $ 560
Underwriting results $ 4 $ 43
Combined ratio 99.6 95.3
===================================================================================================================================
</TABLE>
Personal written premiums increased $53, or 9%, in the first quarter ended March
31, 2000 over the comparable prior year period. Written premiums increased $19
in the AARP program, $21 in affinity programs and financial institutions and $23
in standard personal lines from independent agents. Non-standard automobile
premiums written by Omni Insurance Group, Inc. declined $10 as a result of rate
increases, taken to offset loss cost increases, not matched by competitors.
Underwriting results decreased by $39, or 91%, with a corresponding 4.3 point
increase in the combined ratio, for the first quarter compared with first
quarter 1999. The decrease in underwriting results and increase in combined
ratio resulted primarily from increased loss and loss adjustment expenses. Loss
experience in the automobile line was higher due to increased catastrophes of
$5, before-tax, and increased collision frequency. Loss adjustment expenses
increased due to investments in claim initiatives for automobile bodily injury,
physical damage and property to reduce loss costs in future periods.
Underwriting expenses improved in the period, partially offsetting loss and loss
adjustment expenses, as prior investments began to yield productivity gains and
a reduction in fixed costs.
<TABLE>
<CAPTION>
REINSURANCE
OPERATING SUMMARY
FIRST QUARTER ENDED
MARCH 31,
--------------------------
2000 1999
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Written premiums $ 267 $ 218
Underwriting results $ (13) $ (3)
Combined ratio 103.1 102.2
===================================================================================================================================
</TABLE>
Reinsurance written premiums increased $49, or 22%, in the first quarter over
the comparable prior year period. This increase was primarily due to successful
pricing increases and new business from the Alternative Risk Transfer line.
Underwriting results decreased $10 for the quarter compared to 1999 with a
corresponding 0.9 point increase in the combined ratio. The decrease in
underwriting results and increase in combined ratio were primarily due to an
increase in catastrophes and underwriting losses concentrated in a few classes
of businesses.
- 12 -
<PAGE>
<TABLE>
<CAPTION>
LIFE
OPERATING SUMMARY [1] FIRST QUARTER ENDED
MARCH 31,
--------------------------
2000 1999
--------------------------
<S> <C> <C>
TOTAL REVENUES $ 1,446 $ 1,335
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 150 $ 106
Less: Net realized capital gains, after-tax -- --
- -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 150 $ 106
===================================================================================================================================
<FN>
[1] Life results are presented before the effect of an approximate 19%
minority interest in HLI, which is reflected in Other Operations.
</FN>
</TABLE>
Revenues in the Life segment increased $111, or 8%, for the first quarter ended
March 31, 2000, as compared to the first quarter of 1999, and $170, or 15%, when
excluding the Corporate Owned Life Insurance (COLI) business, where revenues
decreased primarily due to the declining block of leveraged COLI business. The
revenue increase was attributable to growth across each of the Life segment's
other lines of business, particularly the Investment Products operation, where
revenues increased $102, or 21%, over the first quarter of 1999. The strong
growth in Investment Products' revenues was, for the most part, due to a
substantial increase in aggregate fees earned as a result of increased assets
under management. Investment Products' assets under management, including mutual
fund assets, increased $26.1 billion, or 28%, to $118.3 billion as of March 31,
2000 from $92.2 billion as of March 31, 1999 due to strong sales of individual
annuities and mutual funds, and equity market appreciation. Revenues in the
Employee Benefits operation, excluding buyouts, increased $59, or 13%, over the
first quarter of 1999, due to higher premium revenue generated by favorable
persistency of the in force block of business and increased sales to new
customers. Revenues for the Individual Life operation increased $24, or 18%,
primarily due to higher fee income associated with the growing block of variable
life insurance.
Core earnings increased $44, or 42%, for the first quarter ended March 31, 2000
compared to the equivalent prior year period, primarily due to growth in
Investment Products. Investment Products' core earnings increased $24, or 31%,
compared to the prior year, as a result of higher fee income as described above.
