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<SEC-DOCUMENT>0000948572-98-000007.txt : 19980330
<SEC-HEADER>0000948572-98-000007.hdr.sgml : 19980330
ACCESSION NUMBER: 0000948572-98-000007
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19971231
FILED AS OF DATE: 19980327
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:
SEC FILE NUMBER: 001-13958
FILM NUMBER: 98575109
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>THE HARTFORD FINANCIAL SERVICES GROUP, INC.
<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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
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 $0.01 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. [X]
As of February 27, 1998, there were outstanding 117,841,749 shares of Common
Stock, $0.01 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
$11,515,215,088, based on the closing price of $98.25 per share of the Common
Stock on the New York Stock Exchange on February 27, 1998.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1998 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
================================================================================
<PAGE>
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
7A Quantitative and Qualitative Disclosures About Market Risk 42
8 Financial Statements and Supplementary Data 42
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 42
PART III 10 Directors and Executive Officers of The Hartford 42
11 Executive Compensation 42
12 Security Ownership of Certain Beneficial Owners and
Management 42
13 Certain Relationships and Related Transactions 42
PART IV 14 Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 42
Signatures II-1
Exhibits Index II-2
<PAGE>
PART I
ITEM 1. BUSINESS OF THE HARTFORD
(DOLLAR AMOUNTS IN MILLIONS EXCEPT FOR SHARE DATA UNLESS OTHERWISE STATED)
GENERAL
The Hartford Financial Services Group, Inc., formerly ITT Hartford Group, Inc.,
and its subsidiaries ("The Hartford" or the "Company"), headquartered in
Connecticut, are among the largest providers of both property and casualty
insurance and life insurance products in the United States. Hartford Fire
Insurance Company ("Hartford Fire"), founded in 1810, is the oldest of The
Hartford's subsidiaries. Hartford Fire and its subsidiaries write insurance and
reinsurance in the United States and internationally. At December 31, 1997,
total assets and total stockholders' equity of The Hartford were $131.7 billion
and $6.1 billion, respectively.
The Hartford Financial Services 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 The Hartford
Financial Services 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 and
Fencourt Reinsurance Company, Ltd. ("Fencourt"), both of which were wholly owned
subsidiaries of ITT, to The Hartford Financial Services 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.)
On February 10, 1997, Hartford Life, Inc. ("HLI"), the holding company parent of
The Hartford's significant life insurance subsidiaries, filed a registration
statement, as amended, with the Securities and Exchange Commission relating to
the initial public offering of HLI Class A common stock (the "Offering").
Pursuant to the Offering on May 22, 1997, HLI sold to the public 26 million
shares at $28.25 per share and received proceeds, net of offering expenses, of
$687.
The 26 million shares sold in the Offering represented approximately 18.6% of
the equity ownership in HLI and approximately 4.4% of the combined voting power
of HLI's Class A and Class B common stock. The Hartford owns all of the 114
million outstanding shares of Class B common stock of HLI, representing
approximately 81.4% of the equity ownership in HLI and approximately 95.6% of
the combined voting power of HLI's Class A and Class B common stock. Holders of
Class A common stock generally have identical rights to the holders of Class B
common stock except that the holders of Class A common stock are entitled to one
vote per share while holders of Class B common stock are entitled to five votes
per share on all matters submitted to a vote of HLI's stockholders. Also, each
share of Class B common stock is convertible into one share of Class A common
stock (a) upon the transfer of such share of Class B common stock by the holder
thereof to a non-affiliate (except where the shares of Class B common stock so
transferred represent 50% or more of all the outstanding shares of common stock,
calculated without regard to the difference in voting rights between the classes
of common stock) or (b) in the event that the number of shares of outstanding
Class B common stock is less than the 50% of all the common stock then
outstanding. As of December 31, 1997, The Hartford continued to maintain an
81.4% equity ownership in HLI.
In connection with the Offering, The Hartford reported a $368 gain related to
the increased value of its equity ownership in HLI. 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.
As a holding company, The Hartford Financial Services 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 The
Hartford Financial Services Group, Inc. may be found in the Capital Resources
and Liquidity section of the MD&A.
REPORTING SEGMENTS
The Hartford's reporting segments consist of North American Property & Casualty,
Life, International, and Other Operations. Included in Other Operations is the
effect of an 18.6% minority interest in HLI's operating results. 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 41 and
Note 1 and Note 18 of Notes to Consolidated Financial Statements.
NORTH AMERICAN PROPERTY & CASUALTY
The Hartford's North American Property & Casualty segment is the eighth largest
property and casualty insurance operation in the United States based on written
premiums for the year ended December 31, 1996, according to A.M. Best. With
written premiums of $5.8 billion for the year ended December 31, 1997, North
American Property & Casualty is the largest of the Company's segments. In 1997,
the states producing 5% or more of this segment's written premiums were New York
(11%), California (10%), Florida (8%), Connecticut (6%) and Texas (5%). The
North American Property & Casualty segment generated $6.7 billion in revenues
and $583 in net income in 1997.
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
- 2 -
<PAGE>
1997 and offers workers' compensation, property, automobile, liability, marine,
agricultural and bond coverages. 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 global reinsurer, with operations in the
United States, Canada, the United Kingdom, Spain, Germany and Hong Kong.
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 5,900
independent agents and direct marketing including trade associations, customers
of financial institutions and employee groups. 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 within
the financial services industry has 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,
excess capital within the property and casualty insurance industry, exploration
and utilization of alternative distribution techniques and emphasis on cost
containment and reduction.
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 Health Care
Options effective January 1, 1998.
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. Growth in the Life segment's total assets has been primarily driven
by its sale of variable annuities. The Company was rated the number one writer
of variable annuities for 1997 according to the Variable Annuity and Research
Data Service (VARDS) with an 11% market share, and sold approximately $869 of
mutual funds in its first full year offering the product, resulting in total
mutual fund assets of $972 at December 31, 1997. According to the latest results
published by the Life Insurance Marketing and Research Association (LIMRA)
(December 1997), the Company was the second largest provider of group disability
insurance for the nine months ended September 30, 1997. In addition, according
to A.M. Best's latest available data, The Hartford's domestic life insurance
operations are ranked as the sixth largest consolidated life insurance company
in the United States based on statutory assets as of December 31, 1996. In the
past year, the Life segment's total assets have grown 26% to $101 billion at
December 31, 1997. The Life segment generated $4.7 billion in revenues and $306
in net income in 1997.
The Life segment, headquartered in Simsbury, Connecticut, operates in three
principal divisions: Annuity, Individual Life Insurance, and Employee Benefits.
The Life segment also maintains a Guaranteed Investment Contracts division,
which is primarily comprised of business written prior to 1995 and a Corporate
Operation through which it reports items that are not directly allocable to any
of its business divisions.
Principal Products
- ------------------
The Annuity division focuses on the savings and retirement needs of the growing
number of individuals who are preparing for retirement or have already retired.
The variety of products sold within this division reflects the diverse nature of
the market. These products include individual variable annuities, fixed market
value adjusted (MVA) annuities, deferred compensation and retirement plan
services, structured settlement contracts and other special purpose annuity
contracts, investment management services and mutual funds. The Individual Life
Insurance division, which focuses on the high end estate and business planning
markets, sells a variety of life insurance products, including variable life,
universal life, interest-sensitive whole life, and term life insurance policies.
The Employee Benefits division sells group insurance products, including group
life and group disability insurance, and corporate owned life insurance (COLI)
and engages in certain international operations. The Guaranteed Investment
Contracts ("GIC") division consists of guaranteed rate contract ("GRC") business
that is supported by assets held in either the Company's general account or a
guaranteed separate account. Historically, a significant majority of these
contracts were sold as general account contracts with fixed rates and fixed
maturities. The Company decided in 1995, after a thorough review of its GRC
business, that it would significantly de-emphasize general account GRC, choosing
to focus its distribution efforts on other products sold through other
divisions. The Company internally segregates its GIC division into distinct
blocks of business which are separately managed. The Company's GRC business
written prior to 1995 is referred to as Closed Book GRC. Management expects no
material income or loss from the Guaranteed Investment Contracts division in the
future.
Methods of Distribution
- -----------------------
The Life segment sells a variety of individual and group financial services and
insurance products primarily through
- 3 -
<PAGE>
broker-dealers, financial institutions, licensed agents, insurance brokers,
associations and third party administrators, often with the assistance of the
Company's internal sales force. The Annuity 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. The Employee Benefits division uses an experienced
group of Company employees to distribute its products through a variety of
distribution outlets including insurance agents, brokers, associations and
third-party administrators.
Competition
- -----------
The Life segment competes with over 2,000 life insurance companies in the United
States, as well as certain banks, securities brokerage firms and investment
advisors who market investment and retirement-oriented products. Competitive
factors in the life insurance industry include, but are not limited to, price,
name recognition, quality of distribution systems, customer service and
financial strength and claims-paying ability 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 1997 according to the Variable
Annuity and Research Data Service with an 11% market share.
INTERNATIONAL
The Hartford's International segment consists of Western 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 $1.7 billion in revenues and $110 in net income in 1997. Assets
totaled $4.7 billion at December 31, 1997.
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, primarily property coverage, are sold to small
to medium sized clients. Zwolsche life insurance operations offer term life,
mortgage, savings and pension products. Additionally, Zwolsche has an asset
management business offering investment services through a range of mutual
funds. ITT Ercos provides both personal and commercial, property and casualty,
and life insurance products.
Methods of Distribution
- -----------------------
The International segment conducts its business primarily through independent
brokers who are compensated on a commission basis. Both L&E and Zwolsche also
distribute their products through various financial institutions.
Competition
- -----------
The United Kingdom and the Netherlands have historically been open markets with
competitors operating from around the world. While Spain has only opened up its
market within the last fifteen years, it has attracted significant foreign
capital with many of the large global insurance companies establishing a
presence, to the extent that foreign capital now exceeds domestic capital. Each
market has its own unique characteristics but, in general, competition is very
strong in most product lines both from existing competitors and relatively new
market entrants.
OTHER OPERATIONS
The Hartford's Other Operations consist of the property and casualty insurance
operations of The Hartford which have ceased writing new and renewal business.
These operations primarily include First State Insurance Company, located in
Boston, Massachusetts, Fencourt and Heritage Reinsurance Company, Ltd.,
headquartered in Bermuda, and Excess Insurance Company Limited, located in the
United Kingdom.
The primary objectives of Other Operations are the proper disposition of claims,
the resolution of disputes, and the collection of reinsurance proceeds primarily
related to policies written and reinsured prior to 1985. As such, Other
Operations have no new product sales, distribution system, or competitive
issues.
Included in Other Operations is the effect of an 18.6% minority interest in
HLI's operating results.
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.
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. Further discussion
on The Hartford's property and casualty reserves may be found in the Reserves
section of the MD&A.
The Hartford continues to receive claims asserting damages from environmental
pollution and related clean-up costs
- 4 -
<PAGE>
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. 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.
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 $449 and $472 as of December 31, 1997
and 1996, respectively, and amortization of the discount had no material effect
on net income during 1997, 1996 and 1995, 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.
