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<SEC-DOCUMENT>0000948572-97-000016.txt : 19970329
<SEC-HEADER>0000948572-97-000016.hdr.sgml : 19970329
ACCESSION NUMBER: 0000948572-97-000016
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19961231
FILED AS OF DATE: 19970328
SROS: NYSE
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: ITT HARTFORD GROUP INC /DE
CENTRAL INDEX KEY: 0000874766
STANDARD INDUSTRIAL CLASSIFICATION: INSURANCE AGENTS BROKERS & SERVICES [6411]
IRS NUMBER: 133317783
STATE OF INCORPORATION: DE
FISCAL YEAR END: 1231
FILING VALUES:
FORM TYPE: 10-K
SEC ACT: 1934 Act
SEC FILE NUMBER: 001-13958
FILM NUMBER: 97566780
BUSINESS ADDRESS:
STREET 1: HARTFORD PLZ
CITY: HARTFORD
STATE: CT
ZIP: 06115
BUSINESS PHONE: 8605475000
MAIL ADDRESS:
STREET 1: HARTFORD PLAZA T-15
CITY: HARTFORD
STATE: CT
ZIP: 06115
</SEC-HEADER>
<DOCUMENT>
<TYPE>10-K
<SEQUENCE>1
<DESCRIPTION>ITT HARTFORD GROUP, INC. - 10K
<TEXT>
================================================================================
FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 1996
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
ITT HARTFORD 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)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 547-5000
Securities registered pursuant to section 12(b) of the Act: the following, all
of which are registered on the New York Stock Exchange, Inc.:
Common Stock, par value $.01 per share
6.375% Notes due November 1, 2002
7.30 % Debentures due November 1, 2015
7.70 % Cumulative Quarterly Income Preferred Securities, Series A, issued
by Hartford Capital I
8.35 % Cumulative Quarterly Income Preferred Securities, Series B, issued
by Hartford Capital II
Securities registered pursuant to Section 12 (g) of the Act: None
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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 28, 1997, there were outstanding 117,850,480 shares of Common
Stock, $.01 par value per share, of the registrant. The aggregate market value
of the shares of Common Stock held by non-affiliates of the registrant was
$8,795,584,275, based on the closing price of $75.00 per share of the Common
Stock on the New York Stock Exchange on February 28, 1997.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1997 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
================================================================================
<PAGE>
[GRAPHIC OMITTED]
ITT Hartford Group, Inc. and its subsidiaries ("The Hartford") is an
international insurance and financial services organization offering commercial,
personal, and reinsurance property and casualty coverages as well as individual
life and annuities, employee benefits and investment product services.
Founded in 1810, The Hartford has grown from a local fire insurance company to
an internationally recognized insurance and financial services enterprise.
CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of The Hartford 2
2 Properties 8
3 Legal Proceedings 8
4 Submission of Matters to a Vote of Security Holders 8
PART II 5 Market for The Hartford's Common Stock and Related
Stockholder Matters 8
6 Selected Financial Data 9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
8 Financial Statements and Supplementary Data 33
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III 10 Directors and Executive Officers of The Hartford 33
11 Executive Compensation 33
12 Security Ownership of Certain Beneficial Owners
and Management 33
13 Certain Relationships and Related Transactions 33
PART IV 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 33
Signatures II-1
Exhibits Index II-2
<PAGE>
PART I
Item 1. BUSINESS OF THE HARTFORD
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
GENERAL
ITT Hartford Group, Inc. and its subsidiaries ("The Hartford"), headquartered in
Connecticut, are among the largest providers of both property and casualty
insurance and life insurance products in the United States. (The terms "The
Hartford" and the "Company" when used herein, refer to one or more of ITT
Hartford Group, Inc. and its consolidated subsidiaries.) Hartford Fire Insurance
Company ("Hartford Fire"), founded in 1810, is the oldest and best known of The
Hartford's subsidiaries. Hartford Fire and its subsidiaries write insurance in
all fifty states. At December 31, 1996, the total assets and stockholders'
equity of The Hartford were $108.8 billion and $4.5 billion, respectively.
ITT Hartford Group, Inc., a Delaware corporation, was formed in December, 1985
as a wholly-owned subsidiary of ITT Corporation ("ITT"). On December 19, 1995,
ITT distributed all of the outstanding shares of ITT Hartford Group, Inc. to ITT
shareholders of record in an action known herein as the "Distribution". As a
result of the Distribution, The Hartford became an independent, publicly traded
company. In connection with this transaction, ITT transferred the ownership of
First State Insurance Company, together with its subsidiaries ("First State"),
and Fencourt Reinsurance Company, Ltd. ("Fencourt"), both of which were wholly
owned subsidiaries of ITT, to ITT Hartford Group, Inc. prior to the
Distribution. Additional information regarding the Distribution may be found in
Note 2 of Notes to Consolidated Financial Statements and in Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") within the Distribution section and "Distribution Agreement" within the
Capital Resources and Liquidity section.
As a holding company, ITT Hartford Group, Inc. has no significant business
operations of its own and, therefore, relies on the dividends from its insurance
company subsidiaries, which are primarily domiciled in Connecticut, as the
principal source of cash to meet its obligations. Additional information
regarding the cash flow and liquidity needs of ITT Hartford Group, Inc. may be
found in the Capital Resources and Liquidity section of the MD&A.
BUSINESS SEGMENTS
The Hartford consists of four business segments: North American Property &
Casualty, Life, International, and Runoff. The following is a description of
each segment, including a discussion of principal products, methods of
distribution, and competitive environments. Additional information on The
Hartford's business segments may be found in the MD&A on pages 10 to 19 and Note
1 and Note 17 of Notes to Consolidated Financial Statements.
NORTH AMERICAN PROPERTY & CASUALTY
The Hartford's North American Property & Casualty segment is the 8th largest
property and casualty insurance operation in the United States based on written
premiums for the year ended December 31, 1995, per A.M. Best. With written
premiums of $5.7 billion for the year ended December 31, 1996, North American
Property & Casualty is the largest of the Company's segments. In 1996, the
states producing 5% or more of this segment's written premiums were New York
(12%), California (10%), Florida (7%), Connecticut (6%) and Illinois and Texas
(5% each).
Principal Products
- ------------------
The Hartford's North American Property & Casualty segment consists of three
major lines of business: Commercial, Personal and Reinsurance. These lines
provide a wide range of insurance coverages for individuals and businesses.
Commercial is the largest line of business with $3.2 billion in written premiums
in 1996. Workers' compensation, property, automobile, liability, marine,
agricultural and bond coverages are offered by the Commercial line of business.
The Hartford ranks among the largest carriers of personal lines insurance,
providing homeowners, automobile and fire coverages to individuals across North
America including a special program designed exclusively for members of the
American Association of Retired Persons ("AARP"). Additionally, The Hartford is
a major international reinsurer, with operations in Hong Kong, Spain, the United
Kingdom, Germany and Canada. (See the Reinsurance section of Item 1 under Other
Matters for additional information.)
Methods of Distribution
- -----------------------
The North American Property & Casualty segment provides insurance products and
services through its home office located in Hartford, Connecticut, and 39
domestic regional offices. The Company markets its products nationwide utilizing
a variety of distribution networks including the use of approximately 6,000
independent agents and direct marketing. Independent agents, who often represent
other companies as well, are compensated on a commission basis and are not
employees of The Hartford. Additionally, the Company assumes insurance from
other insurers and cedes insurance to other insurers or reinsurers in the
worldwide reinsurance market.
Competition
- -----------
The property and casualty insurance industry is a highly challenging environment
in which The Hartford competes with other stock companies, mutual companies,
self insurers and other underwriting organizations. Intense competition among
insurers, combined with the continued effects of the last economic downturn,
have created difficult market conditions in the domestic property and casualty
industry. This competitive environment is created by tremendous price
competition, consolidation and globalization of companies, exploration and
utilization of alternative distribution techniques and emphasis on cost
containment and reduction.
- 2 -
<PAGE>
A major competitive advantage of The Hartford is the exclusive licensing
arrangement with AARP to provide personal automobile, homeowners and home-based
business insurance products to its members through the year 2002. Favorable
"baby boomer" demographics are expected to increase AARP membership
significantly during this period. During 1996, The Hartford's relationship with
AARP was further strengthened when it was awarded a contract to provide customer
service for all health insurance products offered through AARP's Group Health
Insurance Program effective January 1, 1998. Additionally, The Hartford has
implemented expense management disciplines within the North American Property &
Casualty segment which are designed to maintain efficient and effective
underwriting, servicing and claim settlement operations.
LIFE
The Hartford's Life segment provides insurance and retirement products for the
benefit of millions of individuals. This segment has been among the fastest
growing major life insurance operations for the past several years, as measured
by assets. The Hartford's domestic life insurance operations achieved the rank
of 8th largest life insurer in the United States at December 31, 1995, based on
statutory admitted assets according to A.M. Best. In the past year, the Life
segment's total assets have grown 25% to $76.3 billion at December 31, 1996. The
Life segment generated $4.4 billion in revenues and $249 in net income in 1996.
The Life segment, headquartered in Simsbury, Connecticut, operates in three
principal divisions: Investment Products, Individual Life Insurance, and
Employee Benefits. Each division has grown significantly in revenues and
operating income. In addition, the Life segment maintains a Corporate Operation
through which it reports net investment income on assets representing surplus
not assigned to any of its business segments and certain other revenue and
expenses not specifically allocable to any of its business segments.
Principal Products
- ------------------
The Investment Products division focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired. This division offers fixed and variable annuities, certain
deferred compensation and retirement plan services, mutual funds, investment
management services and certain other financial products. The Individual Life
Insurance division markets both variable and fixed universal life-type
contracts, as well as single premium variable life and term life products. The
primary products of the Employee Benefits division include group life, group
long-term and short-term managed disability, stop-loss and supplementary medical
coverage to employers and employer-sponsored plans, and accidental death and
dismemberment, travel and special risk coverage to employers and associations,
as well as specialty business such as corporate owned life insurance ("COLI")
and reinsurance.
Methods of Distribution
- -----------------------
The Life segment sells a variety of individual and group financial services and
insurance products through a combination of broker-dealers, licensed agents,
third party administrators and a direct sales force. The Investment Products
division primarily distributes through broker-dealers and financial institutions
for individual sales, and through employees of the Company for institutional
sales. The Individual Life Insurance division distributes its products through
insurance agents, broker-dealers and financial institutions, typically assisted
by a dedicated group of Company employees. Employee Benefits division products
are distributed through insurance agents and brokers, usually assisted by a
dedicated group of Company employees.
Competition
- -----------
The life insurance industry in the United States is highly competitive with
approximately 2,000 insurers vying for business. Competitive factors in the life
insurance industry include, but are not limited to, price, name recognition,
quality of distribution systems and financial ratings. In the individual annuity
market, sales volume is also dependent on fund performance, an array of fund and
product options, product design and credited rates. The Company was rated the
number one writer of variable annuities for 1996 with a 13% market share
according to the Variable Annuity and Research Data Service.
INTERNATIONAL
The Hartford's International segment consists of European companies offering a
variety of insurance products designed to meet the needs of local customers.
These companies include ITT London & Edinburgh ("L&E"), headquartered in the
United Kingdom, Zwolsche Algemeene ("Zwolsche"), located in both the Netherlands
and Belgium, and ITT Ercos in Spain. The International segment generated $1.6
billion in revenues and $139 in net income in 1996. Assets totaled $5.3 billion
at December 31, 1996.
Principal Products
- ------------------
L&E offers both personal and commercial lines property and casualty insurance.
Personal lines include automobile, homeowners and creditor (including credit
life) products. Commercial lines include property and liability products sold to
small to medium sized clients. L&E also provides marine products within the
London market. Zwolsche sells property and casualty and life insurance products.
Personal lines products at Zwolsche include automobile, hospitalization and
homeowners. Commercial products, including automobile, are sold to small to
medium sized clients. Zwolsche life insurance operations offer term life,
mortgage and pension products. ITT Ercos provides both personal and commercial,
property and casualty, and life insurance products.
Methods of Distribution
- -----------------------
The International segment conducts the majority of its business through over
10,000 independent brokers in Western Europe.
- 3 -
<PAGE>
These brokers are not employees of The Hartford and often represent other
companies as well. As such, they are compensated on a commission basis.
Competition
- -----------
In the International segment, competition in personal lines insurance comes
primarily from direct writers, while in the commercial insurance market,
competition comes largely from "composites". Composites are well established
companies with both life and property and casualty operations. Within Europe's
life insurance industry, there also exists heavy competition from banks and
direct writers.
RUNOFF
The Hartford's Runoff segment consists of the property and casualty insurance
operations of The Hartford which have ceased writing new and renewal business
and the closed book of guaranteed rate contract business ("Closed Book GRC")
which includes life products with fixed or indexed rates that are guaranteed for
a specific period. Closed Book GRC had no new or renewal business as of the end
of 1994. The Runoff segment has no new product sales, distribution system, or
competitive issues. The property and casualty insurance operations primarily
include First State, located in Boston, Massachusetts and Fencourt,
headquartered in Bermuda.
The primary objective of the Runoff segment is to ensure the full and timely
payment of all runoff liabilities. Specifically, the primary focus of the
property and casualty insurance operations is the proper disposition of claims,
the resolution of disputes, and the collection of reinsurance proceeds related
to policies written and reinsured prior to 1985. The Closed Book GRC's primary
focus is to closely match the interest rate sensitivities of the assets with
those of the liabilities, as well as, matching the duration of its assets to
that of its liabilities.
OTHER MATTERS
PROPERTY AND CASUALTY RESERVES
The Hartford establishes reserves to provide for the estimated costs of paying
claims made by policyholders or against policyholders. These reserves include
estimates for both claims that have been reported and those that have been
incurred but not yet reported to The Hartford and include estimates of all
expenses associated with processing and settling these claims. This estimation
process is primarily based on historical experience and involves a variety of
actuarial techniques which analyze trends and other relevant factors. Further
discussion on The Hartford's property and casualty reserves may be found in the
Reserves section of the MD&A. In addition, a separate process including a study
which reviewed and identified environmental and asbestos exposures in the United
States, was performed in 1996 and is fully discussed in the Environmental and
Asbestos Claims section of the MD&A.
The Hartford continually reviews its estimated claims and claim adjustment
expense reserves as additional experience and other relevant data become
available and reserve levels are adjusted accordingly. Such adjustments are
reflected in net income of the period in which they are made.
The Hartford continues to receive claims asserting damages from environmental
pollution and related clean-up costs and injuries from asbestos and
asbestos-related products. Due to deviations from past experience and a variety
of social, economic and legal issues, the Company's ability to estimate the
future policy benefits, unpaid claims and claim adjustment expenses is
significantly impacted.
Certain liabilities for unpaid claims, principally for permanently disabled
claimants, terminated reinsurance treaties and certain contracts that fund loss
run-offs for unrelated parties have been discounted to present value. The amount
of the discount was approximately $472 and $451 as of December 31, 1996 and
1995, respectively, and the amortization of the discount had no material effect
on net income during 1996, 1995 and 1994, respectively.
In the judgment of The Hartford's management, all information currently
available has been properly considered in establishing the reserves for unpaid
claims and claim adjustment expenses.
- 4 -
<PAGE>
PROPERTY AND CASUALTY RESERVES (CONTINUED)
A reconciliation of liabilities for unpaid claims and claim adjustment expenses
is herein referenced from Note 1(c) of Notes to Consolidated Financial
Statements. A table depicting the historical development of the liabilities for
unpaid claims and claim adjustment expenses follows.
<TABLE>
<CAPTION>
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT
EXPENSE LIABILITY DEVELOPMENT - NET
FOR THE YEARS ENDED DECEMBER 31,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities for unpaid claims and
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
claim adjustment expenses [1] $5,903 $7,262 $8,168 $8,666 $9,366 $9,796 $11,103 $11,441 $11,623 $12,047 $13,389
Cumulative paid claims and claim
expenses
One year later 1,808 2,089 2,296 2,545 2,789 2,879 2,806 2,832 2,983 2,797 --
Two years later 2,916 3,323 3,618 4,013 4,428 4,465 4,415 4,602 4,667 -- --
Three years later 3,683 4,187 4,577 5,132 5,511 5,605 5,655 5,755 -- -- --
Four years later 4,275 4,846 5,341 5,863 6,304 6,507 6,507 -- -- -- --
Five years later 4,743 5,392 5,872 6,435 6,979 7,173 -- -- -- -- --
Six years later 5,168 5,787 6,320 6,944 7,505 -- -- -- -- -- --
Seven years later 5,481 6,155 6,733 7,360 -- -- -- -- -- -- --
Eight years later 5,803 6,492 7,094 -- -- -- -- -- -- -- --
Nine years later 6,103 6,815 -- -- -- -- -- -- -- -- --
Ten years later 6,397 -- -- -- -- -- -- -- -- -- --
Liabilities reestimated
One year later 6,293 7,437 8,342 8,879 9,636 11,053 11,311 11,484 11,856 13,078 --
Two years later 6,422 7,619 8,432 9,052 10,780 11,202 11,354 11,691 13,020 -- --
Three years later 6,718 7,719 8,482 10,200 10,905 11,315 11,582 12,810 -- -- --
Four years later 6,885 7,827 9,645 10,342 11,151 11,653 12,740 -- -- -- --
Five years later 7,021 9,117 9,829 10,578 11,515 12,794 -- -- -- -- --
Six years later 8,504 9,287 10,068 10,972 12,649 -- -- -- -- -- --
Seven years later 8,652 9,521 10,478 12,075 -- -- -- -- -- -- --
Eight years later 8,878 9,943 11,550 -- -- -- -- -- -- -- --
Nine years later 9,298 10,991 -- -- -- -- -- -- -- -- --
Ten years later 10,321 -- -- -- -- -- -- -- -- -- --
Deficiency $4,418 $3,729 $3,382 $3,409 $3,283 $2,998 $1,637 $1,369 $1,397 $1,031 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE
LIABILITY DEVELOPMENT - GROSS
FOR THE YEARS ENDED DECEMBER 31,
1993 1994 1995 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Net reserve [1] $11,441 $11,623 $12,047 $13,389
Reinsurance recoverables 5,385 5,568 5,209 4,703
- ----------------------------------------------------------------------------------------------------------------------------------
Gross reserve [2] $16,826 $17,191 $17,256 $18,092
- ----------------------------------------------------------------------------------------------------------------------------------
Net reestimated reserve $12,810 $13,020 $13,078
Reestimated reinsurance recoverables 6,007 6,103 5,371
- ----------------------------------------------------------------------------------------------------------------------------------
Gross reestimated reserve $18,817 $19,123 $18,449
- ----------------------------------------------------------------------------------------------------------------------------------
Gross deficiency $ 1,991 $ 1,932 $ 1,193
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
The above tables exclude the liabilities and claim developments for reinsurance
coverage written for related parties that fund ultimate net aggregate loss
run-offs since changes to those reserves do not illustrate the manner in which
those reserve estimates changed.
[1] Liabilities, net of reinsurance for unpaid claims and claim adjustment
expenses excluded, were $495, $550 and $500 of December 31, 1994, 1995 and
1996, respectively.
[2] Liabilities, gross of reinsurance for unpaid claims and claim adjustment
expenses excluded, were $244, $280 and $211 as of December 31, 1994, 1995
and 1996, respectively.
Included in the tables above is the impact of the change in The Hartford's
method of discounting to present value certain workers' compensation reserves,
principally for permanently disabled claimants, which was effective January 1,
1994. See Note 1(b) of Notes to Consolidated Financial Statements for further
discussion of this accounting change.
</FN>
</TABLE>
- 5 -
<PAGE>
LIFE RESERVES
In accordance with applicable insurance regulations under which the Life segment
operates, life insurance subsidiaries of The Hartford establish and carry as
liabilities actuarially determined reserves which are calculated to meet The
Hartford's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States modified to reflect The
Hartford's actual experience when appropriate. These reserves are computed at
amounts that, with additions from premiums to be received and with interest on
such reserves compounded annually at certain assumed rates, are expected to be
sufficient to meet The Hartford's policy obligations at their maturities or in
the event of an insured's death. Reserves include unearned premiums, premium
deposits, claims reported but not yet paid, claims incurred but not reported and
claims in the process of settlement. Reserves for assumed reinsurance are
computed on bases essentially comparable to direct insurance reserves.
For The Hartford's individual life, universal life and interest-sensitive whole
life policies, reserves are set according to premiums collected, plus interest
credited, less charges. Other fixed death benefit reserves are based on assumed
investment yield, persistency, mortality and morbidity as per commonly used
actuarial tables, expenses and margins for adverse deviations. For the Company's
group disability policies, the level of reserves is based on a variety of
factors including particular diagnoses, termination rates and benefit payments.
The stability of The Hartford's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on the withdrawal of
funds. Withdrawals in excess of allowable penalty-free amounts are assessed a
surrender charge during a penalty period of approximately seven years. Such
surrender charge is initially a percentage of the accumulation value, which
varies by product, and generally decreases gradually during the penalty period.
Surrender charges are set at levels to protect The Hartford from loss on early
terminations and to reduce the likelihood of policyholders terminating their
policies during periods of increasing interest rates, thereby lengthening the
effective duration of policy liabilities and improving the Company's ability to
maintain profitability on such policies. In addition, The Hartford's fixed
market value adjusted annuities discourage surrender by policyholders. The
Hartford's reserves comply in all material respects with state insurance
department statutory requirements; however, in the Consolidated Financial
Statements, life insurance reserves are determined in accordance with generally
accepted accounting principles, which may vary from statutory requirements.
REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory
and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Regulatory requirements applying to property and casualty premium rates vary
from state to state, but generally provide that rates shall not be inadequate,
excessive or unfairly discriminatory. Rates for many products, including
automobile and homeowners insurance, are subject to prior regulatory approval in
many states. Ocean marine insurance rates are exempt from rate regulation.
Subject to regulatory requirements, management determines the rates charged for
its policies. Methods for arriving at rates vary by product, exposure assumed
and size of risk.
While premium rates in the property and casualty insurance business are for the
most part subject to regulation, such rates are not in most instances uniform
for all insurers within a given jurisdiction, or in all jurisdictions. The
Hartford is a member of various fire, casualty and surety rating organizations.
For some lines of business, The Hartford uses the rates and rating plans which
are filed by these organizations in the various states, while for other lines of
business it uses loss cost data published by such organizations. The Hartford
also uses its own independent rates or otherwise departs from rating
organization rates, where appropriate.
Most states have enacted legislation which regulates insurance holding company
systems such as The Hartford. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
State insurance regulation requires property and casualty insurers to
participate in assigned risk plans, reinsurance facilities and joint
underwriting associations, which are mechanisms to provide risks with various
basic or minimum insurance coverage when they are not available in voluntary
- 6 -
<PAGE>
markets. Such mechanisms are most prevalent for automobile and workers'
compensation insurance, but a majority of states also mandate participation in
so-called FAIR Plans or Windstorm Plans providing basic property coverage.
Additionally, some states mandate such participation in facilities for providing
medical malpractice insurance. Participation is based upon the amount of a
company's written premiums in a particular state for the classes of insurance
involved.
The extent of insurance regulation on business outside the United States varies
significantly among the countries in which The Hartford operates. Some countries
have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors domiciled in that particular
jurisdiction. The Hartford's International operations are comprised of insurers
licensed in their respective countries and, therefore, are subject to generally
less restrictive domestic insurance regulations.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-based Capital".
LEGISLATIVE INITIATIVES
Reference is made to the Regulatory Initiatives section of the MD&A under
"Legislative Initiatives".
INSOLVENCY FUND
Reference is made to the Regulatory Initiatives section of the MD&A under
"Insolvency Fund".
REINSURANCE
In accordance with normal industry practice, The Hartford is involved in both
the cession and assumption of insurance with other insurance and reinsurance
companies. For property and casualty operations, these reinsurance arrangements
provide greater diversification of business and limit The Hartford's maximum net
loss arising from large risks or catastrophes.
A major portion of The Hartford's property and casualty reinsurance is effected
under general reinsurance contracts known as treaties, or, in some instances, is
negotiated on an individual risk basis, known as facultative reinsurance. The
Hartford also has in-force excess of loss contracts with other reinsurers that
protect it against a specified part or all of certain losses over stipulated
amounts.
The ceding of insurance does not discharge the original insurer from its primary
liability to the policyholder. The original insurer would remain liable in those
situations where the reinsurer is unable to meet the obligations assumed under
reinsurance agreements. The Hartford has established strict standards that
govern the placement of reinsurance and monitors ceded insurance security.
Virtually all of The Hartford's property and casualty reinsurance is placed with
reinsurers that meet strict financial criteria established by a credit
committee.
Relative to life operations, The Hartford reinsures with other companies. As of
December 31, 1996, the maximum amount of life insurance retained on any one life
by any of the life operations is approximately $1.3, excluding accidental death
benefits.
INVESTMENT OPERATIONS
An important element of the financial results of The Hartford is the return on
invested assets. The Hartford's investment activities are generally divided
between property and casualty insurance and life insurance. The investment
portfolios of both the property and casualty and the life operations are managed
based on the underlying characteristics and nature of their respective
liabilities.
The investment objective of property and casualty operations is the maximization
of after-tax income consistent with long-term capital growth and maintenance of
appropriate liquidity to meet corporate and policyholder obligations. Property
and casualty investment strategies are developed based on a variety of factors
including business needs, regulatory requirements and tax considerations.
The primary investment objective of the Life segment's general account and
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters (including the management of the interest rate
sensitivity of invested assets to that of policyholder obligations). Life
operations use various derivatives to modify the characteristics of its
investments.
For a further discussion of strategies including derivative utilization, see the
Investments section of the MD&A under "Life Asset and Liability Management
Strategies" , as well as Note 3 of Notes to Consolidated Financial Statements.
EMPLOYEES
The Hartford had approximately 22,000 employees as of December 31, 1996.
EXECUTIVE OFFICERS OF THE HARTFORD
Information about the executive officers of The Hartford who are also directors
and/or nominees for election as directors is set forth in The Hartford's 1997
Proxy Statement. In addition to those executive officers who are listed in the
1997 Proxy Statement, listed below are the following Company executive officers,
the majority of whom have served in similar positions for The Hartford prior to
the Distribution (referred to herein as "Hartford Fire"):
JOHN F. DONAHUE, 61, became Senior Vice President, International/Reinsurance
Operations of The Hartford in June 1996. Prior to that, he served as Senior Vice
President,
- 7 -
<PAGE>
Business Development and Director of reinsurance operations of The Hartford. He
also served as Senior Underwriting Officer of Hartford Fire. Mr. Donahue holds
the designation of Chartered Property/Casualty Underwriter. He was elected Vice
President of Hartford Fire in 1980 and named Director of the commercial lines of
business for Hartford Fire in 1987.
JOSEPH H. GAREAU, 50, has been Executive Vice President and Chief Investment
Officer of Hartford Fire since 1993 and became Executive Vice President and
Chief Investment Officer of the Company in December 1995. Prior to that time, he
served as Senior Vice President and Chief Investment Officer for the domestic
property and casualty operations of Hartford Fire. Mr. Gareau was elected Vice
President of Hartford Fire in 1987.
HELEN G. GOODMAN, 56, has been Senior Vice President, Human Resources of
Hartford Fire since 1994 and became Senior Vice President, Human Resources of
the Company in December 1995. Prior to that time, she held the position of
Senior Vice President, Human Resources for Tambrands Inc.
EDWARD L. MORGAN, 53, has been Senior Vice President, Corporate Relations and
Government Affairs of Hartford Fire since 1993 and became Senior Vice President,
Corporate Relations and Government Affairs of the Company in December 1995. From
1991 to 1993, he served as Vice President and Director of Corporate Relations of
Hartford Fire. Prior to that time, Mr. Morgan held the position of Vice
President of Corporate Relations at Allstate Insurance Company.
JAMES J. WESTERVELT, 50, has been Senior Vice President and Group Controller of
Hartford Fire since 1994. He was appointed to the same position for the Company
in December 1995. He was elected Vice President and became Group Controller in
1989.
MICHAEL S. WILDER, 55, has been Senior Vice President of Hartford Fire since
1987 and General Counsel of Hartford Fire since 1975. He became Senior Vice
President and General Counsel of the Company in December 1995.
ITEM 2. PROPERTIES
The Hartford owns the land and buildings comprising its Hartford location and
other properties within the greater Hartford, Connecticut area which total
approximately 1.6 million square feet. The Hartford's international subsidiaries
own approximately 202 thousand square feet of office space in the United
Kingdom, 218 thousand square feet of office space in the Netherlands and 94
thousand square feet of office space in Spain. In addition, The Hartford leases
approximately 5.1 million square feet throughout the United States and 156
thousand square feet in other countries.
ITEM 3. LEGAL PROCEEDINGS
The Hartford is a defendant in various lawsuits arising out of its business. In
the opinion of management, final outcome of these matters will not materially
affect the consolidated financial position, results of operations or cash flows
of The Hartford.
The Hartford is involved in claim litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed above and in the MD&A under the section
Environmental and Asbestos Claims, 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
No matter was submitted to a vote of security holders of The Hartford during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE HARTFORD'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Hartford's common stock is traded on the New York Stock Exchange ("NYSE")
under the trading symbol "HIG." On December 20, 1995, the common stock began
regular trading on the NYSE.
The following table presents high and low closing prices for the common stock of
The Hartford on the NYSE for the periods indicated, and the quarterly dividends
declared per share:
Common Stock Price Dividends
High Low Declared
- ----------------------- ----------------------- -----------------
1996
First quarter $53.00 $47.13 $0.40
Second quarter 54.13 45.50 0.40
Third quarter 59.63 50.75 0.40
Fourth quarter 69.50 59.13 0.40
- ----------------------- ----------- ----------- -----------------
1995
Fourth quarter [1] $49.13 $48.13 $ --
- ----------------------- ----------- ----------- -----------------
[1] Represents the period from December 20, 1995 (the day regular trading of The
Hartford's common stock commenced on the NYSE) through December 29, 1995 (the
last trading day in 1995).
At February 28, 1997, there were approximately 60,000 shareholders of record of
The Hartford's common stock.
In 1997, The Hartford expects to continue to pay quarterly dividends on its
common stock of $0.40 per share. Dividend decisions will be based on and
affected by a number of factors, including the operating results and financial
requirements of The Hartford on a stand-alone basis and the impact of
- 8 -
<PAGE>
regulatory restrictions discussed in the Liquidity Requirements section of the
MD&A. Prior to the Distribution, dividends that The Hartford declared were paid
to ITT, which then paid dividends to its shareholders.
There are also various legal limitations governing the extent to which The
Hartford's insurance subsidiaries may extend credit, pay dividends or otherwise
provide funds to ITT Hartford Group, Inc. as discussed in the Capital Resources
and Liquidity section of the MD&A under "Liquidity Requirements".
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA)
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Revenues $ 12,473 $ 12,150 $ 11,102 $ 10,338 $ 9,862
Income (loss) before cumulative effect of
accounting changes [1] (99) 559 632 537 (274)
Net income (loss) [1] [2] $ (99) $ 559 $ 644 $ 537 $ (653)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 108,840 $ 93,855 $ 76,765 $ 66,179 $ 54,180
Long-term debt and redeemable preferred stock 1,032 1,022 682 842 867
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
parent junior subordinated debentures 1,000 -- -- -- --
Stockholders' equity $ 4,520 $ 4,702 $ 3,184 $ 4,012 $ 3,679
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE DATA [3]
Income (loss) before cumulative effect of
accounting changes [1] $ (0.84) $ 4.77 $ 5.40 $ 4.59 $ (2.34)
Net income (loss) [1] [2] $ (0.84) $ 4.77 $ 5.50 $ 4.59 $ (5.58)
Dividends declared per common share [4] $ 1.60 $ 6.65 $ 1.94 $ 1.90 $ 1.16
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [5] 105.2 104.5 102.5 103.6 112.3
Worldwide Property & Casualty [5] [6] 105.1 104.1 102.2 104.8 114.8
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] 1996 includes other charges of $693, after-tax, or $5.91 per share,
consisting primarily of environmental and asbestos reserve increases and
recognition of losses on the closed book of guaranteed rate contract
business (for additional information see MD&A). 1992 includes after-tax
reserve strengthening actions (as described in item 5 below) of $759, or
$6.48 per share.
[2] 1994 includes $12, after-tax, or $0.10 per share, for the net cumulative
effect of accounting changes for accounting for certain investments in debt
and equity securities and the change in the method of discounting to
present value certain workers' compensation reserves (for additional
information see Note 1(b) in Notes to Consolidated Financial Statements).
1992 includes a net charge of $379, or $3.24 per share, for the net
cumulative effect of accounting changes for postemployment and
postretirement benefits other than pensions.
[3] Actual number of average common shares outstanding at December 31, 1995 of
117.1 is retroactively presented for all prior periods.
[4] Prior to the Distribution, dividends that The Hartford declared were paid
to ITT, which then paid dividends to its shareholders.
[5] 1996 excludes the impact of $660, before-tax, environmental and asbestos
charge. Including the impact of this charge, the combined ratio for 1996
was 116.9 for the North American Property & Casualty segment (for
additional information see MD&A) and 114.7 for the Worldwide Property &
Casualty. The 1992 combined ratio excludes the impact of $900, before-tax,
of reserve strengthening actions taken to address loss developments in
surplus lines and reinsurance at First State Insurance Company and its
subsidiaries reported in the Runoff Segment and $250 of legal defense costs
associated with environmental-related claims. Including the impact of these
actions, the combined ratio for 1992 was 135.4 for the North American
Property & Casualty segment and 133.7 for the Worldwide Property &
Casualty.
[6] For the periods after 1992, the combined ratios exclude the results of the
Runoff segment.
</FN>
</TABLE>
<TABLE>
Outlined in the table below are U.S. Industry Combined Ratios for each of the
five years ended December 31:
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Industry Combined Ratios (a) 107.0 106.4 108.4 106.9 115.7
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
(a) U.S. Industry Combined Ratio information obtained from A.M. Best. 1996's
combined ratio is an estimate prepared as of January 1997.
</FN>
</TABLE>
- 9 -
<PAGE>
ITEM 7.
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 SHOULD BE READ IN CONJUNCTION WITH THE
CONSOLIDATED FINANCIAL STATEMENTS AND RELATED NOTES BEGINNING ON PAGE F-1.
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. The forward-looking statements are made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon ITT Hartford Group, Inc. ("The Hartford" or the
"Company"). There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on The Hartford will be those anticipated by management. Actual
results could differ materially from those expected by The Hartford, depending
on the outcome of certain factors, including those described with the
forward-looking statements herein.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
================================================================================
INDEX
================================================================================
Distribution 10
Consolidated Results of Operations: Operating Summary 10
North American Property & Casualty 12
Life 14
International 17
Runoff 18
Reserves 20
Environmental and Asbestos Claims 20
Investments 22
Capital Resources and Liquidity 29
Regulatory Initiatives 32
Effect of Inflation 32
================================================================================
DISTRIBUTION
================================================================================
On December 19, 1995, ITT Corporation ("ITT") distributed all of the outstanding
shares of common stock of The Hartford to the shareholders of ITT common stock
(the "Distribution" or "Spin-off"). As a result of the Distribution, The
Hartford became an independent publicly-traded company. "Regular Way" trading of
The Hartford's common stock on the New York Stock Exchange (under the symbol
"HIG") commenced on December 20, 1995. In connection with this transaction, ITT
transferred First State Insurance Company, together with its subsidiaries, and
Fencourt Reinsurance Company, Ltd., both of which were wholly owned companies of
ITT, to The Hartford prior to the Distribution. Consistent with the Consolidated
Financial Statements and related Notes, the financial information included
herein reflects the results of The Hartford as if it were a separate entity for
all periods presented. For additional information, see "Distribution Agreement"
under Capital Resources and Liquidity.
<TABLE>
<CAPTION>
================================================================================
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
================================================================================
OVERVIEW
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums $ 10,076 $ 9,628 $ 8,753
Net investment income 2,523 2,420 2,259
Net realized capital gains (losses) (126) 102 90
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 12,473 12,150 11,102
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 8,942 7,769 7,314
Amortization of deferred policy acquisition costs 1,678 1,658 1,513
Other expenses 2,171 1,981 1,423
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 12,791 11,408 10,250
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (318) 742 852
Income tax expense (benefit) (219) 180 214
Dividends on subsidiary preferred stock -- (3) (6)
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES (99) 559 632
Cumulative effect of accounting changes, net of tax expense of $7 -- -- 12
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (99) 559 644
Less: Cumulative effect of accounting changes, net of tax expense of $7 -- -- 12
Net realized capital gains, after-tax [1] 57 67 59
Other charges (693) -- --
Allocated Distribution items -- 14 50
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 537 $ 478 $ 523
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] 1996 excludes the Closed Book GRC (see below) net realized capital loss of
$137, after-tax. This amount is included in other charges.
</FN>
</TABLE>
- 10 -
<PAGE>
Net income, excluding the impact of accounting changes, net realized capital
gains, after-tax, other charges and allocated Distribution items was $537 for
1996 compared with $478 for 1995 and $523 in 1994. The Hartford defines this
presentation of after-tax operational results as "core earnings".
Core earnings increased $59, or 12%, to $537 in 1996 due primarily to increased
revenues earned on a growing annuity asset base, growth in net investment
income, increased group insurance premiums and favorable mortality experience,
partially offset by after-tax underwriting losses resulting from higher
catastrophes in 1996.
1995 core earnings decreased $45, or 9%, from 1994 due primarily to the impact
of the Dow Corning breast implant claims settlement, a loss from a single
industrial fire covered by the Industrial Risk Insurance ("IRI") pool and losses
attributable to Hurricane Opal. Additionally, results in the closed book of
guaranteed rate contract business ("Closed Book GRC") reflected losses due to
lower investment earnings on mortgage-backed securities, the result of
prepayment experience in excess of assumed levels. Improved property and
casualty net investment income and growth in sales of annuities and corporate
owned life insurance ("COLI") products partially offset the core earnings
decline.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Items excluded from core earnings include the impact of the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", and the change in the method
of discounting to present value certain workers' compensation reserves, the
cumulative net effect of which totaled $12, after-tax, recorded as of January 1,
1994. Upon adoption of SFAS No. 115, the amortized cost basis of mortgage-backed
interest-only investments were written down to fair value and reflected as a
cumulative effect of accounting change of $(30) after-tax. A change in the
method of discounting certain workers' compensation reserves from one that used
statutory interest rates to one utilizing a "risk-free" market rate resulted in
a $42 after-tax cumulative effect benefit.