The Life segment also experienced continued earnings growth across its other
lines of business and recorded a one-time benefit of $8, after-tax, relating to
state income taxes.
<TABLE>
<CAPTION>
INTERNATIONAL
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
2000 1999
---------------------------
<S> <C> <C>
TOTAL REVENUES $ 127 $ 145
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 10 $ 15
Less: Net realized capital gains, after-tax 7 9
- -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 3 $ 6
===================================================================================================================================
</TABLE>
International revenues for the first quarter ended March 31, 2000 decreased $18,
or 12%, over the comparable period in 1999. The decrease was principally due to
a negative foreign exchange impact as the Euro currency depreciated
significantly relative to the U.S. dollar. Excluding the effect of foreign
exchange, total revenues were comparable to the quarter ended March 1999. (For
an analysis of net realized capital gains, see the Investments section.)
Core earnings in the International segment for the first quarter ended March 31,
2000 decreased $3, or 50%, compared to the same period in 1999. This decrease
was due primarily to a negative foreign exchange impact of $1 and a higher
calendar year loss ratio in automobile business.
<TABLE>
<CAPTION>
OTHER OPERATIONS
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
---------------------------
2000 1999
---------------------------
<S> <C> <C>
TOTAL REVENUES $ 35 $ 37
- -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (27) $ (19)
Less: Net realized capital gains, after-tax -- --
- -----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ (27) $ (19)
===================================================================================================================================
</TABLE>
Other Operations consist of property and casualty operations of The Hartford
which have discontinued writing new business as well as the effect of an
approximate 19% minority interest in HLI's operating results. For the first
quarter of 2000 and 1999, core earnings included minority interest in HLI's
operating results of $(28) and $(20), respectively.
- 13 -
<PAGE>
ENVIRONMENTAL AND ASBESTOS CLAIMS
The Hartford continues to receive claims asserting damages from environmental
exposures and for injuries from asbestos and asbestos-related products, both of
which affect North American Property & Casualty and the Other Operations
segment. 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's 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 first quarter ended
March 31, 2000 and the year ended December 31, 1999, was as follows (net of
reinsurance):
<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
FIRST QUARTER ENDED YEAR ENDED
MARCH 31, 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 -- 1 1 7 4 11
Claims and claim adjustment expenses paid (21) (10) (31) (156) (45) (201)
-----------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY [1] $ 974 $ 598 $ 1,572 $ 995 $ 607 $ 1,602
===================================================================================================================================
<FN>
[1] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,448 and $1,506 for March 31, 2000 and December 31, 1999,
respectively. Gross of reinsurance, as of March 31, 2000 and December
31, 1999, reserves for environmental and asbestos were $1,581 and $1,439
and $1,609 and $1,499, respectively.
</FN>
</TABLE>
The Hartford believes that the environmental and asbestos reserves recorded at
March 31, 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 that such changes would have a
material effect on its liquidity or financial condition.
- 14 -
<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 North
American Property & Casualty, Life, International and Other Operations. The
investment portfolios are managed based on the underlying characteristics and
nature of each operation's respective liabilities and managed within established
risk parameters. (For a further discussion on The Hartford's approach to
managing risks, see the Capital Markets Risk Management section.)
Please refer to The Hartford's 1999 Form 10-K Annual Report for a description of
the Company's investment objectives and policies.
NORTH AMERICAN PROPERTY & CASUALTY
Total invested assets were $14.4 billion at March 31, 2000 and were comprised of
fixed maturities of $13.1 billion and other investments of $1.3 billion,
primarily equity securities and limited partnerships. At December 31, 1999,
total invested assets were $14.2 billion and were comprised of fixed maturities
of $13.0 billion and other investments of $1.2 billion, primarily equity
securities and limited partnerships.