A reconciliation of liabilities for unpaid claims and claim adjustment expenses
is herein referenced from Note 1(g) 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,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities for unpaid claims and
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
claim adjustment expenses [1] $7,262 $8,168 $8,666 $9,366 $9,796 $11,103 $11,441 $11,623 $12,047 $13,389 $13,523
CUMULATIVE PAID CLAIMS AND CLAIM
EXPENSES
One year later 2,089 2,296 2,545 2,789 2,879 2,806 2,832 2,983 2,797 2,975 --
Two years later 3,323 3,618 4,013 4,428 4,465 4,415 4,602 4,667 4,571 -- --
Three years later 4,187 4,577 5,132 5,511 5,605 5,655 5,755 5,889 -- -- --
Four years later 4,846 5,341 5,863 6,304 6,507 6,507 6,661 -- -- -- --
Five years later 5,392 5,872 6,435 6,979 7,173 7,212 -- -- -- -- --
Six years later 5,787 6,320 6,944 7,505 7,753 -- -- -- -- -- --
Seven years later 6,155 6,733 7,360 8,010 -- -- -- -- -- -- --
Eight years later 6,492 7,094 7,788 -- -- -- -- -- -- -- --
Nine years later 6,815 7,470 -- -- -- -- -- -- -- -- --
Ten years later 7,156 -- -- -- -- -- -- -- -- -- --
LIABILITIES REESTIMATED
One year later 7,437 8,342 8,879 9,636 11,053 11,311 11,484 11,856 13,078 13,428 --
Two years later 7,619 8,432 9,052 10,780 11,202 11,354 11,691 13,020 13,156 -- --
Three years later 7,719 8,482 10,200 10,905 11,315 11,582 12,810 13,080 -- -- --
Four years later 7,827 9,645 10,342 11,151 11,653 12,740 12,946 -- -- -- --
Five years later 9,117 9,829 10,578 11,515 12,794 12,917 -- -- -- -- --
Six years later 9,287 10,068 10,972 12,649 12,996 -- -- -- -- -- --
Seven years later 9,521 10,478 12,075 12,864 -- -- -- -- -- -- --
Eight years later 9,943 11,550 12,287 -- -- -- -- -- -- -- --
Nine years later 10,991 11,748 -- -- -- -- -- -- -- -- --
Ten years later 11,185 -- -- -- -- -- -- -- -- -- --
DEFICIENCY $3,923 $3,580 $3,621 $3,498 $3,200 $1,814 $1,505 $1,457 $1,109 $39 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS
FOR THE YEARS ENDED DECEMBER 31,
1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
NET RESERVE [1] $11,441 $11,623 $12,047 $13,389 $13,523
Reinsurance recoverables 5,339 5,317 4,939 4,414 4,348
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS RESERVE $16,780 $16,940 $16,986 $17,803 17,871
- ----------------------------------------------------------------------------------------------------------------------------------
NET REESTIMATED RESERVE $12,946 $13,080 $13,155 $13,427
Reestimated reinsurance recoverables 5,932 5,810 5,055 4,650
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS REESTIMATED RESERVE $18,878 $18,890 $18,210 $18,077
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS DEFICIENCY $ 2,098 $ 1,950 $ 1,224 $ 274
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] 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. Liabilities, net and
gross of reinsurance for unpaid claims and claim adjustment expenses
excluded, were $504, $495, $550, $500 and $505 as of December 31, 1993,
1994, 1995, 1996 and 1997, respectively.
</FN>
</TABLE>
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.
- 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, which are 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 universal life and interest-sensitive whole life policies,
reserves are set according to premiums collected, plus interest credited, less
charges. Other fixed death benefit and individual life 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 persistency 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, which is usually at least 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.
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.
REINSURANCE
In accordance with normal industry practice, The Hartford cedes insurance risk
to 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 reinsurers that protect
it against a specified part or all of certain losses over stipulated amounts.
The ceding of insurance obligations 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
reinsurance 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.
In accordance with normal industry practice, HLI is involved in both the cession
and assumption of insurance with other insurance and reinsurance companies. As
of December 31, 1997, the maximum amount of life insurance retained on any one
life by any of the life operations is approximately $2.5, 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 primarily divided
between property and casualty and life operations. 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 to maximize
economic value while generating after-tax income and sufficient 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 operation'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 relative to that of policyholder obligations.
For a further discussion of The Hartford's approach to managing risks, including
derivative utilization, see the Capital Markets Risk Management section of the
MD&A, as well as Note 4 of Notes to Consolidated Financial Statements.
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
- 6 -
<PAGE>
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 regulations require 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
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 and Contingencies section of the
MD&A under "Legislative Initiatives".
INSOLVENCY FUND
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "Insolvency Fund".
NAIC PROPOSALS
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "NAIC Proposals".
YEAR 2000
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "Year 2000".
EMPLOYEES
The Hartford had approximately 25,000 employees as of February 28, 1998.
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 1998
Proxy Statement. In addition to those executive officers who are listed in the
1998 Proxy Statement, listed below are other 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"):
- 7 -
<PAGE>
JOHN F. DONAHUE, 62, became Senior Vice President, International/Reinsurance
Operations of The Hartford in June 1996. Prior to that, he served as Senior Vice
President, 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, 51, 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, 57, 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, 54, 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, 51, 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, 56, 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 203 thousand square feet of office space in the United
Kingdom, 218 thousand square feet of office space in the Netherlands and 74
thousand square feet of office space in Spain. In addition, The Hartford leases
approximately 4.9 million square feet throughout the United States and 204
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 condition, results of operations or cash flows
of The Hartford.
The Hartford is involved in claims litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed 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".
The following table presents the 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:
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ------------------------ --------- ---------- --------- ----------
1997
Common Stock Price
High $80.75 $86.25 $88.00 $93.56
Low 65.63 68.63 79.75 79.44
Dividends Declared 0.40 0.40 0.40 0.40
- ------------------------ --------- ---------- --------- ----------
1996
Common Stock Price
High $53.00 $54.13 $59.63 $69.50
Low 47.13 45.50 50.75 59.13
Dividends Declared 0.40 0.40 0.40 0.40
- ------------------------ --------- ---------- --------- ----------
At February 27, 1998, there were approximately 150,000 beneficial owners of The
Hartford's common stock, including approximately 55,000 shareholders of record
and approximately 95,000 shareholders whose shares are held by brokers and other
nominees.
On February 19, 1998, The Hartford's Board of Directors approved a 5% increase
in its quarterly dividend to $0.42 per share. The dividend will be payable on
April 1, 1998 to shareholders of record as of March 2, 1998. The Hartford
expects to continue paying quarterly dividends on its common stock of $0.42 per
share throughout 1998. Dividend decisions will be based on and affected by a
number of factors, including the operating results and financial requirements of
The Hartford and the impact of regulatory restrictions discussed in the Capital
- 8 -
<PAGE>
Resources and Liquidity section under "Liquidity Requirements" of the MD&A.
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 The Hartford Financial Services 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 AND COMBINED RATIOS)
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
<S> <C> <C> <C> <C> <C>
Total revenues $ 13,305 $ 12,473 $ 12,150 $ 11,102 $ 10,338
Income (loss) before cumulative effect of
accounting changes [1] 1,332 (99) 559 632 537
Net income (loss) [1] [2] 1,332 (99) 559 644 537
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 131,743 $ 108,840 $ 93,855 $ 76,765 $ 66,179
Long-term debt and redeemable preferred stock 1,482 1,032 1,022 682 842
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
parent junior subordinated debentures 1,000 1,000 -- -- --
Total stockholders' equity 6,085 4,520 4,702 3,184 4,012
- --------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE DATA [3]
BASIC EARNINGS PER SHARE
Income (loss) before cumulative effect of
accounting changes [1] $ 11.29 $ (0.84) $ 4.77 $ 5.40 $ 4.59
Net income (loss) [1] [2] 11.29 (0.84) 4.77 5.50 4.59
DILUTED EARNINGS PER SHARE
Income (loss) before cumulative effect of
accounting changes [1] 11.16 (0.84) 4.75 5.37 4.56
Net income (loss) [1] [2] 11.16 (0.84) 4.75 5.47 4.56
DIVIDENDS DECLARED PER COMMON SHARE [4] 1.60 1.60 6.65 1.94 1.90
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [5] 102.3 105.2 104.5 102.5 103.6
Worldwide Property & Casualty [5] [6] 103.6 105.0 103.6 100.9 102.8
- --------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] 1996 includes other charges of $693, after-tax, or $5.91 basic/diluted
earnings 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).
[2] 1994 includes $12, after-tax, or $0.10 basic/diluted earnings 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.
[3] Actual number of weighted average common shares outstanding at December 31,
1995 of 117.1 and actual number of weighted average common shares
outstanding and dilutive potential common shares at December 31, 1995 of
117.7 are retroactively presented for all prior periods. Per share data has
been restated for all periods presented to reflect the adoption of
Statement of Financial Accounting Standards No. 128 (for additional
information, see Note 10 of Notes to Consolidated Financial Statements).
[4] Prior to the Distribution on December 19, 1995, 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 114.6 for the Worldwide Property &
Casualty.
[6] Combined ratios exclude the results of the Other Operations segment for all
periods presented.
</FN>
</TABLE>
<TABLE>
<CAPTION>
Outlined in the table below are U.S. Industry Combined Ratios for each of the
five years ended December 31:
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Industry Combined Ratios [a] 101.8 105.9 106.4 108.4 106.9
- -------------------------------------------------------------------------------------------------------------------------------
<FN>
[a] U.S. Industry Combined Ratio information obtained from A.M. Best. Combined
ratio for 1997 is an estimate prepared as of January 1998.
</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 OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS 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 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect upon The
Hartford Financial Services Group, Inc., formerly ITT Hartford Group, Inc., and
its subsidiaries ("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 11
North American Property & Casualty 13
Life 16
International 19
Other Operations 21
Reserves 22
Environmental and Asbestos Claims 22
Investments 24
Capital Markets Risk Management 27
Capital Resources and Liquidity 37
Regulatory Initiatives and Contingencies 40
Effect of Inflation 41
Accounting Standards 41
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 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 regarding the Distribution, see Note 2 of Notes to
Consolidated Financial Statements.)
- 10 -
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
OVERVIEW
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums and other considerations $ 10,323 $ 10,076 $ 9,628
Net investment income 2,655 2,523 2,420
Net realized capital gains (losses) 327 (126) 102
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 13,305 12,473 12,150
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 7,977 8,942 7,769
Amortization of deferred policy acquisition costs 1,888 1,678 1,658
Other expenses 2,105 2,171 1,981
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 11,970 12,791 11,408
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1,335 (318) 742
Equity gain on HLI initial public offering 368 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES, DIVIDENDS ON SUBSIDIARY
PREFERRED STOCK AND MINORITY INTEREST 1,703 (318) 742
Income tax expense (benefit) 334 (219) 180
Dividends on subsidiary preferred stock -- -- 3
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 1,369 (99) 559
Minority interest in consolidated subsidiary (37) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 1,332 (99) 559
Less: Net realized capital gains, after-tax [1] 215 57 67
Other items 368 (693) --
Allocated Distribution items -- -- 14
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 749 $ 537 $ 478
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] 1996 excludes Closed Book GRC (see below) net realized capital losses of
$137, after-tax. This amount is included in other items.