NET REALIZED CAPITAL GAINS
See Investment Results in the Investments discussion.
OTHER CHARGES
Net income for 1996 includes other charges related to environmental and asbestos
reserve increases, net of taxes, of $(429) in the North American Property &
Casualty segment and $(81) at First State in the Runoff segment (as discussed in
the Environmental and Asbestos Claims section), recognition of losses on Closed
Book GRC of $(169) (as discussed in the Runoff section) and other, primarily
foreign tax-related items, of $(2) in each of the North American Property &
Casualty and Life segments and $(10) in the Runoff segment.
ALLOCATED DISTRIBUTION ITEMS
As part of the Distribution, The Hartford was allocated amounts originally
recorded at the ITT corporate level. The allocations resulted in net income of
$14 and $50 in 1995 and 1994, respectively. For more information on liability
sharing arrangements related to the Distribution, see "Distribution Agreement"
and "Tax Allocation Agreement" under Capital Resources and Liquidity.
INCOME TAXES
The effective tax rates for 1996, 1995 and 1994 were 20%, 24% and 25%,
respectively, excluding the impact of other charges in 1996. Tax-exempt interest
earned on invested assets was the principal cause of effective rates lower than
the 35% U.S. statutory rate. Income taxes paid in 1996, 1995 and 1994 were $170,
$302 and $317, respectively. For additional information, see "Tax Allocation
Agreement" under Capital Resources and Liquidity.
PER COMMON SHARE
The following table represents per common share data and return on equity for
the past three years:
1996 1995 1994
- -----------------------------------------------------------------
Weighted average common shares
outstanding [1] 117.3 117.1 117.1
Operating income (loss) $(2.71) $6.34 $7.28
Net income (loss) $(0.84) $4.77 $5.50
Return on equity [2] [3] (2.3)% 12.6% 15.4%
- ----------------------------------------------------------------
[1] Actual number of common shares outstanding at December 31, 1995 of 117.1
million is retroactively presented for December 31, 1994.
[2] Calculated by dividing net income by average equity excluding unrealized
gain (loss), after-tax.
[3] 1996 return on equity excluding the other charges noted above from net
income was 13.8%.
SEGMENT RESULTS
The Hartford's reporting segments reflect the management structure of the
Company. These segments consist of North American Property & Casualty, Life, and
International, all of which represent ongoing operations, and Runoff. Runoff
includes operations which have ceased writing new and renewal business.
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 for consideration received, 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 core earnings by segment.
1996 1995 1994
- ----------------------------------------------------------------
N. A. Property & Casualty $ 270 $ 251 $ 309
Life 251 221 149
International 87 91 62
Runoff (71) (85) 3
- ----------------------------------------------------------------
CORE EARNINGS $ 537 $ 478 $ 523
- ----------------------------------------------------------------
A description of each segment, as well as 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.
- 11 -
<PAGE>
================================================================================
NORTH AMERICAN PROPERTY & CASUALTY
================================================================================
<TABLE>
<CAPTION>
OPERATING SUMMARY
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums $ 5,657 $ 5,662 $ 5,504
Net investment income 661 646 606
Net realized capital gains 15 29 69
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 6,333 6,337 6,179
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 4,994 4,315 4,070
Amortization of deferred policy acquisition costs 1,154 1,178 1,121
Other expenses 584 510 524
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 6,732 6,003 5,715
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (399) 334 464
Income tax expense (benefit) (248) 61 104
Dividends on subsidiary preferred stock -- (3) (6)
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES (151) 270 354
Cumulative effect of accounting changes, net of tax expense of $7 -- -- 12
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (151) 270 366
Less: Cumulative effect of accounting changes, net of tax expense of $7 -- -- 12
Net realized capital gains, after-tax 10 19 45
Other charges (431) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 270 $ 251 $ 309
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Core earnings for the North American Property & Casualty segment were $270, an
increase of $19 from 1995, primarily due to a $53 increase in after-tax net
investment income partially offset by a $37 increase in after-tax underwriting
loss. The increased underwriting loss resulted from significantly higher
catastrophe and winter storm losses in 1996 partially offset by two material
items discussed in the following Summary Underwriting Results section, which
adversely affected underwriting results in 1995. 1995 core earnings of $251 were
down $58 from 1994 due to the two material items noted, as well as decreased
income from third party servicing contracts and very favorable workers'
compensation loss experience in 1994.
Within the North American Property & Casualty segment, management analyzes the
results of operations by the following four major components on a before-tax
basis:
1996 1995 1994
- ----------------------------------------------------------------
Underwriting results $ (986) $ (270) $ (182)
Net investment income 661 646 606
Net realized capital gains 15 29 69
Other miscellaneous expenses 89 71 29
- ----------------------------------------------------------------
Operating income $ (399) $ 334 $ 464
- ----------------------------------------------------------------
The following discussion summarizes underwriting results by major operation (as
defined below) and other miscellaneous expenses. As previously noted, net
investment income and net realized capital gains are covered in a separate
discussion in the Investments section. Other charges, consisting primarily of an
increase in environmental and asbestos reserves, are discussed in the
Environmental and Asbestos Claims section.
SUMMARY UNDERWRITING RESULTS
Underwriting results represent premiums earned less incurred claims, claim
adjustment expenses and underwriting expenses. The following table shows written
premiums, underwriting results and combined ratios for The Hartford's North
American Property & Casualty segment.
1996 1995 1994
- ----------------------------------------------------------------
Written premiums $ 5,688 $ 5,670 $ 5,648
Underwriting results [1] $ (326) $ (270) $ (182)
Combined ratio [1] [2] 105.2 104.5 102.5
- ----------------------------------------------------------------
[1] 1996 excludes the impact of $660, before-tax, environmental and asbestos
charge. Including the impact of this charge, the combined ratio for 1996 was
116.9 for the North American Property & Casualty segment.
[2] "Combined ratio" is a common industry measurement of the results of property
and casualty insurance underwriting. This ratio is the sum of the ratio of
incurred claims and claim expenses to premiums earned (the "loss ratio") and the
ratio of underwriting expenses incurred to premiums written (the "expense
ratio"). A combined ratio under 100.0 generally indicates an underwriting
profit. Federal income taxes, net investment income, deferred policy acquisition
costs and other non-underwriting expenses are not reflected in the combined
ratio.
Written premiums for this segment were up slightly in 1996 and 1995 from the
respective prior year's results. Continued growth in target markets such as
reinsurance, small commercial accounts and business written under an exclusive
licensing arrangement with The American Association of Retired Persons ("AARP")
was offset by decreased premiums from mid-to-large commercial accounts, agency
personal lines and residual markets. The conversion of certain workers'
compensation business to large deductible programs also depressed the growth in
written premiums.
- 12 -
<PAGE>
1996 underwriting losses before-tax increased $56 over 1995 primarily due to
severe weather-related catastrophe experience, most notably several first
quarter winter storms and Hurricane Fran in September. These events drove total
catastrophe losses in 1996 to exceed 1995 by approximately $130 causing a 2.3
point increase in the combined ratio.
Underwriting results for 1995 were $88 lower than the prior year largely due to
the impact of two items: a $40 loss, net of reinsurance, in connection with the
settlement of claims against Dow Corning Corporation alleging product defects
arising from breast implants, and a net $32 loss resulting from a single
industrial fire covered by the IRI pool. These non-recurring items increased the
combined ratio by 1.3 points in 1995. The 1994 combined ratio of 102.5 was lower
than both the adjusted (excluding the non-recurring items) 1995 and 1996
combined ratios by 0.7 points and 0.4 points, respectively, largely due to
favorable loss experience in workers' compensation in 1994.
The North American Property & Casualty segment consists of three major
operations: Commercial, Personal and Reinsurance. A description of each
operation, including an analysis of underwriting results, follows.
Commercial
- ----------
1996 1995 1994
- ----------------------------------------------------------------
Written premiums $ 3,211 $ 3,335 $ 3,427
Underwriting results $ (201) $ (227) $ (119)
Combined ratio 105.7 106.6 102.5
- ----------------------------------------------------------------
Commercial Insurance Operations (CIO) 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. CIO
is organized into three customer market segments: Commercial Business Insurance
Operations (CBI), Commercial Affinity Segment (CAS), and Specialty Commercial
Lines (SCL). CBI provides standard commercial business for small accounts
(Select Customer) and mid-sized insureds (Key Accounts). Agricultural, livestock
and marine products are also managed within CBI. CAS provides commercial risk
management products and services to members of affinity groups and customers of
financial institutions. SCL provides insurance through retailers and wholesalers
to large commercial clients and insureds requiring a variety of specialized
coverages. SCL's results include the bond lines and First State Management
Group, a leading underwriter of excess and surplus lines business produced
primarily through wholesale brokers.
Written premiums decreased 4% in 1996 to $3.2 billion, compared to a 3% decrease
in the previous year. A decline in workers' compensation premium from less
profitable involuntary workers' compensation pools and increasingly intense
price competition are the primary causes for the 1996 decrease. The decrease in
1995 premium volume reflected the conversion of workers' compensation business
to large deductible programs and a reduction in The Hartford's participation in
the less profitable voluntary and involuntary workers' compensation pools.
1996 underwriting results improved $26 compared with the prior year, reflecting
the impact in 1995 of a $40 loss, net of reinsurance, in connection with a
settlement of claims against Dow Corning Corporation alleging product defects
arising from breast implants. Excluding the impact of this settlement on the
prior year comparison, 1996 underwriting results deteriorated $14 from 1995,
reflecting a 0.3 increase in the combined ratio to 105.7 from the adjusted 1995
level. This decline was due to deterioration in property results which were
adversely impacted by severe catastrophes and winter storms and several large
losses. Despite intense competition, workers' compensation results partially
offset the 1996 deterioration reflecting the impacts of legislative reforms,
depopulation in residual pools and effective managed care related initiatives.
1995 underwriting performance deteriorated $108 compared with 1994, increasing
the combined ratio 4.1 points to 106.6. Excluding the impact of the Dow Corning
settlement, 1995 results declined $68 over 1994. This decline was the result of
higher claims and claim adjustment expense costs in workers' compensation and
liability products and the increase in intensity of competition.
Personal
- --------
1996 1995 1994
- ----------------------------------------------------------------
Written premiums $ 1,864 $ 1,813 $ 1,740
Underwriting results $ (110) $ (21) $ (56)
Combined ratio 105.2 100.9 102.7
- ----------------------------------------------------------------
Personal operations provides automobile, homeowners, home-based business and
fire coverages to individuals throughout the United States and Canada. Personal
operations are organized to provide customized products and services to three
market opportunities: the membership of AARP through a direct marketing
operation; customers who prefer local agent involvement through a network of
independent agents; and members of other affinity groups through a new
organization that is building from the AARP operation competencies. AARP's
exclusive licensing arrangement continues through the year 2002, thus providing
the Company with an important competitive advantage.
Written premiums increased 3% in 1996 compared to a 4% increase in 1995. Both
years include strong growth in AARP premium which is benefiting from the
favorable expansion of this demographic group, partially offset by a selective
disinvestment in unprofitable states and under-performing agents. AARP premiums
represented 64% of the 1996 Personal operations premium, up from 62% in 1995 and
59% in 1994.
Underwriting results decreased by $89 in 1996, with a 4.3 point increase in the
combined ratio. These results were due to severe catastrophe and winter storm
losses, partially offset by improved automobile profitability resulting from
expanded cost containment initiatives. Underwriting results improved by $35 in
1995 over 1994 with a corresponding 1.8 point improvement in the combined ratio
due to lower catastrophe losses and improved automobile results.
- 13 -
<PAGE>
Reinsurance
- -----------
1996 1995 1994
- ----------------------------------------------------------------
Written premiums $ 613 $ 522 $ 481
Underwriting results $ (15) $ (22) $ (7)
Combined ratio 102.8 104.3 101.8
- ----------------------------------------------------------------
The Hartford assumes reinsurance worldwide through its seven Hartford
Reinsurance Company ("HartRe") offices located in Hartford, San Francisco,
Toronto, London, Madrid, Munich and Hong Kong. HartRe primarily writes treaty
reinsurance through professional reinsurance brokers covering various property,
casualty, specialty and marine classes of business.
Written premiums increased 17% in 1996 and 9% in 1995 primarily due to growth in
U.S. casualty and specialty lines. This growth resulted from a combination of
new business opportunities, an increased level of renewals, and continued new
product development in specialty lines, partially offset by a reduction in
domestic and international property and marine rates.
1996 underwriting results increased $7 compared with 1995. Excluding the impact
of the 1995 IRI fire loss described previously, underwriting results decreased
$25 in 1996 due to underwriting losses of $11, resulting from a strategic shift
in the business mix to longer-tailed casualty and specialty lines, catastrophe
and severe winter storm losses of $5 and several large individual risk losses of
$9.
1995 underwriting results decreased $15 compared with 1994 due primarily to
HartRe's participation in the IRI pool which suffered its largest single loss.
HartRe's share of that single loss was $32. Excluding the impact of this loss,
HartRe generated an underwriting gain of $10 and a combined ratio of 97.4 in
1995.
OTHER MISCELLANEOUS EXPENSES
Other miscellaneous expenses, which also include miscellaneous income items,
were $89 in 1996, up from $71 in 1995. This increase was primarily due to
increased debt costs from additional borrowings partially offset by increased
service fee income from third party administration and involuntary pool
servicing contracts. Two major national servicing contracts, entered into in
1996, contributed to this increase in service fee income.
Other miscellaneous expenses for 1995 of $71 increased from $29 in 1994. This
increase was largely attributable to a decrease in service fee income from third
party administration and involuntary pool servicing contracts. The reduction in
service fee income was due to lower servicing carrier allowances caused by the
substantial depopulation of workers' compensation and involuntary pools.
Increased debt costs also impacted other miscellaneous expenses in 1995.
OUTLOOK
Difficult market conditions and intense price competition within the property
and casualty industry show no signs of diminishing in the near term. However,
two major actions were completed in 1996 which management believes will
counterbalance these negative external factors and position the North American
Property & Casualty segment for significant improvement in operating performance
in 1997. First, the adverse impact on earnings from environmental and asbestos
liabilities that had been experienced in prior years was addressed through the
establishment of additional reserves upon completion of a thorough database
review as described in the Environmental and Asbestos Claims section. In
addition, the North American Property & Casualty segment was reorganized to
maximize responsiveness to its customers by grouping market segments and product
lines according to their respective markets and further strengthening an already
strong, results-focused management team. As a result of these actions, as well
as dedication to growing targeted market segments, rigorous expense management
and utilization of alternative distribution channels, management believes the
North American Property & Casualty segment stands poised to successfully
overcome the challenges ahead.
<TABLE>
<CAPTION>
================================================================================
LIFE
================================================================================
OPERATING SUMMARY
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums and other considerations $ 3,068 $ 2,643 $ 2,116
Net investment income 1,323 1,114 922
Net realized capital gains (losses) -- (4) 1
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,391 3,753 3,039
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 2,435 1,978 1,909
Amortization of deferred policy acquisition costs 241 193 145
Other expenses 1,337 1,251 764
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,013 3,422 2,818
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 378 331 221
Income tax expense 129 113 71
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 249 218 150
Less: Net realized capital gains (losses), after-tax -- (3) 1
Other charges (2) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 251 $ 221 $ 149
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 14 -
<PAGE>
Core earnings in the Life segment increased $30, or 14%, to $251 in 1996 from
$221 in 1995 primarily reflecting (i) an increase in earnings of $32 in the
Investment Products division principally driven by an increase in total account
value due to sales of individual annuities and stock market appreciation, (ii) a
$7 increase in the Individual Life Insurance division due to growth in
individual life insurance in force and favorable mortality experience, (iii) an
increase in earnings of $13 in the Employee Benefits division principally due to
an increase in group insurance premiums and favorable morbidity experience and
(iv) a decrease in core earnings of $22 in the Corporate Operation division due
primarily to a guaranty fund adjustment of $10 in 1995 resulting from lower than
expected insolvencies in the insurance industry as well as an increase in debt
service costs in 1996.
Core earnings increased $72, or 48%, to $221 in 1995 from $149 in 1994 largely
due to (i) a $30 increase in the Investment Products division principally driven
by an increase in total account value, (ii) an $11 increase in the Individual
Life Insurance division principally due to growth in the inforce block and
favorable mortality experience and expense trends and (iii) a $21 increase in
the Employee Benefits division principally due to an increase in group premiums
and favorable morbidity experience, as well as growth in the COLI block of
business.
The Life segment operates in three principal divisions: Investment Products,
Individual Life Insurance and Employee Benefits as outlined in the table below.
In addition, the Life segment maintains a Corporate Operation through which it
reports net investment income on assets representing surplus not assigned to any
of its business segments and certain other revenue and expenses not specifically
allocable to any of its business segments.
<TABLE>
<CAPTION>
SUMMARY RESULTS BY DIVISION
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Core Core Core
Revenues Earnings Revenues Earnings Revenues Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Investment Products $ 1,018 $ 146 $ 761 $ 114 $ 571 $ 84
Individual Life Insurance 472 44 408 37 391 26
Employee Benefits 2,834 79 2,523 66 2,049 45
Corporate Operation 67 (18) 61 4 28 (6)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 4,391 $ 251 $ 3,753 $ 221 $ 3,039 $ 149
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following describes each division, including products and services offered,
and analyzes the above results.
Investment Products
- -------------------
The Investment Products division markets fixed and variable annuities, deferred
compensation plan services for municipal governments and corporations,
structured settlements and other special purpose annuity contracts, investment
management contracts, and mutual funds. The Company was rated the number one
writer of variable annuities for 1996 with a 13% market share according to the
Variable Annuity and Research Data Service.
Revenues increased $257, or 34%, to $1.0 billion in 1996 from $761 in 1995. This
increase was principally the result of a $216 increase in premiums and other
considerations, reflecting a substantial increase in aggregate fees earned due
to the division's growing block of separate account assets. The average separate
account assets of this segment increased to $37.5 billion in 1996 from $26.3
billion in 1995 primarily due to sales of individual annuities of approximately
$10 billion in 1996 and $7 billion in 1995, as well as significant market
appreciation in both 1996 and 1995. In addition, the average general account
assets of this segment increased to $7.7 billion in 1996 from $6.5 billion in
1995 largely as a result of growth in the general account portion of the
individual variable annuity products of the Investment Products division. The
growth in this division in 1996 also resulted in an increase in total benefits,
claims and expenses of $199, or 34%, to $791 in 1996 from $592 in 1995. The 38%
growth in average account value in 1996, coupled with an overall reduction in
individual annuity expenses as a percentage of total individual annuity account
value to 28 basis points in 1996 from 31 basis points in 1995, contributed to
the growth in core earnings of $32, or 28%, to $146 in 1996 from $114 in 1995.
Similar factors generated an increase in 1995, as compared with 1994, in
revenues of $190, or 33%, average general account assets of $1.3 billion, or
26%, average separate account assets of $8.0 billion, or 44%, total benefits,
claims and expenses of $149, or 34%, core earnings of $30, or 36%, and a
reduction in individual annuity expenses as a percentage of total individual
annuity account value to 31 basis points in 1995 from 35 basis points in 1994.
Individual Life Insurance
- -------------------------
Individual Life Insurance products include variable life insurance, universal
life insurance, interest-sensitive whole life insurance and term life policies.
Individual Life Insurance business also includes modified guaranteed life and
traditional whole life.
Revenues increased $64, or 16%, to $472 from $408 in 1995. This increase was
primarily due to a $47 increase in premiums and other considerations, reflecting
an increase in cost of insurance charges and variable life fees applied to a
larger
- 15 -
<PAGE>
block of business as insurance in force increased to $52 billion in 1996 from
$48 billion in 1995. Total benefits, claims and expenses increased $54, or 15%,
to $404 in 1996 from $350 in 1995. This increase reflects the increase in the
block of individual life insurance business offset partially by favorable
mortality results. The combination of business growth and favorable mortality
experience resulted in an increase in core earnings of $7, or 19%, to $44 in
1996 from $37 in 1995.
Two other events, along with those mentioned above, influenced the results of
1995 compared with 1994. In 1994, the Life segment assumed $218 of individual
life insurance reserves from the Pacific Standard Life Insurance Company. This
affected both revenues and total benefits, claims and expenses for 1994.
Expenses were also positively influenced by the consolidation of the
professional functions previously performed in Minneapolis, Minnesota into the
Life segment's Simsbury, Connecticut location. The combination of this
acquisition, internal growth, expense management and favorable mortality
experience caused core earnings in this division to increase $11, or 42%, to $37
in 1995 from $26 in 1994.
Employee Benefits
- -----------------
Employee Benefits consists of two areas of operation: Group Insurance and
Specialty Insurance Operations. Through the Group Insurance Operation, the
Company markets group long-term and short-term managed disability, group life,
stop loss, and supplementary medical coverage to employers and
employer-sponsored plans and accidental death and dismemberment, travel and
special risk coverage to associations. The Specialty Insurance Operation unit
consists of the Company's COLI business, life/health reinsurance operations, and
international operations.
Revenues increased $311, or 12%, to $2.8 billion in 1996 from $2.5 billion in
1995. This increase was largely the result of (i) a $162 increase in premiums
and other considerations, reflecting a $226 increase in group insurance premiums
from strong group disability sales and renewals, partially offset by a decline
in leveraged COLI premiums as a result of the Health Insurance Portability and
Accountability Act of 1996 ("HIPA Act of 1996", as discussed below) legislation
and (ii) a $149 increase in net investment income, primarily due to an increase
in COLI account values. Total benefits, claims and expenses increased $295, or
12%, to $2.7 billion in 1996 from $2.4 billion in 1995. This increase generally
reflected an increased block of group disability business and other group
insurance and an increase in the Life segment's COLI block of business,
partially offset by a $41 decrease in dividends to policyholders primarily due
to the elimination of sales of leveraged COLI as a result of the enactment of
the HIPA Act of 1996. In addition, expenses in the group insurance business, as
a percentage of premiums, have declined over the past several years. This trend,
along with favorable mortality and morbidity experience, as well as the factors
mentioned above, resulted in an increase in core earnings in this division of
$13, or 20%, to $79 in 1996 from $66 in 1995.
Sales of leveraged COLI were $867 and $306 in 1995 and 1994, respectively.
Revenues increased $474, or 23%, in 1995, primarily due to a $353 increase
related to COLI premiums. Total benefits, claims and expenses increased $442, or
22%, in 1995 of which $344 related to COLI. The additional growth in the COLI
and group insurance business, expense reductions associated with the decision to
exit the fully insured medical business, and factors similar to those discussed
above for 1996 caused core earnings in this division to increase $21, or 47%, to
$66 in 1995 from $45 in 1994.
OUTLOOK
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader within the financial services
industry, to continue the Life segment's asset growth and to maximize
shareholder value. The Life segment's strong market position in each of its
businesses, coupled with the growth potential management believes exists in its
markets, provides opportunities to increase sales of the Life segment's products
and services as individuals increasingly save and plan for retirement, protect
themselves and their families against disability or death and prepare their
estates for an efficient transfer of wealth between generations.
The HIPA Act of 1996 phases out the deductibility of interest on policy loans
under COLI by 1998, thus eliminating all future sales of leveraged COLI. The
leveraged COLI product has been an important contributor to the Life segment's
profitability in recent years and will continue to contribute to the
profitability of the Life segment in the future, although the level of profit
will decline after 1998. However, the Employee Benefits division has growth
opportunities through variable COLI and other non-qualified deferred
compensation vehicles, reinsurance and international operations. The Company
expects continued growth in core earnings for the Life segment in 1997. See the
Capital Resources and Liquidity section under "Subsequent Events".
- 16 -
<PAGE>
================================================================================
INTERNATIONAL
================================================================================
<TABLE>
<CAPTION>
OPERATING SUMMARY
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums $ 1,342 $ 1,309 $ 1,116
Net investment income 205 183 135
Net realized capital gains 79 48 23
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,626 1,540 1,274
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 931 901 757
Amortization of deferred policy acquisition costs 284 276 241
Other expenses 201 179 163
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,416 1,356 1,161
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 210 184 113
Income tax expense 71 61 37
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 139 123 76
Less: Net realized capital gains, after-tax 52 32 14
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 87 $ 91 $ 62
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The International segment includes direct insurance business written by local
companies in the United Kingdom, namely ITT London & Edinburgh, the Netherlands
and Belgium, Zwolsche Algemeene, and Spain, ITT Ercos. These companies primarily
offer property and casualty products in both personal and commercial lines.
Zwolsche Algemeene and ITT Ercos also offer life products designed to meet the
needs of local customers.
Core earnings in the International segment of $87 in 1996 decreased $4, or 4%,
from 1995, following a $29, or 47%, increase in 1995 over 1994. The decrease in
earnings from 1995 was primarily the result of deteriorating underwriting
results due to heightened competition in the United Kingdom and unfavorable
foreign exchange impacts, partially offset by growth in net investment income.
1996 revenues of $1.6 billion were $86, or 6%, higher than 1995 primarily due to
growth at Zwolsche Algemeene and 1995 results at ITT Ercos only reflecting eight
months of activity due to its acquisition by the Company in May 1995. Growth
over 1995 was dampened by soft market conditions in the United Kingdom.
Additionally, the U.S. dollar strengthened during 1996 compared to 1995,
resulting in unfavorable foreign exchange translation movements during 1996
resulting in approximately $37 and $3 of the decrease in revenues and core
earnings, respectively.
1995 revenues of $1.5 billion and core earnings of $91 were $266, or 21%, and
$29, or 47%, respectively, higher than 1994, the result of significantly
improved investment and underwriting performance, premium growth, and the
acquisition of ITT Ercos. Favorable foreign exchange translation movements
during 1995 accounted for approximately $89 and $2 of the increase in revenues
and core earnings, respectively.
The International segment is organized into the following three business units:
ITT London & Edinburgh, Zwolsche Algemeene and ITT Ercos. In addition, Other
primarily represents home office expenses associated with managing international
operations.
<TABLE>
<CAPTION>
SUMMARY RESULTS BY BUSINESS UNIT
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Core Core Core
Revenues Earnings Revenues Earnings Revenues Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
ITT London & Edinburgh $ 1,088 $ 56 $ 1,071 $ 66 $ 945 $ 46
Zwolsche Algemeene 459 32 416 25 328 17
ITT Ercos 78 3 51 2 -- --
Other 1 (4) 2 (2) 1 (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 1,626 $ 87 $ 1,540 $ 91 $ 1,274 $ 62
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
ITT London & Edinburgh
- ----------------------
1996 revenues at ITT London & Edinburgh of $1.1 billion increased $17, or 2%,
over 1995. Core earnings of $56 decreased $10, or 15%, from 1995 primarily the
result of deteriorating underwriting results due to heightened competition in
the United Kingdom, partially offset by growth in net investment income. Also,
strengthening of the U.S. dollar resulted in negative foreign exchange impacts
on revenues of $15 and core earnings of $2. The increase in revenues was due to
improved investment income, partially offset by a shortfall in written premiums
due to the intense competitive climate in the United Kingdom. Personal lines
underperformed the prior year where shortfalls in automobile were partially
offset by improvements in personal credit insurance, including life. Commercial
lines sales were also dampened due to the increasingly competitive market.
- 17 -
<PAGE>
1995 revenues at ITT London & Edinburgh of $1.1 billion and core earnings of $66
were $126, or 13%, and $20, or 44%, respectively, higher than 1994. These
increases were due to significant improvement in investment performance, premium
growth and foreign exchange rates, offset somewhat by slightly lower
underwriting results. Commercial lines growth moderated during the year due to a
more competitive market. Personal lines growth was mixed with continued
improvement in automobile and creditor products.
Zwolsche Algemeene
- ------------------
Zwolsche Algemeene's 1996 revenues of $459 and core earnings of $32 improved
$43, or 10%, and $7, or 28%, respectively, compared with 1995. These increases
were due to improved premium growth and stronger underwriting results. Due to
the strengthening U.S. dollar, foreign exchange had an adverse effect of $20 on
revenues and a negligible impact on core earnings. Property and casualty growth
in 1996 was relatively strong in motor as market pricing improved. Performance
was also strong in life savings and mortgage products business.
Zwolsche Algemeene's 1995 revenues of $416 and core earnings of $25 improved
$88, or 27%, and $8, or 47%, respectively, compared with 1994. These increases
were due to improved investment performance, moderate premium growth, stronger
underwriting results and foreign exchange impacts. Property and casualty growth
in 1995 was moderate as market pricing slowly improved. Strong growth in life
savings and pension products was partially offset by lower than expected growth
in mortgage savings product business.
ITT Ercos
- ---------
The Hartford acquired ITT Ercos in May 1995. 1996 revenues at ITT Ercos of $78
exceeded the eight months reported for 1995 by $27. Core earnings of $3 were $1
higher than 1995. During 1996 the company has consolidated its branch offices
into one centralized location and reorganized its national sales organization.
These actions were taken to improve expense competitiveness and service which
will position the company for future growth.
OUTLOOK
The outlook for 1997 for commercial and personal lines at ITT London & Edinburgh
is a continuation of heightened competition. Personal lines should experience
strong growth in homeowners business due to an agreement entered into during
1996 with Nationwide Building Society. This agreement provides exclusive rights
to ITT London & Edinburgh to sell homeowners products to the retail customers of
Nationwide. Continuing competition from direct writing companies and entry by
non-traditional risk bearers into markets such as homeowners is anticipated.
The outlook at Zwolsche Algemeene for 1997 is for moderate written premium
growth in property and casualty due to an increase in competition. Continued
growth is also expected for life operations. Sales expectations of life savings
and pension products in the Netherlands continue to be strong due to their
associated tax advantages and expected continued low interest rate environment.
The Company continues to explore the viability of opportunities in both life and
property and casualty business in the Netherlands in 1997 as the government
continues to review moving certain social security programs into the private
sector.
Relative to ITT Ercos, the outlook in the Spanish market is for moderate growth.
ITT Ercos will build on the improved expense and operational foundation
established in 1996 to expand its presence in both life and non-life business
during 1997.
The International segment continues to explore acquisition opportunities in
Western Europe, Latin America and Asia.
================================================================================
RUNOFF
================================================================================
<TABLE>
<CAPTION>
OPERATING SUMMARY
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums $ 9 $ 14 $ 17
Net investment income 334 477 596
Net realized capital gains (losses) (220) 29 (3)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 123 520 610
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 582 575 578
Amortization of deferred policy acquisition costs (1) 11 6
Other expenses 49 35 23
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 630 621 607
------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (507) (101) 3
Income tax expense (benefit) (171) (35) 1
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (336) (66) 2
Less: Net realized capital gains (losses), after-tax [1] (5) 19 (1)
Other charges (260) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ (71) $ (85) $ 3
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] 1996 excludes the Closed Book GRC net realized capital losses of $137,
after-tax. This amount is included in other charges.
</FN>
</TABLE>
- 18 -
<PAGE>
The Runoff segment consists of operations of The Hartford which have
discontinued writing new and renewal business. The property and casualty
operations of the Runoff segment primarily include First State Insurance Company
and its subsidiaries ("First State") and Fencourt Reinsurance Company, Ltd.
("Fencourt"). The primary focus of these operations is the proper disposition of
claims, resolving disputes and collecting reinsurance proceeds related largely
to business underwritten and reinsured prior to 1985.
The Runoff segment also consists of Closed Book GRC which had no new or renewal
business as of the end of 1994. Substantially all of the products included in
Closed Book GRC are guaranteed investment contracts with guaranteed fixed or
indexed rates for a specific period. Prior to 1996, Closed Book GRC was reported
as a component of the Life segment.
Closed Book GRC results have been negatively affected by lower investment rates
and earnings in the related investment portfolio (primarily consisting of
collateralized mortgage obligations and mortgage backed securities) due to
prepayments experienced in excess of assumed levels in years prior to 1995.
Closed Book GRC was also affected by the interest rate rise in 1994 when the
duration of its assets lengthened relative to that of the liabilities. Due to
the reduced investment earnings and duration mismatch, the portfolio had
insufficient assets to fully fund its liability commitments. During the third
quarter of 1996, the Life segment transferred assets in the amount of $200 to
the Runoff segment to adequately fund Closed Book GRC so that future cash
infusions would be minimal.
Although the Closed Book GRC asset portfolio as a whole is duration matched with
its liabilities, certain investments continue to have a longer maturity than
their corresponding liabilities and will need to be liquidated prior to maturity
in order to meet the specific liability commitments. To protect the existing
value of these investments, the Company entered into various hedge transactions
in late September 1996 which substantially eliminated further fluctuation in
fair value of the investments due to interest rate changes.
The Hartford's accounting policy for impairment of investments requires
recognition of an other than temporary impairment charge on a security if it is
determined that the Company is unable to recover all amounts due under the
contractual obligations of the security. In addition, the Company has
established specific criteria to be used in the impairment evaluation of an
individual portfolio of assets. Specifically, if the asset portfolio is
supporting a runoff operation, is forced to be liquidated prior to maturity to
meet liability commitments, and has a fair value below amortized cost, which
will not materially fluctuate as a result of future interest rate changes, then
an other than temporary impairment has been determined to have occurred and is
recognized. The Company then continues to review the impaired securities for
appropriate valuation.
With the initiation of the hedge transactions, which eliminated the possibility
that the fair value of the Closed Book GRC investments would recover to their
current amortized cost, an other than temporary impairment loss of $(82)
after-tax was determined to have occurred and was recorded in September 1996.
Also, during the third quarter, Closed Book GRC had asset sales resulting in
proceeds of approximately $500 and a realized loss of $(55) after-tax. The asset
sales were undertaken as a result of liquidity needs and favorable market
conditions for certain securities. Other charges of $(32) after-tax were also
incurred in the third quarter.
During the fourth quarter of 1996, an additional other than temporary impairment
loss of $(6) after-tax was determined to have occurred, and has been included in
realized losses.
Other charges primarily consist of a $169 third quarter 1996 charge in the
Closed Book GRC (as discussed previously) and an increase in environmental and
asbestos reserves at First State of $81 as discussed in the Environmental and
Asbestos Claims section.
Revenues decreased 76% in 1996 and 15% in 1995 as a result of a decline in net
investment income for both periods and net realized capital losses for 1996 in
Closed Book GRC. Runoff segment core earnings increased $14 in 1996 over 1995
and decreased $88 in 1995 from the prior year. These results reflect the core
earnings of Closed Book GRC of $(51), $(68) and $1 for 1996, 1995 and 1994,
respectively.
OUTLOOK
Management expects that the net income (loss) from Closed Book GRC in the years
subsequent to 1996 will be immaterial based on current projections for the
performance of the assets and liabilities associated with Closed Book GRC and
expectations regarding future asset sales and the stabilizing effect of the
hedge transactions. However, no assurance can be given that, under certain
unanticipated economic circumstances, further losses in respect of Closed Book
GRC will not occur in the future. Additionally, except for the uncertainties
related to dispute resolution, reinsurance collection, and those discussed in
the Environmental and Asbestos Claims section, management does not anticipate
the future financial performance of the property and casualty operations of the
Runoff segment to have a material effect on the operating results of the
Company.
- 19 -
<PAGE>
================================================================================
RESERVES
================================================================================
The Hartford establishes property and casualty reserves to provide for the
estimated costs of paying claims made by policyholders or against policyholders.
These reserves include estimates for both claims that have been reported, and
those that have been incurred, but not yet reported, and include estimates of
all expenses associated with processing and settling these claims. Estimating
the ultimate cost of future claims and claim adjustment expenses is an uncertain
and complex process. This estimation process is based largely on the assumption
that past developments are an appropriate predictor of future events, and
involves a variety of actuarial techniques that analyze experience, trends and
other relevant factors. The uncertainties involved with the reserving process
have become increasingly unpredictable due to a number of complex factors
including social and economic trends and changes in the concepts of legal
liability and damage awards. Accordingly, final claim settlements may vary from
the present estimates, particularly when those payments may not occur until well
into the future.
The Hartford continually reviews its estimated claims and claim adjustment
expense reserves as additional experience and other relevant data become
available and reserve levels are adjusted accordingly. Adjustments to previously
established reserves, if any, will be reflected in the operating results of the
period in which the adjustment is made. In the judgment of management, all
information currently available has been properly considered in the reserves
established for claims and claim adjustment expenses. For a discussion of
environmental and asbestos claims and the uncertainties related to these
reserves, refer to the next section.
In accordance with the insurance laws and regulations under which Life operates,
life insurance subsidiaries of The Hartford establish actuarially determined
reserves to meet their obligations on their outstanding life and disability
insurance contracts, as well as reserves for their universal life and investment
contracts. Reserves for life insurance and disability contracts are based on
mortality and morbidity tables in general use in the United States, modified to
reflect The Hartford's experience. Management believes that these reserves, with
additions from premiums to be received, and with interest on such reserves
compounded annually at certain assumed rates, will be sufficient to meet The
Hartford's policy obligations at their maturities or in the event of an
insured's death. Reserves for universal life insurance and investment products
represent policy account balances before applicable surrender charges.
================================================================================
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 the North American Property & Casualty, International and Runoff
segments. Environmental claims relate primarily to pollution and related
clean-up costs. With regard to these claims, uncertainty exists which impacts
the ability of insurers and reinsurers to estimate the ultimate reserves for
unpaid losses and related settlement expenses. The Hartford finds that
conventional reserving techniques cannot estimate the ultimate cost of these
claims because of inadequate development patterns and inconsistent emerging
legal doctrine. For the majority of environmental claims and many types of
asbestos claims, unlike any other type of contractual claim, there is almost no
agreement or consistent precedent to determine what, if any, coverage exists or
which, if any, policy years and insurers or reinsurers may be liable. Further
uncertainty arises with environmental claims since claims are often made under
policies, the existence of which may be in dispute, the terms of which may have
changed over many years, which may or may not provide for legal defense costs,
and which may or may not contain environmental exclusion clauses that may be
absolute or allow for fortuitous events. Courts in different jurisdictions have
reached disparate conclusions on similar issues and in certain situations have
broadened the interpretation of policy coverage and liability issues. In light
of the extensive claim settlement process for environmental and asbestos claims,
involving comprehensive fact gathering, subject matter expertise and intensive
litigation, The Hartford established an environmental claims facility in 1992 to
defend itself aggressively against unwarranted claims and to minimize costs.