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
- -----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- -----------------------------------------------------------------
Municipal - tax-exempt $ 8,402 64.2% $ 8,160 62.5%
Corporate 1,640 12.5% 1,668 12.8%
Commercial MBS 684 5.2% 696 5.3%
Gov't/Gov't agencies - For. 575 4.4% 606 4.7%
ABS 417 3.2% 419 3.2%
MBS - agency 382 2.9% 413 3.2%
CMO 200 1.5% 228 1.8%
Gov't/Gov't agencies - U.S. 26 0.2% 34 0.3%
Municipal - taxable 11 0.1% 17 0.1%
Short-term 630 4.8% 697 5.3%
Redeemable preferred stock 122 1.0% 109 0.8%
- -----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 13,089 100.0% $ 13,047 100.0%
- -----------------------------------------------------------------
During the first quarter of 2000, North American Property & Casualty continued
its strategy of increasing its ownership of municipal bonds and limited
partnership investments by reducing holdings in short-term, corporate and MBS -
agency securities.
INVESTMENT RESULTS
The table below summarizes North American Property & Casualty's results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
2000 1999
===================================================================
Net investment income,
before-tax $221 $211
Net investment income,
after-tax [1] $177 $170
Yield on average invested
assets, before-tax [2] 6.3% 5.9%
Yield on average
invested assets,
after-tax [1] [2] 5.0% 4.7%
Net realized capital
gains, before-tax $7 $16
==================================================================
[1] Due to the significant holdings in tax-exempt investments, after-tax net
investment income and after-tax yield are included.
[2] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost
(fixed maturities at amortized cost).
For the first quarter ended March 31, 2000, before- and after-tax net investment
income increased 5% and 4%, respectively, compared to the same period in 1999.
These increases were primarily due to an increase in income from limited
partnership investments, which positively impacted both before- and after-tax
yields. An increase in tax-exempt securities also positively impacted after-tax
yields.
Net realized capital gains for the quarter ended March 31, 2000 were down $9
compared to the same period in 1999. Realized capital gains for both years
primarily relate to equity securities.
LIFE
Invested assets, excluding separate accounts, totaled $21.2 billion at March 31,
2000 and were comprised of $17.1 billion of fixed maturities, $3.5 billion of
policy loans, and other investments of $558. At December 31, 1999, invested
assets totaled $21.8 billion and were comprised of $17.0 billion in fixed
maturities, $4.2 billion of policy loans, and other investments of $529. The
decrease in invested assets was primarily due to the decline in leveraged COLI
business (as discussed in the Life section). Policy loans are secured by the
cash value of the life policy and do not mature in a conventional sense, but
expire in conjunction with the related policy liabilities. Policy loans
decreased by $673 from December 31, 1999, as a result of the declining block of
leveraged COLI business.
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
- -----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- -----------------------------------------------------------------
Corporate $ 7,808 45.6% $ 7,737 45.4%
ABS 2,772 16.2% 2,508 14.7%
Commercial MBS 2,307 13.5% 2,112 12.4%
Municipal - tax-exempt 1,264 7.4% 1,108 6.5%
MBS - agency 919 5.4% 853 5.0%
CMO 619 3.6% 592 3.5%
Gov't/Gov't agencies - For. 322 1.9% 339 2.0%
Gov't/Gov't agencies - U.S. 126 0.7% 229 1.3%
Municipal - taxable 112 0.6% 165 1.0%
Short-term 819 4.8% 1,346 7.9%
Redeemable preferred stock 61 0.3% 46 0.3%
- -----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 17,129 100.0% $ 17,035 100.0%
=================================================================
- 15 -
<PAGE>
During the first quarter of 2000, the Life segment continued its investment
strategies of increasing its allocation to municipal tax-exempt securities with
the objective of increasing after-tax yields and increasing its allocation to
ABS and Commercial MBS while reducing its position in short-term investments.
INVESTMENT RESULTS
The table below summarizes the Life segment's results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
(before-tax) 2000 1999
==================================================================
Net investment income - ex. policy loans $308 $290
Policy loan income 74 111
--------- ---------
Net investment income - total $382 $401
Yield on average invested assets [1] 6.9% 6.9%
Net realized capital gains -- --
- ------------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the first quarter ended March 31, 2000, total before-tax net investment
income decreased 5% compared to the same period in 1999. The decrease was
primarily due to a 33% decline in policy loan income resulting from the decrease
in the leveraged COLI business and a decline in policy loan weighted-average
interest rates. Yield on average invested assets remained constant.