</FN>
</TABLE>
The Hartford defines "core earnings" as after-tax operational results excluding,
as applicable, net realized capital gains or losses, the cumulative effect of
accounting changes, allocated Distribution items and certain other items. Core
earnings is an internal performance measure used by the Company in the
management of its operations. Management believes that this performance measure
delineates the results of operations of the Company's ongoing lines of business
in a manner that allows for a better understanding of the underlying trends in
the Company's current business. However, core earnings should only be analyzed
in conjunction with, and not in lieu of, net income and may not be comparable to
other performance measures used by the Company's competitors.
Revenues for 1997 increased $832, or 7%, from 1996, while revenues for 1996 were
up $323, or 3%, from 1995. The growth in both years was primarily due to
increases in the Annuity division fee income earned on separate account assets,
higher group life and disability sales and premium growth in reinsurance
operations and business written under an exclusive licensing arrangement with
The American Association of Retired Persons ("AARP"). Partially offsetting these
increases were a decrease in corporate owned life insurance "COLI" premiums as a
result of the Health Insurance Portability and Accountability Act of 1996 ("HIPA
Act of 1996"), which phases out the deductibility of interest on policy loans
under leveraged COLI by 1998, and a decrease in premium in mid-to-large
commercial accounts and agency personal lines. Higher net investment income and,
for 1997, net realized capital gains also contributed to the revenue increase.
(For an analysis of net investment income and net realized capital gains, see
the Investments section.)
In 1997, core earnings increased $212, or 39%, from 1996 primarily due to a
reduction in domestic property catastrophe and other severe weather-related
losses of $132, after-tax. Also contributing to the increase were higher net
investment income, growth in earnings in the Annuity division, the reduction of
incurred environmental and asbestos losses and the reduction of losses in the
Guaranteed Investment Contracts division. Soft market conditions related to
automobile insurance in the United Kingdom and increased debt service costs
partially offset the increase.
Core earnings increased $59, or 12%, to $537 in 1996 from 1995 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
property catastrophe and other severe weather-related losses in 1996.
NET REALIZED CAPITAL GAINS
See "Investment Results" in the Investments section.
OTHER ITEMS
Net income for 1997 includes a $368 equity gain resulting from the initial
public offering of Hartford Life, Inc. ("HLI"), the holding company parent of
The Hartford's significant life insurance subsidiaries, Class A common stock
("The Offering"). (For additional information, see Note 3 of Notes to
Consolidated Financial Statements and Capital Resources and Liquidity section
under "The Offering".)
- 11 -
<PAGE>
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 in Other Operations (as discussed in the Environmental
and Asbestos Claims section), recognition of losses on guaranteed rate contract
business ("Closed Book GRC") of $169 (as discussed in the Life section) and
other, primarily foreign tax-related items, of $2 in each of the North American
Property & Casualty and Life segments and $10 in Other Operations.
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 in 1995. (For more information on liability sharing arrangements related to
the Distribution, see Note 2 of Notes to Consolidated Financial Statements.)
INCOME TAXES
The effective tax rates for 1997, 1996 and 1995 were 25%, 20% and 24%,
respectively, excluding the impact of other items in 1997 and 1996. The increase
in the effective tax rate for 1997 was due to a reduction in the proportionate
share of tax-exempt net investment income to total net income for 1997 compared
to 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/(refunds received) in 1997, 1996 and 1995 were $(37), $170 and $302,
respectively. For additional information, see Note 14 of Notes to Consolidated
Financial Statements.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Minority interest in consolidated subsidiary represents an 18.6% minority
interest in HLI's operating results. (For additional information, see Note 3 of
Notes to Consolidated Financial Statements and Capital Resources and Liquidity
section under "The Offering".)
PER COMMON SHARE
The following table represents per common share data and return on equity for
the past three years:
1997 1996 1995
- -----------------------------------------------------------------
Basic earnings per share $11.29 $(0.84) $4.77
Weighted average common shares
outstanding [1] 118.0 117.3 117.1
Diluted earnings per share $11.16 $(0.84) $4.75
Weighted average common shares
outstanding and dilutive
potential common shares [1]
119.4 117.3 117.7
Return on equity [2] 28.3% (2.3)% 12.6%
- ----------------------------------------------------------------
[1] 1995 weighted average common shares outstanding represents actual number of
common shares outstanding at December 31, 1995.
[2] Calculated by dividing net income (loss) by average equity excluding
unrealized gain, after-tax. In 1997 and 1996, return on equity excluding
other items (as discussed earlier) from net income (loss) was 20.5% and
13.8%, respectively.
SEGMENT RESULTS
The Hartford's reporting segments consist of North American Property & Casualty,
Life, International and Other Operations. Included in Other Operations is the
effect of an 18.6% minority interest in HLI's operating results. Other
Operations include 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.
1997 1996 1995
- ----------------------------------------------------------------
N. A. Property & Casualty $ 433 $ 270 $ 251
Life 306 200 153
International 46 79 94
Other Operations (36) (12) (20)
- ----------------------------------------------------------------
CORE EARNINGS $ 749 $ 537 $ 478
- ----------------------------------------------------------------
The following is a summary of net income (loss) by segment.
1997 1996 1995
- ----------------------------------------------------------------
N. A. Property & Casualty $ 583 $ (151) $ 270
Life 306 24 150
International 110 127 126
Other Operations [1] 333 (99) (1)
Allocated Distribution items -- -- 14
- ----------------------------------------------------------------
NET INCOME (LOSS) $ 1,332 $ (99) $ 559
- ----------------------------------------------------------------
[1] For 1997, includes a $368 equity gain resulting from the initial public
offering of HLI.
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.
- 12 -
<PAGE>
NORTH AMERICAN PROPERTY & CASUALTY
<TABLE>
<CAPTION>
OPERATING SUMMARY
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums $ 5,704 $ 5,657 $ 5,662
Net investment income 777 661 646
Net realized capital gains 231 15 29
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 6,712 6,333 6,337
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 4,069 4,994 4,315
Amortization of deferred policy acquisition costs 1,196 1,154 1,178
Other expenses 720 584 510
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 5,985 6,732 6,003
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 727 (399) 334
Income tax expense (benefit) 144 (248) 61
Dividends on subsidiary preferred stock -- -- 3
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 583 (151) 270
Less: Net realized capital gains, after-tax 150 10 19
Other items -- (431) --
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 433 $ 270 $ 251
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Revenues for 1997 increased $379, or 6%, over 1996, while revenues for 1996 were
essentially flat compared to 1995. For a further discussion of premiums, see
Summary Underwriting Results below and for net investment income and net
realized capital gains, see the Investments section.
Core earnings for the North American Property & Casualty segment were $433, an
increase of $163, or 60%, from 1996. The increase was primarily due to a $130,
or 61%, improvement in after-tax underwriting results and an $88, or 17%,
increase in after-tax net investment income, partially offset by a $36, or 60%,
increase in debt service costs. The improved underwriting results were
attributable to favorable property catastrophe and other severe weather-related
losses in 1997 and a reduction in incurred environmental and asbestos losses.
The increase in debt service costs is the result of the 1996 sale of Quarterly
Income Preferred Securities and an increase in debt allocated to the North
American Property & Casualty segment. (For additional information, see Capital
Resources and Liquidity section under "Debt".) In addition, for an analysis of
net investment income, see the Investments section.
Core earnings for 1996 of $270 increased $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 primarily due to adverse property catastrophe and
other severe weather-related losses.
Within the North American Property & Casualty segment, management analyzes the
results of operations by the following four major components on a before-tax
basis:
1997 1996 1995
- ---------------------------------------------------------------
Underwriting results [1] $ (126) $ (986) $ (270)
Net investment income 777 661 646
Net realized capital gains 231 15 29
Miscellaneous expenses, net (155) (89) (71)
- ---------------------------------------------------------------
OPERATING INCOME (LOSS) $ 727 $ (399) $ 334
- ---------------------------------------------------------------
[1] 1996 includes the impact of a $660, before-tax, environmental and asbestos
charge.
The following discussion summarizes underwriting results by major operation (as
defined below) and net miscellaneous expenses. As previously noted, net
investment income and net realized capital gains are covered in a separate
discussion in the Investments section. Other items, 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.
1997 1996 1995
- ---------------------------------------------------------------
Written premiums $ 5,771 $ 5,688 $ 5,670
Underwriting results [1] $ (126) $ (326) $ (270)
Combined ratio [1] [2] 102.3 105.2 104.5
- ---------------------------------------------------------------
[1] 1996 excludes the impact of a $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.
- 13 -
<PAGE>
Written premiums for this segment increased 1% in 1997 from 1996, while premiums
for 1996 were up slightly from 1995. Premiums from the segment's primary target
markets of reinsurance, small commercial accounts and AARP grew 10% in 1997 and
6% in 1996, contributing 4% and 2% growth to the total segment in 1997 and 1996,
respectively. However, 3% of this segment growth was offset in each year by an
8% and 6% premium reduction in mid-to-large commercial accounts and agency
personal lines in 1997 and 1996, respectively.
Underwriting results for 1997 improved $200, or 2.9 combined ratio points, from
1996 primarily from a decrease in property catastrophe and other severe
weather-related losses of $204 and a reduction of $67 in incurred environmental
and asbestos losses as a result of the charge taken in the third quarter of 1996
upon completion of the Company's environmental and asbestos database study (for
further discussion see, the Environmental and Asbestos Claims section).
Partially offsetting these two favorable items were expenses related to
significant investments in future growth initiatives and dividends to
policyholders in two states in recognition of favorable personal lines
automobile results.
In 1996, underwriting losses before-tax increased $56, or 0.7 combined ratio
points, over 1995 primarily due to a $130 increase in property catastrophe and
other severe weather-related losses, most notably several first quarter winter
storms and Hurricane Fran in September. Partially offsetting this increase were
the impact of two significant losses, net of reinsurance, in 1995: $40 in
connection with the settlement of claims against Dow Corning Corporation
alleging product defects arising from breast implants, and $32 resulting from
the Company's share of a single industrial fire covered by the Industrial Risk
Insurance ("IRI") pool.
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
- ----------
1997 1996 1995
- ---------------------------------------------------------------
Written premiums $ 3,190 $ 3,253 $ 3,373
Underwriting results $ (149) $ (206) $ (249)
Combined ratio 104.5 105.8 107.1
- ---------------------------------------------------------------
Commercial 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. Commercial is organized into three
customer market segments: Business Insurance, Commercial Affinity and Commercial
Specialty. Business Insurance provides standard commercial business for small
accounts (Select Customer) and mid-sized insureds. Commercial Affinity provides
commercial risk management products and services to members of affinity groups
and customers of financial institutions. Commercial Specialty provides insurance
through retailers and wholesalers to large commercial clients and insureds
requiring a variety of specialized coverages. Its results include the bond lines
and First State Management Group, a leading underwriter of excess and surplus
lines business produced primarily through wholesale brokers.
Agricultural, livestock and marine products are also managed within Commercial
Specialty.
Written premiums decreased 2% in 1997, compared to a 4% decrease in 1996.
Premium growth in several markets and lines of business including Select
Customer, Commercial Affinity, Bond, Marine and Agriculture, Specialty Property
and Specialty Casualty totaled 6% in 1997, contributing 3% to Commercial's total
premium growth rate. However, this total premium growth was more than offset by
a 23% decline in large national accounts caused by declining workers'
compensation rates and intense price competition. In 1996, the primary causes
for the decrease from the prior year were intense price competition primarily in
larger national accounts and a decline in workers' compensation premium from
workers' compensation pools and a shift to large deductibles.