Within the property and casualty insurance industry, progress has been made in
developing sophisticated, alternative methodologies utilizing company experience
and supplemental databases to assess environmental and asbestos liabilities.
Consistent with The Hartford's practice of using the best techniques to estimate
the Company's environmental and asbestos exposures, a study was initiated in
April 1996. The Hartford, utilizing internal staff supplemented by outside legal
and actuarial consultants, completed the study in October 1996.
The study included a review of identified environmental and asbestos exposures
of North American Property & Casualty, U.S. exposures of The Hartford's
International segment and exposures of the Runoff segment, and covered the
Company's Commercial, Personal, and Reinsurance operations. The methodology
utilized a ground up analysis of policy, site and exposure level data for a
representative sample of The Hartford's claims. The results of the evaluation
were extrapolated against the balance of the claim population to estimate the
Company's overall exposure for reported claims.
In addition to estimating liabilities on reported environmental and asbestos
claims, The Hartford estimated reserves for claims incurred but not reported
("IBNR"). The IBNR reserve was estimated using information on reporting patterns
of known insureds, characteristics of insureds such as limits exposed,
attachment points and number of coverage years involved, third party costs, and
closed claims.
Included in The Hartford's analysis of environmental and asbestos exposures was
a review of applicable reinsurance
- 20 -
<PAGE>
coverage. Reinsurance coverage applicable to the sample was used to estimate the
reinsurance coverage that applied to the balance of the reported environmental
and asbestos claims and to the IBNR estimates.
An international actuarial firm reviewed The Hartford's approach and concluded
that the way the Company studied its exposures, the thoroughness of its analysis
and the way The Hartford came to its estimates was reasonable and comprehensive.
Upon completion of the study and assessment of the results in October 1996, The
Hartford determined that its environmental and asbestos reserves should be
increased, on an undiscounted basis, by $493 (net of reinsurance) and $292 (net
of reinsurance), respectively.
Reserve activity for both reported and unreported environmental and asbestos
claims, including reserves for legal defense costs, for the years ended December
31, 1996 and 1995, was as follows (net of reinsurance):
<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS CLAIMS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1996 1995 1994
-------------------------------------------- ------------ -----------
Environmental Asbestos Total Total [1] Total [1]
---------------- -------------- ------------ ------------ -----------
<S> <C> <C> <C> <C> <C>
Beginning liability $ 926 $ 410 $ 1,336 $ 1,334 $ 1,311
Claims and claim adjustment expenses incurred 603 322 925 163 145
Claims and claim adjustment expenses paid (124) (35) (159) (161) (122)
Other [2] 34 20 54 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
Ending liability [2] [3] $ 1,439 $ 717 $ 2,156 $ 1,336 $ 1,334
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Prior to December 31, 1995, reserves were not split between environmental
and asbestos exposures.
[2] The 1996 ending liability includes reclassifications of reserves that were
not previously identified as environmental and asbestos.
[3] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,972, $1,939 and $1,463 for 1996, 1995 and 1994, respectively.
Gross of reinsurance, the years ending December 31, 1996 and 1995 reserves
for environmental and asbestos were $2,342 and $1,786 and $1,707 and
$1,568, respectively. The 1995 reinsurance amount includes $440 of ceded
incurred but not reported ("IBNR") claims for which the equivalent 1994
classification has not been identified.
</FN>
</TABLE>
The Hartford's pretax operating earnings have been impacted over the last three
years by incurred environmental and asbestos claims and claim adjustment
expenses as follows: $925 in 1996, $163 in 1995 and $145 in 1994 with all years
reported net of reinsurance.
The Hartford believes that the environmental and asbestos reserves reported at
December 31, 1996 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.
- 21 -
<PAGE>
================================================================================
INVESTMENTS
================================================================================
An important element of the financial results of The Hartford is return on
invested assets. The Hartford's investment activities are divided between the
reportable segments of North American Property & Casualty, Life, International,
and Runoff. The investment portfolios for these operations are managed based on
the underlying characteristics and nature of their respective liabilities.
NORTH AMERICAN PROPERTY & CASUALTY
The investment objective of the North American Property & Casualty segment is
the maximization of after-tax income consistent with long-term capital growth
and maintenance of appropriate liquidity to meet corporate and policyholder
obligations. Investment strategies are developed based on a variety of factors
including business needs, regulatory requirements and tax considerations.
During 1996, the North American Property & Casualty segment continued its
strategy of maximizing after-tax income through increased ownership of
tax-exempt municipal bonds. On an after-tax basis, municipal bonds generally
continued to provide significant incremental income over taxable securities. In
1996, net purchases of tax-exempt municipal bonds of $2.0 billion increased
holdings to 55% of total invested assets compared to 44% and 26% as of December
31, 1995 and 1994, respectively. In addition to employing new cash flow to
purchase municipal bonds, lower yielding taxable bonds were sold with proceeds
reallocated to the higher after-tax yielding municipal market.
A supplemental benefit resulting from the purchase of municipal bonds continued
to be the improvement in credit quality. While the bond portfolio has
consistently remained "AA" average quality over many years, municipal bonds
purchased in 1996 had an average rating of "AA+", an improvement on the "AA-"
rating on the taxable bonds sold.
Another strategy employed in 1996, which increased income and provided
diversification, was the purchase of additional high yield securities. The high
yield sector also achieved excellent total return performance in 1996. Holdings
of high yield investments increased to $708, or 6%, of total invested assets
compared to $505, or 4%, at December 31, 1995. Included in December 31, 1996
high yield holdings were $135 in emerging market bonds compared to $60 at
December 31, 1995.
The North American Property & Casualty segment also continued its strategy of
increasing equity exposure. In 1996, $275 of net purchases of common stock
increased holdings to $1.3 billion, or 10%, of total invested assets at year end
compared to $922, or 8%, of total invested assets at year end 1995.
Increased holdings of municipal bonds, high yield securities and common stock
were partially accomplished through the sale of more interest rate sensitive
collateralized mortgage obligations (CMO) and residential mortgage backed
securities (MBS). At December 31, 1996, holdings in CMO and MBS were $868, or
7%, of total invested assets compared to $1.7 billion, or 14%, at December 31,
1995.
Total invested assets were $12.8 billion at December 31, 1996 and were comprised
primarily of fixed maturities of $11.3 billion and other investments of $1.5
billion, primarily equity securities. Real estate investments consisted of $29
of land after the sale of substantially all real estate in 1995. The table below
summarizes fixed maturity holdings by type.
FIXED MATURITIES BY TYPE
- -------------------------------------------------------------------
1996 1995
- -------------------------------------------------------------------
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- -------------------------------------------------------------------
Corporate $2,160 19.1% $2,427 22.8%
CMO 655 5.8% 1,462 13.7%
Municipal-tax-exempt 7,123 63.2% 5,171 48.5%
Gov't/Gov't agencies-U.S. 15 0.1% 249 2.3%
Asset backed securities ("ABS") 206 1.8% 239 2.2%
Gov't/Gov't agencies-For. 279 2.5% 255 2.4%
MBS-agency 213 1.9% 244 2.3%
Commercial MBS 107 0.9% 14 0.1%
Municipal-taxable 68 0.6% 75 0.7%
Redeemable pref'd stock 47 0.4% -- --
Short-term 419 3.7% 531 5.0%
- -------------------------------------------------------------------
TOTAL FIXED MATURITIES $11,292 100.0% $10,667 100.0%
- -------------------------------------------------------------------
This segment maintains a high quality fixed maturity portfolio. At December 31,
1996, approximately 93% of the fixed maturity portfolio was invested in
investment-grade securities. The table below summarizes fixed maturity holdings
by credit quality.
FIXED MATURITIES BY CREDIT QUALITY
- -----------------------------------------------------------------
1996 1995
- -----------------------------------------------------------------
FAIR FAIR
CREDIT QUALITY VALUE PERCENT VALUE PERCENT
- -----------------------------------------------------------------
AAA $4,296 38.0% $4,570 42.8%
AA 2,538 22.5% 2,137 20.0%
A 1,683 14.9% 1,862 17.5%
BBB 799 7.1% 649 6.1%
Gov't 720 6.4% 252 2.4%
BB & below 581 5.1% 459 4.3%
Not rated 256 2.3% 207 1.9%
Short-term 419 3.7% 531 5.0%
- -----------------------------------------------------------------
TOTAL FIXED MATURITIES $11,292 100.0% $10,667 100.0%
- -----------------------------------------------------------------
The taxable equivalent duration of the December 31, 1996 fixed maturity
portfolio was 5.0 years compared to 4.4 years at December 31, 1995. Duration is
defined as the market price sensitivity of the portfolio to parallel shifts in
the yield curve.
The North American Property & Casualty segment uses a minimal amount of
derivatives in managing its investments. The notional amount of derivatives was
$1 and $14 as of December 31, 1996 and 1995, respectively.
- 22 -
<PAGE>
Investment Results
- ------------------
The table below summarizes the North American Property & Casualty segment's
results for the past three years.
1996 1995 1994
---------------------------------------------------------------
Net investment income, before-tax $661 $646 $606
Net investment income, after-tax [1] 531 478 440
Yield on average invested assets,
before-tax [2] 5.52% 5.77% 5.65%
Yield on average invested assets,
after-tax [1] [2] 4.44% 4.28% 4.09%
Net realized capital gains,
before-tax $ 15 $ 29 $ 69
---------------------------------------------------------------
[1] Due to the significant holdings in tax-exempt investments an after-tax net
investment income and after-tax yield are also included.
[2] Represents net investment income (excluding net realized capital gains)
divided by average invested assets at cost (fixed maturities at amortized
cost).
For the year ended December 31, 1996, before-tax net investment income was $661
compared to $646 in 1995, an increase of 2%, while after-tax net investment
income increased 11%. Although before-tax yields on average invested assets
decreased to 5.52% in 1996 from 5.77% in 1995, the after-tax yield increased to
4.44% in 1996 from 4.28% in 1995. The increase in before-tax net investment
income was primarily due to increased ownership of high yield securities,
duration extension of 0.6 years and an increase in invested assets. While
before-tax yield decreased due to an increased allocation to common stocks and
municipal bonds and the sale of taxable bonds, increases in after-tax yield and
income were primarily due to the strategic increase in allocation to tax-exempt
municipal bonds.
For the year ended December 31, 1995, before-tax net investment income was $646
compared to $606 in 1994, an increase of 7%, while after-tax income increased
9%. Before-tax yields on average invested assets increased to 5.77% in 1995 from
5.65% in 1994. The after-tax yield increased to 4.28% in 1995 from 4.09% in
1994. The increases in net investment income and yields were primarily due to
the transition from lower yielding taxable bonds and real estate along with
increased ownership of tax-exempt municipal bonds.
Net realized capital gains declined to $15 in 1996 from $29 in 1995. Included in
1996 activity was the generation of $77 of realized gains in the common stock
portfolios which were partially offset by losses incurred in the sale of lower
yielding taxable bonds and certain real estate writedowns.
Net realized capital gains decreased to $29 in 1995 from $69 in 1994. The
reduction was primarily from the impact of the sale of the majority of the real
estate portfolio along with the sale of the lower yielding taxable bonds, both
at realized losses.
LIFE
The Life segment's investment operations are managed by its investment strategy
group which reports directly to senior management of the Company and consists of
a risk management unit and portfolio management unit. The risk management unit
is responsible for monitoring and managing the segment's asset/liability profile
and establishing investment objectives and guidelines; and, the portfolio
management unit is responsible for determining, within specified risk tolerances
and investment guidelines, the general asset allocation, duration and convexity
and other characteristics of the segment's general account and guaranteed
separate account investment portfolios. The investment staff of The Hartford
executes the strategic investment decisions of the portfolio management unit,
including the identification and purchase of securities that fulfill the
objectives of the investment strategy group.
The primary investment objective of the Life segment general account and
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters (including the management of the interest rate
sensitivity of invested assets to that of policyholder obligations). The segment
is exposed to two primary sources of investment risk: credit risk, relating to
the uncertainty associated with the continued ability of a given obligor to make
timely payments of principal and interest, and interest rate risk, relating to
the market price and/or cash flow variability associated with changes in market
yield curves. Credit risk is managed through industry and issuer diversification
and asset allocation. Interest rate risk is managed as part of the segment's
asset/liability management strategies, including the use of certain hedging
techniques (which may include the use of certain financial derivatives), product
design, such as the use of the market value adjustment feature and surrender
charges, and proactive monitoring and management of certain non-guaranteed
elements of the segment's products (such as the resetting of credited interest
rates for policies that permit such adjustments). For a further discussion of
hedging strategies, including derivatives utilization, see the discussion on
Asset and Liability Management Strategies below, as well as the Notes to
Consolidated Financial Statements.
During 1996, the Life segment continued its objective of managing exposure to
securities that "underperform" in a falling interest rate environment. The
segment concentrated on reducing exposure to CMO and MBS asset sectors, and
re-deployed the funds into public and private corporate bonds, and other
nonresidential asset-backed securities. At December 31, 1996, holdings in CMO
and residential MBS were $1.5 billion, or 12%, of total invested assets
excluding policy loans compared to $2.7 billion, or 23%, at December 31, 1995.
At December 31, 1996, approximately 10.3% of the segment's fixed maturity
portfolio was invested in private placement securities (including Rule 144A
offerings). Private placement securities are generally less liquid than public
securities. However, covenants for private placements are generally designed to
mitigate the impact of such increased liquidity risk. Most of the private
placement securities in the segment's portfolio are rated by rating agencies.
Invested assets, excluding separate accounts, totaled $16.3 billion at December
31, 1996 and were comprised of $12.2 billion of fixed maturities, $3.8 billion
of policy loans, and other investments of $276. Policy loans, which carry a
weighted-average interest rate of 11.9%, as of December 31, 1996, are secured by
the cash value of the life policy. These loans do not mature in a conventional
sense, but expire in conjunction with the related policy liabilities. The table
below summarizes fixed maturity holdings by type.
- 23 -
<PAGE>
FIXED MATURITIES BY TYPE
---------------------------------------------------------------
1996 1995
- ------------------------ ------------------- -------------------
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- ----------------------------------------------------------------
Corporate $6,536 53.7% $5,146 45.0%
CMO 1,050 8.6% 2,071 18.1%
Gov't/Gov't agencies-U.S. 145 1.1% 260 2.3%
ABS 2,216 18.2% 1,782 15.6%
Gov't/Gov't agencies-For. 287 2.4% 223 1.9%
MBS-agency 401 3.3% 673 5.9%
Commercial MBS 1,007 8.3% 348 3.0%
Municipal-taxable 203 1.7% 130 1.1%
Short-term 332 2.7% 817 7.1%
- ----------------------------------------------------------------
TOTAL FIXED MATURITIES $12,177 100.0% $11,450 100.0%
- ----------------------------------------------------------------
The Life segment continued to maintain a high quality fixed maturity portfolio.
As of December 31, 1996, approximately 99.7% of the fixed maturity portfolio was
invested in investment-grade securities. The table below summarizes fixed
maturity holdings by credit quality.
FIXED MATURITIES BY CREDIT QUALITY
- ------------------------------------------------------------------
1996 1995
- ------------------------------------------------------------------
FAIR FAIR
CREDIT QUALITY VALUE PERCENT VALUE PERCENT
- ------------------------------------------------------------------
AAA $2,951 24.3% $3,688 32.2%
AA 1,445 11.9% 1,502 13.1%
A 4,737 38.9% 3,561 31.1%
BBB 2,404 19.7% 1,276 11.1%
Gov't 273 2.2% 523 4.6%
BB & below 35 0.3% 29 0.3%
Not rated -- -- 54 0.5%
Short-term 332 2.7% 817 7.1%
- ------------------------------------------------------------------
TOTAL FIXED MATURITIES $12,177 100.0% $11,450 100.0%
- ------------------------------------------------------------------
The estimated maturities of the fixed and variable rate investments in the
general account, along with the respective yields at December 31, 1996, are
reflected below. Asset-backed securities including CMO and MBS are distributed
to maturity year based on the Company's estimate of the rate of future
prepayments of principal over the remaining lives of the securities. These
estimates are developed using prepayment speeds reported in broker consensus
data and can be expected to vary from actual experience. Expected maturities
differ from contractual maturities due to call or prepayment provisions.
<TABLE>
<CAPTION>
1997 1998 1999 2000 2001 Thereafter Total
- -----------------------------------------------------------------------------------------------------------------------
ASSET-BACKED SECURITIES
Variable Rate*
<S> <C> <C> <C> <C> <C> <C> <C>
Amortized cost $ 112 $ 65 $ 84 $ 183 $ 114 $ 675 $1,233
Market value $ 111 $ 85 $ 111 $ 180 $ 112 $ 634 $1,233
Pre-tax yield ** 5.87% 6.67% 6.64% 6.49% 6.72% 6.93% 6.71%
Fixed Rate
Amortized cost 672 466 491 476 331 1,013 3,449
Market value 674 466 490 479 333 999 3,441
Pre-tax yield ** 6.82% 7.04% 6.84% 7.23% 7.20% 7.23% 7.07%
BONDS AND NOTES
Variable Rate *
Amortized cost 52 92 33 91 15 186 469
Market value 52 70 33 92 15 185 447
Pre-tax yield ** 6.41% 5.81% 5.62% 5.97% 5.95% 6.81% 6.30%
Fixed Rate
Amortized cost 925 396 704 737 623 3,592 6,977
Market value 940 397 708 743 624 3,644 7,056
Pre-tax yield ** 6.77% 7.14% 6.69% 6.81% 6.80% 7.22% 7.02%
TOTAL FIXED MATURITIES
Amortized cost $1,761 $1,019 $1,312 $1,487 $1,083 $5,466 $12,128
Market value $1,777 $1,018 $1,342 $1,494 $1,084 $5,462 $12,177
Pre-tax yield ** 6.72% 6.94% 6.72% 6.85% 6.90% 7.17% 6.97%
- -----------------------------------------------------------------------------------------------------------------------
<FN>
*Variable rate securities are instruments for which the coupon rates move
directly with or based upon an index rate. Included in holdings are
interest-only securities and inverse floaters which represent less than
1% and 2%, respectively, of the Life segment's invested assets.
Interest-only securities, for which cost approximates market, have an
average life of 5.1 years and earn an average yield of 14.70%. Inverse
floaters, for which cost approximates market, have an average life of 4.7
years and earn an average yield of 6.30%. Average yields are based upon
estimated cash flows using prepayment speeds reported in broker consensus
data.
** Pre-tax yield does not reflect yields on derivative instruments
although derivative adjustments are included in fixed maturity amortized
cost and market value.
- -----------------------------------------------------------------------------------------------------------------------
</FN>
</TABLE>
- 24 -
<PAGE>
Investment Results
- ------------------
The table below summarizes the Life segment's results for the past three years.
1996 1995 1994
---------------------------------------------------------------
Net investment income, before-tax $1,323 $1,114 $922
Yield on average invested assets,
before-tax [1] 8.51% 8.30% 8.56%
Net realized capital gains
(losses), before-tax -- $(4) $1
---------------------------------------------------------------
[1] Represents net investment income (excluding net realized capital gains
(losses)) divided by average invested assets at cost (fixed maturities at
amortized cost).
For the year ended December 31, 1996, before-tax net investment income totaled
$1.3 billion compared to $1.1 billion in 1995, an increase of 19%. Yields on
average invested assets increased to 8.51% in 1996 from 8.30% in 1995. The
increase in net investment income was primarily due to an increase in policy
loans, new business cash flow invested in fixed maturities and asset mix
changes. The increase in before-tax yield was primarily due to the increase in
policy loan yields; excluding policy loans, the before-tax yield decreased to
7.09% from 7.37% in 1995. The decrease in before-tax yield excluding policy
loans was the result of sales and maturities of higher yielding assets
reinvested at lower average yields.
For the year ended December 31, 1995, before-tax net investment income totaled
$1.1 billion compared to $922 in 1994, an increase of 21%. Before-tax yields on
average invested assets decreased to 8.30% in 1995 from 8.56% in 1994. The
increase in before-tax net investment income was primarily due to an increase in
policy loans and additional new business cash flow invested in fixed maturities.
There were no net realized capital gains (losses) in 1996. Net realized capital
losses decreased to a $(4) loss in 1995 from a $1 gain in 1994. During 1995,
certain mortgage-backed securities were written down to fair value in accordance
with generally accepted accounting principles. These writedowns amounted to
$(45) and were substantially offset by gains generated on the sale of other
fixed maturity investments.
Asset And Liability Management Strategies
- -----------------------------------------
The Life segment employs several risk management tools to quantify and manage
interest rate risk arising from its investments and interest sensitive
liabilities. Management monitors the changes in present value between assets and
liabilities resulting from various interest rate scenarios using integrated
asset/liability measurement systems and a proprietary system that simulates the
impacts of parallel and non-parallel yield curve shifts. Based on this current
and prospective information, management implements risk reducing techniques to
improve the match between assets and liabilities.
Derivatives play an important role in facilitating the management of interest
rate risk, creating opportunities to fund product obligations efficiently,
hedging against risks that affect the value of certain liabilities and adjusting
broad investment risk characteristics when dictated by significant changes in
market risks. As an end user of derivatives, the segment uses a variety of
derivatives, including swaps, caps, floors, forwards and exchange-traded
financial futures and options in order to hedge exposure to price, foreign
currency and/or interest rate risk on anticipated investment purchases or
existing assets and liabilities. The notional amounts of derivative contracts
represent the basis upon which pay and receive amounts are calculated and are
not reflective of credit risk for derivative contracts. Credit risk for
derivative contracts is limited to the amounts calculated to be due to the
Company on such contracts. The Company maintains prudent policies regarding the
financial stability and credit standing of its major counterparties and
typically requires credit enhancement provisions to further limit its credit
risk. Many of these derivative contracts are bilateral agreements that are not
assignable without the consent of the relevant counterparty. Notional amounts
pertaining to derivatives totaled $3.4 billion at December 31, 1996 ($2.7
billion related to life insurance investments and $749 related to life insurance
liabilities) and $4.0 billion at December 31, 1995 ($3.4 billion related to life
insurance investments and $565 related to life insurance liabilities).
Management believes that the use of derivatives allows the Company to sell more
innovative products, capitalize on market opportunities and execute a more
flexible investment strategy for its general account portfolio. The strategies
described below are used by the segment to manage the aforementioned risks
associated with its obligations.
Anticipatory Hedging -- For certain liabilities, the Life segment commits to the
- --------------------
price of the product prior to receipt of the associated premium or deposit. The
segment routinely executes anticipatory hedges to offset the impact of changes
in asset prices arising from interest rate changes, pending the premium or
deposit payment and the resulting purchase of an asset. These hedges involve
taking a long position in interest rate futures or entering into an interest
rate swap with duration characteristics equivalent to the associated liabilities
or anticipated investments. The notional amount of anticipatory hedges as of
December 31, 1996 and 1995 was $392 and $718, respectively.
Liability Hedging -- Several products obligate the Life segment to credit a
- ------------------
return to the contract holder which is indexed to a market rate. In order to
hedge risks associated with these products, the Life segment typically enters
into interest rate swaps to convert the contract rate into a rate that trades in
a more liquid and efficient market. This hedging strategy enables the Life
segment to customize contract terms and conditions to customer objectives and
satisfies the segment's asset/liability matching policy. Additionally, interest
rate swaps are used to convert certain fixed contract rates into floating rates,
thereby allowing them to be appropriately matched against floating rate assets.
The notional amount of derivatives used for liability hedging as of December 31,
1996 and 1995 was $749 and $565, respectively.
Asset Hedging -- To meet the various life policyholder obligations and to
- --------------
provide prudent investment risk diversification, the Life segment may combine
two or more financial instruments to achieve the investment characteristics that
match the associated liability. The use of derivatives in this regard
effectively transfers unwanted investment risks or attributes to others. The
selection of the appropriate derivatives
- 25 -
<PAGE>
depends on the investment risk, the liquidity and efficiency of the market, and
the asset and liability characteristics. The notional amount of asset hedges as
of December 31, 1996 and 1995 was $1.5 billion and $1.7 billion, respectively.
Portfolio Hedging -- The Life segment periodically compares the duration and
- ------------------
convexity of its portfolios of assets to their corresponding liabilities, and
enters into portfolio hedges to reduce any difference to acceptable levels.
Portfolio hedges reduce the mismatch between assets and liabilities and offset
the potential cash flow impact caused by interest rate changes. The notional
amount of portfolio hedges as of December 31, 1996 and 1995 was $755 and $1.0
billion, respectively.
Life Insurance Liability Characteristics
- ----------------------------------------
Insurance liabilities, other than non-guaranteed separate accounts, totaled
$27.3 billion, net of ceded reinsurance, at December 31, 1996 and were backed by
$37.0 billion in total assets including investments of $26.7 billion. Matching
of the duration of the investments with respective policyholder obligations is
an explicit objective of the Life segment's management strategy. The segment's
insurance policy liabilities, along with estimated duration periods based upon
internal actuarial assumptions, can be summarized based on investment needs in
the following five categories at December 31, 1996:
ESTIMATED DURATION YEARS [1]
(IN BILLIONS)
- --------------------------------------------------------------------
BALANCE AT LESS OVER
DECEMBER THAN 1 1-5 6-10 10
DESCRIPTION 31, 1996 YEAR YEARS YEARS YEARS
- --------------------------------------------------------------------
Fixed rate asset
accumulation vehicles $10.3 $0.7 $5.9 $3.7 $-
Indexed asset
accumulation vehicles 0.2 0.2 - - -
Interest credited asset
accumulation vehicles 13.6 4.2 5.1 3.7 0.6
Long-term pay out
liabilities 2.7 0.1 0.6 0.8 1.2
Short-term pay out
liabilities 0.5 0.5 - - -
- --------------------------------------------------------------------
TOTAL $27.3 $5.7 $11.6 $8.2 $1.8
- --------------------------------------------------------------------
[1] The duration of liabilities reflects management's assessment of the market
price sensitivity of the liabilities to changes in market interest rates,
and is not necessarily reflective of the projected liabilities' cash flows
under any specific scenario.
Fixed Rate Asset Accumulation Vehicles -- Products in this category require the
- ---------------------------------------
Life segment to pay a fixed rate for a certain period of time. The cash flows
are not interest sensitive because the products are written with a market value
adjustment feature and the liabilities have protection against the early
withdrawal of funds through surrender charges. The primary risk associated with
these products is that the spread between investment return and credited rate
may not be sufficient to earn the segment's targeted return. Product examples
include fixed rate annuities with a market value adjustment and fixed rate
guaranteed investment contracts. Contract duration is reflected above and is
dependent on the policyholder's choice of guarantee period. The weighted average
credited policyholder rate for these policyholder liabilities was 6.60% as of
December 31, 1996.
Indexed Asset Accumulation Vehicles -- Products in this category are similar to
- ------------------------------------
the fixed rate asset accumulation vehicles, but require the Life segment to pay
a rate that is determined by an external index. The amount and/or timing of cash
flows will therefore vary based on the level of the particular index. The
primary risks inherent in these products are similar to the fixed rate asset
accumulation vehicles, with an additional risk that changes in the index may
adversely affect profitability. Product examples include indexed-guaranteed
investment contracts with an estimated duration of up to two years. The weighted
average credited rate for these contracts was 5.78% as of December 31, 1996,
excluding policy loans.
Interest Credited Asset Accumulation Vehicles -- Products in this category
- -------------------------------------------------
credit interest to policyholders, subject to market conditions and minimum
guarantees. Policyholders may surrender at book value but are subject to
surrender charges for an initial period. The primary risks vary depending on the
degree of insurance element contained in the product. Product examples include
universal life contracts and the general account portion of the segment's
variable annuity products. Liability duration is short to intermediate-term and
is reflected in the table above. The average credited rate for these liabilities
was 5.52% as of December 31, 1996, excluding policy loans.
Long-term Pay Out Liabilities -- Products in this category are long-term in
- -------------------------------
nature and may contain significant actuarial (including mortality and morbidity)
pricing risks. The cash flows are not interest sensitive, but do vary based on
the timing and amount of benefit payments. The primary risks associated with
these products are that the benefits will exceed expected actuarial pricing
and/or the investment return will be lower than assumed in pricing. Product
examples include structured settlement contracts, on-benefit annuities (i.e.,
the annuitant is currently receiving benefits thereon) and long-term disability
contracts. Contract duration is generally 6 to 10 years but, at times, exceeds
30 years. Policy liabilities under these contracts are not interest rate
sensitive.
Short-term Pay Out Liabilities -- These liabilities are short-term in nature
- --------------------------------
with a duration of less than one year. The primary risks associated with these
products are determined by the non-investment contingencies such as mortality or
morbidity. Liquidity is of greater concern than for the long-term pay out
liabilities. Products include individual and group term life insurance contracts
and short-term disability contracts.
INTERNATIONAL
Consistent with the investment objectives of the North American Property &
Casualty segment, the investment objectives of the International segment are to
optimize after-tax returns on invested assets and preserve capital, while
meeting obligations to policyholders. The International segment primarily
comprises the investment activities of ITT London & Edinburgh, Zwolsche
Algemeene and ITT Ercos, which are primarily engaged in property and casualty
insurance.
- 26 -
<PAGE>
Investments are made in maturities and currencies which reflect the nature of
the liabilities.
Invested assets, excluding separate accounts, were $3.0 billion at December 31,
1996 and were comprised of fixed maturities of $2.5 billion and other
investments of $521, primarily equity securities. The table below summarizes
fixed maturity holdings by type.
FIXED MATURITIES BY TYPE
---------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- ----------------------------------------------------------------
Corporate $544 21.6% $261 10.8%
Gov't/Gov't agencies-U.S. 121 4.8% 57 2.4%
Gov't/Gov't agencies-For. 1,418 56.2% 1,203 49.8%
Short-term 440 17.4% 893 37.0%
- ------------------------ ---------- -------- --------- ---------
TOTAL FIXED MATURITIES $2,523 100.0% $2,414 100.0%
- ----------------------------------------------------------------
As of December 31, 1996, the fixed maturity portfolio consisted of 100%
investment grade securities with no security rated lower than A. Minimal use is
made of derivatives which, if purchased, are used for hedging market and foreign
exchange risk. The table below summarizes fixed maturity holdings by credit
quality.
FIXED MATURITIES BY CREDIT QUALITY
- -----------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------
FAIR FAIR
CREDIT QUALITY VALUE PERCENT VALUE PERCENT
- ----------------------------------------------------------------
AAA $1,876 74.4% $1,428 59.1%
AA 203 8.0% 89 3.7%
A 4 0.2% 4 0.2%
Short-term 440 17.4% 893 37.0%
- ----------------------------------------------------------------
TOTAL FIXED MATURITIES $2,523 100.0% $2,414 100.0%
- ----------------------------------------------------------------
Investment Results
- ------------------
The table below summarizes the International segment's results for the past
three years.
1996 1995 1994
---------------------------------------------------------------
Net investment income, before-tax $205 $183 $135
Yield on average invested assets,
before-tax [1] 7.05% 7.10% 6.10%
Net realized capital gains, before-tax $79 $48 $23
---------------------------------------------------------------
[1] Represents net investment income (excluding net realized capital gains)
divided by average invested assets at cost (fixed maturities at amortized
cost).
For the year ended December 31, 1996, before-tax net investment income totaled
$205 compared to $183 in 1995, an increase of 12%. Before tax yields on average
invested assets decreased to 7.05% in 1996 from 7.10% in 1995. The change in
income reflected the full year of investment results from ITT Ercos (acquired in
May, 1995), a change in asset composition favoring longer maturities, and a
modest increase in cash flow.
For the year ended December 31, 1995, before-tax net investment income totaled
$183 compared to $135 in 1994, an increase of 36%. Before-tax yields on average
invested assets increased to 7.10% in 1995 from 6.10% in 1994. The increase in
before-tax net investment income was primarily due to increased operating cash
flow and the acquisition of ITT Ercos in May 1995, while the increase in yield
was the result of higher yields in the international bond and equity market.
Net realized capital gains increased to $79 in 1996 from $48 in 1995 due to
increased sales in 1996 of both fixed maturity and equity securities. Net
realized capital gains increased to $48 in 1995 from $23 in 1994, again, the
result of greater sales of fixed maturity and equity securities.
RUNOFF
The primary objective of the Runoff segment is to ensure the full and timely
payment of all runoff liabilities. The ongoing strategy of this segment is to
match closely the interest rate sensitivities of the assets with those of the
liabilities.
Invested assets were $5.5 billion at December 31, 1996 and were mostly comprised
of fixed maturities. The Runoff segment uses derivatives related to the Closed
Book GRC. As of December 31, 1996 and 1995, the Runoff segment had derivatives
with an aggregate notional amount of $7.5 billion and $5.6 billion,
respectively, for asset/liability management purposes. The Company entered into
various hedge transactions related to Closed Book GRC with a notional amount of
$4.0 billion in September and October 1996 which substantially eliminated
further fluctuation in fair value of the Closed Book GRC investments due to
interest rate changes. (For additional information on Closed Book GRC, see the
Runoff section.) The table below summarizes fixed maturity holdings by type.
FIXED MATURITIES BY TYPE
- ----------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------
FAIR FAIR
TYPE VALUE PERCENT VALUE PERCENT
- ----------------------------------------------------------------
Corporate $2,366 43.3% $2,587 39.0%
CMO 1,140 20.8% 1,691 25.5%
Gov't/Gov't agencies-U.S. 259 4.7% 362 5.4%
ABS 625 11.5% 649 9.8%
Gov't/Gov't agencies-For. 146 2.7% 145 2.2%
MBS-agency 37 0.7% 218 3.3%
Commercial MBS 179 3.3% 77 1.1%
Municipal-taxable 85 1.6% 87 1.3%
Short-term 620 11.4% 821 12.4%
- ----------------------------------------------------------------
TOTAL FIXED MATURITIES $5,457 100.0% $6,637 100.0%
- ----------------------------------------------------------------
The Runoff segment maintains a greater than 99% investment grade fixed maturity
portfolio. The table below summarizes fixed maturity holdings by credit quality.
FIXED MATURITIES BY CREDIT QUALITY
- ----------------------------------------------------------------
1996 1995
- ----------------------------------------------------------------
FAIR FAIR
CREDIT QUALITY VALUE PERCENT VALUE PERCENT
- ----------------------------------------------------------------
AAA $1,871 34.2% $2,804 42.2%
AA 679 12.4% 691 10.4%
A 1,722 31.6% 1,615 24.3%
BBB 255 4.7% 357 5.4%
Gov't 296 5.4% 272 4.1%
BB & below 14 0.3% 12 0.2%
Not rated -- -- 65 1.0%
Short-term 620 11.4% 821 12.4%
- ----------------------------------------------------------------
TOTAL FIXED MATURITIES $5,457 100.0% $6,637 100.0%
- ----------------------------------------------------------------
- 27 -
<PAGE>
Investment Results
- ------------------
The table below summarizes the Runoff segment's results for the past three
years.
1996 1995 1994
---------------------------------------------------------------
Net investment income, before-tax $334 $477 $596
Yield on average invested assets,
before-tax [1] 5.27% 5.85% 7.13%
Net realized capital gains
(losses), before-tax $(220) $29 $(3)
---------------------------------------------------------------
[1] Represents net investment income (excluding net realized capital gains
(losses)) divided by average invested assets at cost (fixed maturities at
amortized cost).
For the year ended December 31, 1996, before-tax net investment income totaled
$334 compared to $477 in 1995, a decrease of 30%. Before-tax yields on average
invested assets decreased to 5.27% in 1996 from 5.85% in 1995. Before-tax net
investment income decreased primarily due to asset sales and maturities in the
Closed Book GRC. The decrease in yield was primarily the result of sales and
maturities of higher yielding securities in the Closed Book GRC.
For the year ended December 31, 1995, before-tax net investment income totaled
$477 compared to $596 in 1994, a decrease of 20%. Before-tax yields on average
invested assets decreased to 5.85% in 1995 from 7.13% in 1994. The decrease in
before-tax net investment income was primarily the result of sales and
maturities of higher yielding securities and hedge costs in the Closed Book GRC.
The decrease in yield resulted primarily from impact related to prepayments and
hedge costs associated with the Closed Book GRC.
Net realized capital losses were $220 in 1996 compared to a $29 gain in 1995,
primarily due to Closed Book GRC. (For additional information regarding Closed
Book GRC see the Runoff section.) Net realized capital gains increased to $29 in
1995 from a $3 loss in 1994 primarily due to gains taken in Fencourt.
RISK MANAGEMENT
The Hartford has a disciplined approach to managing the risks arising from its
assets and liabilities. Portfolio management is organized to bring together
portfolios with similar investment criteria and objectives, group common styles
and provide more consistent investment management. All investment activity,
including setting policy and defining acceptable risk levels and counterparty
qualifications, is subject to the regular review and approval by The Hartford's
Finance Committee. The Hartford has a stringent investment credit policy that
focuses on credit quality, limits credit concentrations, encourages
diversification and requires frequent creditworthiness reviews. The Company has
established exposure limits, diversification standards and review procedures for
all credit risk whether borrower, issuer or counterparty. The Hartford analyzes
interest rate risk using various models including a proprietary, multi-scenario
cash flow projection model that forecasts liabilities and their supporting
investments, including derivatives.
The Investment division has a compliance function to affirm that derivatives
transactions meet Company policy, are effectively hedging identified risks, and
remain appropriately correlated. All derivatives strategies satisfy at least one
of the following objectives: to hedge risk arising from interest rate, price or
foreign exchange rate volatility; to manage liquidity; or to control transaction
costs. The Company's derivatives counterparty exposure policy establishes
market-based credit limits, favors long-term financial stability and
creditworthiness, and typically requires credit enhancement/credit risk reducing
agreements. To initiate contracts, counterparties must generally be rated A-/A3
or better by rating agencies. Credit risk is measured as the amount owed to The
Hartford based on current market conditions. Payment obligations between The
Hartford and its counterparties are netted and quantified monthly. Collateral is
pledged/held to the extent the current value of derivatives exceed exposure
thresholds. As of December 31, 1996, the Company's counterparty exposure, net of
$17 collateral held, was $27.