There were no net realized capital gains for the quarters ended March 31, 2000
and 1999.
INTERNATIONAL
Invested assets, excluding separate accounts, were $1.1 billion at March 31,
2000 and were comprised of fixed maturities of $727 and other investments of
$338, primarily equity securities. At December 31, 1999, invested assets were
$1.1 billion and were comprised of fixed maturities of $734 and other
investments of $361, primarily equity securities.
FIXED MATURITIES BY TYPE
- ------------------------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
- -----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- -----------------------------------------------------------------
Gov't/Gov't agencies - For. $ 519 71.4% $ 475 64.7%
Corporate 106 14.6% 130 17.7%
ABS 10 1.3% 16 2.2%
Short-term 92 12.7% 113 15.4%
- -----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 727 100.0% $ 734 100.0%
=================================================================
INVESTMENT RESULTS
The table below summarizes the International segment's results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
(before-tax) 2000 1999
- -------------------------------------------------------------------
Net investment income $16 $16
Yield on average invested
assets [1] 6.1% 5.9%
Net realized capital gains $10 $13
==================================================================
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the first quarter ended March 31, 2000, before-tax net investment income was
comparable to the same period in 1999. Yields on average invested assets
increased slightly to 6.1% as of March 31, 2000 from 5.9% in 1999.
Net realized capital gains decreased slightly compared to 1999 primarily due to
the negative impact of foreign exchange rates.
OTHER OPERATIONS
Invested assets were $2.0 billion and $2.1 billion at March 31, 2000 and
December 31, 1999, respectively, and were substantially comprised of fixed
maturities.
FIXED MATURITIES BY TYPE
- -----------------------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
- -----------------------------------------------------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- -----------------------------------------------------------------
Corporate $ 1,286 63.1% $ 1,306 63.4%
Commercial MBS 182 8.9% 185 9.0%
ABS 157 7.7% 161 7.8%
Gov't/Gov't agencies - U.S. 68 3.3% 67 3.2%
Gov't/Gov't agencies - For. 56 2.8% 59 2.9%
Municipal - taxable 33 1.6% 37 1.8%
MBS - agency 31 1.5% 32 1.6%
CMO 12 0.6% 12 0.6%
Short-term 206 10.1% 193 9.4%
Redeemable preferred stock 7 0.4% 7 0.3%
- -----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 2,038 100.0% $ 2,059 100.0%
=================================================================
INVESTMENT RESULTS
The table below summarizes the Other Operations segment's results.
FIRST QUARTER
ENDED MARCH 31,
-------------------
(before-tax) 2000 1999
- -------------------------------------------------------------------
Net investment income $35 $37
Yield on average invested
assets [1] 6.5% 6.4%
Net realized capital gains -- --
- ------------------------------------------------------------------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the first quarter ended March 31, 2000, before-tax net investment income
decreased 5% primarily due to the reduction in invested assets as a result of
the funding of runoff liabilities.
- 16 -
<PAGE>
CAPITAL MARKETS RISK MANAGEMENT
The Hartford has a disciplined approach to managing risks associated with its
capital markets and asset/liability management activities. Investment portfolio
management is organized to focus investment management expertise on specific
classes of investments, while asset/liability management is the responsibility
of separate and distinct risk management units supporting the property and
casualty operations and life operations. Derivative instruments are utilized in
accordance with established Company policy and regulatory requirements 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 the property and
casualty operations, including international and other operations, and the life
operations, including international operations and guaranteed separate accounts,
by credit quality. The ratings referenced in the tables are based on the ratings
of a nationally recognized rating organization or, if not rated, assigned based
on the Company's internal analysis of such securities.