Underwriting results improved $57, or 1.3 combined ratio points, in 1997 as
compared with 1996. The primary factors contributing to the improvement were
reductions in property catastrophe and other severe weather-related losses of
$76 and a reduction of asbestos and environmental incurred losses of $67 as a
result of the charge taken in 1996. Also, continued favorable loss and loss
expense development trends, particularly in workers' compensation and other
casualty lines, have been generated through the execution of the operation's
total cost containment strategy which includes loss prevention and avoidance,
early reporting, active claim management and prompt return to work programs.
Partially offsetting the favorable losses described above was a $103 reduction
in earned premiums, primarily from the declining written premium from large
national accounts over the last two years, which have a high percentage of
January renewals and therefore a more significant impact on earned premiums.
In 1996, underwriting results improved $43, or 1.3 combined ratio points,
compared with the prior year. This improvement reflected 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
and a net $32 loss resulting from a single industrial fire covered by the IRI
pool. Excluding the impact of these items on the prior year comparison, 1996
underwriting results decreased $29 from 1995, reflecting a 0.8 point increase in
the combined ratio from the adjusted 1995 level. This decline was primarily due
to a decrease in property results of approximately $50 which were adversely
impacted by property catastrophe and other severe weather-related losses.
Despite intense competition, favorable workers' compensation results partially
offset this decrease reflecting the impacts of legislative reforms, depopulation
in residual pools and effective managed care related initiatives.
Personal
- --------
1997 1996 1995
- ---------------------------------------------------------------
Written premiums $ 1,893 $ 1,864 $ 1,813
Underwriting results $ 37 $ (110) $ (21)
Combined ratio 98.6 105.2 100.9
- ---------------------------------------------------------------
- 14 -
<PAGE>
Personal provides automobile, homeowners, home-based business and fire coverages
to individuals throughout the United States. Personal is 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 an affinity center which began in 1996 and 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 2% in 1997 compared to a 3% increase in 1996. Both
years included strong growth in AARP premium of 7% which is benefiting from the
favorable expansion of this demographic group, partially offset by declines in
Agency premiums of 7% in 1997 and 4% in 1996. The decline in 1997 was due to the
sale of the Company's Canadian personal lines as well as disruption in the
incoming flow of business associated with a major strategic shift in emphasis
from homeowners to automobile coverages. The 1996 decline was due to selective
disinvestment in unprofitable states and underperforming agents. AARP premiums
represented 67% of the 1997 Personal premiums, up from 64% in 1996 and 62% in
1995.
Underwriting results improved by $147 in 1997 over 1996, with a corresponding
6.6 point improvement in the combined ratio. This improvement was primarily due
to significantly lower property catastrophe and other severe weather-related
losses of $137. Improved automobile and homeowners profitability resulting from
expanded cost containment initiatives was partially offset by expenses related
to significant investments in future growth initiatives and a $34 dividend to
policyholders in two states in recognition of favorable personal lines
automobile results. Underwriting results decreased by $89 in 1996, with a 4.3
point increase in the combined ratio. These results were due to an increase in
property catastrophe and other severe weather-related losses of $93, partially
offset by improved automobile results.
Reinsurance
- -----------
1997 1996 1995
- ---------------------------------------------------------------
Written premiums $ 688 $ 571 $ 484
Underwriting results $ (14) $ (10) $ --
Combined ratio 102.6 102.1 99.9
- ---------------------------------------------------------------
The Hartford assumes reinsurance worldwide through its nine Hartford Reinsurance
Company ("HartRe") offices located in Hartford, San Francisco, Miami,
Philadelphia, 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 20% in 1997 primarily due to the acquisition of
renewal rights for the business of Security Re and San Francisco Re which
occurred in late 1996. Written premiums grew 18% in 1996 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.
Underwriting results for 1997 decreased $4, or 0.5 combined ratio points, from
1996 as favorable worldwide property catastrophe experience was offset by
increasingly competitive market conditions which softened premium rate levels.
During 1996, HartRe began a strategic shift in its business mix to longer-tailed
casualty and specialty lines to provide further growth opportunities and better
diversify its portfolio. The expected profitability composition of such
longer-tailed lines includes a higher investment income component, which allows
for higher targeted combined ratios. As a result of this strategy, along with
higher property catastrophe losses, 1996 underwriting results decreased $10
compared with 1995.
MISCELLANEOUS EXPENSES, NET
Miscellaneous expenses, net of miscellaneous income items, were $155 in 1997, up
from $89 in 1996. This increase was primarily due to increased debt service
costs of $55 resulting from additional borrowings and a reallocation of
corporate debt costs to the North American Property & Casualty segment.
Miscellaneous expenses for 1996 were $89, up from $71 in 1995. This increase was
primarily due to increased debt costs of $27 from additional borrowings
partially offset by increased service fee income from involuntary pool servicing
contracts net of other miscellaneous expenses.
OUTLOOK
Difficult market conditions and intense price competition within the property
and casualty industry show no signs of diminishing in the near term. However,
several major strategic actions are underway, with many completed in 1997, which
management believes may counterbalance these negative external factors and
position the North American Property & Casualty segment for improved written
premium growth in 1998 and beyond, while maintaining core profitability. The
acquisition of Omni Insurance Group, Inc., which was completed on February 12,
1998, provides Personal immediate access to the non-standard automobile market
with a highly-regarded and well-established franchise. (For additional
information, see Capital Resources and Liquidity section under "Omni".)
Strategic alliances have been formed with several major national and regional
banks to market personal and/or commercial products to each banks' customers.
The Hartford Customer Services Group contracted with AARP to service its group
health insurance plan partners and recipients beginning January 1, 1998.
Significant investments have been made in such areas as advertising, product
research and development, technology and staff training to heighten brand
awareness, increase product offerings, further develop alternative distribution
channels and improve productivity. On-going claim initiatives have kept claim
cost increases below national trends. As a result of these and other actions and
initiatives, management believes the North American Property & Casualty segment
stands poised to capitalize on the opportunities that lie ahead.
- 15 -
<PAGE>
LIFE
<TABLE>
<CAPTION>
OPERATING SUMMARY [1]
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums and other considerations $ 3,163 $ 3,069 $ 2,643
Net investment income 1,536 1,530 1,451
Net realized capital losses -- (219) (4)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,699 4,380 4,090
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 2,671 2,727 2,395
Amortization of deferred policy acquisition costs 345 241 205
Other expenses 1,203 1,381 1,264
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,219 4,349 3,864
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 480 31 226
Income tax expense 174 7 76
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 306 24 150
Less: Net realized capital losses, after-tax [2] -- (5) (3)
Other items -- (171) --
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 306 $ 200 $ 153
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Life results are presented before the effect of the 18.6% minority interest
in HLI, which is reflected in Other Operations.
[2] 1996 excludes the Closed Book GRC net realized capital losses of $137,
after-tax, which is included in other items.
</FN>
</TABLE>
The Life segment operates in three principal divisions: Annuity, Individual Life
Insurance and Employee Benefits. The Life segment also maintains a Guaranteed
Investment Contracts ("GIC") division, which is primarily comprised of
guaranteed rate contract ("GRC") business written prior to 1995 ("Closed Book
GRC") and a Corporate Operation through which it reports net investment income
on assets representing surplus not assigned to any of its business divisions and
certain other revenue and expenses not specifically allocable to any of its
business divisions. On May 22, 1997, HLI, the holding company parent of The
Hartford's significant life subsidiaries, completed the Offering of 18.6% of its
common stock. (For additional information, see Capital Resources and Liquidity
section under "The Offering".)
Revenues increased $319, or 7%, to $4.7 billion in 1997 from $4.4 billion in
1996. Revenues were impacted by the HIPA Act of 1996, which virtually eliminated
all new sales of leveraged COLI, and by GRC, where net realized capital losses
and other charges were taken in the third quarter of 1996 related to Closed Book
GRC. Excluding revenues associated with COLI and GRC, revenues increased $490,
or 16%, in 1997 as compared to 1996. The increase was primarily due to growth in
the Annuity division where revenues increased as a result of higher fee income
earned on growth in separate account assets due to strong annuity sales and
stock market appreciation. Additionally, strong sales and renewals of group
insurance premiums within the Employee Benefits division contributed to the
revenue growth.
Core earnings increased $106, or 53%, to $306 in 1997 from $200 in 1996,
primarily as a result of (i) an increase in earnings in the Annuity division of
$57 and in the Individual Life Insurance division of $12, both of which were
driven by an increase in total account value due to strong sales and stock
market appreciation, (ii) an increase in earnings of $6 in the Employee Benefits
division principally due to an improvement in group insurance premiums and
favorable mortality and morbidity experience and (iii) a reduction in losses of
$50 in the GIC division as a result of actions taken in the third quarter of
1996 related to Closed Book GRC (discussed below), partially offset by a
decrease in core earnings of $19 in the Corporate Operation due primarily to an
increase in capital allocated to the divisions, as well as higher interest
expense as a result of increased indebtedness in conjunction with the Offering.
(For additional information, see Capital Resources and Liquidity section under
"The Offering" and "Debt".)
Revenues increased $290, or 7%, in 1996 as compared to 1995. Excluding revenues
associated with COLI and GRC as discussed above, revenues increased $549, or
22%, in 1996 compared to 1995. The increase was primarily due to growth in the
Annuity division where revenues increased due to a substantial increase in
aggregate fees earned on a larger block of separate account assets as a result
of strong annuity sales and stock market appreciation. Additionally, revenues in
the Employee Benefits division grew resulting from strong sales and renewals of
group insurance premiums.
Core earnings increased $47, or 31%, to $200 in 1996 from $153 in 1995,
primarily as a result of (i) an increase in earnings in the Annuity division of
$32 and in the Individual Life Insurance division of $7, both of which were
driven by an increase in total account value due to strong sales and stock
market appreciation, (ii) an increase in earnings of $13 in the Employee
Benefits division principally as a result of an increase in group insurance
premiums and favorable mortality and morbidity experience and (iii) a reduction
in losses of $17 in the GIC division as a result of actions taken in the third
quarter of 1996 related to Closed Book GRC, partially offset by a decrease in
earnings in the Corporate Operation of $22 due primarily to a favorable guaranty
fund adjustment of $10 in 1995 resulting
- 16 -
<PAGE>
from lower than expected insolvencies in the insurance industry as well as an
increase in debt service costs in 1996.
Other items primarily consist of a $169 third quarter 1996 loss in Closed Book
GRC (discussed below).
<TABLE>
<CAPTION>
SUMMARY RESULTS
1997 1996 1995
---------------------------------- ---------------------------------- --------------------------------
Net Net Net
Core Income Core Income Core Income
Revenues Earnings [1] (Loss) Revenues Earnings [1] (Loss) Revenues Earnings [1] (Loss)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Annuity $ 1,271 $ 202 $ 202 $ 974 $ 145 $ 145 $ 721 $ 113 $ 113
Individual Life Insurance 510 56 56 472 44 44 408 37 37
Employee Benefits 2,644 85 85 2,834 79 79 2,523 66 66
Guaranteed Investment
Contracts 239 -- -- 33 (50) (224) 377 (67) (67)
Corporate Operation 35 (37) (37) 67 (18) (20) 61 4 1
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 4,699 $ 306 $ 306 $ 4,380 $ 200 $ 24 $ 4,090 $ 153 $ 150
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Core earnings represent after-tax operational results excluding, as
applicable, net realized capital gains or losses and certain other items,
primarily Closed Book GRC charges in 1996.