SEPARATE ACCOUNT PRODUCTS
Separate account products are those for which a separate investment and
liability account is maintained on behalf of the policyholder. Separate accounts
reflect two categories of risk assumption: non-guaranteed separate accounts
totaling $39.9 billion, wherein the policyholder assumes substantially all the
risk and reward, and guaranteed separate accounts totaling $10.6 billion,
wherein The Hartford contractually guarantees either a minimum return or account
value to the policyholder. Investment strategy varies by fund choice, as
outlined in the fund prospectus or separate account plan of operations.
Non-guaranteed products include variable annuities and variable life contracts.
Guaranteed separate account products primarily consist of modified guaranteed
individual annuity and modified guaranteed life insurance, and generally include
market value adjustment provisions to mitigate the disintermediation risk upon
surrenders.
Additional investment risk is hedged using a variety of derivatives which
totaled $86 and $133 in carrying value and $2.4 billion and $2.7 billion in
notional amounts at December 31, 1996 and 1995, respectively. For a further
discussion of strategies, including derivative utilization, see the previous
discussion on Asset and Liability Management Strategies as well as the Notes to
Consolidated Financial Statements.
- 28 -
<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 and equity,
summarized as follows:
<TABLE>
<CAPTION>
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term debt $ 500 $ 886 $ 902
Long-term debt 1,032 1,022 596
Company obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely parent junior subordinated debentures ("QUIPS") 1,000 -- --
Subsidiary preferred stock -- -- 86
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 2,532 $ 1,908 $ 1,584
-----------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain (loss), net of tax $ 4,168 $ 4,457 $ 4,403
Unrealized gain (loss), net of tax 352 245 (1,219)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 4,520 $ 4,702 $ 3,184
-----------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION EXCLUDING UNREALIZED GAIN (LOSS), NET OF TAX $ 6,700 $ 6,365 $ 5,987
-----------------------------------------------------------------------------------------------------------------------
Debt to equity excluding unrealized gain (loss), net of tax 61% 43% 36%
Debt to capitalization excluding unrealized gain (loss), net of tax 38% 30% 26%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
CAPITALIZATION
The Hartford's total capitalization excluding unrealized gain (loss), net of
tax, increased by $335 in 1996. This change was a result of additional net
borrowings totaling $624, partially offset by a net loss of $99 and dividends
declared of $188 on The Hartford common stock.
In 1995, total capitalization excluding unrealized gain (loss), net of tax,
increased by $378 from 1994 as a result of earnings of $559, additional net
borrowings of $410 and capital contributions of $250, partially offset by
dividends declared of $779 on The Hartford common stock held by ITT prior to
December 20, 1995 and redemption of subsidiary preferred stock totaling $86.
DEBT
Total debt in 1996 increased $624 compared to a $410 increase in the prior year.
The Hartford used the proceeds of these additional borrowings to fund the
insurance operations of its subsidiaries, and in 1995, to partially repay
outstanding commercial paper and other short-term debt, redeem subsidiary
preferred stock and pay dividends.
As of December 31, 1996, The Hartford had an unsecured aggregate $2.0 billion
credit facility with twenty-nine participating banks which is comprised of a
$1.5 billion five year revolving credit facility and a $500 short-term credit
facility. This facility is available for general corporate purposes and to
provide additional support to the Company's existing commercial paper program.
At December 31, 1996, there were no outstanding borrowings under the facility.
On February 10, 1997, Hartford Life, Inc. ("HLI"), a wholly-owned subsidiary of
The Hartford, entered into a $1.3 billion unsecured short-term credit facility
with four banks.
During 1996, The Hartford expanded its commercial paper program by increasing
the maximum allowable outstanding amount of unsecured short-term commercial
paper notes from $1.0 billion to $2.0 billion.
In connection with a shelf registration statement filed with and declared
effective by the Securities and Exchange Commission ("SEC") in 1995, The
Hartford registered for sale up to an aggregate $1.0 billion of debt securities
and preferred stock. In 1995, the Company issued and sold $500 in senior debt
securities. The intended use of the proceeds from the sale of such securities
has been and will continue to be primarily for the repayment and/or replacement
of outstanding commercial paper and other short-term debt. This reflects The
Hartford's strategy of managing its capital within acceptable ranges of
volatility and financial ratings while achieving the lowest long-run cost of
capital that is reasonably possible. On October 2, 1996, this shelf registration
statement was amended for an additional $1.25 billion of securities, making an
aggregate of $1.75 billion available for sale. The amended registration
statement also expanded the type of securities which could be offered under this
shelf registration statement by including provisions for the offering of common
stock, depositary shares, warrants, stock purchase contracts, stock purchase
units and junior subordinated deferrable interest debentures of the Company,
preferred securities of any of the Hartford Trusts (referred to below) and
guarantees by the Company with respect to the preferred securities of any of the
Hartford Trusts. After the issuance of QUIPS on October 30, 1996 discussed
below, The Hartford had $1.25 billion remaining on this shelf registration at
December 31, 1996.
On January 19, 1996, The Hartford and several wholly-owned special purpose
trusts ("Hartford Trusts") formed by The Hartford filed with the SEC a shelf
registration statement for the potential offering and sale of $500 of debt
securities and preferred stock, including up to an aggregate $500 Junior
Subordinated Deferrable Interest Debentures of The Hartford and Preferred
Securities of the Hartford Trusts which were issued as discussed below. (For
additional information, see Notes 5 and 6 of Notes to Consolidated Financial
Statements.)
- 29 -
<PAGE>
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES ("QUIPS")
On February 28, 1996, Hartford Capital I, a subsidiary trust, issued 20,000,000
Series A, 7.7% Cumulative Quarterly Income Preferred Securities. The proceeds
from the sale of these securities were used to acquire $500 of Junior
Subordinated Deferrable Interest Debentures from The Hartford. The Hartford used
the proceeds from the sale of such debentures for the partial repayment of
outstanding commercial paper and short-term bank indebtedness. (For additional
information, see Note 6 of Notes to Consolidated Financial Statements.)
On October 30, 1996, Hartford Capital II, a subsidiary trust, issued 20,000,000,
Series B, 8.35% Cumulative Quarterly Income Preferred Securities. The proceeds
from the sale of these securities were used to acquire $500 of Junior
Subordinated Deferrable Interest Debentures from The Hartford. The Hartford used
the proceeds from the sale of such debentures for general corporate purposes.
(For additional information, see Note 6 of Notes to Consolidated Financial
Statements.)
SUBSIDIARY PREFERRED STOCK
During 1995, Hartford Fire Insurance Company ("Hartford Fire"), a wholly-owned
subsidiary of The Hartford, redeemed $86 of its Class A Preferred Stock - Series
2.
DIVIDENDS
In 1996, The Hartford declared $188 and paid $140 in dividends to shareholders.
In 1995, The Hartford paid dividends to ITT consisting of cash of $384 and
non-cash of $395 prior to the Distribution.
On October 17, 1996, The Hartford declared a dividend on its common stock of
$0.40 per share payable on January 2, 1997 to all shareholders of record as of
November 29, 1996.
In 1997, The Hartford expects to continue paying quarterly dividends on its
common stock of $0.40 per share. Dividend decisions will be based on, and
affected by, a number of factors, including the operating results and financial
requirements of The Hartford on a stand-alone basis and the impact of the
regulatory restrictions discussed in the Liquidity Requirements section below.
RATINGS
The following table summarizes The Hartford's significant U.S. member companies'
financial ratings from the major independent rating organizations as of February
10, 1997:
A.M. DUFF STANDARD
BEST & & POOR'S MOODY'S
PHELPS
- ----------------------------------------------------------------
INSURANCE RATINGS:
Hartford Fire A+ AA AA Aa3
Hartford Life A+ AA+ AA Aa3
Hartford Life & Accident A+ AA+ AA --
ITT Hartford Life &
Annuity A+ AA+ AA --
- ----------------------------------------------------------------
OTHER RATINGS:
ITT Hartford Group, Inc.:
Senior debt -- A+ A A2
Commercial paper -- D-1 A-1 P-1
Hartford Capital I and
II quarterly income
preferred securities -- A A- A2
- ----------------------------------------------------------------
On February 10, 1997, Standard & Poor's reaffirmed its claims-paying ability
ratings and various other ratings of The Hartford group of companies. On
September 24, 1996, Standard & Poor's announced that it had reduced the
claims-paying ability ratings and various other ratings of The Hartford group of
companies. In announcing the rating change, Standard & Poor's stated that the
action was based primarily on increased concern with the overall strength of The
Hartford's consolidated capital, partially offset by a superior business
position within the markets that The Hartford operates.
On January 23, 1997, Moody's Investors Service announced that it downgraded
various ratings of The Hartford and its subsidiaries, including the financial
strength ratings of The Hartford's insurance subsidiaries, and the ratings
assigned to the quarterly income preferred securities of Hartford Capital I and
Hartford Capital II. Moody's indicated that the action reflected The Hartford's
financial leverage, the remaining risks as to adequacy of loss reserves related
to the Company's environmental and asbestos exposures, and the continuing
intense competition in The Hartford's ongoing business segments.
On February 10, 1997, ratings from Duff & Phelps were reaffirmed for The
Hartford's significant U.S. member companies. On February 10, 1997, A.M. Best
placed the ratings of The Hartford's significant member companies under review
with developing implications.
LIQUIDITY REQUIREMENTS
The liquidity requirements of The Hartford have been and will continue to be met
by funds from operations as well as the issuance of commercial paper, debt
securities and bank borrowings. The principal sources of funds are premiums and
investment income as well as maturities and sales of invested assets. The
Hartford is a holding company which receives operating cash flow in the form of
dividends from its subsidiaries, enabling it to service debt and pay business
expenses.
Dividends to ITT Hartford Group, Inc. from its subsidiaries are restricted. The
payment of dividends by Connecticut-domiciled insurers is limited under the
insurance holding
- 30 -
<PAGE>
company laws of Connecticut. Hartford Fire adheres to these laws which require
notice to and approval by the state insurance commissioner for the declaration
or payment of any dividend, which together with other dividends or distributions
made within the preceding twelve months, exceeds the greater of (i) 10% of the
insurer's policyholder surplus as of December 31 of the preceding year or (ii)
net income (or net gain from operations, if such company is a life insurance
company) for the twelve-month period ending on the thirty-first day of December
last preceding, in each case determined under statutory insurance accounting
policies. In addition, if any dividend of a Connecticut-domiciled insurer
exceeds the insurer's earned surplus, it requires the prior approval of the
Connecticut Insurance Commissioner. For this reason, any statutory dividend
which may be paid to ITT Hartford Group, Inc. by its insurance subsidiaries in
1997 requires prior approval.
The insurance holding company laws of the other jurisdictions in which The
Hartford's insurance subsidiaries are incorporated (or deemed commercially
domiciled) generally contain similar (although in certain instances somewhat
more restrictive) limitations on the payment of dividends.
The primary uses of funds are to pay claims, policy benefits, operating expenses
and commissions, and to purchase new investments. In addition, The Hartford
carries a significant short-term investment position and accordingly does not
anticipate selling intermediate and long-term fixed maturity investments to meet
any liquidity needs. For a discussion of the Company's investment objectives and
strategies, see Investments section.
DISTRIBUTION AGREEMENT
As part of the Distribution Agreement entered into by The Hartford, ITT
Destinations, Inc., and ITT Industries, Inc. ("the former ITT subsidiaries"),
provisions were outlined addressing the disposition of shared liabilities. A
shared liability is defined as a liability arising out of, or related to,
business conducted by ITT prior to the Distribution that was not otherwise
specifically related to one of the former ITT subsidiaries. Under the
Distribution Agreement, responsibility for shared liabilities shall be borne
equally by each of the former ITT subsidiaries, including related attorney's
fees and other out-of-pocket expenses. As of December 31, 1996, all known
liabilities covered by this agreement have been accrued.
TAX ALLOCATION AGREEMENT
ITT and The Hartford have entered into a Tax Allocation Agreement whereby The
Hartford will pay a share of ITT's consolidated tax liability for the tax years
that The Hartford was included in ITT's consolidated federal income tax return.
The Tax Allocation Agreement provides for the attribution to specific companies
of any state, local and foreign taxes related to periods prior to December 20,
1995.
RISK-BASED CAPITAL
The National Association of Insurance Commissioners ("NAIC") adopted regulations
establishing minimum capitalization requirements based on risk-based capital
("RBC") formulas for both property and casualty companies (effective December
31, 1994) and life companies (effective December 31, 1993). The requirements
consist of formulas which identify companies that are undercapitalized and
require specific regulatory actions. RBC is calculated for property and casualty
companies after adjusting capital for certain underwriting, asset, credit and
off-balance sheet risks. The RBC formula for life companies establishes capital
requirements relating to insurance, business, asset and interest rate risks. As
of December 31, 1996, each of The Hartford's insurance subsidiaries within the
North American Property & Casualty and Life segments have more than sufficient
capital to meet the NAIC's RBC requirements.
CASH FLOW
1996 1995 1994
- ----------------------------------------------------------------
Cash provided by operating
activities $ 994 $ 1,094 $ 823
Cash used for investing
activities $ (1,035) $ (1,597) $ (3,336)
Cash provided by financing
activities $ 59 $ 533 $ 2,509
Cash - end of year $ 112 $ 95 $ 55
- ----------------------------------------------------------------
During 1996, cash provided by operating activities decreased from the prior year
due primarily to increased policy acquisition costs related to strong growth in
the Life segment. During 1995, cash provided by operating activities improved
over 1994 due to increased revenues and collections on reinsurance recoverables.
The changes in cash provided by both investing and financing activities between
years were primarily due to declines in investment-type contracts written in the
Life segment coupled with increases in investment-type contract maturities
resulting in cash (used) provided of $(390), $530 and $2,584 for the years ended
December 31, 1996, 1995 and 1994, respectively. These funds, along with cash
reserves, were invested in securities held by The Hartford. Operating cash flows
in each of the last three years have been more than adequate to meet liquidity
requirements.
SUBSEQUENT EVENTS
On February 10, 1997, HLI filed a registration statement with the Securities and
Exchange Commission relating to an initial public offering of up to 20% of HLI
common stock. HLI is the holding company parent of The Hartford's significant
life insurance and related subsidiaries. Management intends to use the proceeds
from the offering to reduce certain debt outstanding, to fund growth
initiatives, and for other general corporate purposes. Management of The
Hartford believes the offering will strengthen the Company's financial position
and flexibility. If and when the offering is completed, The Hartford's current
intent is to continue to beneficially own at
- 31 -
<PAGE>
least 80% of HLI, but it is under no contractual obligation to do so.
On February 14, 1997, HLI filed a shelf registration statement for the issuance
and sale of up to $1.0 billion in the aggregate of senior debt securities,
subordinated debt securities and preferred stock of HLI ("the HLI securities").
HLI intends to use the proceeds from any offering for the repayment of debt,
including outstanding commercial paper and other third party indebtedness and
the satisfaction of other obligations, for working capital, capital
expenditures, investments in or loans to subsidiaries and for other general
corporate purposes.
================================================================================
REGULATORY INITIATIVES
================================================================================
LEGISLATIVE INITIATIVES
Although the Federal government does not directly regulate the insurance
business, Federal initiatives often have an impact on the insurance industry in
a variety of ways. Legislation has not been introduced in the current Congress
but has in recent sessions which, if enacted, would result in substantially
greater Federal regulation of the property and casualty and life insurance
industries. Current and proposed Federal measures which may significantly affect
the life insurance business include medical testing for insurability, tax law
changes affecting the tax treatment of life insurance products and its impact on
the relative desirability of various personal investment vehicles and proposed
legislation to prohibit the use of gender in determining insurance and pension
rates and benefits. Such measures which may significantly impact the property
and casualty industry include possible modifications to the Superfund program,
the tax laws governing property and casualty insurance companies, Federal
catastrophe fund legislation and tort reform proposals.
INSOLVENCY FUND
In all states, insurers licensed to transact certain classes of insurance are
required to become members of an insolvency fund. In most states, in the event
of the insolvency of an insurer writing any such class of insurance in the
state, all members of the fund are assessed to pay certain claims of the
insolvent insurer. A particular state's fund assesses its members based on their
respective written premiums in the state for the classes of insurance in which
the insolvent insurer is engaged. Assessments are generally limited for any year
to one or two percent of premiums written per year depending on the state. Such
assessments paid by The Hartford approximated $14 in 1996, $15 in 1995 and $23
in 1994.
================================================================================
EFFECT OF INFLATION
================================================================================
The rate of inflation as measured by the change in the average consumer price
index has not had a material effect on the revenues or operating results of The
Hartford during the three most recent fiscal years.
- 32 -
<PAGE>
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE HARTFORD
Certain of the information called for by Item 10 is set forth in the definitive
proxy statement for the 1997 annual meeting of shareholders (the "Proxy
Statement") filed or to be filed by The Hartford with the Securities and
Exchange Commission within 120 days after the end of the last fiscal year
covered by this Form 10-K under the caption "Item 1. Election of Directors -
Directors and Nominees" and "The Board of Directors and Its Committees - Section
16(a) Beneficial Ownership Reporting Compliance" and is incorporated herein by
reference. Additional information required by Item 10 regarding The Hartford's
executive officers is set forth in Item 1 of this Form 10-K under the caption
"Executive Officers of The Hartford" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is set forth in the Proxy Statement under
the captions "Compensation of Executive Officers" and "The Board of Directors
and its Committees - Directors' Compensation" and is incorporated herein by
reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is set forth in the Proxy Statement under
the caption "Stock Ownership of Directors, Executive Officers and Certain
Shareholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. Consolidated Financial Statements. See Index to Consolidated Financial
Statements elsewhere herein.
2. Consolidated Financial Statement Schedules. See Index to Consolidated
Financial Statement Schedules elsewhere herein.
3. Exhibits. See Exhibit Index elsewhere herein.
(b) On October 18, 1996, The Hartford filed a Form 8-K, reporting under Item 5,
Other Events, a press release announcing third quarter losses due to asbestos
and environmental and Closed Book GRC charges, and the election of Ramani Ayer
as the Company's next chairman.
(c) See Item 14(a)(3).
(d) See Item 14(a)(2).
- 33 -
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page(s)
Report of Management F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the three years ended
December 31, 1996 F-3
Consolidated Balance Sheets as of December 31, 1996 and 1995 F-4
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1996 F-5
Consolidated Statements of Cash Flows for the three years
ended December 31, 1996 F-6
Notes to Consolidated Financial Statements F-7-26
Summary of Investments - Other Than Investments in Affiliates S-1
Supplementary Condensed Financial Statements S-2-3
Supplementary Insurance Information S-4
Reinsurance S-5
Valuation and Qualifying Accounts S-6
Supplemental Information Concerning Property and Casualty
Insurance Operations S-7
REPORT OF MANAGEMENT
The management of ITT Hartford Group, Inc. ("The Hartford") is responsible for
the preparation and integrity of information contained in the accompanying
consolidated financial statements and other sections of the Annual Report. The
financial statements are prepared in accordance with generally accepted
accounting principles, and, where necessary, include amounts that are based on
management's informed judgments and estimates. Management believes these
statements present fairly The Hartford's financial position and results of
operation, and, that any other information contained in the Annual Report is
consistent with the financial statements.
Management has made available The Hartford's financial records and related data
to Arthur Andersen LLP, independent public accountants, in order for them to
perform an audit of The Hartford's consolidated financial statements. Their
report appears on page F-2.
An essential element in meeting management's financial responsibilities is The
Hartford's system of internal controls. These controls, which include accounting
controls and the internal auditing program, are designed to provide reasonable
assurance that assets are safeguarded, and transactions are properly authorized,
executed and recorded. The controls, which are documented and communicated to
employees in the form of written codes of conduct and policies and procedures,
provide for careful selection of personnel and for appropriate division of
responsibility. Management continually monitors for compliance, while The
Hartford's internal auditors independently assess the effectiveness of the
controls and make recommendations for improvement. Also, Arthur Andersen LLP
took into consideration The Hartford's system of internal controls in
determining the nature, timing and extent of its audit tests.
Another important element is management's recognition of its responsibility for
fostering a strong, ethical climate, thereby ensuring that The Hartford's
affairs are transacted according to the highest standards of personal and
professional conduct. The Hartford has a long-standing reputation of integrity
in business conduct and utilizes communication and education to create and
fortify a strong compliance culture.
The Audit Committee of the Board of Directors of The Hartford, composed of
non-employee directors, meets periodically with the external and internal
auditors to evaluate the effectiveness of work performed by them in discharging
their respective responsibilities and to assure their independence and free
access to the Committee.
F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO ITT HARTFORD GROUP, INC.:
We have audited the accompanying Consolidated Balance Sheets of ITT Hartford
Group, Inc. ("The Hartford") (a Delaware corporation) and subsidiaries as of
December 31, 1996 and 1995, and the related Consolidated Statements of Income,
Stockholders' Equity and Cash Flows for each of the three years in the period
ended December 31, 1996. These consolidated financial statements and the
schedules referred to below are the responsibility of The Hartford's management.
Our responsibility is to express an opinion on these financial statements and
the schedules based on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present
fairly, in all material respects, the financial position of The Hartford and
subsidiaries as of December 31, 1996 and 1995, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1996 in conformity with generally accepted accounting principles.
As discussed in Note 1 of Notes to Consolidated Financial Statements, The
Hartford adopted new accounting standards promulgated by the Financial
Accounting Standards Board, changing its method of accounting, effective January
1, 1994, for certain investments in debt and equity securities. The Hartford
also changed, effective January 1, 1994, its method used to discount certain
workers' compensation liabilities.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the Index to
Consolidated Financial Statements and Schedules are presented for the purpose of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
February 10, 1997
F-2
<PAGE>
<TABLE>
<CAPTION>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
-------------------------------------
(In millions, except for per share data) 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C>
Earned premiums $ 10,076 $ 9,628 $ 8,753
Net investment income 2,523 2,420 2,259
Net realized capital gains (losses) (126) 102 90
- ---------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 12,473 12,150 11,102
----------------------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 8,942 7,769 7,314
Amortization of deferred policy acquisition costs 1,678 1,658 1,513
Other expenses 2,171 1,981 1,423
- ---------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 12,791 11,408 10,250
----------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (318) 742 852
Income tax expense (benefit) (219) 180 214
Dividends on subsidiary preferred stock -- (3) (6)
- ---------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES (99) 559 632
Cumulative effect of accounting changes, net of tax expense of 7 -- -- 12
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (99) $ 559 $ 644
----------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE
Income (loss) before cumulative effect of accounting changes $ (0.84) $ 4.77 $ 5.40
Cumulative effect of accounting changes -- -- 0.10
- ---------------------------------------------------------------------------------------------------------------------
Net income (loss) $ (0.84) $ 4.77 $ 5.50
- ---------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding (1) 117.3 117.1 117.1
- ---------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 1.60 -- --
- ---------------------------------------------------------------------------------------------------------------------
<FN>
(1) Actual number of weighted average common shares outstanding at December 31,
1995 of 117.1 is retroactively presented for the years ended December 31,
1995 and 1994.
</FN>
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral
part of the above statements.
F-3
<PAGE>
<TABLE>
<CAPTION>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
-------------------------------
(In millions, except for share data) 1996 1995
- --------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments
- -----------
Fixed maturities, available for sale, at fair value (amortized cost of $31,178
<S> <C> <C>
and $30,892) $ 31,449 $ 31,168
Equity securities, available for sale, at fair value (cost of $1,581 and $1,192) 1,865 1,342
Policy loans, at outstanding balance 3,839 3,380
Other investments, at cost 486 785
- --------------------------------------------------------------------------------------------------------------------------
Total investments 37,639 36,675
Cash 112 95
Premiums receivable and agents' balances 1,797 1,890
Reinsurance recoverables 11,229 11,801
Deferred policy acquisition costs 3,535 2,945
Deferred income tax 1,480 1,150
Other assets 2,596 2,451
Separate account assets 50,452 36,848
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 108,840 $ 93,855
====================================================================================================================
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 18,303 $ 17,536
Life 4,371 3,894
Other policy claims and benefits payable 22,220 22,770
Unearned premiums 2,797 2,766
Short-term debt 500 886
Long-term debt 1,032 1,022
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely parent junior subordinated debentures 1,000 --
Other liabilities 3,645 3,431
Separate account liabilities 50,452 36,848
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 104,320 89,153
====================================================================================================================
STOCKHOLDERS' EQUITY
Common stock - authorized 200,000,000, issued 119,194,412 and
118,762,331 shares, par value $0.01 1 1
Treasury stock - 1,638,000 shares (30) (30)
Capital surplus 1,642 1,636
Cumulative translation adjustments 40 48
Unrealized gain on securities, net of tax 352 245
Retained earnings 2,515 2,802
- --------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 4,520 4,702
====================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 108,840 $ 93,855
====================================================================================================================
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-4
<PAGE>
<TABLE>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
(In millions) Shares
Amounts (in thousands)
------------------------------------------- ------------------------------
1996 1995 1994 1996 1995
------------------------------------------- ------------------------------
COMMON STOCK AND CAPITAL SURPLUS
<S> <C> <C> <C> <C>
Balance, beginning of year $ 1,637 $ 1,357 $ 1,357 118,762 --
The Hartford Distribution: [1]
Issuance of common stock in connection
with the Distribution -- -- -- -- 117,069
Common stock issued to a subsidiary of
the Company -- 30 -- -- 1,408
Other -- -- -- -- 230
Other 6 250 -- 432 55
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 1,643 1,637 1,357 119,194 118,762
- ---------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK
Balance, beginning of year (30) -- -- (1,638) --
Common stock issued to a subsidiary of
the Company -- (30) -- -- (1,408)
Other -- -- -- -- (230)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (30) (30) -- (1,638) (1,638)
- ---------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, beginning of year 48 24 (28)
Translation adjustments (8) 24 52
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 40 48 24
- ---------------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAIN (LOSS) ON SECURITIES, NET OF TAX
Balance, beginning of year 245 (1,219) 78
Net change in unrealized gains (losses) on
investment securities, net of tax [2] 107 1,464 (1,297)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 352 245 (1,219)
- ---------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year 2,802 3,022 2,605
Net income (loss) (99) 559 644
Dividends declared on common stock (188) (779) (227)
- ---------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 2,515 2,802 3,022
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY AND COMMON $ 4,520 $ 4,702 $ 3,184 117,556 117,124
SHARES OUTSTANDING
=================================================================================================================================
<FN>
[1] For information regarding The Hartford Distribution, see Note 2 of Notes to
Consolidated Financial Statements.
[2] The 1994 change in unrealized loss on securities, net of tax, includes a
gain of $303 due to the adoption of SFAS No. 115 as discussed in Note 1(b)
of Notes to Consolidated Financial Statements.
</FN>
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-5
<PAGE>
<TABLE>
<CAPTION>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
------------------------------------
(In millions) 1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ (99) $ 559 $ 644
Cumulative effect of accounting changes -- -- (12)
- -----------------------------------------------------------------------------------------------------------------------------
Income (loss) before cumulative effect of accounting changes (99) 559 632
ADJUSTMENTS TO NET INCOME (LOSS)
Depreciation and amortization 81 85 80
Net realized capital (gains) losses 126 (102) (90)
Change in receivables, payables and accruals (38) (45) (67)
Accrued and deferred taxes (449) (56) (125)
Increase in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums 968 804 610
Increase in deferred policy acquisition costs (589) (413) (484)
Decrease in reinsurance recoverables and other related assets 611 320 241
Other, net 383 (58) 26
- -----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 994 1,094 823
=============================================================================================================================
INVESTING ACTIVITIES
Purchase of investments (33,424) (43,153) (41,777)
Sale of investments 14,602 14,759 15,702
Maturity of investments 17,856 26,873 22,815
Additions to plant, property and equipment (69) (76) (76)
- -----------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (1,035) (1,597) (3,336)
=============================================================================================================================
FINANCING ACTIVITIES
Short-term debt, net (386) (142) 516
Long-term debt, net -- 552 13
Net proceeds from issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely parent junior
subordinated debentures 969 -- --
Dividends paid (140) -- --
Investments, advances and dividends to ITT Industries, Inc. -- (314) (427)
Net receipts from (disbursements for) investment and universal life-type contracts
credited to (charged from) policyholder accounts (390) 530 2,584
Redemption of subsidiary preferred stock -- (86) (177)
Other, net 6 (7) --
- -----------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 59 533 2,509
=============================================================================================================================
Foreign exchange rate effect on cash (1) 10 (2)
=============================================================================================================================
Increase (decrease) in cash 17 40 (6)
Cash - beginning of year 95 55 61
- -----------------------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 112 $ 95 $ 55
=============================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- -------------------------------------------------
NET CASH PAID DURING THE YEAR FOR:
Income taxes $ 170 $ 302 $ 317
Interest $ 142 $ 95 $ 74
NONCASH FINANCING ACTIVITIES:
Capital contribution $ -- $ 180 $ --
Dividends paid $ -- $ 395 $ --
</TABLE>
The accompanying Notes to Consolidated Financial Statements are an integral part
of the above statements.
F-6
<PAGE>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA UNLESS OTHERWISE STATED)
1. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
ITT Hartford Group, Inc. together with its consolidated subsidiaries ("The
Hartford" or the "Company") provide property and casualty and life insurance to
both individual and commercial customers in the United States and
internationally.
In June 1995, the Board of Directors of ITT Industries, Inc. (the
"Corporation"), formerly ITT Corporation ("ITT"), approved the distribution to
holders of the Corporation's common stock of all outstanding shares of common
stock of The Hartford on a pro rata basis (see Note 2). The Hartford became a
publicly traded company that includes the insurance businesses of the former
ITT. For purposes of these financial statements, all references to The Hartford
include the assets, liabilities and results of operations of First State
Insurance Company and its subsidiaries ("First State") and Fencourt Reinsurance
Company, Ltd., which were transferred to The Hartford prior to the distribution
(see Note 2).
These financial statements present the financial position, results of operations
and cash flows of The Hartford as if it were a separate entity for all periods
presented. The Corporation's historical basis in the assets and liabilities of
certain companies, that were previously not a part of The Hartford, has been
carried over and included in the accompanying financial statements as if such
companies had been transferred for all periods presented, in a manner similar to
pooling of interest accounting. All material intercompany transactions and
balances between The Hartford, its subsidiaries and affiliates have been
eliminated. The consolidated financial statements are prepared on the basis of
generally accepted accounting principles which differ materially from the
accounting prescribed by various insurance regulatory authorities.
The preparation of financial statements, in conformity with generally accepted
accounting principles, requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial statements and
the reported amounts of revenues and expenses during the reporting period.
Actual results could differ from those estimates.
The most significant estimates include those used in determining deferred policy
acquisition costs and the liability for future policy benefits, unpaid claims
and claim adjustment expenses. Although some variability is inherent in these
estimates, management believes the amounts provided are adequate.
Certain reclassifications have been made to prior year financial information to
conform to current year presentation.
(b) CHANGES IN ACCOUNTING PRINCIPLES
On November 14, 1996, the Emerging Issues Task Force ("EITF") reached a
consensus on Issue No. 96-12, "Recognition of Interest Income and Balance Sheet
Classification of Structured Notes". This Issue requires companies to record
income on certain structured securities on a retrospective interest method. The
Company adopted EITF No. 96-12 for structured securities acquired after November
14, 1996. Adoption of EITF No. 96-12 did not have a material effect on the
Company's financial condition or results of operations.
In June 1996, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 125, "Accounting for Transfers
and Servicing of Financial Assets and Extinguishment of Liabilities" which is
effective for transfers and servicing of financial assets and extinguishments of
liabilities occurring after December 31, 1996. This statement established
criteria for determining whether transferred assets should be accounted for as
sales or secured borrowings. Subsequently, in December 1996, the FASB issued
SFAS No. 127, "Deferral of Effective Date of Certain Provisions of FASB
Statement No. 125, which defers the effective date of certain provisions of SFAS
No. 125 for one year. Adoption of SFAS No. 125 is not expected to have a
material effect on the Company's financial condition or results of operations.
Effective January 1, 1996, The Hartford adopted SFAS No. 121, "Accounting for
the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of
". This statement establishes accounting standards for the impairment of
long-lived assets, certain identifiable intangibles, and goodwill related to
those assets to be held and used and for long-lived assets and certain
identifiable intangibles to be disposed of. Adoption of SFAS No. 121 did not
have a material effect on the Company's financial condition or results of
operations.
In October 1995, the FASB issued SFAS No. 123, "Accounting for Stock-Based
Compensation", which is effective in 1996 for calendar year end companies. As
permitted by SFAS No. 123, The Hartford continues to measure compensation costs
of employee stock option plans using the intrinsic value method prescribed by
Accounting Principles Board Opinion No. 25 and has made pro forma disclosures of
net income and earnings per share as if the fair value method prescribed by SFAS
No. 123 had been applied. For additional information, see Note 8.
Effective January 1, 1994, The Hartford adopted SFAS No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." The standard requires, among
other things, that securities be classified as "held-to-maturity", "available
for sale" or "trading" based on the company's intentions with respect to the
ultimate disposition of the security and its ability to effect those intentions.
The classification determines the appropriate accounting carrying value (cost
basis or fair value)
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(b) CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
and, in the case of fair value, whether the adjustment impacts Stockholders'
Equity directly or is reflected in the Consolidated Statements of Income.
Investments in equity securities had previously been and continue to be recorded
at fair value with the corresponding impact included in Stockholders' Equity.
Under SFAS No. 115, The Hartford's fixed maturities are classified as available
for sale and accordingly, these investments are reflected at fair value with the
corresponding impact included as a component of Stockholders' Equity designated
"unrealized gain (loss) on securities, net of tax". At December 31, 1996, the
net unrealized gain on securities, net of tax of $190, was $352 including a net
unrealized gain pertaining to equity securities of $186. EITF Issue No. 93-18
prescribes specific accounting treatment with respect to mortgage-backed
interest-only investments. EITF Issue No. 93-18 reached the conclusion that the
measure of impairment of these instruments should be changed from undiscounted
cash flows to fair value. Accordingly, the amortized cost basis of such
instruments, that were determined to have other-than-temporary impairment losses
at the time of the initial adoption of SFAS No. 115, was written down to fair
value and reflected as a cumulative effect of accounting change of $(30)
after-tax as of January 1, 1994 in the accompanying Consolidated Statements of
Income.
Effective January 1, 1994, The Hartford elected to change its method of
discounting to present value certain workers' compensation reserves, principally
for permanently disabled claimants. This change involved discounting these
reserves at a market interest rate as compared to previously used statutory
rates ranging from 3 to 3.5 percent. The market rate, which approximated 7
percent at January 1, 1994, represents the rate of return The Hartford could
receive on risk-free investments with maturities comparable to the duration of
the claim liabilities. This accounting change resulted in a $42 after-tax
cumulative effect benefit which is reflected in the accompanying Consolidated
Statements of Income. The total amount of the reserve discount was $472 and $451
at December 31, 1996 and 1995, respectively.
The Hartford's cash flows were not impacted by these changes in accounting
principles.
(c) PROPERTY AND CASUALTY INSURANCE OPERATIONS
Policy acquisition costs, representing commissions, premium taxes and certain
other underwriting expenses, are deferred and amortized over policy terms.
Estimates of future revenues, including net investment income and tax benefits,
are compared to estimates of future costs, including amortization of policy
acquisition costs, to determine if business currently in force is expected to
result in a net loss. No revenue deficiencies have been determined in the
periods presented.
The Hartford establishes reserves to provide for the estimated costs of paying
claims made by policyholders or against policyholders. These reserves include
estimates for both claims that have been reported and those that have been
incurred but not yet reported to The Hartford and include estimates of all
expenses associated with processing and settling these claims. This estimation
process is primarily based on historical experience and involves a variety of
actuarial techniques which analyze trends and other relevant factors. A
reconciliation of liabilities for unpaid claims and claim adjustment expenses
and a table depicting the historical development of the liabilities for unpaid
claims and claim adjustment expenses follows:
December 31,
----------------------------
1996 1995 1994
----------------------------
BEGINNING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-GROSS $17,536 $17,435 $17,284
Reinsurance recoverables 4,939 5,317 5,339
- -------------------------------------------------------------------
BEGINNING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-NET 12,597 12,118 11,945
ADD PROVISION FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES
Current year 5,075 5,041 4,841
Prior years (1) 1,049 254 55
- -------------------------------------------------------------------
TOTAL PROVISION FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES 6,124 5,295 4,896
- -------------------------------------------------------------------
LESS PAYMENTS
Current year 2,082 1,905 1,891
Prior years 2,797 3,032 2,832
- -------------------------------------------------------------------
TOTAL PAYMENTS 4,879 4,937 4,723
- -------------------------------------------------------------------
Foreign currency translation 47 6 65
Cumulative effect of accounting
changes (2) -- -- (65)
ITT Ercos (3) -- 34 --
Other reclassifications -- 81 --
- -------------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-NET 13,889 12,597 12,118
Reinsurance recoverables 4,414 4,939 5,317
- -------------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-GROSS $18,303 $17,536 $17,435
===================================================================
[1] See Note 14(b) Environmental and Asbestos Claims. Excludes the effects of
foreign exchange adjustments.
[2] Refer to Note 1(b) above for further discussion of the accounting changes
involving the discounting of reserves.
[3] Represents beginning balances for liabilities for unpaid claims and claim
adjustment expenses of ITT Ercos, a subsidiary acquired during 1995.
The Company has an exposure to catastrophe losses which can be caused by
significant events including hurricanes, severe winter storms, earthquakes,
windstorms and fires. The frequency and severity of catastrophes are
unpredictable and the exposure to a catastrophe is a function of both the total
amount insured in an area affected by the event and the severity of the event.
Catastrophes generally impact limited geographic areas; however, certain events
may produce significant damage in
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(c) PROPERTY AND CASUALTY INSURANCE OPERATIONS (CONTINUED)
heavily populated areas. The Company generally seeks to reduce its exposure to
catastrophe losses through individual risk selection and the purchase of
catastrophe reinsurance.