PROPERTY AND CASUALTY OPERATIONS
As of March 31, 2000 and December 31, 1999, over 95% of the fixed maturity
portfolio was invested in securities rated investment grade.
FIXED MATURITIES BY CREDIT QUALITY
- -----------------------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
- -----------------------------------------------------------------
CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- -----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 568 3.7% $ 650 4.2%
AAA 6,245 40.4% 6,045 39.2%
AA 3,283 21.2% 3,278 21.2%
A 2,552 16.5% 2,613 16.9%
BBB 1,284 8.3% 1,240 8.0%
BB & below 646 4.2% 658 4.3%
Short-term 884 5.7% 958 6.2%
- -----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 15,462 100.0% $ 15,442 100.0%
=================================================================
LIFE OPERATIONS
As of March 31, 2000 and December 31, 1999, over 97% of the fixed maturity
portfolio was invested in securities rated investment grade.
FIXED MATURITIES BY CREDIT QUALITY
- ----------------------------------------------------------------
MARCH 31, 2000 DECEMBER 31, 1999
- ----------------------------------------------------------------
CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- ----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,201 8.4% $ 2,404 9.1%
AAA 4,225 16.1% 3,868 14.7%
AA 3,371 12.8% 3,219 12.2%
A 8,912 33.9% 8,731 33.1%
BBB 6,004 22.8% 5,816 22.1%
BB & below 664 2.5% 559 2.1%
Short-term 928 3.5% 1,772 6.7%
- -----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 26,305 100.0% $ 26,369 100.0%
=================================================================
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 regulatory requirements in order to achieve one of three
Company approved objectives: to hedge risk arising from interest rate, price or
currency exchange rate volatility; to manage liquidity; or to control
transaction costs. The Company does not make a market or trade derivatives for
the express purpose of earning trading profits.
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the Company's Finance Committee.
The notional amounts of derivative contracts represent the basis upon which pay
or receive amounts are calculated and are not reflective of credit risk.
Notional amounts pertaining to derivative instruments for both general and
guaranteed separate accounts totaled $9.6 billion and $9.8 billion at March 31,
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.
- 17 -
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of The
Hartford and its ability to generate strong cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The capital structure of The Hartford consists of debt, minority interest
and equity, summarized as follows:
<TABLE>
<CAPTION>
MARCH 31, 2000 DECEMBER 31, 1999
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Short-term debt $ 31 $ 31
Long-term debt 1,548 1,548
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures (QUIPS and TruPS) 1,250 1,250
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 2,829 $ 2,829
-----------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ 516 $ 491
-----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized loss on securities, net of tax $ 5,780 $ 5,664
Unrealized loss on securities, net of tax (105) (198)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 5,675 $ 5,466
-----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 9,125 $ 8,984
-----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 49% 50%
Debt to capitalization [2] [3] 31% 31%
====================================================================================================================================
<FN>
[1] Excludes unrealized loss on securities, net of tax, of $(59) and $(62)
as of March 31, 2000 and December 31, 1999, respectively.
[2] Excludes unrealized loss on securities, net of tax.
[3] Excluding QUIPS and TruPS, the debt to equity ratio was 27% and 28% and
the debt to capitalization ratio was 17% and 18% as of March 31, 2000
and December 31, 1999, respectively.
</FN>
</TABLE>
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized loss on securities,
net of tax, increased by $141 as of March 31, 2000 compared to December 31,
1999. This change was primarily the result of earnings, partially offset by
dividends declared on The Hartford's common stock and the effect of treasury
stock acquired net of reissuances for incentive and stock purchase plans.
STOCKHOLDERS' EQUITY
Dividends - On February 16, 2000, The Hartford declared a dividend on its common
stock of $0.24 per share payable on April 3, 2000 to shareholders of record as
of March 1, 2000.
Treasury Stock - During the first quarter of 2000, The Hartford repurchased
2,832,525 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 this repurchase program, The Hartford has repurchased 5.9
million shares at a total cost of $243. Some of the repurchased shares were
reissued pursuant to certain stock-based benefit plans.