</FN>
</TABLE>
The following describes each division, including products and services offered,
and analyzes the above results.
Annuity
- -------
The Annuity division focuses on the savings and retirement needs of the growing
number of individuals who are preparing for retirement or have already retired.
The variety of products sold within this division reflects the diverse nature of
the market. These include individual variable annuities, fixed market value
adjusted (MVA) annuities, deferred compensation and retirement plan services,
structured settlement contracts and other special purpose annuity contracts,
investment management contracts and mutual funds. The Company was rated the
number one writer of variable annuities for 1997 according to the Variable
Annuity and Research Data Service (VARDS) with an 11% market share, and sold
approximately $869 of mutual funds in its first full year offering the product,
resulting in total mutual fund assets of $972 at December 31, 1997.
Revenues increased $297, or 30%, to $1.3 billion in 1997 from $974 in 1996. This
increase was principally the result of a $229 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 division increased to $50.7 billion in 1997 from $37.2
billion in 1996, primarily due to annual sales of individual variable annuities
of approximately $9.7 billion in 1997, as well as significant stock market
appreciation. In addition, the average general account assets of this division
increased to $8.1 billion in 1997 from $7.2 billion in 1996 largely as a result
of growth in the general account portion of the individual variable annuity
products. The growth in this division in 1997 also resulted in an increase in
total benefits, claims and expenses of $207, or 28%, to $957 in 1997 from $750
in 1996. A 33% growth in average account value in 1997, coupled with an overall
reduction in individual annuity expenses as a percentage of total individual
annuity account value to 25 basis points in 1997 from 28 basis points in 1996,
contributed to the growth in core earnings of $57, or 39%, to $202 in 1997 from
$145 in 1996.
Similar factors generated an increase in 1996, as compared with 1995, in
revenues of $253, or 35%, average general account assets of $1.0 billion, or
16%, average separate account assets of $11.1 billion, or 42%, total benefits,
claims and expenses of $196, or 35%, core earnings of $32, or 28%, and a
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.
Individual Life Insurance
- -------------------------
The Individual Life Insurance division, which focuses on the high end estate and
business planning markets, sells a variety of life insurance products, including
variable life, universal life, interest-sensitive whole life, and term life
insurance policies.
Revenues in 1997 increased $38, or 8%, to $510 from $472 in 1996. In the first
quarter of 1996, a block of business was assumed from Investors Equity Life
Insurance Company which increased 1996 revenues by $9. Excluding this
transaction, 1997 revenues increased $47, or 10%, as compared to 1996,
reflecting the impact of applying cost of insurance charges and variable life
fees to a larger block of business. Account values increased $555, or 17%, to
$3.8 billion in 1997 from $3.2 billion in 1996. Total benefits, claims and
expenses increased $19, or 5%, to $423 in 1997 from $404 in 1996. The growth in
the Individual Life Insurance division's account values, particularly variable
life, along with favorable mortality experience contributed to an increase in
core earnings of $12 in 1997.
Revenues in 1996 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 block of business as account values increased $678 to $3.2
billion in 1996 from $2.6 billion in 1995. Total benefits, claims and expenses
increased $54, or 15%, to $404 in 1996
- 17 -
<PAGE>
from $350 in 1995. This increase reflects the growth in the block of individual
life insurance business and is partially offset by favorable mortality results
and the full year impact of expense leverage due to the consolidation of the
division's two individual life operations in 1995. The combination of account
value growth, operational efficiencies, and favorable mortality experience
resulted in an increase in core earnings of $7, or 19%, to $44 in 1996 from $37
in 1995.
Employee Benefits
- -----------------
The Employee Benefits division sells group insurance products, including group
life and group disability insurance, and COLI and engages in certain
international operations, primarily in South America. According to the latest
results published by the Life Insurance Marketing and Research Association
(LIMRA) (December 1997), the Company was the second largest provider of group
disability insurance for the nine months ended September 30, 1997.
Revenues decreased $190, or 7%, to $2.6 billion in 1997 from $2.8 billion in
1996. This decrease was primarily attributable to the COLI business for which
associated revenues decreased $380, or 28%, to $980 from $1.4 billion in 1996.
The decrease in COLI revenues is primarily a result of the elimination of sales
of leveraged COLI due to the HIPA Act of 1996 which phases out the deductibility
of interest on policy loans under leveraged COLI by the end of 1998. Partially
offsetting this decrease was an increase in group insurance revenues of $237, or
16%, to $1.7 billion from $1.5 billion in 1996. The increase in revenues is
mainly attributable to group life and group disability premium growth, as a
result of strong new business sales and renewals. Total benefits, claims and
expenses decreased $212, or 8%, to $2.5 billion in 1997 from $2.7 billion in
1996. This decrease generally reflected a decrease in dividends to policyholders
of $394, or 62%, primarily due to the elimination of sales of leveraged COLI,
partially offset by an increase in group insurance of $216, or 15%, as a result
of growth in group life and group disability products. The 1997 results were
impacted by a $6 operating loss related to the division's international
operations. This loss was primarily attributable to the segment's operations in
Argentina, specifically, the Company's 60% investment in ITT Hartford
Sudamericana Holdings, S.A. ("Suda"). In November 1997, the Company replaced the
Argentine management team with a new management team and purchased the remaining
40% interest in Suda from the local shareholders. The Argentine loss was
primarily due to higher than anticipated costs and expenditures. As a result of
the factors mentioned above, and the impact of favorable mortality and morbidity
results, core earnings in this division increased $6, or 8%, to $85 in 1997 from
$79 in 1996.
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 $221 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 HIPA Act of 1996 and (ii) a $149
increase in net investment income, primarily due to an increase in COLI account
value as a result of strong sales in 1995. 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
an increase in COLI account value, 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. This
premium growth in group insurance, along with favorable mortality and morbidity
experience, resulted in an increase in core earnings in this division of $13, or
20%, to $79 in 1996 from $66 in 1995.
Guaranteed Investment Contracts
- -------------------------------
The GIC division consists of GRC business that is supported by assets held in
either the Company's general account or a guaranteed separate account and
includes Closed Book GRC. Historically, a significant majority of these
contracts were sold as general account contracts with fixed rates and fixed
maturities. The Company decided in 1995, after a thorough review of its GRC
business, that it would significantly de-emphasize general account GRC, choosing
instead to focus its distribution efforts on other products sold through other
divisions and selling general account GRC primarily as an accommodation to
customers. From 1992 to 1994, the GIC division sold over $5.0 billion of GRC. In
contrast, the GIC division sold only $47 and $108 general account GRC in 1997
and 1996, respectively. Consistent with management's expectations, the division
had no core earnings in 1997 and expects no material income or loss from the GIC
division in the future.
Closed Book GRC results in 1996 and 1995 were 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 and historical
levels in years prior to 1995. Closed Book GRC was also negatively affected by
the interest rate rise in 1994 when the duration of its assets lengthened
relative to that of the liabilities. 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. As of December 31, 1997, Closed
Book GRC had general account assets and liabilities of $2.2 billion. The
scheduled maturities are $1.0 billion, or 45%, in 1998, $0.7 billion, or 32%, in
1999 and $0.5 billion, or 23%, thereafter.
During 1996, Closed Book GRC incurred a $51, after-tax, loss from operations as
a result of negative interest spread, as compared with an after-tax loss from
operations of $68 in 1995. With the initiation of the hedge transactions
discussed above, which eliminated the possibility that the fair value of Closed
Book GRC investments would recover to their current amortized cost prior to
sale, an other than temporary impairment
- 18 -
<PAGE>
loss of $82, after-tax, was determined to have occurred and was recorded in
September 1996. An additional other than temporary impairment loss of $6,
after-tax, occurred in the fourth quarter of 1996 bringing the total 1996
impairment to $88. Also, during the third quarter of 1996, 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 of 1996.
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
primary 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,
financially protect themselves and their families against disability or death
and prepare their estates for an efficient transfer of wealth between
generations.
Management expects that the net income (loss) from Closed Book GRC in the years
subsequent to 1997 will be immaterial based on the actual results from 1997,
current projections for the performance of the assets and liabilities associated
with Closed Book GRC, and the stabilizing effect of the hedge transactions
implemented in 1996. 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.
The HIPA Act of 1996 phases out the deductibility of interest on policy loans
under COLI by the end of 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 is
declining. However, the Employee Benefits division has other growth
opportunities particularly through its group insurance products.
Certain proposed legislative initiatives which could impact the Life segment are
discussed in the Regulatory Initiatives and Contingencies section.
The Company expects continued growth in core earnings for the Life segment in
1998.
INTERNATIONAL
<TABLE>
<CAPTION>
OPERATING SUMMARY
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums and other considerations $ 1,452 $ 1,338 $ 1,303
Net investment income 185 183 158
Net realized capital gains 95 73 47
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,732 1,594 1,508
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 1,037 920 865
Amortization of deferred policy acquisition costs 346 284 276
Other expenses 187 198 178
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,570 1,402 1,319
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 162 192 189
Income tax expense 52 65 63
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 110 127 126
Less: Net realized capital gains, after-tax 64 48 32
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 46 $ 79 $ 94
- ---------------------------------------------------------------------------------------------------------------------------------
</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 as
well as life insurance products designed to meet the needs of local customers.
In addition, other operations primarily represent home office expenses
associated with managing international operations.
In 1997, revenues of $1.7 billion were $138, or 9%, higher than 1996, primarily
due to new business attributable to an agreement entered into at the end of 1996
with Nationwide Building Society ("Nationwide") at ITT London & Edinburgh to
exclusively underwrite the homeowners business of Nationwide's customers. Growth
over 1996, excluding Nationwide, was dampened by soft market conditions in the
United Kingdom. In addition, the U.S. dollar strengthened against the guilder
and peseta during 1997 compared to 1996, while weakening against sterling which
overall had a negative foreign exchange impact on revenues of $17.
Core earnings of $46 in 1997 decreased $33, or 42%, from 1996. The decrease in
core earnings from 1996 was due to a $33 decrease in after-tax underwriting
results of the automobile line at ITT London & Edinburgh and unfavorable foreign
exchange of $5 in the Netherlands, due to the strengthening of the U.S. dollar.
- 19 -
<PAGE>
In 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 a negative foreign exchange impact on revenues of $37.
Core earnings of $79 in 1996 decreased $15, or 16%, from 1995. The decrease in
earnings from 1995 was primarily the result of decreased underwriting results
due to heightened competition in the United Kingdom and unfavorable foreign
exchange impacts, partially offset by growth in net investment income.
<TABLE>
<CAPTION>
SUMMARY RESULTS
1997 1996 1995
---------------------------------- ---------------------------------- --------------------------------
Net Net Net
Core Income Core Income Core Income
Revenues Earnings [1] (Loss) Revenues Earnings [1] (Loss) Revenues Earnings [1] (Loss)
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
ITT London & Edinburgh $ 1,225 $ 14 $ 27 $ 1,056 $ 48 $ 50 $ 1,039 $ 69 $ 78
Zwolsche Algemeene 432 33 83 459 32 76 416 25 48
ITT Ercos 75 2 3 78 3 4 51 2 2
Other -- (3) (3) 1 (4) (3) 2 (2) (2)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 1,732 $ 46 $ 110 $ 1,594 $ 79 $ 127 $ 1,508 $ 94 $ 126
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Core earnings represent after-tax operational results excluding, as
applicable, net realized capital gains or losses.