(d) LIFE INSURANCE OPERATIONS
Life insurance revenues are comprised of life insurance premiums which are
recognized when due from policyholders, accident and health premiums which are
recognized when earned and policyholder charges on universal life-type and
investment contracts. Realized capital gains and losses on security transactions
associated with the Company's immediate participation guaranteed contracts are
excluded from revenues and deferred, since under the terms of the contracts the
realized gains and losses will be credited to policyholders in future years as
they are entitled to receive them. Policy acquisition costs, including
commissions and certain underwriting expenses associated with acquiring
business, are deferred and amortized over the estimated lives of the contracts,
generally 20 years. Generally, acquisition costs are deferred and amortized
using the retrospective deposit method. Under the retrospective deposit method,
acquisition costs are amortized in proportion to the present value of expected
gross profits from surrender charges, investment, mortality and expense margins.
Actual gross profits can vary from management's estimates resulting in increases
or decreases in the rate of amortization. Management periodically updates these
estimates, when appropriate, and evaluates the recoverability of the deferred
acquisition cost asset. When appropriate, management revises its assumptions on
the estimated gross profits of these contracts and the cumulative amortization
for the books of business are reestimated and readjusted by a cumulative charge
or credit to income.
Liabilities for future policy benefits are computed by the net level premium
method using interest assumptions ranging from 3% to 11% and withdrawal,
mortality and morbidity assumptions appropriate at the time the policies were
issued. Health reserves are stated at amounts determined by estimates on
individual cases and estimates of unreported claims based on past experience.
Liabilities for universal life-type and investment contracts are stated at
policyholder account values before surrender charges.
The Company maintains separate account assets and liabilities which are reported
at fair value. Separate account assets are segregated from other investments,
and investment income and gains and losses accrue directly to the policyholders.
Separate accounts reflect two categories of risk assumption: non-guaranteed
separate accounts, wherein the policyholder assumes the investment risk, and
guaranteed separate account assets, wherein the Company contractually guarantees
either a minimum return or account value to the policyholder.
(e) FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in Stockholders'
Equity. Balance sheet accounts are translated at the exchange rates in effect at
each year end and income statement accounts are translated at the average rates
of exchange prevailing during the year. The national currencies of the
international operations are generally their functional currencies.
(f) INVESTMENTS
The Hartford's investments in fixed maturities include bonds and commercial
paper which are classified as "available for sale" and accordingly are carried
at fair value with the after-tax difference from cost reflected as a component
of Stockholders' Equity designated "unrealized gain (loss) on securities, net of
tax". Equity securities, which include common and non-redeemable preferred
stocks, are carried at fair value with the after-tax difference from cost
reflected in Stockholders' Equity. Fair value for fixed maturities and equity
securities approximate those quotations published by applicable stock exchanges
or received from other reliable sources. Net realized capital gains and losses,
after deducting life and pension policyholders' share, are reported as a
component of revenue and are determined on a specific identification basis.
Policy loans are carried at outstanding balance which approximates fair value.
The Company's accounting policy for impairment requires recognition of an other
than temporary impairment charge on a security if it is determined that the
company is unable to recover all amounts due under the contractual obligations
of the security. In addition, the Company has established specific criteria to
be used in the impairment evaluation of an individual portfolio of assets.
Specifically, if the asset portfolio is supporting a runoff operation, is forced
to be liquidated prior to maturity to meet liability commitments, and has a fair
value below amortized cost, which will not materially fluctuate as a result of
future interest rate changes, then an other than temporary impairment has been
determined to have occurred and is recognized. The Company then continues to
review the impaired securities for appropriate valuation on an ongoing basis.
During 1996, it was determined that a portfolio of assets within the closed book
of guaranteed rate contract business ("Closed Book GRC") was impaired. With the
initiation of certain hedge transactions, which eliminated the possibility that
the fair value of the Closed Book GRC investments would recover to their current
amortized cost, an other than temporary impairment loss of $88 after-tax was
determined to have occurred and was recorded.
(g) DERIVATIVE FINANCIAL INSTRUMENTS
The Hartford uses a variety of derivative financial instruments including swaps,
caps, floors, forwards and exchange traded financial futures and options as part
of an overall risk management strategy. These instruments are used as a means of
hedging exposure to price, foreign currency and/or interest rate risk on planned
investment purchases or existing assets and
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(g) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
liabilities. The Hartford does not hold or issue derivative financial
instruments for trading purposes. The Hartford's accounting for derivative
financial instruments used to manage risk is in accordance with the concepts
established in SFAS No. 80, "Accounting for Futures Contracts", SFAS No. 52 ,
"Foreign Currency Translation", American Institute of Certified Public
Accountants Statement of Position 86-2, "Accounting for Options" and various
EITF pronouncements. Written options are used, in all cases in conjunction with
other assets and derivatives as part of the Company's asset and liability
management strategy. Derivative instruments are carried at values consistent
with the asset or liability being hedged. Derivatives used to hedge fixed
maturities or equities are carried at fair value with the after-tax difference
from cost reflected in Stockholders' Equity. Derivatives used to hedge other
invested assets or liabilities are carried at cost.
Derivatives must be designated at inception as a hedge and measured for
effectiveness both at inception and on an ongoing basis. The Hartford's minimum
correlation threshold for hedge designation is 80%. If correlation, which is
assessed monthly and measured based on a rolling three month average, falls
below 80%, hedge accounting will be terminated. Derivatives used to create a
synthetic asset must meet synthetic accounting criteria including designation at
inception and consistency of terms between the synthetic and the instrument
being replicated. Synthetic instrument accounting, consistent with industry
practice, provides that the synthetic asset is accounted for like the financial
instrument it is intended to replicate. Derivatives which fail to meet risk
management criteria are marked to market with the impact reflected in the
Consolidated Statements of Income.
Gains or losses on financial futures contracts entered into in anticipation of
the future receipt of product cash flows are deferred and, at the time of the
ultimate purchase, reflected as a basis adjustment to the purchased asset. Gains
or losses on futures used in invested asset risk management are deferred and
adjusted into the basis of the hedged asset when the contract futures are
closed, except for futures used in duration hedging which are deferred and basis
adjusted on a quarterly basis. The basis adjustments are amortized into net
investment income over the remaining asset life.
Open forward commitment contracts are marked to market through Stockholders'
Equity. Such contracts are recorded at settlement by recording the purchase of
the specified securities at the previously committed price. Gains or losses
resulting from the termination of the forward commitment contracts before the
delivery of the securities are recognized immediately in the Consolidated
Statements of Income as a component of net investment income.
The cost of options entered into as part of a risk management strategy are basis
adjusted to the underlying asset or liability and amortized over the remaining
life of the hedge. Gains or losses on expiration or termination are adjusted
into the basis of the underlying asset or liability and amortized over the
remaining asset life.
Interest rate swaps involve the periodic exchange of payments without the
exchange of underlying principal or notional amounts. Net receipts or payments
are accrued and recognized over the life of the swap agreement as an adjustment
to income. Should the swap be terminated, the gain or loss is adjusted into the
basis of the asset or liability and amortized over the remaining life. Should
the hedged asset be sold or liability terminated without terminating the swap
position, any swap gains or losses are immediately recognized in earnings.
Interest rate swaps purchased in anticipation of an asset purchase
("anticipatory transaction") are recognized consistent with the underlying asset
components such that the settlement component is recognized in the Consolidated
Statements of Income while the change in market value is recognized as an
unrealized gain or loss.
Premiums paid on purchased floor or cap agreements and the premium received on
issued cap or floor agreements (used for risk management) are adjusted into the
basis of the applicable asset and amortized over the asset life. Gains or losses
on termination of such positions are adjusted into the basis of the asset or
liability and amortized over the remaining asset life. Net payments are
recognized as an adjustment to income or basis adjusted and amortized depending
on the specific hedge strategy.
Forward exchange contracts and foreign currency swaps are accounted for in
accordance with SFAS No. 52. Changes in the spot rate of instruments designated
as hedges of the net investment in a foreign subsidiary are reflected in the
cumulative translation adjustments component of Stockholders' Equity.
(h) EARNINGS PER SHARE
Earnings per share for the years ended December 31, 1995 and 1994 were
determined based on the actual number of common shares outstanding at December
31, 1995 of 117.1 million.
2. THE DISTRIBUTION
On December 19, 1995, ITT distributed all of the outstanding shares of common
stock of The Hartford to the shareholders of ITT common stock (the
"Distribution" or "Spin-off"). As a result of the Distribution, The Hartford
became an independent publicly-traded company. "Regular Way" trading of The
Hartford common stock securities on the New York Stock Exchange (under the
symbol "HIG") commenced on December 20, 1995. In connection with this
transaction, ITT transferred First State and Fencourt Reinsurance Company, Ltd.,
both of which were wholly-owned companies of ITT, to The Hartford prior to the
Distribution.
The Distribution Agreement entered into by The Hartford, ITT Destinations, Inc.,
and ITT Industries, Inc. ("the former ITT subsidiaries") addressed the
disposition of shared liabilities. A shared liability is defined as a liability
arising out of, or related
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2. THE DISTRIBUTION (CONTINUED)
to, business conducted by ITT prior to the Distribution that was not otherwise
specifically related to one of the former ITT subsidiaries. Under the
Distribution Agreement, responsibility for shared liabilities generally will be
borne equally by each of the former ITT subsidiaries, including related
attorney's fees and other out-of-pocket expenses. As of December 31, 1996, all
known liabilities covered by this agreement have been accrued.
Additionally, ITT and The Hartford have entered into a Tax Allocation Agreement
whereby The Hartford will pay a share of ITT's consolidated tax liability for
the tax years that The Hartford was included in ITT's consolidated Federal
income tax return. The Tax Allocation Agreement provides for the attribution to
specific companies of any state, local and foreign taxes related to periods
prior to December 20, 1995.
<TABLE>
<CAPTION>
3. INVESTMENTS
For the years ended December 31,
--------------------------------------------------
1996 1995 1994
- -------------------------------------------------------------------------------------------------------------------------
(a) COMPONENTS OF NET INVESTMENT INCOME
<S> <C> <C> <C>
Interest income $ 2,483 $ 2,384 $ 2,167
Dividends from unaffiliated companies 55 38 47
Real estate income 7 34 62
Other investment income 25 36 79
- -------------------------------------------------------------------------------------------------------------------------
Gross investment income 2,570 2,492 2,355
Less: Investment expenses 47 72 96
- -------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 2,523 $ 2,420 $ 2,259
=========================================================================================================================
(b) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
Fixed maturities $ (247) $ 63 $ (24)
Equity securities 135 77 83
Real estate and other (11) (35) 26
Less: Increase (decrease) in liability to policyholders for
realized capital gains 3 3 (5)
- -------------------------------------------------------------------------------------------------------------------------
NET REALIZED CAPITAL GAINS (LOSSES) $ (126) $ 102 $ 90
=========================================================================================================================
(c) UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES
Gross unrealized gains $ 336 $ 199 $ 118
Gross unrealized losses (52) (49) (103)
- -------------------------------------------------------------------------------------------------------------------------
Net unrealized gains 284 150 15
Deferred income tax expense 98 52 5
- -------------------------------------------------------------------------------------------------------------------------
Net unrealized gains, net of tax 186 98 10
Balance - beginning of year 98 10 78
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED INVESTMENT GAINS (LOSSES) $ 88 $ 88 $ (68)
=========================================================================================================================
(d) UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized gains $ 717 $ 943 $ 228
Gross unrealized losses (446) (667) (2,164)
Unrealized (gains) losses credited to policyholders (13) (51) 46
- -------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses) 258 225 (1,890)
Deferred income tax expense (benefit) 92 78 (661)
- -------------------------------------------------------------------------------------------------------------------------
Net unrealized gains (losses), net of tax 166 147 (1,229)
Balance - beginning of year 147 (1,229) 303
- -------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED INVESTMENT GAINS (LOSSES) $ 19 $ 1,376 $ (1,532)
=========================================================================================================================
</TABLE>
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
3. INVESTMENTS (CONTINUED)
(e) FIXED MATURITY INVESTMENTS
As of December 31, 1996
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES
U. S. gov't and gov't agencies and authorities
<S> <C> <C> <C> <C>
(guaranteed and sponsored) $ 389 $ 15 $ (4) $ 400
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 2,992 177 (143) 3,026
States, municipalities and political subdivisions 7,524 143 (38) 7,629
International governments 2,230 82 (6) 2,306
Public utilities 1,228 16 (12) 1,232
All other corporate including international 8,483 190 (150) 8,523
All other corporate - asset-backed 4,814 63 (66) 4,811
Short-term investments 1,812 -- -- 1,812
Certificates of deposit 1,661 29 (27) 1,663
Redeemable preferred stock 45 2 -- 47
- --------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 31,178 $ 717 $ (446) $ 31,449
================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1995
-------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES
U. S. gov't and gov't agencies and authorities
<S> <C> <C> <C> <C>
(guaranteed and sponsored) $ 947 $ 9 $ (12) $ 944
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 5,521 267 (420) 5,368
States, municipalities and political subdivisions 5,322 148 (11) 5,459
International governments 1,933 79 (5) 2,007
Public utilities 1,295 37 (2) 1,330
All other corporate including international 7,240 263 (134) 7,369
All other corporate - asset-backed 4,031 96 (63) 4,064
Short-term investments 3,065 -- -- 3,065
Certificates of deposit 1,538 44 (20) 1,562
- --------------------------------------------------------------------------------------------------------------------------------
Total fixed maturities $ 30,892 $ 943 $ (667) $ 31,168
================================================================================================================================
</TABLE>
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 1996 by maturity are shown to the right. Asset-backed securities,
including MBS and CMO's, are distributed to maturity year based on estimates of
the rate of future prepayments of principal over the remaining lives of the
securities. These estimates are developed using prepayment speeds reported in
broker consensus data and can be expected to vary from actual experience.
Expected maturities differ from contractual maturities due to call or prepayment
provisions.
Amortized
MATURITY Cost Fair Value
- --------------------------------------------------------------
One year or less $ 4,363 $ 4,382
Over one year through five years 10,675 10,789
Over five years through ten years 8,963 9,042
Over ten years 7,177 7,236
- --------------------------------------------------------------
TOTAL $ 31,178 $ 31,449
==============================================================
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (CONTINUED)
(e) FIXED MATURITY INVESTMENTS (CONTINUED)
Sales of fixed maturities, excluding short-term fixed maturities, for the years
ended December 31, 1996, 1995 and 1994 resulted in proceeds of $11.3 billion,
$10.7 billion and $10.2 billion, gross gains of $161, $210 and $188 and gross
losses (including writedowns) of $(408), $(147) and $(212), respectively. Sales
of equity security investments for the years ended December 31, 1996, 1995 and
1994 resulted in proceeds of $1.4 billion, $1.7 billion and $1.7 billion, gross
gains of $184, $150 and $135 and gross losses of $(49), $(73) and $(52),
respectively.
(f) CONCENTRATION OF CREDIT RISK
Included in fixed maturity investments at December 31, 1996 and 1995,
respectively, were $39 of Orange County, California Pension Obligation Bonds,
$17 of which were carried in the general account and $22 of which were included
in The Hartford's separate account assets. During 1996, all interest payments
due were received. The bonds were sold in January 1997 for $40.
Excluding U.S. government and government agency investments, The Hartford is not
exposed to any significant credit concentration risk.
(g) FAIR VALUE OF FINANCIAL INSTRUMENTS NOT DISCLOSED ELSEWHERE AS OF DECEMBER
31, 1996 AND 1995
Balance Sheet Items
1996 1995
------------------ -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------
Assets
Other investments $4,265 $4,355 $4,066 $4,082
Liabilities
Other policy claims
and benefits payable* 11,707 11,469 12,727 12,767
Short-term debt 500 500 886 886
Long-term debt 1,032 1,044 1,022 1,172
QUIPS ** 1,000 993 -- --
- -----------------------------------------------------------------
* Excludes corporate owned life insurance ("COLI") and universal life insurance
contracts totaling $10.5 billion and $10.0 billion at December 31, 1996 and
1995, respectively.
** Represents company obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely parent junior subordinated debentures.
The following methods and assumptions were used to estimate the fair value of
each class of financial instrument above for which it is practicable to do so:
policy and mortgage loan carrying amounts approximate fair value; investments in
partnerships and trusts are based on external market valuations from partnership
and trust management; other policy claims and benefits payable are determined by
estimating future cash flows discounted at the current market rate; short-term
debt carrying amounts approximate fair value; and long-term debt, including
QUIPS, is based on external valuation using discounted future cash flows at
current market interest rates.
(h) DERIVATIVE FINANCIAL INSTRUMENTS
The Hartford uses a variety of derivative financial instruments, including
swaps, caps, floors, forwards and exchange traded financial futures and options
in order to hedge exposure to price, foreign currency and/or interest rate risks
on anticipated investment purchases or existing assets and liabilities. Approved
derivatives usage must support at least one of the following objectives: to
manage the risk to the operation arising from price, interest rate and foreign
currency volatility, to manage liquidity, or to control transaction costs. The
notional amounts of derivative contracts represent the basis upon which pay and
receive amounts are calculated and are not reflective of credit risk. Credit
risk for derivative contracts is limited to the amounts calculated to be due to
The Hartford on such contracts. Payment obligations between The Hartford and its
counterparties are typically netted on a quarterly basis. The Hartford has
policies regarding the financial stability and credit standing of its major
counterparties and typically requires credit enhancement provisions to further
limit its credit risk for derivative contracts. Many of these derivative
contracts are bilateral agreements that are not assignable without the consent
of the relevant counterparty. Notional amounts pertaining to derivative
financial instruments totaled $11.1 billion and $9.8 billion ($8.3 billion and
$7.9 billion related to life insurance operations investments, $2.6 billion and
$1.7 billion on life insurance operations liabilities and $200 and $200 related
to variable rate debt) at December 31, 1996 and 1995, respectively.
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS (CONTINUED)
(h) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
A summary of derivatives for The Hartford, segregated by major investment
category, was as follows as of December 31, 1996 and 1995:
<TABLE>
<CAPTION>
1996 Amount Hedged (Notional Amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors Rate Currency Notional
ASSETS HEDGED Value $ Floors (C) & Options (D) Futures (E) Swaps (H) Swaps (F) Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities (excluding
<S> <C> <C> <C> <C> <C> <C> <C>
inverse floaters and anticipatory) $ 7,429 $ 500 $ 2,454 $ -- $ 941 $ -- $ 3,895
Inverse floaters (A) 408 98 856 -- 346 -- 1,300
Anticipatory (G) -- -- -- 287 105 -- 392
Other bonds and notes 21,800 456 748 50 1,265 125 2,644
Short-term investments 1,812 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 31,449 1,054 4,058 337 2,657 125 8,231
Equity securities, policy loans and
other investments 6,190 -- -- -- 19 -- 19
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 37,639 $ 1,054 $ 4,058 $ 337 $ 2,676 $ 125 $ 8,250
==================================================================================================================================
TOTAL DERIVATIVES - FAIR VALUE (B) $ (10) $ 35 $ -- $ (27) $ (9) $ (11)
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1995 Amount Hedged (Notional Amounts)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors Rate Currency Notional
ASSETS HEDGED Value $ Floors (C) & Options (D) Futures (E) Swaps (H) Swaps (F) Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Asset-backed securities (excluding
<S> <C> <C> <C> <C> <C> <C> <C>
inverse floaters and anticipatory) $ 8,543 $ 118 $ 3,433 $ 323 $ 290 $ -- $ 4,164
Inverse floaters (A) 892 560 354 18 681 -- 1,613
Anticipatory (G) (3) -- -- 478 240 -- 718
Other bonds and notes 18,671 33 66 336 798 187 1,420
Short-term investments 3,065 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 31,168 711 3,853 1,155 2,009 187 7,915
Equity securities, policy loans and
other investments 5,507 -- -- -- 18 -- 18
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 36,675 $ 711 $ 3,853 $ 1,155 $ 2,027 $ 187 $ 7,933
==================================================================================================================================
TOTAL DERIVATIVES - FAIR VALUE (B) $ (32) $ 4 7 $ -- $ (113) $ (24) $ (122)
==================================================================================================================================
<FN>
(A) Inverse floaters are variations of collateralized mortgage obligations
("CMO's") for which the coupon rates move inversely with an index rate such
as the London interbank offered rate ("LIBOR"). The risk to principal is
considered negligible as the underlying collateral for the securities is
guaranteed or sponsored by government agencies. To address the volatility
risk created by the coupon variability, The Hartford uses a variety of
derivative instruments, primarily interest rate swaps and caps and floors.
(B) The fair value of derivative instruments, including swaps, caps, floors,
futures, options and forward commitments, was determined using a pricing
model which is validated through quarterly comparison to dealer quoted
prices for 1996, and using dealer quoted prices for 1995.
(C) The 1996 data includes issued caps of $433 with a weighted average strike
rate of 8.21% (ranging from 7.0% to 9.5%) and over 93% maturing in 2000
through 2005. In addition, issued floors totaled $621, and had a weighted
average strike rate of 5.16% (ranging from 4.88% to 7.85%) with all of them
maturing by the end of 2005. The 1995 data includes issued caps of $475
with a weighted average strike rate of 8.5% (ranging from 7.0% to 10.4%)
and over 85% maturing in 2000 through 2004. In addition, issued floors
totaled $236, had a weighted average strike rate of 8.1% (ranging from 5.3%
to 10.9%) and mature through 2007 with 76% maturing by 2004.
(D) The 1996 data includes purchased floors of $2.6 billion, purchased options
of $11 and purchased caps of $1.4 billion. The floors had a weighted
average strike rate of 5.77% (ranging from 3.70% to 7.85%) and over 95%
mature in the years 1997 through 2001. The options mature in 1997. The caps
had a weighted average strike rate of 7.68% (ranging from 4.40% to 10.13%)
and over 77% of them mature in the year 1997 through 2001. The 1995 data
includes purchased floors of $2.1 billion and purchased caps of $1.8
billion. The floors had a weighted average strike rate of 5.7% (ranging
from 3.7% to 6.8%) and over 87% mature in 1997 through 1999. The caps had a
weighted average strike rate of 7.6% (ranging from 4.5% to 10.1%) and over
82% mature in 1997 through 2000.
(E) As of December 31, 1996 and 1995, over 71% and 95% , respectively, of the
notional futures contracts expire within one year.
(F) As of December 31, 1996 and 1995, over 42% and 25%, respectively, of
foreign currency swaps expire within one year; the balance mature over the
succeeding 4 to 5 years.
(G) Deferred gains and losses on anticipatory transactions are included in the
carrying value of fixed maturity investments in the Consolidated Balance
Sheets. At the time of the ultimate purchase, they are reflected as a basis
adjustment to the purchased asset. At December 31, 1996, The Hartford had
$5.7 in net deferred gains for futures, interest rate swaps and purchased
options. The Hartford expects to basis adjust the $5.7 of deferred gains in
1997. At December 31, 1995, The Hartford had $12.9 in net deferred gains
for futures, interest rate swaps and purchased options of which $12.6 was
basis adjusted in 1996.
(H) The following tables summarize the maturities of interest rate swaps
outstanding at December 31, 1996 and 1995, and the related weighted average
interest pay rate or receive rate. The variable rates represent spot rates
(primarily 90 day LIBOR).
</FN>
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
(h) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
Interest Rate Swaps
- ---------------------------------------------------------------------------------------------------------------------------------
Latest
1996 1997 1998 1999 2000 2001 Thereafter Total Maturity
- ---------------------------------------------------------------------------------------------------------------------------------
PAY FIXED/RECEIVE VARIABLE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional value $ -- $ 50 $ 165 $ 35 $ 162 $ 334 $ 746 2016
Weighted average pay rate --% 5.7% 5.8% 5.5% 5.5% 5.6% 5.6%
Weighted average receive rate --% 3.2% 1.5% 6.5% 6.3% 6.7% 5.2%
PAY VARIABLE/RECEIVE FIXED
Notional value $ 86 $ 25 $ 486 $ 74 $ 582 $ 399 $ 1,652 2007
Weighted average pay rate 7.5% --% 6.4% 6.7% 7.0% 6.8% 6.8%
Weighted average receive rate 5.6% --% 5.6% 5.7% 6.2% 5.8% 5.9%
PAY VARIABLE/RECEIVE DIFFERENT VARIABLE
Notional value $ 19 $ 15 $ -- $ 200 $ -- $ 44 $ 278 2007
Weighted average pay rate 5.9% 5.7% --% 6.4% --% 12.9% 7.4%
Weighted average receive rate 3.7% 5.5% --% 5.0% --% 6.4% 5.2%
TOTAL INTEREST RATE SWAPS $ 105 $ 90 $ 651 $ 309 $ 744 $ 777 $ 2,676 2016
TOTAL WEIGHTED AVERAGE PAY RATE 7.2% 5.7% 6.2% 6.4% 6.7% 6.6% 6.5%
TOTAL WEIGHTED AVERAGE RECEIVE RATE 5.2% 3.8% 4.4% 5.4% 6.2% 6.3% 5.6%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Interest Rate Swaps
- ---------------------------------------------------------------------------------------------------------------------------------
Latest
1995 1996 1997 1998 1999 2000 Thereafter Total Maturity
- ---------------------------------------------------------------------------------------------------------------------------------
PAY FIXED/RECEIVE VARIABLE
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional value $ 15 $ 50 $ -- $ 453 $ 31 $ 229 $ 778 2004
Weighted average pay rate 5.0% 7.2% --% 8.1% 7.1% 7.8% 7.8%
Weighted average receive rate 5.8% 5.9% --% 5.8% 5.7% 5.9% 5.8%
PAY VARIABLE/RECEIVE FIXED
Notional value $ 120 $ 68 $ 25 $ 25 $ 35 $ 295 $ 568 2007
Weighted average pay rate 5.9% 8.6% 5.9% --% 5.9% 4.3% 5.4%
Weighted average receive rate 2.8% 7.9% 4.0% --% 6.5% 6.7% 5.6%
PAY VARIABLE/RECEIVE DIFFERENT VARIABLE
Notional value $ 161 $ 18 $ 36 $ 12 $ 200 $ 254 $ 681 2004
Weighted average pay rate 5.5% 6.2% 3.7% 3.4% 4.5% 16.3% 5.6%
Weighted average receive rate 6.5% 8.1% 5.6% 5.2% 6.8% 5.9% 6.5%
TOTAL INTEREST RATE SWAPS $ 296 $ 136 $ 61 $ 490 $ 266 $ 778 $ 2,027 2007
TOTAL WEIGHTED AVERAGE PAY RATE 5.6% 7.8% 4.6% 7.6% 5.0% 6.4% 6.5%
TOTAL WEIGHTED AVERAGE RECEIVE RATE 4.9% 7.2% 4.9% 5.4% 6.6% 6.3% 5.9%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
3. INVESTMENTS (CONTINUED)
(h) DERIVATIVE FINANCIAL INSTRUMENTS (CONTINUED)
In addition, interest rate sensitivity related to certain liabilities in life
insurance operations and variable rate debt in property and casualty insurance
operations (as described in Note 5) was modified primarily through interest rate
swap agreements. The notional amount of the life insurance operations liability
agreements, in which life insurance operations generally pay one variable rate
in exchange for another, was $2.6 billion and $1.7 billion at December 31, 1996
and 1995, respectively. As of December 31, 1996, the weighted average pay rate
was 5.6% and the weighted average receive rate was 6.5%. These agreements mature
A reconciliation between notional amounts at December 31, 1996 and 1995 by
derivative type and strategy is as follows:
<TABLE>
<CAPTION>
December 31, 1995 Maturities/ December 31, 1996
Notional Amount Additions Terminations [2] Notional Amount
- ---------------------------------------------------------------------------------------------------------------
BY DERIVATIVE TYPE
<S> <C> <C> <C> <C>
Caps $ 2,284 $ 1,293 $ 1,715 $ 1,862
Floors 2,380 2,184 1,165 3,399
Swaps/ Forwards 3,822 4,299 2,852 5,269
Futures 1,155 3,776 4,594 337
Options -- 14 3 11
- ---------------------------------------------------------------------------------------------------------------
TOTAL [1] $ 9,641 $ 11,566 $ 10,329 $ 10,878
===============================================================================================================
BY STRATEGY
Liability $ 1,708 $ 2,057 $ 1,137 $ 2,628
Anticipatory 718 2,117 2,443 392
Asset 3,051 1,583 2,253 2,381
Portfolio 4,164 5,809 4,496 5,477
- ---------------------------------------------------------------------------------------------------------------
TOTAL [1] $ 9,641 $ 11,566 $ 10,329 $ 10,878
===============================================================================================================
<FN>
[1] Excludes $200 of swaps related to variable rate debt. For additional
information, see Note 5.
[2] During 1996, the Company had no significant gain or loss on terminations of
hedge positions using derivative financial instruments.
</FN>
</TABLE>
<TABLE>
<CAPTION>
4. INCOME TAX
For the years ended December 31,
--------------------------------------------------------------------
1996 1995 1994
- --------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
<S> <C> <C> <C>
U.S. Federal $ (529) $ 599 $ 763
International 211 143 89
- --------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME (LOSS) $ (318) $ 742 $ 852
- --------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT)
Current - U.S. Federal $ 84 $ 247 $ 227
International 83 64 45
- --------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT 167 311 272
Deferred - U.S. Federal (381) (142) (65)
International (5) 11 7
- --------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED (386) (131) (58)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE (BENEFIT) $ (219) $ 180 $ 214
==========================================================================================================================
</TABLE>
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
4. INCOME TAX (CONTINUED)
Deferred tax assets (liabilities) include the following for the years ended
December 31:
1996 1995
----------------------------------------------------------------------
U.S. Federal International U.S. Federal International
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discounted loss reserves $ 793 $ 1 $ 751 $ --
Net operating loss carryforwards 154 -- -- --
Employee benefits 138 (10) 137 (7)
Earnings from foreign subsidiaries 123 -- 111 --
Other insurance related items 51 (70) 346 (76)
Reserve for bad debts 26 -- 14 --
Accelerated depreciation 17 (1) 16 --
Unrealized gains (141) (47) (95) (35)
Other 319 3 (130) 1
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,480 $ (124) * $ 1,150 $ (117)*
=================================================================================================================================
<FN>
* Included in other liabilities on the Consolidated Balance Sheets.
</FN>
</TABLE>
No additional provision was made for U.S. taxes payable on undistributed
international earnings amounting to approximately $383 at December 31, 1996,
since these amounts are permanently reinvested.
A reconciliation of the tax provision at the U.S. Federal statutory rate to the
provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. Federal statutory rate $ (111) $ 260 $ 298
Tax-exempt interest (97) (53) (45)
Foreign tax rate differential (2) (1) (10)
Other (9) (26) (29)
- ---------------------------------------------------------------------------------------------------------------------------------
PROVISION (BENEFIT) FOR INCOME TAX $ (219) $ 180 $ 214
=================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
5. Debt 1996 1995
--------------------------------------------------------------------------------------
Weighted Average Weighted Average
Amount Interest Rate [1] Amount Interest Rate [1]
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT
<S> <C> <C> <C> <C>
Commercial paper $ 445 6.0% $ 732 5.9%
Bank loans and other short-term debt 55 5.6% 54 5.8%
Current maturities of long-term debt -- -- 100 7.3%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $ 500 6.0% $ 886 6.1%
=================================================================================================================================
LONG-TERM DEBT
DOMESTIC
Notes, due 1998 $ 200 8.2% $ 200 8.2%
Notes, due 2001 200 8.3% 200 8.3%
Notes, due 2002 300 6.4% 300 6.4%
Notes, due 2015 198 7.3% 198 7.3%
INTERNATIONAL
Notes, due 2002 134 6.4% 124 6.7%
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 1,032 7.3% $ 1,022 7.3%
=================================================================================================================================
<FN>
[1] Represents the weighted average interest rate at the end of the period.
Weighted average cost of short-term debt does not include cost of interest
rate swaps.
</FN>
</TABLE>
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. DEBT (CONTINUED)
SHORT-TERM DEBT - The Hartford's commercial paper ranks equally with its other
unsecured and unsubordinated indebtedness. Effective December 20, 1996, The
Hartford entered into an unsecured aggregate $2.0 billion credit facility with
twenty-nine banks which is comprised of a $1.5 billion five year revolving
credit facility and a $500 short-term credit facility. This facility is
available for general corporate purposes and to provide additional support to
the Company's commercial paper program. At December 31, 1996, there were no
outstanding borrowings under the facility. On February 10, 1997, Hartford Life,
Inc. ("HLI"), a wholly-owned subsidiary of The Hartford, entered into a $1.3
billion unsecured short-term credit facility with four banks.
During 1996, The Hartford expanded its commercial paper program by increasing
the maximum allowable outstanding amount of unsecured short-term commercial
paper notes from $1.0 billion to $2.0 billion.
LONG-TERM DEBT - The Hartford's long-term debt securities are unsecured
obligations of The Hartford and rank on a parity with all other unsecured and
unsubordinated indebtedness. On October 11, 1995, The Hartford filed with the
Securities and Exchange Commission a shelf registration statement for the
potential offering and sale of up to an aggregate $1.0 billion in debt
securities and preferred stock. On November 3, 1995, the Company issued and sold
$500 in senior debt securities in two tranches ($300 of 6.4% notes due 2002 and
$200 in 7.3% debentures due 2015). On October 2, 1996, this shelf registration
statement was amended for an additional $1.25 billion of securities, making an
aggregate of $1.75 billion available for sale. The amended registration
statement also expanded the type of securities which could be offered under this
shelf registration statement by including provisions for the offering of common
stock, depositary shares, warrants, stock purchase contracts, stock purchase
units and junior subordinated deferrable interest debentures of the Company,
preferred securities of any of the Hartford Trusts (referred to below) and
guarantees by the Company with respect to the preferred securities of any of the
Hartford Trusts. After the issuance of Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trusts Holding Solely Parent Junior
Subordinated Debentures on October 30, 1996 discussed below, The Hartford had
$1.25 billion remaining on this shelf registration at December 31, 1996.
On January 19, 1996, The Hartford and several wholly-owned special purpose
trusts ("Hartford Trusts") formed by The Hartford filed with the Securities and
Exchange Commission a shelf registration statement for the potential offering
and sale of $500 of debt securities and preferred stock, including up to an
aggregate $500 Junior Subordinated Deferrable Interest Debentures of The
Hartford and Preferred Securities of the Hartford Trusts which were issued as
discussed in Note 6.
Interest rate risk relative to The Hartford's debt portfolios is selectively
managed through interest rate swap agreements. The following table summarizes
the maturities of these interest rate swaps outstanding at December 31, 1996 and
the related weighted average interest pay rates and receive rates.
RECEIVE VARIABLE/PAY
FIXED 1997 Thereafter TOTAL
- -----------------------------------------------------------------
Notional value $200 $-- $200
Weighted average receive
rate 5.87% -- 5.87%[1]
Weighted average pay rate 6.18% -- 6.18%
- -----------------------------------------------------------------
[1] Rate represents six month LIBOR as of December 31, 1996.
The fair value of the interest rate swaps on short-term debt at December 31,
1996 and December 31, 1995 was $(1) and $(3), respectively. Any credit risk
related to these swaps is considered remote.
Interest expense incurred related to short- and long-term debt totaled $108,
$101 and $76 for 1996, 1995 and 1994, respectively.
6. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES
On February 28, 1996, Hartford Capital I, a special purpose Delaware trust
formed by The Hartford, issued 20,000,000 Series A, 7.7% Cumulative Quarterly
Income Preferred Securities ("Series A Preferred Securities"). The proceeds from
the sale of the Series A Preferred Securities were used to acquire $500 of
Junior Subordinated Deferrable Interest Debentures, Series A ("Junior
Subordinated Debentures"), issued by The Hartford. The Hartford used the
proceeds from the sale of such debentures for the partial repayment of
outstanding commercial paper and short-term bank indebtedness.
Series A Preferred Securities represent undivided beneficial interests in the
assets of Hartford Capital I. The Hartford owns all of the beneficial interests
represented by Series A Common Securities of Hartford Capital I. Holders of
Series A Preferred Securities are entitled to receive preferential cumulative
cash distributions accruing from February 28, 1996 and payable quarterly in
arrears commencing March 31, 1996 at the annual rate of 7.7% of the liquidation
amount of $25.00 per Series A Preferred Security. The Series A Preferred
Securities are subject to mandatory redemption upon repayment of the Junior
Subordinated Debentures at maturity or their earlier redemption. Holders of
Series A Preferred Securities have limited voting rights.
The Junior Subordinated Debentures bear interest at the annual rate of 7.7% of
the principal amount, payable quarterly in arrears commencing March 31, 1996,
and mature on February 28, 2016. The Junior Subordinated Debentures are
unsecured and rank junior and subordinate in right of payment to all senior debt
of The Hartford and are effectively subordinated to all existing and future
liabilities of its subsidiaries.
The Hartford has the right to defer payments of interest on the Junior
Subordinated Debentures by extending the interest
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES (CONTINUED)
payment period for up to 20 consecutive quarters for each deferral period, up to
the maturity date. During any such period, interest will continue to accrue and
The Hartford may not declare or pay any cash dividends or distributions on The
Hartford's common stock nor make any principal, interest or premium payments on
or repurchase any debt securities that rank pari passu with or junior to the
Junior Subordinated Debentures. In the event of failure to pay interest for 30
consecutive days (subject to the deferral of any due date in the case of an
extension period), the Junior Subordinated Debentures will become due and
payable. The Hartford has guaranteed, on a subordinated basis, all of the
Hartford Capital I obligations under the Series A Preferred Securities,
including, to pay the redemption price and any accumulated and unpaid
distributions to the extent of available funds and upon dissolution, winding up
or liquidation, but only to the extent that Hartford Capital I has funds to make
such payments.
On October 30, 1996, Hartford Capital II, a special purpose Delaware trust
formed by The Hartford, issued 20,000,000 Series B, 8.35% Cumulative Quarterly
Income Preferred Securities ("Series B Preferred Securities"). The material
terms of the Series B Preferred Securities are substantially the same as the
Series A Preferred Securities described above, except for the rate and maturity
date. The Series B Debentures bear interest at the annual rate of 8.35% of the
principal amount payable quarterly in arrears commencing December 31, 1996, and
mature on October 30, 2026. The proceeds from the sale of the Series B Preferred
Securities were used to acquire $500 of Junior Subordinated Deferrable Interest
Debentures, Series B ("Series B Debentures"), issued by The Hartford. The
Hartford used the proceeds from the sale of such debentures for general
corporate purposes.
Interest expense incurred with respect to the Series A Preferred Securities and
Series B Preferred Securities totaled approximately $40 in 1996.
7. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS
(a) PENSION PLANS
The Hartford has a number of noncontributory defined benefit pension plans
covering most U.S. and international employees. Plans covering U.S. employees
provide pension benefits that are based on years of service and the employee's
compensation during the last ten years of employment. The Hartford's funding
policy is to contribute annually at an amount between the minimum funding
requirements set forth in the Employee Retirement Income Security Act of 1974
and the maximum amount that can be deducted for U.S. Federal income tax
purposes. Employees of international subsidiaries are covered by various
postemployment benefit arrangements, some of which are considered to be defined
benefit plans for accounting purposes.
The following table sets forth the defined benefit plans' funded status and
amounts recognized in the Consolidated Balance Sheets. International plans
represent an immaterial percentage of total pension assets, liabilities and
expense and, for reporting purposes, are combined with domestic plans.
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1996 1995
- -------------------------------------------------------------------------------------------------------------
ACTUARIAL PRESENT VALUE OF
<S> <C> <C>
Vested benefit obligation $ 1,090 $ 994
Accumulated benefit obligation 1,207 1,102
Actuarial present value of projected benefit obligation 1,467 1,423
Plan assets at fair value, primarily listed U.S. stocks and bonds 1,478 1,291
- -------------------------------------------------------------------------------------------------------------
Plan assets in excess of (less than) projected benefit obligation 11 (132)
Unrecognized net loss 10 197
Unrecognized prior service cost 72 27
Unrecognized net obligation at January 1, 1986 9 4
- -------------------------------------------------------------------------------------------------------------
PENSION ASSET $ 102 $ 96
=============================================================================================================
Assumptions used in the accounting for the plans in 1996 and 1995 were:
Benefit discount rate 8.00% 7.50%
Expected long-term rate of return on plan assets 9.75% 9.75%
Rate of increase in compensation levels 4.25% 4.75%
</TABLE>
<TABLE>
<CAPTION>
Total pension costs for 1996, 1995 and 1994 include the following components:
For the years ended December 31,
----------------------------------------------------------
1996 1995 1994
- -----------------------------------------------------------------------------------------------------------------------------
DEFINED BENEFIT PLANS
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 56 $ 48 $ 54
Interest cost on projected benefit obligation 104 96 90
Actual return on plan assets (189) (271) (4)
Net amortization (deferral) 80 170 (84)
- -----------------------------------------------------------------------------------------------------------------------------
NET PERIODIC PENSION COST $ 51 $ 43 $ 56
=============================================================================================================================
</TABLE>
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS
(CONTINUED)
(b) INVESTMENT AND SAVINGS PLAN
Prior to the Distribution, employees of The Hartford participated in
ITT's Investment and Savings Plans. As part of the Distribution, the Company
established The Hartford Investment and Savings Plan. Substantially all
employees are eligible to participate in this plan under which designated
contributions, which may be invested in common stock of The Hartford or certain
other investments, are matched, up to 3% of compensation, by the Company. The
cost to The Hartford for the above-mentioned plans was approximately $20, $19
and $19 for 1996, 1995 and 1994, respectively.
(c) POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT PLANS
The Hartford provides certain health care and life insurance benefits for
eligible retired employees. A substantial portion of The Hartford's employees
may become eligible for these benefits upon retirement. The Hartford's
contribution for health care benefits will depend upon the retiree's date of
retirement and years of service. In addition, the plan has a defined dollar cap
which limits average Company contributions. The Hartford has prefunded a portion
of the health care and life insurance obligations through trust funds where such
prefunding can be accomplished on a tax effective basis. Postretirement health
care and life insurance expense (benefit) was comprised of the following in
1996, 1995 and 1994:
1996 1995 1994
- ---------------------------------------------------------------
Service cost $ 6 $ 6 $ 7
Interest cost 18 21 20
Return on assets (7) (6) (4)
Net deferral (23) (23) (23)
- ---------------------------------------------------------------
NET PERIODIC BENEFIT $ (6) $ (2) $ --
===============================================================
The following table sets forth the funded status of the postretirement benefit
plans other than pensions, the amounts recognized in The Hartford's balance
sheet at December 31, 1996 and 1995 and the principal weighted average
assumptions inherent in their determination:
1996 1995
- ----------------------------------------------------------------
Accumulated postretirement benefit
obligation $ 252 $ 303
Plan assets at fair value, primarily
listed U.S. stock and bonds 77 73
Accumulated postretirement benefit
obligation in excess of plan assets (175) (230)
Unrecognized net (gain)/loss (24) 35
Unrecognized past service liability (234) (256)
- ----------------------------------------------------------------
LIABILITY RECOGNIZED IN THE
BALANCE SHEET $ (433) $ (451)
- ----------------------------------------------------------------
Discount rate 8.00% 7.50%
Rate of return on invested assets 9.75% 9.75%
Ultimate health care trend rate 6.00% 6.00%
- ----------------------------------------------------------------
The assumed rate of future increases in the per capita cost of health care (the
health care trend rate) was 9.3% for 1996, decreasing ratably to 6.0% in the
year 2001. Increasing the table of health care trend rates by one percent per
year would have the effect of increasing the accumulated postretirement benefit
obligation by $7 and the annual expense by $1. To the extent that the actual
experience differs from the inherent assumptions, the effect will be amortized
over the average future service of the covered active employees.
8. STOCK COMPENSATION PLANS
Prior to the Distribution, certain employees of The Hartford were granted awards
under ITT's stock option incentive plans. Effective December 19, 1995, awards
outstanding under these plans that were held by employees of The Hartford were
offered substitute awards under the 1995 ITT Hartford Incentive Stock Plan (the
"Plan"). For the substitute awards, the number of shares subject to options was
increased and the option exercise price was decreased immediately following the
Distribution to preserve, as closely as possible, the economic value of the
options that existed prior to the Distribution.
Under the Plan, the Company is authorized to issue up to 8,500,000 shares, of
which no more that 5,000,000 shares may be available for incentive stock
options. The Plan contains a formula that determines the maximum number of
shares with respect to which awards may be made in any one year and limits such
amount to 1.5% of the total of the outstanding shares plus treasury shares as
reported in ITT Hartford's Form 10-K for the preceding year plus unused portions
of such limit from prior years. All options granted have an exercise price equal
to the market price of the Company's stock on the date of grant and an option's
maximum term is ten years. Certain options become exercisable upon the
attainment of specified market price appreciation of the Company's common shares
or at seven years after the date of grant, while the remaining options become
exercisable over a three year period commencing with the date of grant.
Additionally, during the fourth quarter of 1996, the Company established the ITT
Hartford Employee Stock Purchase Plan ("ESPP"). Under this plan, eligible
employees of The Hartford may purchase common stock of the Company at a 15%
discount from the lower of the market price at the beginning or end of the
quarterly offering period. The Company may sell up to 2,700,000 shares of stock
to eligible employees under the ESPP, and 39,214 shares were sold in 1996.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans.
Accordingly, no compensation cost has been recognized for its stock option plan
and stock purchase plan. Had compensation cost for the Company's two stock-based
compensation plans been determined based on the fair value at
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
8. STOCK COMPENSATION PLANS (CONTINUED)
the grant dates for awards under those plans consistent with the method of SFAS
No. 123, the Company's net income (loss) and earnings (loss) per share would
have been reduced to the pro forma amounts indicated below:
1996 1995
- ------------------------------------------------------------------
Net income (loss): As reported $ (99) $ 559
Pro forma $(106) $ 556
Earnings (loss) per share: As reported $(0.84) $4.77
Pro forma $(0.90) $4.74
- ------------------------------------------------------------------
Note: The pro forma disclosures are not representative of the effects on net
income and earnings per share in future years.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes options-pricing model with the following weighted-average
assumptions used for grants in 1996 and 1995: dividend yield of 2.9% for both
years, expected price variability of 20.8% for both years, risk-free interest
rates of 5.69% and 5.77% for the 1996 grants under 10,000 shares and grants over
10,000 shares, respectively, and 6.28% and 6.31%, respectively, for the 1995
grants; and expected lives of five and six years for both years.
A summary of the status of the Company's option plan as of December 31, 1995 and
1996 and changes during the periods December 19, 1995 through December 31, 1995,
and for the year ended December 31, 1996 are presented below:
<TABLE>
<CAPTION>
1995 ITT HARTFORD INCENTIVE STOCK PLAN
(shares in thousands)
Shares Subject to Stock Option
---------------------------------------------------------------------
Shares Weighted-Average Exercise Price
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Balance transferred at December 19, 1995 [1] 3,370 $35.16
Vested exercises (1) 33.38
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1995 3,369 35.16
Grants 1,431 52.05
Vested exercises (380) 31.92
Cancellations (Un-vested) (32) 45.86
- ---------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 1996 4,388 $40.87
=================================================================================================================================
<FN>
[1] Includes 1,129 shares issued in 1995.
</FN>
</TABLE>
The weighted-average fair value of The Hartford stock options, calculated using
the Black-Scholes option-pricing model, granted during the years ended December
31, 1996 and 1995 were $11.21 and $10.01, respectively. The weighted-average
fair value of shares sold under the ESPP in 1996 was $16.50.
The following table summarizes information about stock options outstanding and
exercisable (shares in thousands) at December 31, 1996:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
--------------------------------------------------------------- ----------------------------------------
Number Outstanding Weighted-Average Weighted-Average Number Weighted-Average
Range of at December 31, 1996 Remaining Exercise Price Exercisable at Exercise Price
Exercise Prices Contractual Life December 31, 1996
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
$17.68 - $29.31 290 4.3 $19.08 290 $19.08
32.74 - 43.41 2,686 7.7 37.35 1,678 35.36
46.75 - 57.00 1,401 9.1 51.96 170 52.00
58.25 - 68.50 11 9.8 64.21 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
$17.68 - $68.50 4,388 7.9 $40.87 2,138 $34.47
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. REINSURANCE
The Hartford cedes insurance to other insurers in order to limit its maximum
loss. Such transfer does not relieve The Hartford of its primary liability. The
Hartford also assumes insurance from other insurers. Failure of reinsurers to
honor their obligations could result in losses to The Hartford. The Hartford
evaluates the financial condition of its reinsurers and monitors concentration
of credit risk.
The effect of reinsurance on property and casualty premiums written and earned
was as follows:
For the years ended December 31,
------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------
PREMIUMS WRITTEN
Direct $ 6,798 $ 6,898 $ 6,786
Assumed 903 825 782
Ceded (795) (803) (829)
- ------------------------------------------------------------------
NET $ 6,906 $ 6,920 $ 6,739
==================================================================
PREMIUMS EARNED
Direct $ 6,850 $ 6,895 $ 6,717
Assumed 878 817 746
Ceded (837) (822) (883)
- ------------------------------------------------------------------
NET $ 6,891 $ 6,890 $ 6,580
==================================================================
Reinsurance cessions which reduce claims and claim expenses incurred were $651,
$678 and $1.0 billion for the years ended December 31, 1996, 1995 and 1994,
respectively.
Life insurance net retained premiums were comprised of the following:
For the years ended December 31,
-------------------------------------
1996 1995 1994
- ------------------------------------------------------------------
Gross premiums $ 3,200 $ 2,447 $ 2,053
Assumed 406 613 336
Ceded (421) (322) (216)
- ------------------------------------------------------------------
NET RETAINED PREMIUMS $ 3,185 $ 2,738 $ 2,173
==================================================================
Life insurance recoveries, which reduce death and other benefits, approximated
$239, $162 and $113 for the years ended December 31, 1996, 1995 and 1994,
respectively.
As of December 31, 1996, the Company had reinsurance recoverables of $3.8
billion from Mutual Benefit Life Assurance Corporation ("Mutual Benefit"),
supported by assets in a security trust of $3.8 billion (including policy loans
of $3.3 billion). The risk of Mutual Benefit becoming insolvent is mitigated by
the reinsurance agreement's requirement that the assets be kept in a security
trust with the Company as sole beneficiary. The Hartford has no other
significant reinsurance-related concentrations of credit risk.
10. TRANSACTIONS WITH AFFILIATES
Prior to the Distribution (see Note 2), The Hartford had substantial dealings
with ITT and its affiliates as described below.
The Hartford and its U.S. subsidiaries were included in ITT's consolidated U.S.
Federal income tax return and received from ITT an income tax benefit computed
in accordance with a tax-sharing arrangement. This arrangement generally
reimbursed The Hartford on a current basis for taxes it would have been refunded
if it had filed a separate U.S. Federal income tax return. The balance due from
ITT as a result of the tax-sharing arrangement was $90 at December 19, 1995 and
$52 at December 31, 1994. The Hartford filed a separate consolidated U.S.
Federal income tax return for the period December 20, 1995 through December 31,
1995 and will continue to file its owned consolidated returns thereafter.
ITT furnished The Hartford with technical, administrative, personnel, financial,
accounting and operating advice and assistance, as well as other services. The
Hartford reimbursed ITT for the cost of such services. These reimbursements
totaled $16 in 1995 and $15 in 1994.
In June 1995, ownership of ITT Lyndon Insurance Company was transferred from ITT
to The Hartford via a capital contribution of $180, representing the net assets
of the company.
In 1995, The Hartford paid common stock dividends to ITT Corporation of $779,
including cash dividends of $384 and non-cash dividends of $395. The non-cash
dividend was primarily Alcatel Alsthom Stock, which represents a portion of the
total ITT holdings in that company.
11. PREFERRED STOCK
During 1995, The Hartford authorized 50,000,000 shares of Preferred Stock, par
value $.01 per share. The Company may not pay any common stock dividends unless
all preferred dividend requirements on Series A Preferred Stock (300,000 shares)
have been met. The holders of Series A Preferred Stock are entitled to
cumulative dividends. The holders of Series A Preferred Stock may not vote
separately as a class, but may vote together as one class with the holders of
shares of common stock. No shares were issued or outstanding at December 31,
1996.
Hartford Fire Insurance Company ("Hartford Fire"), a subsidiary of The Hartford,
had no shares of Class A Preferred Stock - Series 2 outstanding at December 31,
1996. During 1995, 1,700,000 shares were redeemed at $50 per share. Hartford
Fire had no shares of Class E Preferred Stock outstanding. During 1995, 455,333
shares were redeemed at $10 per share.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. STATUTORY RESULTS
For the years ended December 31,
-------------------------------------
1996 1995 1994
- ------------------------------------------------------------------
STATUTORY NET INCOME (LOSS)
Property and casualty
operations $ (103) $ 428 $ 452
Life operations 190 133 85
- ------------------------------------------------------------------
TOTAL $ 87 $ 561 $ 537
==================================================================
STATUTORY SURPLUS
Property and casualty
operations $ 2,749 $ 2,617 $ 2,123
Life operations 1,448 1,319 1,180
- ------------------------------------------------------------------
TOTAL $ 4,197 $ 3,936 $ 3,303
==================================================================
A significant percentage of the consolidated statutory surplus is permanently
reinvested or is subject to various state and foreign government regulatory
restrictions or other agreements which limit the payment of dividends without
prior approval. Any statutory dividend which may be paid to ITT Hartford Group,
Inc. by its insurance subsidiaries in 1997 requires prior approval.
The domestic insurance subsidiaries of ITT Hartford Group, Inc. prepare their
statutory financial statements in accordance with accounting practices
prescribed by the State of Connecticut Insurance Department. Prescribed
statutory accounting practices include publications of the National Association
of Insurance Commissioners ("NAIC"), as well as state laws, regulations, and
general administrative rules.
13. LEASES AND RENTALS
Total rental expense on operating leases was $110 in 1996, $121 in 1995 and $106
in 1994. Future minimum rental commitments are as follows:
1997 $86
1998 73
1999 65
2000 55
2001 56
Thereafter 280
- ----------------------------------------------------------------
Total $615
================================================================
14. CONTINGENCIES
(a) LITIGATION
The Hartford is involved in various legal actions, some of which involve claims
for substantial amounts. In the opinion of management, the ultimate liability
with respect to such lawsuits is not expected to be material to the consolidated
financial position, results of operations or cash flows of The Hartford.
(b) ENVIRONMENTAL AND ASBESTOS CLAIMS
Historically, The Hartford has found it difficult to estimate ultimate
liabilities related to environmental and asbestos claims due to uncertainties
surrounding these exposures. Within the property and casualty insurance
industry, progress has been made in developing sophisticated, alternative
methodologies utilizing company experience and supplemental databases to assess
environmental and asbestos liabilities. A study which incorporated these
methodologies was initiated by The Hartford in April 1996. The study included a
review of identified environmental and asbestos exposures of the North American
Property & Casualty segment, U.S. exposures of The Hartford's International
segment and exposures of the Runoff segment, and covered the Company's Personal,
Commercial and Reinsurance lines of business. The methodology utilized a ground
up analysis of policy, site and exposure level data for a representative sample
of The Hartford's claims. The results of the evaluation were extrapolated
against the balance of the claim population to estimate the Company's overall
exposure for reported claims. In addition to estimating liabilities on reported
environmental and asbestos claims, The Hartford estimated reserves for claims
incurred but not reported (IBNR). The IBNR reserve was estimated using
information on reporting patterns of known insureds, characteristics of insureds
such as limits exposed, attachment points and number of coverage years involved,
third party costs, and closed claims. Also included in The Hartford's analysis
of environmental and asbestos exposures was a review of applicable reinsurance
coverage. Reinsurance coverage applicable to the sample was used to estimate the
reinsurance coverage that applied to the balance of the reported environmental
and asbestos claims and to the IBNR estimates.
Upon completion of the study and assessment of the results in October 1996, the
Company determined that its environmental and asbestos reserves should be
increased, on an undiscounted basis, by $493 (net of reinsurance) and $292 (net
of reinsurance), respectively, for the year ended December 31, 1996.
The Hartford believes that the environmental and asbestos reserves reported at
December 31, 1996, 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
continue to expand 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.
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. SEPARATE ACCOUNTS
The Hartford maintained separate account assets and liabilities totaling $50.5
billion and $36.8 billion at December 31, 1996 and 1995, respectively, which are
reported at fair value. Separate account assets are segregated from other
investments and net investment income and net realized capital gains and losses
accrue directly to the policyholder. Separate accounts reflect two categories of
risk assumption: non-guaranteed separate accounts totaling $39.9 billion and
$26.4 billion at December 31, 1996 and 1995, respectively, wherein the
policyholder assumes the investment risk, and guaranteed separate accounts
totaling $10.6 billion and $10.4 billion at December 31, 1996 and 1995,
respectively, wherein The Hartford contractually guarantees either a minimum
return or account value to the policyholder. Included in the non-guaranteed
category were policy loans totaling $2.0 billion and $1.7 billion at December
31, 1996 and 1995, respectively. Net investment income (including net realized
capital gains and losses) and interest credited to policyholders on separate
account assets are not reflected in the Consolidated Statements of Income.
Non-guaranteed separate accounts are not subject to claims that arise out of any
other business of The Hartford. Separate account management fees, net of minimum
guarantees, were $538, $387 and $256 in 1996, 1995 and 1994, respectively.
The guaranteed separate accounts include modified guaranteed individual annuity
and modified guaranteed life insurance. The average credited interest rate on
these contracts was 6.6% at December 31, 1996. The assets that support these
liabilities were comprised of $10.3 billion in bonds as of December 31, 1996.
The portfolios are segregated from other investments and are managed so as to
minimize liquidity and interest rate risk. To minimize the risk of
disintermediation associated with early withdrawals, individual annuity and
modified guaranteed life insurance contracts carry a graded surrender charge as
well as a market value adjustment. Additional investment risk is hedged using a
variety of derivatives which totaled $86 in carrying value and $2.4 billion in
notional amounts as of December 31, 1996.
16. SUBSEQUENT EVENT
On February 10, 1997, HLI filed a registration statement with the Securities and
Exchange Commission relating to an initial public offering of up to 20% of HLI
common stock. HLI is the holding company parent of The Hartford's significant
life insurance and related subsidiaries. Management intends to use the proceeds
from the offering to reduce certain debt outstanding, to fund growth
initiatives, and for other general corporate purposes. Management of The
Hartford believes the offering will strengthen the Company's financial position
and flexibility. If and when the offering is completed, The Hartford's current
intent is to continue to beneficially own at least 80% of HLI, but it is under
no contractual obligation to do so.
17. BUSINESS SEGMENT INFORMATION
The Hartford provides insurance and financial services in the United States,
Canada, Western Europe, Latin America and Asia. The Company's ongoing business
segments are North American Property & Casualty, Life and International. The
North American Property & Casualty segment offers insurance coverages including
personal automobile and homeowners, commercial insurance for small, mid-size and
large accounts, specialty risk insurance and reinsurance. The Life segment
markets a variety of insurance and financial services which provides investment
products such as individual variable annuities and market value adjusted fixed
rate annuities, deferred compensation plan services and mutual funds for savings
and retirement needs, life insurance for income protection and estate planning,
and employee benefits products such as group life, group disability and
corporate owned life insurance products. The International segment consists of
European companies offering a variety of insurance products (primarily property
and casualty products in both personal and commercial lines) designed to meet
the needs of local customers.
The following table outlines revenues, operating income and assets by business
segment and geographical segment information.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
17. BUSINESS SEGMENT INFORMATION (CONTINUED) For the years ended December 31,
-----------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C>
North American P&C $ 6,333 $ 6,337 $ 6,179
Life 4,391 3,753 3,039
International 1,626 1,540 1,274
- ---------------------------------------------------------------------------------------------------------------------------
Ongoing operations 12,350 11,630 10,492
Runoff 123 520 610
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 12,473 $ 12,150 $ 11,102
===========================================================================================================================
OPERATING INCOME (LOSS)
North American P&C $ (399) $ 334 $ 464
Life 378 331 221
International 210 184 113
Other -- (6) 51
- ---------------------------------------------------------------------------------------------------------------------------
Ongoing operations 189 843 849
Runoff (507) (101) 3
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME (LOSS) $ (318) $ 742 $ 852
===========================================================================================================================
ASSETS
North American P&C $ 19,262 $ 18,309 $ 17,406
Life 76,266 60,831 42,992
International 5,330 5,109 4,398
Other 2 1 (39)
- ---------------------------------------------------------------------------------------------------------------------------
Ongoing operations 100,860 84,250 64,757
Runoff 7,980 9,605 12,008
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 108,840 $ 93,855 $ 76,765
===========================================================================================================================
GEOGRAPHICAL SEGMENT INFORMATION
REVENUES
North America $ 10,698 $ 10,480 $ 9,696
Western Europe and other 1,775 1,670 1,406
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 12,473 $ 12,150 $ 11,102
===========================================================================================================================
OPERATING INCOME (LOSS)
North America $ (567) $ 557 $ 728
Western Europe and other 249 185 124
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME (LOSS) $ (318) $ 742 $ 852
===========================================================================================================================
ASSETS
North America $ 103,025 $ 88,487 $ 72,176
Western Europe and other 5,815 5,368 4,589
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 108,840 $ 93,855 $ 76,765
===========================================================================================================================
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
18. QUARTERLY RESULTS FOR 1996 AND 1995 (UNAUDITED)
Three Months Ended
---------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
---------------------------------------------------------------------------------------
1996 1995 1996 1995 1996 1995 1996 1995
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 3,278 $ 3,005 $ 3,026 $ 2,914 $ 2,836 $ 3,058 $ 3,333 $ 3,173
Benefits, claims and expenses 3,164 2,808 2,847 2,788 3,701 2,835 3,079 2,977
Income (loss) before cumulative
effect of accounting changes 96 140 143 105 (543) 173 205 141
Net income (loss) $ 96 $ 140 $ 143 $ 105 $ (543) $ 173 $ 205 $ 141
EARNINGS PER SHARE
Income (loss) before cumulative
effect of accounting changes $ 0.82 $ 1.19 $ 1.22 $ 0.90 $ (4.63) $ 1.48 $ 1.75 $ 1.20
Net income (loss) $ 0.82 $ 1.19 $ 1.22 $ 0.90 $ (4.63) 1.48 $ 1.75 $ 1.20
WEIGHTED AVERAGE COMMON SHARES
OUTSTANDING [1] 117.2 117.1 117.2 117.1 117.2 117.1 117.3 117.1
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] In millions of shares; 1995 weighted average common shares outstanding of
117.1 reflects a retroactive presentation of the actual number of shares
outstanding at December 31, 1995.
</FN>
</TABLE>
F-26
<PAGE>
<TABLE>
<CAPTION>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
(In millions) As of December 31, 1996
----------------------------------------------------------
Amount at which
shown on Balance
Type of Investment Cost Fair Value Sheet
- ------------------------------------------------------------------------------------------------------------------------------
FIXED MATURITIES
Bonds and Notes
U. S. gov't and gov't agencies and authorities
<S> <C> <C> <C>
(guaranteed and sponsored) $ 389 $ 400 $ 400
U. S. gov't and gov't agencies and authorities
(guaranteed and sponsored) - asset-backed 2,992 3,026 3,026
States, municipalities and political subdivisions 7,524 7,629 7,629
International governments 2,230 2,306 2,306
Public utilities 1,228 1,232 1,232
All other corporate including international 8,483 8,523 8,523
All other corporate - asset-backed 4,814 4,811 4,811
Short-term investments 1,812 1,812 1,812
Certificates of deposit 1,661 1,663 1,663
Redeemable preferred stock 45 47 47
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 31,178 31,449 31,449
- ------------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES
Common Stocks
Public utilities 29 33 33
Banks, trusts and insurance companies 127 165 165
Industrial and miscellaneous 1,388 1,626 1,626
Nonredeemable preferred stocks 37 41 41
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES 1,581 1,865 1,865
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 32,759 33,314 33,314
- ------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE 60 60 60
OTHER INVESTMENTS
Mortgage loans on real estate 4 4 4
Policy loans 3,839 3,839 3,839
Investments in partnerships and trusts 244 277 244
Futures, options and miscellaneous 178 235 178
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INVESTMENTS 4,265 4,355 4,265
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 37,084 $ 37,729 $ 37,639
==============================================================================================================================
</TABLE>
S-1
<PAGE>
<TABLE>
<CAPTION>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF ITT HARTFORD GROUP, INC.
(REGISTRANT)
(In millions) As of December 31,
---------------------------------------
BALANCE SHEETS 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Receivables from affiliates $ 44 $ 7
Other assets 205 131
Investment in affiliates 6,740 6,395
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 6,989 6,533
- ------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt 500 886
Long-term debt 898 898
Company obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely parent junior subordinated debentures 1,000 --
Other liabilities 71 47
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,469 1,831
TOTAL STOCKHOLDERS' EQUITY 4,520 4,702
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 6,989 $ 6,533
- ------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(In millions)
STATEMENTS OF INCOME For the years ended December 31,
----------------------------------------------------------
1996 1995 1994
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings (loss) of subsidiaries $ (6) $ 619 $ 689
Interest expense (net of interest income) 139 92 69
Other expenses 4 -- --
- ------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT (149) 527 620
Income tax benefit (50) (32) (24)
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ (99) $ 559 $ 644
==============================================================================================================================
</TABLE>
S-2
<PAGE>
<TABLE>
<CAPTION>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF ITT HARTFORD GROUP, INC.(CONTINUED)
(REGISTRANT)
(In millions)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
---------------------------------------------------------------
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ (99) $ 559 $ 644
Undistributed earnings of subsidiaries 362 (505) (425)
Change in working capital (87) 133 (47)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 176 187 172
- ---------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital contribution to subsidiary (625) (281) (321)
- ---------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (625) (281) (321)
- ---------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in debt (386) 408 516
Net proceeds from issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trusts
holding solely parent junior subordinated debentures 969 -- --
Dividends paid (140) -- --
Investments, advances and dividends to ITT Industries, Inc. -- (314) (367)
Other, net 6 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES 449 94 149
- ---------------------------------------------------------------------------------------------------------------------------------
Net change in cash -- -- --
Cash - beginning of year -- -- --
- ---------------------------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ -- $ -- $ --
=================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------
NET CASH PAID DURING THE YEAR FOR:
Interest $ 132 $ 86 $ 69
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Capital contribution $ -- $ 180 $ --
Dividends paid $ -- $ 395 $ --
</TABLE>
S-3
<PAGE>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
<TABLE>
<CAPTION>
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
For the years ended December 31, 1996, 1995 and 1994
(In millions)
Future
Policy
Benefits, Other
Deferred Unpaid Policy
Policy Claims and Claims and Net
Acquisition Claim Unearned Benefits Earned Investment
Segment Costs Adjustment Premiums Payable Premiums Income
Expenses
- ---------------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C> <C>
North American P&C $ 485 $ 12,012 $ 2,077 $ -- $ 5,657 $ 661
Life 2,800 3,986 40 18,672 3,068 1,323
International 250 2,626 680 7 1,342 205
- ---------------------------------------------------------------------------------------------------------
ONGOING OPERATIONS 3,535 18,624 2,797 18,679 10,067 2,189
- ---------------------------------------------------------------------------------------------------------
Runoff -- 4,050 -- 3,541 9 334
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 3,535 $ 22,674 $ 2,797 $ 22,220 $ 10,076 $ 2,523
=========================================================================================================
1995
North American P&C $ 490 $ 11,127 $ 2,066 $ -- $ 5,662 $ 646
Life 2,220 3,514 40 17,586 2,643 1,114
International 235 2,715 659 7 1,309 183
Other -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------
ONGOING OPERATIONS 2,945 17,356 2,765 17,593 9,614 1,943
- ---------------------------------------------------------------------------------------------------------
Runoff -- 4,074 1 5,177 14 477
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 2,945 $ 21,430 $ 2,766 $ 22,770 $ 9,628 $ 2,420
=========================================================================================================
1994
North American P&C $ 486 $ 10,820 $ 2,075 $ -- $ 5,504 $ 606
Life 1,819 2,864 37 15,050 2,116 922
International 208 2,468 611 1 1,116 135
Other -- -- -- -- -- --
- ---------------------------------------------------------------------------------------------------------
ONGOING OPERATIONS 2,513 16,152 2,723 15,051 8,736 1,663
- ---------------------------------------------------------------------------------------------------------
Runoff 12 4,435 2 7,257 17 596
- ---------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 2,525 $ 20,587 $ 2,725 $ 22,308 $ 8,753 $ 2,259
=========================================================================================================
<FN>
Note: Certain reclassifications have been made to prior year financial
information to conform to current year presentation.
N/A - Not applicable to life insurance pursuant to Regulation S-X.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE III
(CONTINUED)
SUPPLEMENTARY INSURANCE INFORMATION
For the years ended December 31, 1996, 1995 and 1994
(In millions)
Benefits, Amortization
Claims and of Deferred
Net Realized Claim Policy
Capital Adjustment Acquisition Other Net
Segment Gains(Losses) Expenses Costs Expenses Written
Premiums
- -------------------------------------------------------------------------------------------------
1996
<S> <C> <C> <C> <C> <C>
North American P&C $ 15 $ 4,994 $ 1,154 $ 584 $ 5,687
Life -- 2,435 241 1,337 N/A
International 79 931 284 201 1,211
- -------------------------------------------------------------------------------------------------
ONGOING OPERATIONS 94 8,360 1,679 2,122 6,898
- -------------------------------------------------------------------------------------------------
Runoff (220) 582 (1) 49 8
- -------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ (126) $ 8,942 $ 1,678 $ 2,171 $ 6,906
=================================================================================================
1995
North American P&C $ 29 $ 4,315 $ 1,178 $ 510 $ 5,670
Life (4) 1,978 193 1,251 N/A
International 48 901 276 179 1,237
Other -- -- -- 6 --
- -------------------------------------------------------------------------------------------------
ONGOING OPERATIONS 73 7,194 1,647 1,946 6,907
- -------------------------------------------------------------------------------------------------
Runoff 29 575 11 35 13
- -------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 102 $ 7,769 $ 1,658 $ 1,981 $ 6,920
=================================================================================================
1994
North American P&C $ 69 $ 4,070 $ 1,121 $ 524 $ 5,648
Life 1 1,909 145 764 N/A
International 23 757 241 163 1,079
Other -- -- -- (51) --
- -------------------------------------------------------------------------------------------------
ONGOING OPERATIONS 93 6,736 1,507 1,400 6,727
- -------------------------------------------------------------------------------------------------
Runoff (3) 578 6 23 12
- -------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 90 $ 7,314 $ 1,513 $ 1,423 $ 6,739
=================================================================================================
<FN>
Note: Certain reclassifications have been made to prior year financial
information to conform to current year presentation.
N/A - Not applicable to life insurance pursuant to Regulation S-X.
</FN>
</TABLE>
S-4
<PAGE>
<TABLE>
<CAPTION>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
Ceded to Assumed From Percentage of
Gross Amount Other Other Net Amount Amount Assumed
(In millions) Companies Companies to Net
- ----------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 1996
<S> <C> <C> <C> <C> <C>
Life insurance in force $ 312,176 $ 91,474 $ 46,156 $ 266,858 17%
============================================================================================================================
Insurance revenues
Property and casualty insurance $ 6,850 $ 837 $ 878 $ 6,891 13%
Life insurance 2,461 334 184 2,311 8%
Accident and health insurance 739 87 222 874 25%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 10,050 $ 1,258 $ 1,284 $ 10,076 13%
============================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1995
Life insurance in force $ 339,291 $ 87,923 $ 18,918 $ 270,286 7%
- ----------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Property and casualty insurance $ 6,895 $ 822 $ 817 $ 6,890 12%
Life insurance 1,752 256 476 1,972 24%
Accident and health insurance 695 66 137 766 18%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 9,342 $ 1,144 $ 1,430 $ 9,628 15%
============================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1994
Life insurance in force $ 246,138 $ 66,709 $ 33,090 $ 212,519 16%
- ----------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Property and casualty insurance $ 6,717 $ 883 $ 746 $ 6,580 11%
Life insurance 1,422 151 197 1,468 13%
Accident and health insurance 631 65 139 705 20%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 8,770 $ 1,099 $ 1,082 $ 8,753 12%
============================================================================================================================
</TABLE>
S-5
<PAGE>
<TABLE>
<CAPTION>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
Charged to
Balance Costs and Translation Write-offs/ Balance
January 1, Expenses Adjustment Payments/Other December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1996
----
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 104 $ 18 $ -- $ (9) $ 113
Accumulated depreciation of plant,
property and equipment 535 68 2 12 617
1995
----
Allowance for doubtful accounts $ 102 $ 21 $ -- $ (19) $ 104
Accumulated depreciation of plant, 493 60 2 (20) 535
property and equipment
1994
----
Allowance for doubtful accounts $ 84 $ 26 $ -- $ (8) $ 102
Accumulated depreciation of plant,
property and equipment 434 59 5 (5) 493
================================================================================================================================
</TABLE>
S-6
<PAGE>
<TABLE>
<CAPTION>
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY
AND CASUALTY INSURANCE OPERATIONS
Discount Claims and Claim Adjustment Expenses Paid Claims and
(In millions) Deducted From Incurred Related to: Claim Adjustment
--------------------------------------
Liabilities (1) Current Year Prior Years Expenses
- --------------------------------------------------------------------------------------------------------------------------------
Years ended December 31,
<S> <C> <C> <C> <C>
1996 $ 472 $ 5,075 $ 1,049 $ 4,879
1995 $ 451 $ 5,041 $ 254 $ 4,937
1994 $ 432 $ 4,841 $ 55 $ 4,723
================================================================================================================================
<FN>
[1] Reserves for permanently disabled claimants, terminated reinsurance
treaties and certain reinsurance contracts have been discounted using the
rate of return The Hartford could receive on risk-free investments of 6.9%,
6.3% and 8.1% for 1996, 1995 and 1994, respectively.
</FN>
</TABLE>
S-7
<PAGE>
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
ITT HARTFORD GROUP, INC.
By: /s/ James J. Westervelt
------------------------------------------
James J. Westervelt
Senior Vice President and Group Controller
(Date) March 28, 1997
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
Signature Title Date
--------- ----- ----
/s/ Ramani Ayer Chairman, President, Chief March 28, 1997
- -----------------------
Ramani Ayer Executive Officer and Director
/s/ Lowndes A. Smith Vice Chairman and Director March 28, 1997
- -----------------------
Lowndes A. Smith
/s/ David K. Zwiener Executive Vice President March 28, 1997
- -----------------------
David K. Zwiener and Chief Financial Officer
/s/ James J. Westervelt Senior Vice President March 28, 1997
- -----------------------
James J. Westervelt and Group Controller
/s/ Bette B. Anderson Director March 28, 1997
- -----------------------
Bette B. Anderson
/s/ Rand V. Araskog Director March 28, 1997
- -----------------------
Rand V. Araskog
/s/ Robert A. Burnett Director March 28, 1997
- -----------------------
Robert A. Burnett
/s/ Donald R. Frahm Director March 28, 1997
- -----------------------
Donald R. Frahm
/s/ Arthur A. Hartman Director March 28, 1997
- -----------------------
Arthur A. Hartman
/s/ Paul G. Kirk, Jr. Director March 28, 1997
- -----------------------
Paul G. Kirk, Jr.
/s/ H. Patrick Swygert Director March 28, 1997
- -----------------------
H. Patrick Swygert
/s/ DeRoy C. Thomas Director March 28, 1997
- -----------------------
DeRoy C. Thomas
/s/ Gordon I. Ulmer Director March 28, 1997
- -----------------------
Gordon I. Ulmer
II-1
<PAGE>
ITT HARTFORD GROUP, INC.
FORM 10-K
EXHIBITS INDEX
EXHIBIT #
- ---------
3.01 Amended and Restated Certificate of Incorporation of ITT Hartford Group,
Inc. ("The Hartford") was filed as Exhibit 3.01 to The Hartford's Form
10-K for the fiscal year ended December 31, 1995 and is incorporated
herein by reference.
3.02 By-Laws of The Hartford effective October 25, 1995 were filed as Exhibit
3.02 to The Hartford's Form 10-K for the fiscal year ended December 31,
1995 and are incorporated herein by reference.
4.01 Amended and Restated Certificate of Incorporation and By-Laws of The
Hartford (included as Exhibits 3.01 and 3.02 that are incorporated herein
by reference).
4.02 Rights Agreement dated as of November 1, 1995 between The Hartford and
The Bank of New York as Rights agent was filed as Exhibit 4.02 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is
incorporated herein by reference.