CASH FLOWS
FIRST QUARTER ENDED
MARCH 31,
--------------------------
2000 1999
- ------------------------------------------------------------------
Cash provided by (used for) operating
activities $ 319 $ (118)
Cash provided by investing activities $ 962 $ 2,470
Cash used for financing activities $ (1,244) $ (2,364)
Cash - end of period $ 216 $ 108
==================================================================
The increase in operating cash flow was primarily the result of a decrease in
income taxes paid and the timing in the settlement of other receivables and
payables in the Life segment. The decrease in cash used for financing activities
was the result of a lower level of disbursements for investment type contracts
related to the leveraged block of COLI business. This also accounted for the
decrease in cash provided by investing activities, partially offset by the
investment of cash provided from operations.
PROPOSED ACQUISITION OF MINORITY INTEREST OF HLI
On March 27, 2000, The Hartford offered to acquire all of the approximately 26
million outstanding common shares of HLI not already owned by The Hartford at a
price of $44 per share in cash. As of March 31, 2000, The Hartford owned
approximately 81.5 percent of the outstanding shares of HLI common stock.
A special committee consisting of HLI directors not affiliated with The Hartford
has been appointed by the HLI board of directors to consider the offer. As of
May 12, 2000, the committee was considering the offer.
- 18 -
<PAGE>
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 Codification and the Company will make the necessary changes required for
implementation. The Company is in the process of determining the impact, if any,
that Codification 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 March 31, 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 quarter ended March 31, 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.
- 19 -
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Hartford is involved in various legal actions arising out of its business.
In the opinion of management, final outcome of these matters, after
consideration of provisions made for potential losses and costs of defense, is
not expected to be material to the consolidated financial condition, results of
operations or cash flows of The Hartford.
Subsequent to the announcement of the Company's proposal to acquire all of the
outstanding common shares of HLI which the Company does not already own, the
Company and certain members of its Board of Directors, and HLI and the members
of its board of directors were named as defendants in six similar actions filed
in the Chancery Court of Delaware. The plaintiffs in these actions assert, on
behalf of themselves and a purported class of other public shareholders of HLI,
that the Company and the individual director defendants are breaching fiduciary
obligations to the public shareholders of HLI, and that the Company is engaging
in unfair dealing by seeking to acquire the publicly held shares of HLI at an
inadequate price. The plaintiffs seek to enjoin the defendants from proceeding
with or implementing the proposed transaction or, if it is consummated, to
rescind it, as well as compensatory damages and other relief. No motion for
preliminary relief has been made by the plaintiffs and the cases are still in a
preliminary stage.
The Hartford is involved in claims litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed in the MD&A under the Environmental and Asbestos
Claims section, The Hartford continues to receive environmental and asbestos
claims which involve significant uncertainty regarding policy coverage issues.
Regarding these claims, The Hartford continually reviews its overall reserve
levels, reserving methodologies and reinsurance coverages.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index.
(b) Reports on Form 8-K - A Form 8-K Current Report dated March 31, 2000 was
filed to report that the Board of Directors of the Company had presented an
offer to the board of directors of HLI to acquire all of the common shares of
HLI not already owned by the Company. No financial statements were required to
be or were filed with this Form 8-K.
- 20 -
<PAGE>
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
The Hartford Financial
Services Group, Inc.
(Registrant)
/s/ John N. Giamalis
----------------------------------------
John N. Giamalis
Senior Vice President and Controller
May 15, 2000
- 21 -
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FORM 10-Q
EXHBITS INDEX
EXHIBIT #
---------
27 Financial Data Schedule is filed herewith.
- 22 -
<PAGE>
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<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 3-MOS
<FISCAL-YEAR-END> DEC-31-2000
<PERIOD-END> MAR-31-2000
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<DEBT-CARRYING-VALUE> 0
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1,250 <F1>
0
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<INCOME-TAX> 78
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<EPS-BASIC> 1.10
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<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
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<FN>
<F1> REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES
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