</FN>
</TABLE>
ITT London & Edinburgh
- ----------------------
In 1997, revenues at ITT London & Edinburgh of $1.2 billion increased $169, or
16%, over 1996. In local currency, 1997 revenues grew 10% overall with 25%
growth in net written premiums. The increase in revenues and net written
premiums was primarily due to a new business agreement entered into at the end
of 1996 with Nationwide Building Society. In 1997, the weakening of the U.S.
dollar against the sterling resulted in a positive foreign exchange impact on
revenues of $59.
Core earnings for 1997 of $14 decreased $34, or 71%, over 1996. In local
currency, core earnings were down 72% as a result of a $31 after-tax decrease in
the underwriting results of the automobile line, due to reserve strengthening.
The foreign exchange impact on core earnings for 1997 was negligible.
In 1996, revenues at ITT London & Edinburgh of $1.1 billion increased $17, or
2%, over 1995. The increase in revenues was due to improved net investment
income of $21, partially offset by a shortfall in written premiums due to the
intense competitive climate in the United Kingdom. Personal lines for 1996
under-performed 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. Also,
strengthening of the U.S. dollar resulted in negative foreign exchange impacts
on revenues of $15.
In 1996, core earnings of $48 decreased $21, or 30%, over 1995 primarily due to
decreased underwriting results and heightened competition in the United Kingdom
market, partially offset by growth in net investment income. The strengthening
of the U.S. dollar in 1996 had a negative foreign exchange impact on core
earnings of $2.
Zwolsche Algemeene
- ------------------
In 1997, revenues at Zwolsche Algemeene of $432 decreased $27, or 6%, over 1996.
In local currency, 1997 total revenues grew by 8% as a result of 28% growth in
net realized capital gains and 9% net written premium growth in life savings and
mortgage product lines. All property and casualty lines were flat compared to
1996 net written premium levels in local currency terms. Strengthening in the
U.S. dollar against the guilder resulted in a negative foreign exchange impact
on revenues of $64.
In 1997, core earnings of $33 improved $1, or 3%, over 1996 levels in U.S.
dollar terms. In local currency, 1997 core earnings achieved 19% growth due to
strong underwriting results; however, this was offset by a negative foreign
exchange impact on core earnings of $5.
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. Property
and casualty growth in 1996 was relatively strong in the automobile line as
market pricing improved. In 1996, performance was also strong in life savings
and mortgage products business. Due to the strengthening U.S. dollar, foreign
exchange had an adverse effect of $20 on revenues and a negligible impact on
core earnings.
ITT Ercos
- ---------
In 1997, revenues at ITT Ercos of $75 decreased $3, or 4%, over 1996 in U.S.
dollars. In local currency, 1997 revenues grew by 13% overall with 27% growth in
net written premiums of property and casualty product lines together with 9%
growth in life savings and mortgage products. Due to the strengthening U.S.
dollar, foreign exchange had an adverse effect of $12 on revenues.
- 20 -
<PAGE>
In 1997, core earnings of $2 decreased $1, or 33%, over 1996 levels in U.S.
dollars. In local currency, 1997 core earnings decreased 13%. Despite improved
expense ratios, operating performance was down due to worsening underwriting
performance and lower yields on the investment portfolio. The strengthening of
the U.S. dollar in 1997 had a negligible foreign exchange impact on core
earnings.
The Hartford acquired ITT Ercos in May 1995. In 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 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. The strengthening of the U.S.
dollar against the peseta in 1996 resulted in a negative foreign exchange impact
on revenues and core earnings of $2 and $1, respectively.
OUTLOOK
The outlook for 1998 for commercial and personal lines at ITT London & Edinburgh
is a continuation of heightened competition. The market currently has excess
capacity which will lead to continued soft market pricing in the short term.
Continuing competition from direct writing companies and entry by
non-traditional risk bearers into markets such as homeowners is anticipated. In
connection with the automobile line, management has implemented strong price and
underwriting actions in 1997 to improve operational performance. It is expected
that these actions will bring about an improvement in the underwriting results
of the automobile line in 1998.
The outlook at Zwolsche Algemeene for 1998 is for moderate written premium
growth in property and casualty due to an increase in competition. Continued
strong growth is expected for life operations. Growth expectations for 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 will continue to explore the viability of opportunities
in both life and property and casualty business in the Netherlands during 1998
as the government continues to review moving certain social security programs
into the private sector. In February 1998, the Company obtained a bank license
to support growth of the asset management business.
The outlook for ITT Ercos in the Spanish market is for moderate growth. It is
expected ITT Ercos will continue to build on the improved operational foundation
established in 1996 and expense reductions achieved in 1997 to expand its
presence in both life and non-life business during 1998.
The International segment continues to explore acquisition opportunities in
Western Europe, Latin America and Asia. In January 1998, the Company acquired a
49% interest in The People's Insurance Company Limited ("PIC"), a Singapore
company. This is intended to provide a base of operations for further Asian
development. The recent Asian economic crisis has had little impact on the
underlying value of the investment in PIC.
OTHER OPERATIONS
<TABLE>
<CAPTION>
OPERATING SUMMARY
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums $ 4 $ 12 $ 20
Net investment income 157 149 165
Net realized capital gains 1 5 30
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 162 166 215
------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 200 301 194
Amortization of deferred policy acquisition costs 1 (1) (1)
Other expenses (income) (5) 8 23
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 196 308 216
------------------------------------------------------------------------------------------------------------------------
OPERATING LOSS (34) (142) (1)
Equity gain on HLI initial public offering 368 -- --
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 334 (142) (1)
Income tax benefit (36) (43) --
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 370 (99) (1)
Minority interest in consolidated subsidiary (37) -- --
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 333 (99) (1)
Less: Net realized capital gains, after-tax 1 4 19
Other items 368 (91) --
- ----------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ (36) $ (12) $ (20)
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other Operations consist of property and casualty operations of The Hartford
which have discontinued writing new and renewal business. These operations
primarily include First State Insurance Company, Fencourt Reinsurance Company,
Ltd., Heritage Reinsurance Company, Ltd. and Excess Insurance Company Limited,
which has been reclassified from ITT
- 21 -
<PAGE>
London & Edinburgh in the International segment for all periods presented. 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.
Other items for 1997 consisted of a $368 non-taxable equity gain following the
sale of 18.6% of The Hartford's principal Life subsidiary, HLI. (For additional
information, see Note 3 of Notes to Consolidated Financial Statements and
Capital Resources and Liquidity section under "The Offering".) Other items in
1996 primarily consisted of an increase in environmental and asbestos reserves
at First State Insurance Company of $81 as discussed in the Environmental and
Asbestos Claims section.
Revenues were essentially flat in 1997 compared to 1996 and decreased $49, or
23%, in 1996 as a result of a decline in net investment income. In 1997, core
earnings included a decrease of $37 which represented an 18.6% minority interest
in HLI's operating results. (For additional information regarding HLI's results,
see the Life section.) Excluding minority interest, core earnings increased $13
in 1997 over 1996 and $8 in 1996 from the prior year.
OUTLOOK
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 Other Operations to have a material effect on the
future operating results of the Company.
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 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 the Life
segment 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 Other
Operations segments. Environmental claims relate primarily to pollution and
related clean-up costs. With regard to these claims, uncertainty exists which
impacts the ability of insurers and reinsurers to estimate the ultimate reserves
for unpaid losses and related settlement expenses. The Hartford finds that
conventional reserving techniques cannot estimate the ultimate cost of these
claims because of inadequate development patterns and inconsistent emerging
legal doctrine. For the majority of environmental claims and many types of
asbestos claims, unlike any other type of contractual claim, there is almost no
agreement or consistent precedent to determine what, if any, coverage exists or
which, if any, policy years and insurers or reinsurers may be liable. Further
uncertainty arises with environmental claims since claims are often made under
policies, the existence of which may be in dispute, the terms of which may have
changed over many years, which may or may not provide for legal defense costs,
and 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
- 22 -
<PAGE>
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 Other Operations 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 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 were 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, 1997, 1996 and 1995, was as follows (net of reinsurance):
<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS CLAIMS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1997 1996 1995
---------------------------------------- ----------------------------------------- ----------
Environmental Asbestos Total Environmental Asbestos Total Total [1]
---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Beginning liability $ 1,439 $ 717 $ 2,156 $ 926 $ 410 $ 1,336 $ 1,334
Claims and claim adjustment
expenses incurred -- 2 2 603 322 925 163
Claims and claim adjustment
expenses paid (113) (45) (158) (124) (35) (159) (161)
Other [2] (14) 14 -- 34 20 54 --
- ----------------------------------------------------------------------------------------------------------------------------------
ENDING LIABILITY [3] $ 1,312 $ 688 $ 2,000 $ 1,439 $ 717 $ 2,156 $ 1,336
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Prior to December 31, 1995, reserves were not split between environmental
and asbestos exposures.
[2] Other represents reclassifications of beginning reserves between
environmental and asbestos for 1997 and represents reclassifications of
reserves that were not previously identified as environmental and asbestos
for 1996.
[3] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,853, $1,972 and $1,939 for 1997, 1996 and 1995, respectively.
Gross of reinsurance, as of December 31, 1997, 1996 and 1995 reserves for
environmental and asbestos were $2,165 and $1,688, $2,342 and $1,786, and
$1,707 and $1,568, respectively.
</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, net of reinsurance, as follows: $2 in 1997, $925 in 1996 and $163 in
1995.
The Hartford believes that the environmental and asbestos reserves reported at
December 31, 1997 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.
- 23 -
<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 Other Operations. The investment portfolios for these segments are managed
based on the underlying characteristics and nature of their respective
liabilities. For a further discussion on The Hartford's approach to managing
risks, see the Capital Markets Risk Management section.
The investment portfolios of the individual segments are managed by distinct
investment strategy groups which are accountable to the senior management of the
segments. They are responsible for monitoring and managing the segment's
asset/liability profile, establishing investment objectives and guidelines, and
determining, within specified risk tolerances and investment guidelines, the
appropriate asset allocation, duration, and convexity characteristics of the
portfolios. Hartford Investment Management Company, a wholly owned subsidiary of
The Hartford, executes the investment plan of the strategy groups including the
identification and purchase of securities that fulfill the objectives of the
strategy groups. International subsidiaries maintain individual investment units
with comparable responsibilities.
NORTH AMERICAN PROPERTY & CASUALTY
The investment objective of the North American Property & Casualty segment is to
maximize economic value while generating after-tax income and sufficient
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.
Total invested assets were $15.0 billion at December 31, 1997 and were comprised
of fixed maturities of $13.5 billion and other investments of $1.5 billion,
primarily equity securities. As of December 31, 1997 and 1996, the segment had a
minimal amount of real estate.