4.03 Form of certificate of the voting powers, preferences and relative
participating, optional and other special rights, qualifications,
limitations or restrictions of Series A Participating Cumulative
Preferred Stock of The Hartford (attached as Exhibit A to the Rights
Agreement that is incorporated by reference as Exhibit 4.02 hereto).
4.04 Form of Right Certificate (attached as Exhibit B to the Rights Agreement
that is incorporated by reference as Exhibit 4.02 hereto).
4.05 Indenture dated as of May 15, 1991 between The Hartford and The Chase
Manhattan Bank (National Association), as trustee, with respect to The
Hartford's 8.20% Notes due October 15, 1998, 7.25% Notes due December 1,
1996, and 8.30% Notes due December 1, 2001 (incorporated by reference to
Exhibit 4(b) to The Hartford's Form 10 filed on May 9, 1991, as amended,
file no. 0-19277).
4.06 Forms of The Hartford's 8.20% Notes due October 15, 1998, 7.25% Notes due
December 1, 1996 and 8.30% Notes due December 1, 2001( included in the
Indenture filed as Exhibit 4.05 hereto).
4.07 Senior Indenture, dated as of October 20, 1995, between The Hartford and
The Chase Manhattan Bank (National Association), as trustee, with respect
to The Hartford's 6.375% Notes Due November 1, 2002 and 7.30% Debentures
Due November 1, 2015 (incorporated by reference to Exhibit 4.08 to The
Hartford's Report on Form 8-K dated November 15, 1995).
4.08 Forms of The Hartford's 6.375% Notes Due November 1, 2002 and 7.30%
Debentures due November 1, 2015 (incorporated by reference to Exhibits
4.09 and 4.10, respectively, of The Hartford's Report on Form 8-K dated
November 15, 1995).
4.09 Junior Subordinated Indenture, dated as of February 28, 1996, between The
Hartford and Wilmington Trust Company, as Trustee, with respect to The
Hartford's 7.70% Junior Subordinated Deferrable Interest Debentures,
Series A, due February 28, 2016 ("Junior Debentures") was filed as
Exhibit 4.09 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1995 and is incorporated herein by reference.
4.10 Supplemental Indenture No. 1 dated as of February 28, 1996 between The
Hartford and Wilmington Trust Company, as Trustee, with respect to the
Junior Debentures, was filed as Exhibit 4.10 to The Hartford's Form 10-K
for the fiscal year ended December 31, 1995 and is incorporated herein by
reference.
4.11 Form of The Hartford's 7.70% Junior Subordinated Deferrable Interest
Debenture, Series A, due February 28, 2016 (included in the indenture
incorporated by reference as Exhibit 4.09 hereto).
4.12 Amended and Restated Trust Agreement dated as of February 28, 1996 of
Hartford Capital I, relating to the 7.70% Cumulative Quarterly Income
Preferred Securities, Series A ("Preferred Securities") was filed as
Exhibit 4.12 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1995 and is incorporated herein by reference.
II-2
<PAGE>
EXHIBITS INDEX (CONTINUED)
EXHIBIT #
- ---------
4.13 Agreement as to Expenses and Liabilities dated as of February 28, 1996
between The Hartford and Hartford Capital I was filed as Exhibit 4.13 to
The Hartford's Form 10-K for the fiscal year ended December 31, 1995 and
is incorporated herein by reference.
4.14 Preferred Security Certificate for Hartford Capital I (included as
Exhibit E of the Trust Agreement incorporated by reference as Exhibit
4.12 hereto).
4.15 Guarantee Agreement dated as of February 28, 1996 between The Hartford
and Wilmington Trust, as trustee, relating to The Hartford's guarantee of
the Preferred Securities, was filed as Exhibit 4.15 to The Hartford's
Form 10-K for the fiscal year ended December 31, 1995 and is incorporated
herein by reference.
4.16 Junior Subordinated Indenture, dated as of October 30, 1996, between The
Hartford and Wilmington Trust Company, as Trustee, with respect to The
Hartford's 8.35% Junior Subordinated Deferrable Interest Debentures,
Series B, due October 30, 2026 ("Series B Junior Debentures") is filed
herewith.
4.17 Form of The Hartford's 8.35% Junior Subordinated Deferrable Interest
Debenture, Series B, due October 30, 2026 was filed as Exhibit 4.2 to The
Hartford's Form 8-K dated November 4, 1996, and is incorporated herein by
reference.
4.18 Amended and Restated Trust Agreement dated as of October 30, 1996 of
Hartford Capital II, relating to the 8.35% Cumulative Quarterly Income
Preferred Securities, Series B, ("Series B Preferred Securities") was
filed as Exhibit 4.1 to The Hartford's Form 8-K dated November 4, 1996,
and is incorporated herein by reference.
4.19 Agreement as to Expenses and Liabilities dated as of October 30, 1996
between The Hartford and Hartford Capital II (included as Exhibit D of
Exhibit 4.18 that is incorporated by reference herein).
4.20 Preferred Security Certificate for Hartford Capital II (included as
Exhibit E of Exhibit 4.18 that is incorporated by reference herein).
4.21 Guarantee Agreement dated as of October 30, 1996 between The Hartford and
Wilmington Trust, as trustee, relating to The Hartford's guarantee of the
Series B Preferred Securities, is filed herewith.
10.01 Distribution Agreement among ITT Corporation, ITT Destinations, Inc. and
The Hartford was filed as Exhibit 10.01 to The Hartford's Form 10-K for
the fiscal year ended December 31, 1995 and is incorporated herein by
reference.
10.02 Intellectual Property License Agreement among ITT Corporation, ITT
Destinations, Inc. and The Hartford was filed as Exhibit 10.02 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is
incorporated herein by reference.
10.03 Tax Allocation Agreement among ITT Corporation, ITT Destinations, Inc.
and The Hartford was filed as Exhibit 10.03 to The Hartford's Form 10-K
for the fiscal year ended December 31, 1995 and is incorporated herein by
reference.
10.04 Form of Trade Name and Service Mark License Agreement between ITT
Corporation and The Hartford was filed as Exhibit 10.04 to The Hartford's
Form 10-K for the fiscal year ended December 31, 1995 and is incorporated
herein by reference.
10.05 License Assignment Agreement among ITT Destinations, Inc., The Hartford
and Nutmeg Insurance Company was filed as Exhibit 10.05 to The Hartford's
Form 10-K for the fiscal year ended December 31, 1995 and is incorporated
herein by reference.
10.06 License Assignment Agreement among ITT Destinations, Inc., Nutmeg
Insurance Company and Hartford Fire Insurance Company was filed as
Exhibit 10.06 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1995 and is incorporated herein by reference.
II-3
<PAGE>
EXHIBITS INDEX (CONTINUED)
EXHIBIT #
- ---------
10.7 Employee Benefit Services and Liability Agreement among ITT Corporation,
ITT Destinations, Inc. and The Hartford was filed as Exhibit 10.07 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is
incorporated herein by reference.
10.08 ITT Hartford Group, Inc. 1996 Restricted Stock Plan for Non-Employee
Directors was filed as Exhibit 10.08 to The Hartford's Form 10-K for the
fiscal year ended December 31, 1995 and is incorporated herein by
reference.
10.09 1995 ITT Hartford Incentive Stock Plan was filed as Exhibit 10.09 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1995 and is
incorporated herein by reference.
10.10 Debt allocation agreement dated as of November 1, 1995 between ITT
Corporation and The Hartford, and related Fourth Supplemental Indenture
dated as of November 1, 1995 among ITT Corporation, The Hartford and
State Street Bank and Trust Company, as successor trustee, were filed as
Exhibit 10.10 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1995 and are incorporated herein by reference.
10.11 Five-Year Competitive Advance and Revolving Credit Facility Agreement
dated as of December 20, 1996 among The Hartford, the Lenders named
therein and The Chase Manhattan Bank as Administrative Agent is filed
herewith.
10.12 364 Day Competitive Advance and Revolving Credit Facility Agreement dated
as of December 20, 1996 among The Hartford, the lenders named therein and
The Chase Manhattan Bank as Administrative Agent is filed herewith.
10.13 (pound)80,000,000 credit facility dated September 29, 1995 among London &
Edinburgh Insurance Group Limited, as borrower, The Hartford, as
guarantor, the managers and banks named therein and The Sumitomo Bank,
Limited, was filed as Exhibit 10.12 to The Hartford's Form 10-K for the
fiscal year ended December 31, 1995 and is incorporated herein by
reference.
10.14 Employment Agreement dated October 24, 1995 between The Hartford and
Ramani Ayer (incorporated herein by reference to Exhibit 10.11 to The
Hartford's Registration Statement on Form 8-A, dated September 18, 1995,
as amended by the Form 8-A/A, dated November 13, 1995).
10.15 Employment Agreement dated October 24, 1995 between The Hartford and
Lowndes A. Smith (incorporated herein by reference to Exhibit 10.12 to
The Hartford's Registration Statement on Form 8-A, dated September 18,
1995, as amended by the Form 8-A/A, dated November 13, 1995).
10.16 1996 ITT Hartford Deferred Restricted Stock Unit Plan is filed herewith.
11.01 Statement Re: Computation of Earnings Per Share is filed herewith.
12.01 Statement Re: Computation of Ratio of Earnings to Fixed Charges is filed
herewith.
21.01 Subsidiaries of ITT Hartford Group, Inc. is filed herewith.
23.01 Consent of Arthur Andersen LLP to the incorporation by reference into The
Hartford's Registration Statements on Forms S-8 and Form S-3 of the
report of Arthur Andersen LLP contained in this Form 10-K on the audited
financial statements, is filed herewith.
27.01 Financial Data Schedule is filed herewith.
II-4
<PAGE>
EXHIBIT 4.16
================================================================================
ITT HARTFORD GROUP, INC.
to
WILMINGTON TRUST COMPANY
Trustee
------------------------------
JUNIOR SUBORDINATED INDENTURE
Dated as of October 30, 1996
------------------------------
================================================================================
<PAGE>
TABLE OF CONTENTS
-----------------
ARTICLE ONE
Definitions and other Provisions of General Application
-------------------------------------------------------
SECTION 101. Definitions.................................2
SECTION 102. Compliance Certificate and Opinions........12
SECTION 103. Forms of Documents Delivered to
Trustee....................................13
SECTION 104. Acts of Holders............................14
SECTION 105. Notices, Etc. to Trustee and Company.......15
SECTION 106. Notice to Holders; Waiver..................16
SECTION 107. Conflict With Trust Indenture Act..........16
SECTION 108. Effect of Headings and Table of
Contents...................................17
SECTION 109. Successors and Assigns.....................17
SECTION 110. Separability Clause........................17
SECTION 111. Benefits of Indenture......................17
SECTION 112. Governing Law..............................17
SECTION 113. Non-Business Days..........................17
ARTICLE TWO
Security Forms
--------------
SECTION 201. Forms Generally............................18
SECTION 202. Form of Face of Security...................18
SECTION 203. Form of Reverse of Security................24
SECTION 204. Additional Provisions Required in
Global Security............................27
SECTION 205. Form of Trustee's Certificate of
Authentication.............................27
ARTICLE THREE
The Securities
--------------
SECTION 301. Title and Terms............................28
SECTION 302. Denominations..............................31
SECTION 303. Execution, Authentication, Delivery
and Dating.................................31
SECTION 304. Temporary Securities.......................33
SECTION 305. Registration, Transfer and Exchange........34
SECTION 306. Mutilated, Destroyed, Lost and Stolen
Securities.................................36
SECTION 307. Payment of Interest; Interest Rights
Preserved..................................37
SECTION 308. Persons Deemed Owners......................39
SECTION 309. Cancellation...............................39
SECTION 310. Computation of Interest....................39
i
<PAGE>
SECTION 311. Deferrals of Interest Payment Dates........39
SECTION 312. Right of Set-Off...........................41
SECTION 313. Agreed Tax Treatment.......................41
SECTION 314. Extension of Stated Maturity;
Adjustment of Stated Maturity Upon an
Exchange...................................41
SECTION 315. CUSIP Numbers..............................42
ARTICLE FOUR
Satisfaction and Discharge
--------------------------
SECTION 401. Satisfaction and Discharge of
Indenture..................................42
SECTION 402. Application of Trust Money.................44
SECTION 403. Satisfaction, Discharge and
Defeasance of Securities of Any
Series.....................................44
ARTICLE FIVE
Remedies
--------
SECTION 501. Events of Default..........................46
SECTION 502. Acceleration of Maturity; Rescission
and Annulment..............................47
SECTION 503. Collection of Indebtedness and Suits
for Enforcement by Trustee.................49
SECTION 504. Trustee May File Proofs of Claim...........50
SECTION 505. Trustee May Enforce Claim Without
Possession of Securities...................51
SECTION 506. Application of Money Collected.............52
SECTION 507. Limitation on Suits........................52
SECTION 508. Unconditional Right of Holders to
Receive Principal, Premium and
Interest...................................53
SECTION 509. Restoration of Rights and Remedies.........54
SECTION 510. Rights and Remedies Cumulative.............54
SECTION 511. Delay or Omission Not Waiver...............54
SECTION 512. Control by Holders.........................54
SECTION 513. Waiver of Past Defaults....................55
SECTION 514. Undertaking for Costs......................56
SECTION 515. Waiver of Stay or Extension Laws...........56
ARTICLE SIX
The Trustee
-----------
SECTION 601. Certain Duties and Responsibilities........57
SECTION 602. Notice of Defaults.........................58
SECTION 603. Certain Rights of Trustee..................59
ii
<PAGE>
SECTION 604. Not Responsible for Recitals or
Issuance of Securities.....................60
SECTION 605. May Hold Securities........................60
SECTION 606. Money Held in Trust........................60
SECTION 607. Compensation and Reimbursement.............61
SECTION 608. Disqualification; Conflicting
Interests..................................62
SECTION 609. Corporate Trustee Required;
Eligibility................................62
SECTION 610. Resignation and Removal; Appointment
of Successor...............................63
SECTION 611. Acceptance of Appointment by
Successor..................................64
SECTION 612. Merger, Conversion, Consolidation or
Succession to Business.....................66
SECTION 613. Preferential Collection of Claims
Against Company............................66
SECTION 614. Appointment of Authenticating Agent........67
ARTICLE SEVEN
Holders' Lists and Reports by Trustee and Company
-------------------------------------------------
SECTION 701. Company to Furnish Trustee Names and
Addresses of Holders.......................69
SECTION 702. Preservation of Information,
Communications to Holders..................69
SECTION 703. Reports by Trustee.........................70
SECTION 704. Reports by Company.........................70
ARTICLE EIGHT
Consolidation, Merger, Conveyance, Transfer or Lease
----------------------------------------------------
SECTION 801. Company May Consolidate, Etc., Only
on Certain Terms...........................71
SECTION 802. Successor Corporation Substituted..........72
ARTICLE NINE
Supplemental Indentures
-----------------------
SECTION 901. Supplemental Indentures Without
Consent of Holders.........................73
SECTION 902. Supplemental Indentures with Consent
of Holders.................................74
SECTION 903. Execution of Supplemental Indentures.......76
SECTION 904. Effect of Supplemental Indentures..........77
SECTION 905. Conformity with Trust Indenture Act........77
SECTION 906. Reference in Securities to
Supplemental Indentures....................77
iii
<PAGE>
ARTICLE TEN
Covenants
---------
SECTION 1001. Payment of Principal, Premium and
Interest...................................77
SECTION 1002. Maintenance of Office or Agency............77
SECTION 1003. Money for Security Payments to be
Held in Trust..............................78
SECTION 1004. Payment of Taxes and Other Claims..........80
SECTION 1005. Statement as to Compliance.................80
SECTION 1006. Waiver of Certain Covenants................81
SECTION 1007. Additional Sums............................81
SECTION 1008. Additional Covenants.......................82
ARTICLE ELEVEN
Redemption of Securities
------------------------
SECTION 1101. Applicability of This Article..............83
SECTION 1102. Election to Redeem; Notice to Trustee......83
SECTION 1103. Selection of Securities to be
Redeemed...................................84
SECTION 1104. Notice of Redemption.......................84
SECTION 1105. Deposit of Redemption Price................85
SECTION 1106. Payment of Securities Called for
Redemption.................................85
SECTION 1107. Company's Right of Redemption..............86
ARTICLE TWELVE
Sinking Funds
-------------
SECTION 1201. Applicability of Article...................88
SECTION 1202. Satisfaction of Sinking Fund Payments
with Securities............................88
SECTION 1203. Redemption of Securities for Sinking
Fund.......................................89
ARTICLE THIRTEEN
Subordination of Securities
---------------------------
SECTION 1301. Securities Subordinate to Senior Debt......91
SECTION 1302. Payment Over of Proceeds Upon
Dissolution, Etc...........................91
SECTION 1303. Prior Payment to Senior Debt Upon
Acceleration of Securities.................93
SECTION 1304. No Payment When Senior Debt in
Default....................................94
SECTION 1305. Payment Permitted If No Default............95
SECTION 1306. Subrogation to Rights of Holders of
Senior Debt................................95
iv
<PAGE>
SECTION 1307. Provisions Solely to Define Relative
Rights.....................................96
SECTION 1308. Trustee to Effectuate Subordination........96
SECTION 1309. No Waiver of Subordination Provisions......96
SECTION 1310. Notice to Trustee..........................97
SECTION 1311. Reliance on Judicial Order or
Certificate of Liquidating Agent...........97
SECTION 1312. Trustee Not Fiduciary for Holders of
Senior Debt................................98
SECTION 1313. Rights of Trustee as Holder of Senior
Debt; Preservation of Trustee's
Rights.....................................98
SECTION 1314. Article Applicable to Paying Agents........98
SECTION 1315. Certain Conversions or Exchanges
Deemed Payment.............................98
Annex A -- Form of Trust Agreement
Annex B -- Form of Amended and Restated Trust Agreement
Annex C -- Form of Guarantee Agreement
v
<PAGE>
ITT HARTFORD GROUP, INC.
Reconciliation and tie between the Trust Indenture Act of 1939
(including cross-references to provisions of Sections 310 to and including 317
which, pursuant to Section 318(c) of the Trust Indenture Act of 1939, as amended
by the Trust Reform Act of 1990, are a part of and govern the Indenture whether
or not physically contained therein) and the Junior Subordinated Indenture,
dated as of February 28, 1996.
Trust Indenture
Act Section Indenture Section
(S) 310 (a)(1), (2) and (5).....................................609
(a)(3).......................................Not Applicable
(a)(4).......................................Not Applicable
(b).....................................................608
........................................................610
(c)..........................................Not Applicable
(S) 311 (a)..................................................613(a)
(b)..................................................613(b)
(b)(2)............................................703(a)(2)
..................................................703(a)(2)
(S) 312 (a).....................................................701
.....................................................702(a)
(b)..................................................702(b)
(c)..................................................702(c)
(S) 313 (a)..................................................703(a)
(b)..................................................703(b)
(c)..........................................703(a), 703(b)
(d)..................................................703(c)
(S) 314 (a)(1), (2) and (3).....................................704
(a)(4).................................................1006
(b)..........................................Not Applicable
(c)(1)..................................................102
(c)(2)..................................................102
(c)(3).......................................Not Applicable
(d)..........................................Not Applicable
(e).....................................................102
(f)..........................................Not Applicable
(S) 315 (a)..................................................601(a)
(b).....................................................602
..................................................703(a)(6)
(c)..................................................601(b)
(d)..................................................601(c)
(d)(1)............................................601(a)(1)
(d)(2)............................................601(c)(2)
(d)(3)............................................601(c)(3)
(e).....................................................514
(S) 316 (a).....................................................101
(a)(1)(A)...............................................512
(a)(1)(B)...............................................513
(a)(2).................................. ....Not Applicable
(b).....................................................508
(c)..................................................104(f)
(S) 317 (a)(1)..................................................503
(a)(2)..................................................504
(b)....................................................1003
(S) 318 (a).....................................................107
Note: This reconciliation and tie shall not, for any purpose, be deemed to be a
part of the Junior Subordinated Indenture.
<PAGE>
JUNIOR SUBORDINATED INDENTURE, dated as of October 30, 1996 between ITT
HARTFORD GROUP, INC., a Delaware corporation (hereinafter called the "Company")
having its principal office at Hartford Plaza, Hartford, Connecticut 06115, and
Wilmington Trust Company, a Delaware banking corporation duly organized and
existing under the laws of the State of Delaware, as Trustee (hereinafter called
the "Trustee").
RECITALS OF THE COMPANY
The Company has duly authorized the execution and delivery of this
Indenture to provide for the issuance from time to time of its unsecured junior
subordinated debt securities in series (hereinafter called the "Securities") of
substantially the tenor hereinafter provided, including, without limitation,
Securities issued to evidence loans made to the Company of the proceeds from the
issuance from time to time by one or more business trusts (each a "Hartford
Trust", and collectively, the "Hartford Trusts") of preferred trust interests in
such Trusts (the "Preferred Securities") and common interests in such Trusts
(the "Common Securities"), and to provide the terms and conditions upon which
the Securities are to be authenticated, issued and delivered.
All things necessary to make the Securities, when executed by the Company
and authenticated and delivered hereunder and duly issued by the Company, the
valid obligations of the Company, and to make this Indenture a valid agreement
of the Company, in accordance with their and its terms, have been done.
NOW THEREFORE, THIS INDENTURE WITNESSETH:
For and in consideration of the premises and the purchase of the Securities
by the Holders thereof, it is mutually covenanted and agreed, for the equal and
proportionate benefit of all Holders of the Securities or of any series thereof,
as follows:
ARTICLE ONE
DEFINITIONS AND OTHER PROVISIONS OF GENERAL APPLICATION
-------------------------------------------------------
SECTION 101. Definitions.
-----------
For all purposes of this Indenture, except as otherwise expressly provided
or unless the context otherwise requires:
(1) The terms defined in this Article have the meanings assigned to them in
this Article, and include the plural as well as the singular;
(2) All other terms used herein which are defined in the Trust Indenture
Act, either directly or by reference therein, have the meanings assigned to them
therein;
(3) All accounting terms not otherwise defined herein have the meanings
assigned to them in accordance with generally accepted accounting principles,
and the term "generally accepted accounting principles" with respect to any
computation required or permitted hereunder shall mean such accounting
principles which are generally accepted at the date or time of such computation;
provided, that when two or more principles are so generally accepted, it shall
- --------
mean that set of principles consistent with those in use by the Company; and
(4) The words "herein," "hereof" and "hereunder" and other words of similar
import refer to this Indenture as a whole and not to any particular Article,
Section or other subdivision.
Certain terms, used principally in Article Six, are defined in that
Article.
"Act" when used with respect to any Holder has the meaning specified in
---
Section 104.
"Additional Interest" means the interest, if any, that shall accrue on any
-------------------
interest on the Securities of any series that is in arrears for more than one
interest payment period or not paid during any Extension Period, which in either
case shall accrue at the rate per annum specified or determined as specified in
such Security.
2
<PAGE>
"Additional Sums" has the meaning specified in Section 1007.
---------------
"Additional Taxes" means the sum of additional taxes, duties and other
----------------
governmental charges to which a Hartford Trust has become subject from time to
time as a result of a Tax Event.
"Affiliate" of any specified Person means any other Person directly or
---------
indirectly controlling or controlled by or under direct or indirect common
control with such specified Person; provided, however, that an Affiliate of the
-------- -------
Company shall not be deemed to include any Hartford Trust to which Securities
have been issued. For the purposes of this definition, "control" when used with
respect to any specified Person means the power to direct the management and
policies of such Person, directly or indirectly, whether through the ownership
of voting securities, by contract or otherwise; and the terms "controlling" and
"controlled" have meanings correlative to the foregoing.
"Authenticating Agent" means any Person authorized by the Trustee pursuant
--------------------
to Section 614 to act on behalf of the Trustee to authenticate Securities of one
or more series.
"Board of Directors" means either the board of directors of the Company or
------------------
any committee of that board duly authorized to act hereunder.
"Board Resolution" means a copy of a resolution certified by the Secretary
----------------
or an Assistant Secretary of the Company to have been duly adopted by the Board
of Directors, or such committee of the Board of Directors or officers of the
Company to which authority to act on behalf of the Board of Directors has been
delegated, and to be in full force and effect on the date of such certification,
and delivered to the Trustee.
"Business Day" means any day other than (i) a Saturday or Sunday or (ii) a
------------ - --
day on which banking institutions in The City of New York are authorized or
required by law or executive order to remain closed or (iii) a day on which the
---
Corporate Trust Office of the Trustee, or, with respect to the Securities of a
series issued to a Hartford Trust, the principal office of the Property Trustee
under the related Trust Agreement, is closed for business.
3
<PAGE>
"Commission" means the Securities and Exchange Commission, as from time to
----------
time constituted, created under the Securities Exchange Act of 1934, or if at
any time after the execution of this instrument such Commission is not existing
and performing the duties now assigned to it under the Trust Indenture Act, then
the body performing such duties on such date.
"Common Securities" has the meaning specified in the first recital of this
-----------------
Indenture.
"Company" means the Person named as the "Company" in the first paragraph of
-------
this instrument until a successor corporation shall have become such pursuant to
the applicable provisions of this Indenture, and thereafter "Company" shall mean
such successor corporation.
"Company Request" and "Company Order" mean, respectively, the written
--------------- -------------
request or order signed in the name of the Company by the Chairman and Chief
Executive Officer, President or a Vice President, and by the Treasurer, an
Associate Treasurer, an Assistant Treasurer, the Controller, the Secretary or an
Assistant Secretary of the Company, and delivered to the Trustee.
"Corporate Trust Office" means the principal office of the Trustee at which
----------------------
at any particular time its corporate trust business shall be administered.
"Corporation" includes corporations, associations, companies and business
-----------
trusts.
"Current Value" has the meaning specified in Section 1107.
-------------
"Debt" means, with respect to any Person, whether recourse is to all or a
----
portion of the assets of such Person and whether or not contingent, (i) every
-
obligation of such Person for money borrowed; (ii) every obligation of such
--
Person evidenced by bonds, debentures, notes or other similar instruments,
including obligations incurred in connection with the acquisition of property,
assets or businesses; (iii) every reimbursement obligation of such Person with
---
respect to letters of credit, bankers' acceptances or similar facilities issued
for the account of such Person; (iv) every obligation of such Person issued or
--
assumed as the deferred purchase price of property or services (but excluding
trade accounts payable or accrued liabilities arising in the ordinary course of
business);
4
<PAGE>
(v) every capital lease obligation of such Person; and (vi) every obligation of
- --
the type referred to in clauses (i) through (v) of another Person and all
dividends of another Person the payment of which, in either case, such Person
has guaranteed or is responsible or liable, directly or indirectly, as obligor
or otherwise.
"Defaulted Interest" has the meaning specified in Section 307.
------------------
"Depositary" means, with respect to the Securities of any series issuable
----------
or issued in whole or in part in the form of one or more Global Securities, the
Person designated as Depositary by the Company pursuant to Section 301 with
respect to such series (or any successor thereto).
"Discounted Remaining Fixed Amount Payments" has the meaning specified in
------------------------------------------
Section 1107.
"Discounted Swap Equivalent Payments" has the meaning specified in Section
-----------------------------------
1107.
"Dollar" means the currency of the United States of America as at the time
------
of payment is legal tender for the payment of public and private debts.
"Event of Default" unless otherwise specified in the supplemental indenture
----------------
creating a series of Securities, has the meaning specified in Article Five.
"Extension Period" has the meaning specified in Section 311.
----------------
"Foreign Currency" means any currency issued by the government of one or
----------------
more countries other than the United States of America or by any recognized
confederation or association of such governments.
"Global Security" means a Security in the form prescribed in Section 204
---------------
evidencing all or part of a series of Securities, issued to the Depositary or
its nominee for such series, and registered in the name of such Depositary or
its nominee.
"Government Obligations" means, with respect to the Securities of any
----------------------
series, securities which are (i) direct obligations of the United States of
America or (ii) obligations of a Person controlled or supervised by and acting
as an agency or instrumentality of the United States
5
<PAGE>
of America the payment of which is unconditionally guaranteed by the United
States of America and which, in either case, are full faith and credit
obligations of the United States of America and are not callable or redeemable
at the option of the issuer thereof and shall also include a depository receipt
issued by a bank (as defined in Section 3(a)(2) of the Securities Act of 1933,
as amended) as custodian with respect to any such Government Obligation or a
specific payment of interest on or principal of any such Government Obligation
held by such custodian for the account of the holder of such depository receipt;
provided that (except as required by law) such custodian is not authorized to
- --------
make any deduction from the amount payable to the holder of such depository
receipt from any amount received by the custodian in respect of the Government
Obligation or the specific payment of interest on or principal of the Government
Obligation evidenced by such depository receipt.
"Hartford Guarantee" means the guarantee by the Company of distributions on
------------------
the Preferred Securities of a Hartford Trust to the extent provided in the
Guarantee Agreement, substantially in the form attached hereto as Annex C, or
substantially in such form as may be specified as contemplated by Section 301
with respect to the Securities of any series, in each case as amended from time
to time.
"Hartford Trust" has the meaning specified in the first recital of this
--------------
Indenture.
"Holder" means a Person in whose name a Security is registered in the
------
Securities Register.
"Junior Subordinated Payment" has the meaning specified in Section 1302.
---------------------------
"Indenture" means this instrument as originally executed or as it may from
---------
time to time be supplemented or amended by one or more indentures supplemental
hereto entered into pursuant to the applicable provisions hereof and shall
include the terms of each particular series of Securities established as
contemplated by Section 301.
"Interest Payment Date" means as to each series of Securities the Stated
---------------------
Maturity of an installment of interest on such Securities.
6
<PAGE>
"Interest Rate" means the rate of interest specified or determined as
-------------
specified in each Security as being the rate of interest payable on such
Security.
"Investment Company Event" means, in respect of a Hartford Trust, the
------------------------
occurrence of a change in law or regulation or a change in interpretation or
application of law or regulation by any legislative body, court, governmental
agency or regulatory authority (a "Change in 1940 Act Law") to the effect that
such Hartford Trust is or will be considered an "investment company" that is
required to be registered under the 1940 Act, which Change in 1940 Act Law
becomes effective on or after the date of original issuance of the Preferred
Securities of such Hartford Trust.
"Lien" means any mortgage, pledge, lien, security interest or other
----
encumbrance.
"Maturity" when used with respect to any Security means the date on which
--------
the principal of such Security becomes due and payable as therein or herein
provided, whether at the Stated Maturity or by declaration of acceleration, call
for redemption or otherwise.
"1940 Act" means the Investment Company Act of 1940, as amended.
--------
"Notice of Default" has the meaning specified in Section 501(3).
-----------------
"Officers' Certificate" means a certificate signed by the Chairman and
---------------------
Chief Executive Officer, President or a Vice President, and by the Treasurer, an
Associate Treasurer, an Assistant Treasurer, the Controller, the Secretary or an
Assistant Secretary of the Company, and delivered to the Trustee.
"Opinion of Counsel" means a written opinion of counsel, who may be counsel
------------------
for the Company.
"Original Issue Date" means the date of issuance specified as such in each
-------------------
Security.
"Original Issue Discount Security" means any security which provides for an
--------------------------------
amount less than the principal amount thereof to be due and payable upon a
declaration of acceleration of the Maturity thereof pursuant to Section 502.
7
<PAGE>
"Outstanding" means, as of the date of determination, all Securities
-----------
theretofore authenticated and delivered under this Indenture, except:
(i) Securities theretofore canceled by the Trustee or delivered to the
Trustee for cancellation;
(ii) Securities for whose payment money in the necessary amount has been
theretofore deposited with the Trustee or any Paying Agent in trust for the
Holders of such Securities; and
(iii) Securities in substitution for or in lieu of which other
Securities have been authenticated and delivered or which have been paid
pursuant to Section 306, unless proof satisfactory to the Trustee is
presented that any such Securities are held by Holders in whose hands such
Securities are valid, binding and legal obligations of the Company;
provided, however, that in determining whether the Holders of the requisite
- -------- -------
principal amount of Outstanding Securities have given any request, demand,
authorization, direction, notice, consent or waiver hereunder, Securities owned
by the Company or any other obligor upon the Securities or any Affiliate of the
Company or such other obligor shall be disregarded and deemed not to be
outstanding, except that, in determining whether the Trustee shall be protected
in relying upon any such request, demand, authorization, direction, notice,
consent or waiver, only Securities which the Trustee knows to be so owned shall
be so disregarded. Securities so owned which have been pledged in good faith may
be regarded as Outstanding if the pledgee establishes to the satisfaction of the
Trustee the pledgee's right so to act with respect to such Securities and that
the pledgee is not the Company or any other obligor upon the Securities or any
Affiliate of the Company or such other obligor. Upon request of the Trustee, the
Company shall furnish to the Trustee promptly an Officers' Certificate listing
and identifying all Securities, if any, known by the Company to be owned or held
by or for the account of the Company, or any other obligor on the Securities or
any Affiliate of the Company or such obligor, and, subject to the provisions of
Section 601, the Trustee shall be entitled to accept such Officers' Certificate
as conclusive evidence of the facts therein set forth and of the fact that all
Securities not listed therein are Outstanding for the purpose of any such
determination.
8
<PAGE>
"Paying Agent" means the Trustee or any Person authorized by the Company to
------------
pay the principal of or interest on any Securities on behalf of the Company.
"Person" means any individual, corporation, partnership, joint venture,
------
association, joint-stock company, trust, unincorporated organization or
government or any agency or political subdivision thereof.
"Place of Payment" means, with respect to the Securities of any series, the
----------------
place or places where the principal of (and premium, if any) and interest on the
Securities of such series are payable pursuant to Section 301 or 311.
"Predecessor Security" of any particular Security means every previous
--------------------
Security evidencing all or a portion of the same debt as that evidenced by such
particular Security; and, for the purposes of this definition, any security
authenticated and delivered under Section 306 in lieu of a lost, destroyed or
stolen Security shall be deemed to evidence the same debt as the lost, destroyed
or stolen Security.
"Preferred Securities" has the meaning specified in the first recital of
--------------------
this Indenture.
"Proceeding" has the meaning specified in Section 1302.
----------
"Property Trustee" means, in respect of any Hartford Trust, the commercial
----------------
bank or trust company identified as the "Property Trustee" in the related Trust
Agreement, solely in its capacity as Property Trustee of such Hartford Trust
under such Trust Agreement and not in its individual capacity, or its successor
in interest in such capacity, or any successor property trustee appointed as
therein provided.
"Regular Record Date" for the interest payable on any Interest Payment Date
-------------------
with respect to the Securities of a series means, unless otherwise provided
pursuant to Section 301 with respect to Securities of a series, the date which
is fifteen days next preceding such Interest Payment Date (whether or not a
Business Day).
"Responsible Officer" when used with respect to the Trustee means any
-------------------
officer of the Trustee assigned by the
9
<PAGE>
Trustee from time to time to administer its corporate trust matters.
"Restricted Subsidiary" means a Subsidiary which is incorporated in any
---------------------
state of the United States or in the District of Columbia and which is a
regulated insurance company principally engaged in one or more of the property,
casualty and life insurance businesses, provided that no such Subsidiary shall
--------
be a Restricted Subsidiary if (i) the total assets of such Subsidiary are less
-
than 10% of the total assets of the Company and its consolidated Subsidiaries
(including such Subsidiary), in each case as set forth on the most recent fiscal
year-end balance sheets of such Subsidiary and the Company and its consolidated
Subsidiaries, respectively, and computed in accordance with generally accepted
accounting principles, or (ii) in the judgment of the Board of Directors, as
--
evidenced by a Board Resolution, such Subsidiary is not material to the
financial condition of the Company and its consolidated Subsidiaries taken as a
whole.
"Securities" or "Security" means any debt securities or debt security, as
---------- --------
the case may be, authenticated and delivered under this Indenture.
"Securities Register" and "Securities Registrar" have the respective
------------------- --------------------
meanings specified in Section 305.
"Senior Debt" means the principal of (and premium, if any) and interest, if
-----------
any (including interest accruing on or after the filing of any petition in
bankruptcy or for reorganization relating to the Company whether or not such
claim for post-petition interest is allowed in such proceeding), on Debt,
whether incurred on or prior to the date of this Indenture or thereafter
incurred, unless, in the instrument creating or evidencing the same or pursuant
to which the same is outstanding, it is provided that such obligations are not
superior in right of payment to the Securities or to other Debt which is pari
----
passu with, or subordinated to, the Securities, provided, however, that Senior
- ----- -------- -------
Debt shall not be deemed to include (a) the 7.70% Junior Subordinated Deferrable
-
Interest Debentures, Series A, Due February 28, 2015, of the Company, (b) any
-
Debt of the Company which when incurred and without respect to any election
under Section 1111(b) of the Bankruptcy Reform Act of 1978, was without recourse
to the Company, (c) any Debt of the Company to any of its Subsidiaries, (d) Debt
- -
to any employee of the Company, (e) any liability for taxes, (f) Debt or other
- -
monetary obligations to trade creditors
10
<PAGE>
created or assumed by the Company or any of its Subsidiaries in the ordinary
course of business in connection with the obtaining of goods, materials or
services and (g) the Securities.
-
"Special Event" means a Tax Event or an Investment Company Event.
-------------
"Special Record Date" for the payment of any Defaulted Interest means a
-------------------
date fixed by the Trustee pursuant to Section 307.
"Stated Maturity" when used with respect to any Security or any installment
---------------
of principal thereof or interest thereon means the date specified in such
Security as the fixed date on which the principal of such Security or such
installment of interest is due and payable.
"Subsidiary" means any corporation of which at the time of determination
----------
the Company and/or one or more Subsidiaries owns or controls directly or
indirectly more than 50% of the outstanding shares of voting stock. For purposes
of this definition, "voting stock" means stock which has voting power for the
election of directors, whether at all times or only so long as no senior class
of stock has such voting power by reason of any contingency.
"Tax Event" means the receipt by a Hartford Trust of an Opinion of Counsel
---------
experienced in such matters to the effect that, as a result of any amendment to,
or change (including any announced prospective change) in, the laws (or any
regulations thereunder) of the United States or any political subdivision or
taxing authority thereof or therein affecting taxation, or as a result of any
official administrative pronouncement or judicial decision interpreting or
applying such laws or regulations, which amendment or change is effective or
such pronouncement or decision is announced on or after the date of issuance of
the Preferred Securities of such Hartford Trust, there is more than an
insubstantial risk that (i) the Hartford Trust is, or will be within 90 days of
-
the date thereof, subject to United States Federal income tax with respect to
income received or accrued on the corresponding series of Securities, (ii)
--
interest payable by the Company on the corresponding series of Securities is
not, or within 90 days of the date thereof, will not be, deductible, in whole or
in part, for United States Federal income tax purposes or (iii) the Hartford
---
Trust is, or will be within 90 days of the date thereof, subject to more than
11
<PAGE>
a de minimis amount of other taxes, duties or other governmental charges.