FIXED MATURITIES BY TYPE
- ----------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
TYPE FAIR PERCENT FAIR PERCENT
VALUE VALUE
- ----------------------------------------------------------------
Municipal - tax-exempt $ 7,873 58.5% $ 7,123 63.2%
Corporate 2,257 16.8% 2,160 19.1%
Commercial MBS 687 5.1% 107 0.9%
ABS 559 4.2% 206 1.8%
MBS - agency 540 4.0% 213 1.9%
CMO 483 3.6% 655 5.8%
Gov't/Gov't agencies - For. 459 3.4% 279 2.5%
Gov't/Gov't agencies - U.S. 32 0.2% 15 0.1%
Municipal - taxable 31 0.2% 68 0.6%
Short-term 479 3.6% 419 3.7%
Redeemable pref'd stock 56 0.4% 47 0.4%
- ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 13,456 100.0% $ 11,292 100.0%
- ----------------------------------------------------------------
During 1997, the North American Property & Casualty segment adjusted its
strategy to increase its ownership of taxable bonds, specifically, asset backed
securities ("ABS"), commercial mortgage backed securities ("MBS") and
corporates. In addition, the segment's percentage ownership of equity securities
to total invested assets decreased primarily as a result of opportunities taken
in a favorable equity market.
The taxable equivalent duration of the December 31, 1997 fixed maturity
portfolio was 4.7 years compared to 5.0 years at December 31, 1996. Duration is
defined as the market price sensitivity of the portfolio to parallel shifts in
the yield curve.
INVESTMENT RESULTS
The table below summarizes the North American Property & Casualty segment's
results.
1997 1996 1995
- ----------------------------------------------------------------
Net investment income, before-tax $ 777 $ 661 $ 646
Net investment income, after-tax $ 619 $ 531 $ 478
[1]
Yield on average invested assets,
before-tax [2] 5.9% 5.5% 5.8%
Yield on average invested assets,
after-tax [1] [2] 4.7% 4.4% 4.3%
Net realized capital gains, $ 231 $ 15 $ 29
before-tax
- ----------------------------------------------------------------
[1] Due to the significant holdings in tax-exempt investments, after-tax net
investment income and yield are 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, 1997, before-tax net investment income was $777
compared to $661 in 1996, an increase of 18%, while after-tax net investment
income increased 17%. The increase in both before- and after-tax net investment
income was primarily due to an increase in invested assets as a result of
increased operating cash flow, investment of the proceeds from the 1996 sale of
Quarterly Income Preferred Securities and 1997 repayment of allocated advances
by HLI, partially offset by the 1997 North American Property & Casualty
segment's share of repayment of short-term debt. The increase in both before-
and after-tax yield was primarily due to increased allocations to higher
yielding ABS and commercial MBS along with an increase in below investment grade
securities.
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%. 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 decision to increase investment in municipal
tax-exempt bonds.
Net realized capital gains increased to $231 in 1997 from $15 in 1996. The
increase in net realized capital gains resulted primarily from opportunities in
a strong equity market, partially offset by real estate writedowns of $31.
Net realized capital gains declined to $15 in 1996 from $29 in 1995. Included in
1996 activity was the generation of $77 of net realized capital gains in the
common stock portfolios which
- 24 -
<PAGE>
were offset by real estate writedowns of $27 and losses incurred in the sale of
lower yielding taxable bonds.
LIFE
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 relative to that of policyholder obligations as
discussed in the Capital Markets Risk Management section under "Market Risk -
Life Operations - Interest Rate Risk").
Invested assets, excluding separate accounts, totaled $21.0 billion at December
31, 1997 and were comprised of $16.8 billion of fixed maturities, $3.8 billion
of policy loans, and other investments of $363. Policy loans, which had a
weighted-average interest rate of 11.2% as of December 31, 1997, 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.
FIXED MATURITIES BY TYPE
- -----------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
TYPE FAIR PERCENT FAIR PERCENT
VALUE VALUE
- ----------------------------------------------------------------
Corporate $ 7,970 47.3% $ 7,587 48.3%
ABS 3,199 19.0% 2,693 17.1%
Commercial MBS 1,606 9.5% 1,098 7.0%
CMO 978 5.8% 2,150 13.7%
MBS - agency 514 3.1% 402 2.6%
Gov't/Gov't agencies - For. 502 3.0% 395 2.5%
Municipal - taxable 267 1.6% 266 1.7%
Gov't/Gov't agencies - U.S. 241 1.4% 355 2.2%
Municipal - tax-exempt 171 1.0% -- --
Short-term 1,395 8.3% 765 4.9%
Redeemable preferred stock 5 -- -- --
- ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 16,848 100.0% $ 15,711 100.0%
- ----------------------------------------------------------------
During 1997, the Life segment continued its objective of managing exposure to
securities that "underperform" in a falling interest rate environment. The
segment continued to concentrate on reducing exposure to the collateralized
mortgage obligations ("CMO") asset sector, and reallocated the funds into public
and private corporate bonds, commercial MBS and other nonresidential ABS. In
general, commercial MBS and other nonresidential ABS, although subject to
prepayment risk, are significantly less sensitive to changes in interest rates
as compared to CMO securities. At December 31, 1997, holdings in CMO securities
were $978, or 5.7%, of total invested assets excluding policy loans compared to
$2.2 billion, or 13.4%, at December 31, 1996 and $3.7 billion, or 22%, at
December 31, 1995.
As of December 31, 1997 and 1996, approximately 22.6% and 10.3%, respectively,
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 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.
INVESTMENT RESULTS
The table below summarizes the Life segment's results.
(before-tax) 1997 1996 1995
- ----------------------------------------------------------------
Net investment income $ 1,536 $ 1,530 $ 1,451
Yield on average invested assets[1] 7.6% 7.7% 7.4%
Net realized capital losses $ -- $ (219) $ (4)
- ----------------------------------------------------------------
[1] Represents net investment income (excluding net realized capital losses)
divided by average invested assets at cost (fixed maturities at amortized
cost).
For the year ended December 31, 1997, before-tax net investment income totaled
$1.5 billion, unchanged from 1996. Before-tax yields on average invested assets
decreased to 7.6% in 1997 from 7.7% in 1996. The decrease in before-tax yields
was primarily attributable to declining market interest rates and a reduction in
policy loan yields.
For the year ended December 31, 1996, before-tax net investment income increased
by 5% from 1995. Yields on average invested assets increased to 7.7% in 1996
from 7.4% 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 offset by asset sales and maturities in Closed Book GRC.
(For additional information regarding Closed Book GRC, see the Life section.)
The increase in before-tax yield was primarily due to the increase in policy
loan yields, offset by a reduction in yield on fixed maturities as a result of
sales and maturities of higher yielding assets reinvested at lower average
yields.
There were no net realized capital gains or losses for the year ended December
31, 1997 as compared to net realized capital losses of $219 in 1996 and $4 in
1995. The 1996 capital losses were primarily attributable to the writedown and
sale of certain securities within Closed Book GRC.
INTERNATIONAL
The investment objectives of the International segment are to generate
appropriate after-tax income and sufficient liquidity to meet corporate and
policyholder obligations. The International segment primarily comprises the
investment activities of ITT London & Edinburgh, Zwolsche Algemeene and ITT
Ercos, which are engaged in property and casualty and life insurance.
Investments are made in maturities and currencies which reflect the nature of
the liabilities.
Invested assets, excluding separate accounts, were $2.7 billion at December 31,
1997 and were comprised of fixed maturities of $2.3 billion and other
investments of $407, primarily equity securities.
FIXED MATURITIES BY TYPE
- -----------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
TYPE FAIR PERCENT FAIR PERCENT
VALUE VALUE
- ----------------------------------------------------------------
Gov't/Gov't agencies - For. $ 829 36.5% $ 1,384 63.1%
Corporate 414 18.3% 401 18.3%
Gov't/Gov't agencies - U.S. 19 0.8% 29 1.3%
Short-term 1,007 44.4% 379 17.3%
- ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 2,269 100.0% $ 2,193 100.0%
- ----------------------------------------------------------------
- 25 -
<PAGE>
INVESTMENT RESULTS
The table below summarizes the International segment's results.
(before-tax) 1997 1996 1995
- ----------------------------------------------------------------
Net investment income $ 185 $ 183 $ 158
Yield on average invested assets [1] 7.2% 7.4% 7.3%
Net realized capital gains $ 95 $ 73 $ 47
- ----------------------------------------------------------------
[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, 1997, both net investment income and yield were
relatively flat as compared to 1996.
For the year ended December 31, 1996, before-tax net investment income totaled
$183 compared to $158 in 1995, an increase of 16%. Before-tax yields on average
invested assets increased to 7.4% in 1996 from 7.3% in 1995. The change in net
investment 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.
Net realized capital gains increased to $95 in 1997 compared to $73 in 1996,
primarily the result of opportunities in a favorable equity market. Net realized
capital gains increased to $73 in 1996 from $47 in 1995 due to increased sales
in 1996 of both fixed maturities and equity securities.
OTHER OPERATIONS
The investment objective of the Other Operations segment is to ensure the full
and timely payment of all liabilities. The ongoing strategy is to match asset
and liability cash flow in the early years and to minimize the difference
between asset and liability durations.
Invested assets were $2.5 billion at December 31, 1997 and were mostly comprised
of fixed maturities.
FIXED MATURITIES BY TYPE
- -----------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
TYPE FAIR PERCENT FAIR PERCENT
VALUE VALUE
- ----------------------------------------------------------------
Corporate $ 1,530 61.7% $ 1,458 64.7%
Commercial MBS 149 6.0% 88 3.9%
ABS 142 5.7% 148 6.6%
Gov't/Gov't agencies - U.S. 88 3.5% 141 6.2%
Gov't/Gov't agencies - For. 83 3.3% 72 3.2%
MBS - agency 56 2.3% 36 1.6%
Municipal - taxable 39 1.6% 22 1.0%
CMO 27 1.1% 40 1.8%
Short-term 357 14.4% 248 11.0%
Redeemable preferred stock 9 0.4% -- --
- ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 2,480 100.0% $ 2,253 100.0%
- ----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Other Operations segment's results.
(before-tax) 1997 1996 1995
- ----------------------------------------------------------------
Net investment income $ 157 $ 149 $ 165
Yield on average invested assets [1] 6.7% 6.5% 7.2%
Net realized capital gains $ 1 $ 5 $ 30
- ----------------------------------------------------------------
[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, 1997, before-tax net investment income totaled
$157 compared to $149 in 1996, an increase of 5%, while before-tax yields
increased to 6.7% from 6.5%. The increase in net investment income and yield was
due primarily to an increase in invested assets and the receipt of interest
income in an arbitration settlement.
For the year ended December 31, 1996, before-tax net investment income totaled
$149 compared to $165 in 1995, a decrease of 10%. Before-tax yields on average
invested assets decreased to 6.5% in 1996 from 7.2% in 1995. The decrease in net
investment income and yield were due to the sale of fixed maturities late in
1995 in the Fencourt portfolio and reinvestment in securities with substantially
lower yields.
Net realized capital gains were $1 in 1997 compared to $5 in 1996 and $30 in
1995, primarily due to gains taken in the Fencourt portfolio in 1995.
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 $59.4 billion as of December 31, 1997, wherein the policyholder assumes
substantially all the risk and reward, and guaranteed separate accounts totaling
$10.7 billion as of December 31, 1997 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 applicable fund
prospectus or separate account plan of operations. Non-guaranteed separate
account products include variable annuities, variable life insurance contracts
and COLI. Guaranteed separate account products primarily consist of modified
guaranteed individual annuity and modified guaranteed life insurance, and
generally include market value adjustment features to mitigate the
disintermediation risk in the event of surrenders.