-- -------
"Trust Agreement" means the Trust Agreement substantially in the form
---------------
attached hereto as Annex A, as amended by the form of Amended and Restated Trust
Agreement substantially in the form attached hereto as Annex B, or substantially
in such form as may be specified as contemplated by Section 301 with respect to
the Securities of any series, in each case as amended from time to time.
"Trustee" means the Person named as the "Trustee" in the first paragraph of
-------
this instrument until a successor Trustee shall have become such pursuant to the
applicable provisions of this Indenture, and thereafter "Trustee" shall mean or
include each Person who is then a Trustee hereunder and, if at any time there is
more than one such Person, "Trustee" as used with respect to the Securities of
any series shall mean the Trustee with respect to Securities of that series.
"Trust Indenture Act" means the Trust Indenture Act of 1939 (15 U.S.C.
-------------------
(S)(S) 77aaa-77bbb), as amended and as in effect on the date as of this
Indenture, except as provided in Section 905.
"Vice President" when used with respect to the Company, means any vice
--------------
president, whether or not designated by a number or a word or words added before
or after the title "vice president."
SECTION 102. Compliance Certificate and Opinions.
-----------------------------------
Upon any application or request by the Company to the Trustee to take any
action under any provision of this Indenture, the Company shall furnish to the
Trustee an Officers' Certificate stating that all conditions precedent
(including covenants, compliance with which constitutes a condition precedent),
if any, provided for in this Indenture relating to the proposed action have been
complied with and an Opinion of Counsel stating that in the opinion of such
counsel all such conditions precedent (including covenants compliance with which
constitute a condition precedent), if any, have been complied with, except that
in the case of any such application or request as to which the furnishing of
such documents is specifically required by any provision of this Indenture
relating to such particular application or
12
<PAGE>
request, no additional certificate or opinion need be furnished.
Every certificate or opinion with respect to compliance with a condition or
covenant provided for in this Indenture (other than the certificates provided
pursuant to Section 1006) shall include:
(1) a statement that each individual signing such certificate or opinion
has read such covenant or condition and the definitions herein relating
thereto;
(2) a brief statement as to the nature and scope of the examination or
investigation upon which the statements or opinions contained in such
certificate or opinion are based;
(3) a statement that, in the opinion of each such individual, he has
made such examination or investigation as is necessary to enable him to
express an informed opinion as to whether or not such covenant or condition
has been complied with; and
(4) a statement as to whether, in the opinion of each such individual,
such condition or covenant has been complied with.
SECTION 103. Forms of Documents Delivered to Trustee.
---------------------------------------
In any case where several matters are required to be certified by, or
covered by an opinion of, any specified Person, it is not necessary that all
such matters be certified by, or covered by the opinion of, only one such
Person, or that they be so certified or covered by only one document, but one
such Person may certify or give an opinion with respect to some matters and one
or more other such Persons as to other matters, and any such Person may certify
or give an opinion as to such matters in one or several documents.
Any certificate or opinion of an officer of the Company may be based,
insofar as it relates to legal matters, upon a certificate or opinion of, or
representations by, counsel, unless such officer knows, or in the exercise of
reasonable care should know, that the certificate or opinion or representations
with respect to matters upon which his certificate or opinion is based are
erroneous. Any such certificate or Opinion of Counsel may be
13
<PAGE>
based, insofar as it relates to factual matters, upon a certificate or opinion
of, or representations by, an officer or officers of the Company stating that
the information with respect to such factual matters is in the possession of the
Company, unless such counsel knows, or in the exercise of reasonable care should
know, that the certificate or opinion or representations with respect to such
matters are erroneous.
Where any Person is required to make, give or execute two or more
applications, requests, consents, certificates, statements, opinions or other
instruments under this Indenture, they may, but need not, be consolidated and
form one instrument.
SECTION 104. Acts of Holders
---------------
(a) Any request, demand, authorization, direction, notice, consent, waiver
or other action provided by this Indenture to be given to or taken by Holders
may be embodied in and evidenced by one or more instruments of substantially
similar tenor signed by such Holders in person or by an agent duly appointed in
writing; and, except as herein otherwise expressly provided, such action shall
become effective when such instrument or instruments is or are delivered to the
Trustee, and, where it is hereby expressly required, to the Company. Such
instrument or instruments (and the action embodied therein and evidenced
thereby) are herein sometimes referred to as the "Act" of the Holders signing
such instrument or instruments. Proof of execution of any such instrument or of
a writing appointing any such agent shall be sufficient for any purpose of this
Indenture and (subject to Section 601) conclusive in favor of the Trustee and
the Company and any agent of the Trustee or the Company, if made in the manner
provided in this Section.
(b) The fact and date of the execution by any Person of any such instrument
or writing may be proved by the affidavit of a witness of such execution or by
the certificate of any notary public or other officer authorized by law to take
acknowledgments of deeds, certifying that the individual signing such instrument
or writing acknowledged to him the execution thereof. Where such execution is by
a Person acting in other than his individual capacity, such certificate or
affidavit shall also constitute sufficient proof of his authority.
14
<PAGE>
(c) The fact and date of the execution by any Person of any such instrument
or writing, or the authority of the Person executing the same, may also be
proved in any other manner which the Trustee deems sufficient and in accordance
with such reasonable rules as the Trustee may determine.
(d) The ownership of Securities shall be proved by the Securities
Register.
(e) Any request, demand, authorization, direction, notice, consent, waiver
or other action by the Holder of any Security shall bind every future Holder of
the same Security and the Holder of every Security issued upon the transfer
thereof or in exchange therefor or in lieu thereof in respect of anything done
or suffered to be done by the Trustee or the Company in reliance thereon,
whether or not notation of such action is made upon such Security.
(f) The Company may, but shall not be obligated to, fix a record date for
the purpose of determining the Holders entitled to take any action under this
Indenture by vote or consent. Except as otherwise provided herein, such record
date shall be the later of 30 days prior to the first solicitation of such
consent or vote or the date of the most recent list of Securityholders furnished
to the Trustee pursuant to Section 701 prior to such solicitation. If a record
date is fixed, those persons who were Securityholders at such record date (or
their duly designated proxies), and only those persons, shall be entitled to
take such action by vote or consent or to revoke any vote or consent previously
given, whether or not such persons continue to be Holders after such record
date, provided, however, that unless such vote or consent is obtained from the
-------- -------
Holders (or their duly designated proxies) of the requisite principal amount of
Outstanding Securities prior to the date which is the 120th day after such
record date, any such vote or consent previously given shall automatically and
without further action by any Holder be canceled and of no further effect.
SECTION 105. Notices, Etc. to Trustee and Company.
------------------------------------
Any request, demand, authorization, direction, notice, consent, waiver or
Act of Holders or other document provided or permitted by this Indenture to be
made upon, given or furnished to, or filed with,
15
<PAGE>
(1) the Trustee by any Holder or by the Company shall be sufficient for
every purpose hereunder if made, given, furnished or filed in writing to or with
the Trustee at its Corporate Trust office, or
(2) the Company by the Trustee or by any Holder shall be sufficient for
every purpose (except as otherwise provided in Section 501 hereof) hereunder if
in writing and mailed, first class, postage prepaid, to the Company addressed to
it at the address of its principal office specified in the first paragraph of
this instrument or at any other address previously furnished in writing to the
Trustee by the Company.
SECTION 106. Notice to Holders; Waiver.
-------------------------
Where this Indenture provides for notice to Holders of any event, such
notice shall be sufficiently given (unless otherwise herein expressly provided)
if in writing and mailed, first class postage prepaid, to each Holder affected
by such event, at the address of such Holder as it appears in the Securities
Register, not later than the latest date, and not earlier than the earliest
date, prescribed for the giving of such notice. In any case where notice to
Holders is given by mail, neither the failure to mail such notice, nor any
defect in any notice so mailed, to any particular Holder shall affect the
sufficiency of such notice with respect to other Holders. Where this Indenture
provides for notice in any manner, such notice may be waived in writing by the
Person entitled to receive such notice, either before or after the event, and
such waiver shall be the equivalent of such notice. Waivers of notice by Holders
shall be filed with the Trustee, but such filing shall not be a condition
precedent to the validity of any action taken in reliance upon such waiver.
SECTION 107. Conflict With Trust Indenture Act.
---------------------------------
If any provision of this Indenture limits, qualifies or conflicts with the
duties imposed by any of Sections 310 to 317, inclusive, of the Trust Indenture
Act through operation of Section 318(c) thereof, such imposed duties shall
control.
16
<PAGE>
SECTION 108. Effect of Headings and Table of Contents.
----------------------------------------
The Article and Section headings herein and the Table of Contents are for
convenience only and shall not affect the construction hereof.
SECTION 109. Successors and Assigns.
----------------------
All covenants and agreements in this Indenture by the Company shall bind
its successors and assigns, whether so expressed or not.
SECTION 110. Separability Clause.
-------------------
In case any provision in this Indenture or in the Securities shall be
invalid, illegal or unenforceable, the validity, legality and enforceability of
the remaining provisions shall not in any way be affected or impaired thereby.
SECTION 111. Benefits of Indenture.
---------------------
Nothing in this Indenture or in the Securities, express or implied, shall
give to any Person, other than the parties hereto, any Paying Agent and their
successors and assigns and the Holders of the Securities, any benefit or any
legal or equitable right, remedy or claim under this Indenture.
SECTION 112. Governing Law.
-------------
This Indenture and the Securities shall be governed by and construed in
accordance with the laws of the State of New York.
SECTION 113. Non-Business Days.
-----------------
In any case where any Interest Payment Date or Stated Maturity of any
Security shall not be a Business Day, then (notwithstanding any other provision
of this Indenture or the Securities) payment of interest or principal need not
be made on such date, but may be made on the next succeeding Business Day and no
interest shall accrue for the period from and after such Interest Payment Date
or Stated Maturity, as the case may be, until the next succeeding Business Day,
in each case with the same force and effect as if made on the Interest Payment
Date or at the Stated Maturity, except that, if such Business Day is in the next
17
<PAGE>
succeeding calendar year, such payment shall be made on the immediately
preceding Business Day.
ARTICLE TWO
SECURITY FORMS
--------------
SECTION 201. Forms Generally.
---------------
The Securities of each series and the Trustee's certificate of
authentication shall be in substantially the forms set forth in this Article, or
in such other form or forms as shall be established by or pursuant to a Board
Resolution or in one or more indentures supplemental hereto, in each case with
such appropriate insertions, omissions, substitutions and other variations as
are required or permitted by this Indenture and may have such letters, numbers
or other marks of identification and such legends or endorsements placed thereon
as may be required to comply with applicable tax laws or the rules of any
securities exchange or as may, consistently herewith, be determined by the
officers executing such securities, as evidenced by their execution of the
Securities. If the form of Securities of any series is established by action
taken pursuant to a Board Resolution, a copy of an appropriate record of such
action shall be certified by the Secretary or an Assistant Secretary of the
Company and delivered to the Trustee at or prior to the delivery of the Company
Order contemplated by Section 303 with respect to the authentication and
delivery of such Securities.
The Trustee's certificates of authentication shall be substantially in
the form set forth in this Article.
The definitive Securities shall be printed, lithographed or engraved
or produced by any combination of these methods, if required by any securities
exchange on which the Securities may be listed, on a steel engraved border or
steel engraved borders or may be produced in any other manner permitted by the
rules of any securities exchange on which the Securities may be listed, all as
determined by the officers executing such Securities, as evidenced by their
execution of such securities.
SECTION 202. Form of Face of Security.
------------------------
[If the Security is a Global Security, insert -- This Security is a
Global Security within the meaning of the Indenture hereinafter referred to and
is registered in the
18
<PAGE>
name of The Depository Trust Company (the "Depository") or a nominee of the
Depository. This Security is exchangeable for Securities registered in the name
of a person other than the Depository or its nominee only in the limited
circumstances described in the Indenture and no transfer of this Security (other
than a transfer of this Security as a whole by the Depository to a nominee of
the Depository or by a nominee of the Depository to the Depository or another
nominee of the Depository) may be registered except in limited circumstances.
Unless this Security is presented by an authorized representative of
The Depository Trust Company (55 Water Street, New York) to ITT Hartford Group,
Inc. or its agent for registration of transfer, exchange or payment, and any
Security issued is registered in the name of Cede & Co. or such other name as
requested by an authorized representative of The Depository Trust Company and
any payment hereon is made to Cede & Co., ANY TRANSFER, PLEDGE OR OTHER USE
HEREOF FOR VALUE OR OTHERWISE BY A PERSON IS WRONGFUL inasmuch as the registered
owner hereof, Cede & Co., has an interest herein.]
If the Security is an Original Issue Discount Security, insert -- This
Security was issued with original issue discount for United States Federal
income tax purposes. For further information, please contact [name, title and
address or telephone number of a representative of the Company].
ITT HARTFORD GROUP, INC.
(Title of Security)
No. __________ $_____________
ITT HARTFORD GROUP, INC., a corporation organized and existing under
the laws of Delaware (hereinafter called the "Company", which term includes any
successor corporation under the Indenture hereinafter referred to), for value
received, hereby promises to pay to _______________, or registered assigns, the
principal sum of __________________ Dollars on ________________________,[;
provided that the Company may (i) change the maturity date upon the occurrence
-
of an exchange of the Securities for the Trust Securities subject to certain
conditions set forth in Section 314 of the Indenture, which changed maturity
date shall in no case be earlier than , or later than , and (ii) extend
--
the maturity date subject to certain conditions specified in Section 314 of the
Indenture, which extended maturity date
19
<PAGE>
shall in no case be later than ,]. The Company further promises to pay interest
on said principal sum from ______, ___ or from the most recent interest payment
date (each such date, an "Interest Payment Date") on which interest has been
paid or duly provided for, [monthly] [quarterly] [semi-annually] [if applicable,
insert-(subject to deferral as set forth herein)] in arrears on [insert
applicable Interest Payment Dates] of each year, commencing ______, ___, at the
rate of ___% per annum, until the principal hereof shall have become due and
payable, [if applicable, insert- plus Additional Interest, if any,] until the
principal hereof is paid or duly provided for or made available for payment [if
applicable, insert- and on any overdue principal and (without duplication and to
the extent that payment of such interest is enforceable under applicable law) on
any overdue installment of interest at the rate of ___% per annum, compounded
[monthly] [quarterly] [annually]. The amount of interest payable for any period
will be computed on the basis of twelve 30-day months and a 360-day year. The
amount of interest payable for any partial period shall be computed on the basis
of the number of days elapsed in a 360-day year of twelve 30-day months. In the
event that any date on which interest is payable on this Security is not a
Business Day, then a payment of the interest payable on such date will be made
on the next succeeding day which is a Business Day (and without any interest or
other payment in respect of any such delay), except that, if such Business Day
is in the next succeeding calendar year, such payment shall be made on the
immediately preceding Business Day, in each case with the same force and effect
as if made on the date the payment was originally payable. A "Business Day"
-------- ---
shall mean any day other than a day on which banking institutions in the City of
New York are authorized or required by law or executive order to remain closed
or a day on which the Corporate Trust Office of the Trustee [if applicable,
insert-, or the principal office of the Property Trustee under the Trust
Agreement hereinafter referred to for Hartford Capital __,] is closed for
business. The interest installment so payable, and punctually paid or duly
provided for, on any Interest Payment Date will, as provided in the Indenture,
be paid to the Person in whose name this Security (or one or more Predecessor
Securities, as defined in the Indenture) is registered at the close of business
on the Regular Record Date for such interest installment, which shall be the
[[insert Regular Record Dates] (whether or not a Business Day)] [close of
business on the Business Day] next preceding such Interest Payment Date. Any
such interest installment not so punctually paid or duly provided for shall
forthwith cease to be payable to the Holder on
20
<PAGE>
such Regular Record Date and may either be paid to the Person in whose name this
Security (or one or more Predecessor Securities) is registered at the close of
business on a Special Record Date for the payment of such Defaulted Interest to
be fixed by the Trustee, notice whereof shall be given to Holders of Securities
of this series not less than 10 days prior to such Special Record Date, or be
paid at any time in any other lawful manner not inconsistent with the
requirements of any securities exchange on which the Securities of this series
may be listed, and upon such notice as may be required by such exchange, all as
more fully provided in said Indenture.
[If applicable, insert- The Company shall have the right at any time
during the term of this Security, from time to time, to extend the interest
payment period of such Security for up to __ consecutive [months] [quarters]
with respect to each deferral period (each an "Extension Period"), during which
----------------
periods the Company shall have the right to make partial payments of interest on
any Interest Payment Date, and at the end of which the Company shall pay all
interest then accrued and unpaid (together with Additional Interest thereon to
the extent permitted by applicable law); provided that during any such
--------
Extension Period, the Company will not, and will not permit any Subsidiary of
the Company to (i) declare or pay any dividends or distributions or redeem,
-
purchase, acquire or make a liquidation payment with respect to, any of the
Company's outstanding capital stock or (ii) make any payment of principal,
--
interest or premium, if any, on or repay, repurchase or redeem any debt security
that ranks pari passu with or junior in interest to this Security or make any
---- -----
guarantee payments with respect to the foregoing (other than (a) dividends or
-
distributions in common stock of the Company, (b) redemptions or purchases of
-
any rights pursuant to the Company's Rights Plan, or any successor to such
Rights Plan, and the declaration of a dividend of such rights in the future, and
(c) payments under any Hartford Guarantee (as defined in the Indenture)). Prior
-
to the termination of any such Extension Period, the Company may further extend
the interest payment period, provided that such Extension Period together with
--------
all such previous and further extensions of such Extension Period, shall not
exceed __ consecutive [months] [quarters] or extend beyond the Maturity of this
Security. Upon the termination of any such Extension Period and upon the payment
of all accrued and unpaid interest and any Additional Interest then due, the
Company may select a new Extension Period, subject to the above requirements. No
interest shall be due and
21
<PAGE>
payable during an Extension Period except at the end thereof. The Company shall
give the Holder of this Security and the Trustee notice of its selection of an
Extension Period at least one Business Day prior to the Interest Payment Date
[if applicable, insert- the earlier of (i) the date the Distributions on the
-
Preferred Securities are payable or (ii) the date the Administrative Trustees
--
are required to give notice to the New York Stock Exchange or other applicable
self-regulatory organization or to holders of such Preferred Securities of the
record date or the date such Distributions are payable, but in any event not
less than one Business Day prior to such record date.
Payment of the principal of (and premium, if any) and interest on this
Security will be made at the office or agency of the Company maintained for that
purpose in the United States, in such coin or currency of the United States of
America as at the time of payment is legal tender for payment of public and
private debts [if applicable, insert-; provided, however, that at the option of
-------- -------
the Company payment of interest may be made (i) by check mailed to the address
-
of the Person entitled thereto as such address shall appear in the Securities
Register or (ii) by wire transfer in immediately available funds at such place
--
and to such account as may be designated by the Person entitled thereto as
specified in the Securities Register].
The indebtedness evidenced by this Security is, to the extent provided
in the Indenture, subordinate and subject in right of payments to the prior
payment in full of all Senior Debt, and this Security is issued subject to the
provisions of the Indenture with respect thereto. Each Holder of this Security,
by accepting the same, (a) agrees to and shall be bound by such provisions, (b)
- -
authorizes and directs the Trustee on his behalf to take such actions as may be
necessary or appropriate to effectuate the subordination so provided and (c)
-
appoints the Trustee his attorney-in-fact for any and all such purposes. Each
Holder hereof, by his acceptance hereof, waives all notice of the acceptance of
the subordination provisions contained herein and in the Indenture by each
holder of Senior Debt, whether now outstanding or hereafter incurred, and waives
reliance by each such holder upon said provisions.
Reference is hereby made to the further provisions of this Security
set forth on the reverse hereof, which further provisions shall for all purposes
have the same effect as if set forth at this place.
22
<PAGE>
Unless the certificate of authentication hereon has been executed by
the Trustee referred to on the reverse hereof by manual signature, this Security
shall not be entitled to any benefit under the Indenture or be valid or
obligatory for any purpose.
IN WITNESS WHEREOF, the Company has caused this instrument to be duly
executed under its corporate seal.
Dated:
ITT HARTFORD GROUP, INC.
By:__________________________
[Chairman and Chief Executive
Officer, President or Vice President]
Attest:
- ----------------------------------
[Secretary or Assistant Secretary]
23
<PAGE>
SECTION 203. Form of Reverse of Security.
---------------------------
This Security is one of a duly authorized issue of securities of the
Company, (herein called the "Securities"), issued and to be issued in one or
----------
more series under a Junior Subordinated Indenture, dated as of October 30, 1996
(herein called the "Indenture"), between the Company and Wilmington Trust
---------
Company, as Trustee (herein called the "Trustee", which term includes any
-------
successor trustee under the Indenture), to which Indenture and all indentures
supplemental thereto reference is hereby made for a statement of the respective
rights, limitations of rights, duties and immunities thereunder of the Trustee,
the Company and the Holders of the Securities, and of the terms upon which the
Securities are, and are to be, authenticated and delivered. This Security is one
of the series designated on the face hereof[, limited in aggregate principal
amount to $___________].
All terms used in this Security that are defined in the Indenture [if
applicable, insert- or in the Trust Agreement, dated _________, 1996, as amended
(the "Trust Agreement"), among ITT Hartford Group, Inc. as Depositor, and the
Trustees named therein, for Hartford Capital __,] shall have the meanings
assigned to them in the Indenture [if applicable, insert- or the Trust
Agreement, as the case may be].
[If applicable, insert- The Company may, at its option, subject to the
terms and conditions of Article Eleven of the Indenture, redeem this Security on
any Interest Payment date with respect thereto in whole at any time or in part
from time to time, without premium or penalty, at a redemption price equal to
the accrued and unpaid interest [if applicable, insert-, including Additional
Interest, if any,] to the date fixed for redemption, plus the greater of (a) the
-
principal amount thereof and (b) an amount equal to [for Securities bearing
-
interest at a fixed rate: the Discounted Remaining Fixed Amount Payments] [for
Securities bearing interest determined by a floating rate: the Discounted Swap
Equivalent Payments].
[If applicable, insert- If a Special Event in respect of a Hartford Trust
shall occur and be continuing, the Company may, at its option, redeem the
corresponding series of Securities on any Interest Payment Date falling within
90 days of the occurrence of such Special Event, in
24
<PAGE>
whole but not in part, subject to the provisions of Section 1107 and the other
provisions of Article Eleven of the Indenture. The redemption price for any
Security so redeemed shall be equal to 100% of the principal amount thereof plus
accrued and unpaid interest, including Additional Interest, if any, to the date
fixed for redemption.]
In the event of redemption of this Security in part only, a new Security
or Securities of this series for the unredeemed portion hereof will be issued in
the name of the Holder hereof upon the cancellation hereof.
[If the Security is not an Original Issue Discount Security, - If an
Event of Default with respect to Securities of this series shall occur and be
continuing, the principal of the Securities of this series may be declared due
and payable in the manner, with the effect and subject to the conditions
provided in the Indenture.]
[If the Security is an Original Issue Discount Security, - If an Event of
Default with respect to Securities of this series shall occur and be continuing,
an amount of principal of the Securities of this series may be declared due and
payable in the manner, with the effect and subject to the conditions provided in
the Indenture. Such amounts shall be equal to - insert formula for determining
the amount. Upon payment (i) of the amount of principal so declared due and
-
payable and (ii) of interest on any overdue principal and overdue interest (in
--
each case to the extent that the payment of such interest shall be legally
enforceable), all of the Company's obligations in respect of the payment of the
principal of and interest, if any, on the Securities of this series shall
terminate.]
The Indenture contains provisions for satisfaction, discharge and
defeasance at any time of the entire indebtedness of this Security upon
compliance by the Company with certain conditions set forth in the Indenture.
The Indenture permits, with certain exceptions as therein provided, the
amendment thereof and the modification of the rights and obligations of the
Company and the rights of the Holders of the Securities of each series to be
affected under the Indenture at any time by the Company and the Trustee with the
consent of the Holders of a majority in principal amount of the Securities of
each series at the time Outstanding of each series to be affected. The Indenture
also contains provisions permitting Holders of
25
<PAGE>
specified percentages in principal amount of the Securities of each series at
the time Outstanding, on behalf of the Holders of all Securities of such series,
to waive compliance by the Company with certain provisions of the Indenture and
certain past defaults under the Indenture and their consequences. Any such
consent or waiver by the Holder of this Security shall be conclusive and binding
upon such Holder and upon all future Holders of this Security and of any
Security issued upon the registration of transfer hereof or in exchange herefor
or in lieu hereof, whether or not notation of such consent or waiver is made
upon this Security.
No reference herein to the Indenture and no provision of this Security or
of the Indenture shall alter or impair the obligation of the Company, which is
absolute and unconditional, to pay the principal of (and premium, if any) and
interest on this Security at the times, place and rate, and in the coin or
currency, herein prescribed.
As provided in the Indenture and subject to certain limitations therein
set forth, the transfer of this Security is registrable in the Securities
Register, upon surrender of this Security for registration of transfer at the
office or agency of the Company maintained under Section 1002 of the Indenture
duly endorsed by, or accompanied by a written instrument of transfer in form
satisfactory to the Company and the Securities Registrar duly executed by, the
Holder hereof or his attorney duly authorized in writing, and thereupon one or
more new Securities of this series, of authorized denominations and for the same
aggregate principal amount, will be issued to the designated transferee or
transferees. No service charge shall be made for any such registration of
transfer or exchange, but the Company may require payment of a sum sufficient to
cover any tax or other governmental charge payable in connection therewith.
Prior to due presentment of this Security for registration of transfer,
the Company, the Trustee and any agent of the Company or the Trustee may treat
the Person in whose name this Security is registered as the owner hereof for all
purposes, whether or not this Security be overdue, and neither the Company, the
Trustee nor any such agent shall be affected by notice to the contrary.
The Securities of this series are issuable only in registered form
without coupons in denominations of $____ and any integral multiple thereof. As
provided in the
26
<PAGE>
Indenture and subject to certain limitations therein set forth, Securities of
this series are exchangeable for a like aggregate principal amount of Securities
of such series of a different authorized denomination, as requested by the
Holder surrendering the same.
[If applicable, insert- The Company and, by its acceptance of this
Security or a beneficial interest therein, the Holder of, and any Person that
acquires a beneficial interest in, this Security agree that for United States
Federal, state and local tax purposes it is intended that this Security
constitute indebtedness.]
THE INDENTURE AND THIS SECURITY SHALL BE GOVERNED BY AND CONSTRUED IN
ACCORDANCE WITH THE LAWS OF THE STATE OF NEW YORK WITHOUT REGARD TO CONFLICTS OF
LAWS PRINCIPLES THEREOF.
SECTION 204. Additional Provisions Required in Global Security.
-------------------------------------------------
Any Global Security issued hereunder shall, in addition to the provisions
contained in Sections 202 and 203 bear a legend in substantially the following
form:
"This Security is a Global Security within the meaning of the Indenture
hereinafter referred to and is registered in the name of a Depositary or a
nominee of a Depositary. This Security is exchangeable for Securities registered
in the name of a person other than the Depositary or its nominee only in the
limited circumstances described in the Indenture and may not be transferred
except as a whole by the Depositary to a nominee of the Depositary or by a
nominee of the Depositary to the Depositary or another nominee of the
Depositary."
SECTION 205. Form of Trustee's Certificate of Authentication.
-----------------------------------------------
This is one of the Securities referred to in the within mentioned
Indenture.
-------------------------
as Trustee
By: ____________________
Authorized Officer
27
<PAGE>
ARTICLE THREE
THE SECURITIES
--------------
SECTION 301. Title and Terms.
---------------
The aggregate principal amount of Securities which may be authenticated
and delivered under this Indenture is unlimited.
The Securities may be issued in one or more series. There shall be
established in or pursuant to a Board Resolution, and set forth in an Officers'
Certificate, or established in one or more indentures supplemental hereto, prior
to the issuance of Securities of a series:
(a) the title of the Securities of such series, which shall distinguish the
Securities of the series from all other Securities;
(b) the limit, if any, upon the aggregate principal amount of the Securities
of such series which may be authenticated and delivered under this Indenture
(except for Securities authenticated and delivered upon registration of transfer
of, or in exchange for, or in lieu of, other Securities of the series pursuant
to Section 304, 305, 306, 906 or 1106); provided, however, that the authorized
-------- -------
aggregate principal amount of such series may be increased above such amount by
a Board Resolution to such effect;
(c) the Stated Maturity or Maturities on which the principal of the
Securities of such series is payable or the method of determination thereof;
(d) the rate or rates, if any, at which the Securities of such series shall
bear interest, if any, the rate or rates and extent to which Additional
Interest, if any, shall be payable in respect of any Securities of such series,
the Interest Payment Dates on which such interest shall be payable, the right,
pursuant to Section 311 or as otherwise set forth therein, of the Company to
defer or extend an Interest Payment Date, and the Regular Record Date for the
interest payable on any Interest Payment Date or the method by which any of the
foregoing shall be determined;
(e) the place or places where the principal of (and premium, if any) and
interest on the Securities of
28
<PAGE>
such series shall be payable, the place or places where the Securities of such
series may be presented for registration of transfer or exchange, and the place
or places where notices and demands to or upon the Company in respect of the
Securities of such series may be made;
(f) the period or periods within or the date or dates on which, if any, the
price or prices at which and the terms and conditions upon which the Securities
of such series may be redeemed, in whole or in part, at the option of the
Company;
(g) the obligation or the right, if any, of the Company to redeem, repay or
purchase the Securities of such series pursuant to any sinking fund,
amortization or analogous provisions or at the option of a Holder thereof and
the period or periods within which, the price or prices at which, the currency
or currencies (including currency unit or units) in which and the other terms
and conditions upon which Securities of the series shall be redeemed, repaid or
purchased, in whole or in part, pursuant to such obligation;
(h) the denominations in which any Securities of such series shall be
issuable, if other than denominations of $25 and any integral multiple thereof;
(i) if other than Dollars, the currency or currencies (including currency unit
or units) in which the principal of (and premium, if any) and interest, if any,
on the Securities of the series shall be payable, or in which the Securities of
the series shall be denominated;
(j) the additions, modifications or deletions, if any, in the Events of
Default or covenants of the Company set forth herein with respect to the
Securities of such series;
(k) if other than the principal amount thereof, the portion of the principal
amount of Securities of such series that shall be payable upon declaration of
acceleration of the Maturity thereof;
(l) the additions or changes, if any, to this Indenture with respect to the
Securities of such series as shall be necessary to permit or facilitate the
issuance of the Securities of such series in bearer
29
<PAGE>
form, registrable or not registrable as to principal, and with or without
interest coupons;
(m) any index or indices used to determine the amount of payments of principal
of and premium, if any, on the Securities of such series or the manner in which
such amounts will be determined;
(n) the issuance of a temporary Global Security representing all of the
Securities of such series and exchange of such temporary Global Security for
definitive Securities of such series;
(o) whether the Securities of the series shall be issued in whole or in part
in the form of one or more Global Securities and, in such case, the Depositary
for such Global Securities, which Depositary shall be a clearing agency
registered under the Securities Exchange Act of 1934, as amended;
(p) the appointment of any Paying Agent or Agents for the Securities of such
series;
(q) the terms of any right to convert or exchange Securities of such series
into any other securities or property of the Company, and the additions or
changes, if any, to this Indenture with respect to the Securities of such series
to permit or facilitate such conversion or exchange;
(r) the form or forms of the Trust Agreement, Amended and Restated Trust
Agreement and Guarantee Agreement, if different from the forms attached hereto
as Annexes A, B and C, respectively;
(s) the relative degree, if any, to which the Securities of the series shall
be senior to or be subordinated to other series of Securities in right of
payment, whether such other series of Securities are Outstanding or not; and
(t) any other terms of the Securities of such series (which terms shall not be
inconsistent with the provisions of this Indenture).
All Securities of any one series shall be substantially identical except
as to denomination and except as may otherwise be provided herein or in or
pursuant to such Board
30
<PAGE>
Resolution and set forth in such Officers' Certificate or in any such indenture
supplemental hereto.
If any of the terms of the series are established by action taken
pursuant to a Board Resolution, a copy of an appropriate record of such action
shall be certified by the Secretary or an Assistant Secretary of the Company and
delivered to the Trustee at or prior to the delivery of the Officers'
Certificate setting forth the terms of the series.
SECTION 302. Denominations.
-------------
The Securities of each series shall be in registered form without coupons
and shall be issuable in denominations of $25 and any integral multiple thereof,
unless otherwise specified as contemplated by Section 301.
SECTION 303. Execution, Authentication, Delivery and Dating.
----------------------------------------------
The Securities shall be executed on behalf of the Company by its
President or one of its Vice Presidents under its corporate seal reproduced or
impressed thereon and attested by its Secretary or one of its Assistant
Secretaries. The signature of any of these officers on the Securities may be
manual or facsimile.
Securities bearing the manual or facsimile signatures of individuals who
were at any time the proper officers of the Company shall bind the Company,
notwithstanding that such individuals or any of them have ceased to hold such
offices prior to the authentication and delivery of such Securities or did not
hold such offices at the date of such Securities. At any time and from time to
time after the execution and delivery of this Indenture, the Company may deliver
Securities executed by the Company to the Trustee for authentication. Securities
may be authenticated on original issuance from time to time and delivered
pursuant to such procedures acceptable to the Trustee ("Procedures") as may be
specified from time to time by Company Order. Procedures may authorize
authentication and delivery pursuant to oral instructions of the Company or a
duly authorized agent, which instructions shall be promptly confirmed in
writing.
Prior to the delivery of a Security in any such form to the Trustee for
authentication, the Company shall deliver to the Trustee the following:
31
<PAGE>
(a) A Company Order requesting the Trustee's authentication and delivery of
all or a portion of the Securities of such series, and if less than all, setting
forth procedures for such authentication;
(b) The Board Resolution by or pursuant to which such form of Security has
been approved, and the Board Resolution, if any, by or pursuant to which the
terms of the Securities of such series have been approved, and, if pursuant to a
Board Resolution, an Officers' Certificate describing the action taken;
(c) An Officers' Certificate dated the date such certificate is delivered to
the Trustee, stating that all conditions precedent provided for in this
Indenture relating to the authentication and delivery of Securities in such form
and with such terms have been complied with; and
(d) An Opinion of Counsel stating that (i) the form of such Securities has
-
been duly authorized and approved in conformity with the provisions of this
Indenture; (ii) the terms of such Securities have been duly authorized and
--
determined in conformity with the provisions of this Indenture, or, if such
terms are to be determined pursuant to Procedures, when so determined such terms
shall have been duly authorized and determined in conformity with the provisions
of this Indenture; and (iii) Securities in such form when completed
---
by appropriate insertions and executed and delivered by the Company to the
Trustee for authentication in accordance with this Indenture, authenticated and
delivered by the Trustee in accordance with this Indenture within the
authorization as to aggregate principal amount established from time to time by
the Board of Directors and sold in the manner specified in such opinion of
Counsel, will be the legal, valid and binding obligations of the Company
entitled to the benefits of this Indenture, subject to applicable bankruptcy,
reorganization, insolvency and similar laws generally affecting creditors'
rights, to general equitable principles except as enforcement thereof may be
limited by (A) requirements that a claim with respect to any Securities
-
denominated other than in Dollars (or a Foreign Currency or currency unit
judgment in respect of such claim) be converted into Dollars at a rate of
exchange prevailing on a date determined pursuant to applicable law or (B)
governmental authority to limit, delay or prohibit -
32
<PAGE>
the making of payments in Foreign Currencies or currency units or payments
outside the United States and subject to such other qualifications as such
counsel shall conclude do not materially affect the rights of Holders of such
Securities;
provided, however, that the Trustee shall be entitled to receive the documents
- -------- -------
referred to in Clauses (b), (c) and (d) above only at or prior to the first
- - -
request of the Company to the Trustee to authenticate Securities of such series.
Each Security shall be dated the date of its authentication.
No Security shall be entitled to any benefit under this Indenture or be
valid or obligatory for any purpose, unless there appears on such Security a
certificate of authentication substantially in the form provided for herein
executed by the Trustee by the manual signature of one of its authorized
officers, and such certificate upon any Security shall be conclusive evidence,
and the only evidence, that such Security has been duly authenticated and
delivered hereunder.
SECTION 304. Temporary Securities.
--------------------
Pending the preparation of definitive Securities of any series, the
Company may execute, and upon Company Order the Trustee shall authenticate and
deliver, temporary Securities which are printed, lithographed, typewritten,
mimeographed or otherwise produced, in any denomination, substantially of the
tenor of the definitive Securities of such series in lieu of which they are
issued and with such appropriate insertions, omissions, substitutions and other
variations as the officers executing such Securities may determine, as evidenced
by their execution of such Securities.
If temporary Securities of any series are issued, the Company will cause
definitive Securities of such series to be prepared without unreasonable delay.
After the preparation of definitive Securities, the temporary Securities shall
be exchangeable for definitive Securities upon surrender of the temporary
Securities at the office or agency of the Company designated for that purpose
without charge to the Holder. Upon surrender for cancellation of any one or more
temporary Securities, the Company shall execute and the Trustee shall
authenticate and deliver in
33
<PAGE>
exchange therefor a like principal amount of definitive Securities of the same
series of authorized denominations having the same Original Issue Date and
Stated Maturity and having the same terms as such temporary Securities. Until so
exchanged, the temporary Securities shall in all respects be entitled to the
same benefits under this Indenture as definitive Securities.
SECTION 305. Registration, Transfer and Exchange.
-----------------------------------
The Company shall cause to be kept at the Corporate Trust Office of the
Trustee a register in which, subject to such reasonable regulations as it may
prescribe, the Company shall provide for the registration of Securities and of
transfers of Securities. Such register is herein sometimes referred to as the
"Securities Register." The Trustee is hereby appointed "Securities Registrar"
for the purpose of registering Securities and transfers of Securities