- 26 -
<PAGE>
CAPITAL MARKETS RISK MANAGEMENT
The Hartford has a disciplined approach to managing risks associated with its
capital markets and asset/liability management activities. Investment portfolio
management is organized to focus investment management expertise on specific
classes of investments while asset/liability management is the responsibility of
separate and distinct risk management units supporting the property and casualty
and life operations. Derivative instruments are utilized in accordance with
established Company policy and are monitored internally and reviewed by senior
management.
The Company is exposed to two primary sources of investment and asset/liability
management risk: credit risk, relating to the uncertainty associated with the
ability of an obligor or counterparty to make timely payments of principal
and/or interest, and market risk, relating to the market price and/or cash flow
variability associated with changes in interest rates, securities prices, market
indices, yield curves or currency exchange rates. The Company does not hold any
financial instruments entered into for trading purposes.
CREDIT RISK
The Hartford has established investment credit policies that focus on the credit
quality of obligors and counterparties, limit credit concentrations, encourage
diversification and require frequent creditworthiness reviews. Investment
activity, including setting of policy and defining acceptable risk levels, is
subject to regular review and approval by senior management and frequent review
by the Company's Finance Committee.
The Company invests primarily in investment grade securities and has established
exposure limits, diversification standards and review procedures for all credit
risks whether borrower, issuer or counterparty. Creditworthiness of specific
obligors is determined by an internal credit evaluation supplemented by
consideration of external determinants of creditworthiness, typically ratings
assigned by nationally recognized ratings agencies. Obligor, geographic, asset
sector and industry concentrations are subject to established limits and
monitored on a regular interval.
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. Credit
risk is measured as the amount owed to the Company based on current market
conditions and potential payment obligations between the Company and its
counterparties. Credit exposures are quantified weekly and netted, and
collateral is pledged to or held by the Company to the extent the current value
of derivatives exceed exposure policy thresholds.
The Hartford is not exposed to any significant credit concentration risk of a
single issuer.
The following tables identify fixed maturity securities for the property and
casualty operations, including international and other operations, and the life
operations, including international operations and guaranteed separate accounts,
by credit quality. The ratings referenced in the tables are based on the ratings
of a nationally recognized rating organization or, if not rated, assigned based
on the Company's internal analysis of such securities.
PROPERTY AND CASUALTY OPERATIONS
As of December 31, 1997, over 95% of the fixed maturity portfolio was invested
in investment-grade securities.
FIXED MATURITIES BY CREDIT QUALITY
- ----------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
CREDIT QUALITY FAIR PERCENT FAIR PERCENT
VALUE VALUE
- ----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 1,083 6.1% $ 1,058 6.9%
AAA 6,337 35.4% 5,739 37.3%
AA 3,426 19.1% 3,095 20.1%
A 3,096 17.3% 2,779 18.0%
BBB 1,352 7.6% 877 5.7%
BB & below 767 4.3% 581 3.8%
Not Rated -- -- 256 1.7%
Short-term 1,832 10.2% 998 6.5%
- ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 17,893 100.0% $ 15,383 100.0%
- ----------------------------------------------------------------
LIFE OPERATIONS
As of December 31, 1997, over 99% of the fixed maturity portfolio was invested
in investment-grade securities.
FIXED MATURITIES BY CREDIT QUALITY
- ---------------------------------------------------------------
1997 1996
- ----------------------------------------------------------------
CREDIT QUALITY FAIR PERCENT FAIR PERCENT
VALUE VALUE
- ----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,907 10.6% $ 2,003 7.6%
AAA 4,252 15.4% 6,047 23.1%
AA 2,990 10.9% 3,704 14.1%
A 9,351 33.9% 8,936 34.1%
BBB 5,966 21.7% 4,467 17.0%
BB & below 205 0.7% 155 0.6%
Short-term 1,880 6.8% 911 3.5%
- ----------------------------------------------------------------
TOTAL FIXED MATURITIES $ 27,551 100.0% $ 26,223 100.0%
- ----------------------------------------------------------------
MARKET RISK
The Hartford has several objectives in managing market risk associated with its
property and casualty and life operations. The property and casualty operations
attempt to maximize economic value while generating appropriate after-tax income
and sufficient liquidity to meet corporate and policyholder obligations. The
property and casualty operations have material exposure to interest rate and
equity market risk. The life operations are responsible for maximizing after-tax
returns within acceptable risk parameters including the management of the
interest rate sensitivity of invested assets to that of policyholder
obligations. The life operations have material market exposure to interest rate
risk associated with its fixed maturity portfolios. The Company continually
monitors these exposures and adjusts the composition and profile of its invested
assets through both the cash and derivatives markets to manage these risks.
- 27 -
<PAGE>
The Company analyzes interest rate risk using various models including
multi-scenario cash flow projection models that forecast cash flows of the
liabilities and their supporting investments, including derivative instruments.
DERIVATIVE INSTRUMENTS
The Hartford utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or to control transaction costs. The
Company does not make a market or trade derivatives for the express purpose of
earning trading profits.
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities. (For additional information of these
strategies along with tables reflecting outstanding derivative instruments, see
the Property and Casualty Operations and Life Operations discussions below.)
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the Company's Finance Committee.
The notional amounts of derivative contracts represent the basis upon which pay
or receive amounts are calculated and are not reflective of credit risk.
Notional amounts pertaining to derivative instruments for both general and
guaranteed separate accounts totaled $11.1 billion at December 31, 1997.
The following discussions focus on the key market risk exposures within each of
the property and casualty and life operations.
PROPERTY AND CASUALTY OPERATIONS
Interest Rate Risk
- ------------------
The primary exposure to interest rate risk in the property and casualty
operations relates to its fixed maturity investments. Changes in market interest
rates directly impact the market value of the fixed maturity securities. In
addition, but to a lesser extent, interest rate risk exists on debt issued.
Derivative instruments are used periodically to manage interest rate risk and as
a result, their value will change as market rates change, usually in the
opposite direction of the item being hedged. The total notional amount of
derivatives used for hedging interest rate risk was $125 as of December 31,
1997.
The principal amounts of the fixed and variable rate fixed maturity portfolios,
along with the respective weighted average coupons at December 31, 1997, are
reflected in the following table by estimated maturity year. Expected maturities
differ from contractual maturities due to call or prepayment provisions. The
weighted average coupon on variable rate securities is based upon spot rates as
of December 31, 1997, and is based primarily on London Interbank Offered Rate
("LIBOR"). Callable bonds and notes are primarily municipal bonds, and are
distributed to either call dates or maturity depending on which date produces
the most conservative yield. Asset backed securities, collateralized mortgage
obligations and mortgage backed securities are distributed to maturity year
based on estimates of the rate of future prepayments of principal over the
remaining life of the securities. These estimates are developed using prepayment
speeds contained in broker consensus data. Such estimates are derived from
prepayment speeds previously experienced at interest rate levels projected for
the underlying collateral. Actual prepayment experience may vary from these
estimates. Financial instruments with certain leverage features have been
included in each of the fixed maturity categories. These instruments have not
been separately displayed as they were immaterial to the property and casualty
operations' investment portfolio.
- 28 -
<PAGE>
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES - CALLABLE
Fixed Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Par value $ 127 $ 80 $ 95 $ 115 $ 174 $ 5,581 $ 6,172 $ 6,341
Weighted average coupon 6.7% 7.4% 8.4% 7.4% 6.3% 5.4% 5.5%
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 257 $ 257 $ 232
Weighted average coupon -- -- -- -- -- 6.4% 6.4%
BONDS AND NOTES - OTHER
Fixed Rate
Par value $ 2,011 $ 689 $ 490 $ 764 $ 711 $ 3,662 $ 8,327 $ 8,620
Weighted average coupon 6.2% 6.9% 7.2% 7.4% 7.0% 6.3% 6.5%
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 70 $ 70 $ 57
Weighted average coupon -- -- -- -- -- 6.5% 6.5%
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 16 $ 5 $ 108 $ 95 $ 132 $ 301 $ 657 $ 668
Weighted average coupon 8.4% 7.4% 6.5% 7.2% 6.8% 6.6% 6.8%
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 30 $ 30 $ 30
Weighted average coupon -- -- -- -- -- 6.6% 6.6%
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 9 $ 13 $ 42 $ 30 $ 109 $ 288 $ 491 $ 493
Weighted average coupon 8.6% 6.7% 7.1% 7.0% 6.5% 7.2% 7.0%
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 17 $ 17 $ 17
Weighted average coupon -- -- -- -- -- 7.9% 7.9%
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ -- $ -- $ 27 $ 6 $ 15 $ 654 $ 702 $ 724
Weighted average coupon -- -- 6.5% 6.8% 7.1% 7.3% 7.2%
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 108 $ 108 $ 112
Weighted average coupon -- -- -- -- -- 7.3% 7.3%
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ -- $ -- $ -- $ -- $ 1 $ 586 $ 587 $ 596
Weighted average coupon -- -- -- -- 6.8% 7.3% 7.3%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 29 -
<PAGE>
The following table provides information as of December 31, 1997 on interest
rate swaps used to manage interest rate risk on fixed maturities and presents
notional amounts with weighted average pay and receive rates by maturity year.
The weighted average pay rate is based upon spot rates as of December 31, 1997.
<TABLE>
<CAPTION>
1997
INTEREST RATE SWAPS 1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional value $ -- $ -- $ -- $ -- $ 75 $ 50 $ 125 $ 3
Weighted average pay rate -- -- -- -- 5.8% 5.9% 5.8%
Weighted average receive rate -- -- -- -- 6.5% 6.7% 6.6%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The table below provides information as of December 31, 1997 on debt obligations
and reflects principal cash flows and related weighted average interest rate by
maturity year.
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT
Fixed Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amount $ 241 $ -- $ -- $ -- $ -- $ -- $ 241 $ 244
Weighted average interest rate 7.8% -- -- -- -- -- 7.8%
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ 200 $ 434 $ 198 $ 832 $ 856
Weighted average interest rate -- -- -- 8.3% 6.9% 7.3% 7.2%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Equities Price Risk
- -------------------
The property and casualty operations hold a well diversified portfolio of
investments in equity securities representing firms in various countries,
industries and market segments ranging from small market capitalization stocks
to the Standard & Poor's 500 stocks. The risk associated with these securities
relates to potential decreases in value resulting from changes in the equity
prices.
The operations may occasionally use equity futures to hedge against a change in
value on the anticipated purchase or sale of equity securities. As of December
31, 1997, there were no outstanding derivative instruments hedging equity price
risk.
The following table reflects equity securities owned at December 31, 1997
grouped by major market type.
1997
--------------------------------
EQUITY SECURITIES Fair Value Percent
- ---------------------------------------------------------------
Domestic
Large cap $ 793 45.5%
Midcap/small cap 293 16.8%
Foreign
EAFE [1]/Canadian 562 32.3%
Emerging 93 5.4%
- ---------------------------------------------------------------
Total $ 1,741 100.0%
- ---------------------------------------------------------------
[1] Europe, Australia, Far East countries index.
Currency Exchange Risk
- ----------------------
Currency exchange risk within the property and casualty operations relates
primarily to translating both profits and net equity investment in its
international subsidiaries from
- 30 -
<PAGE>
the subsidiary's local currency to U.S. dollars. The following table represents
the property and casualty operations' net equity investments in its primary
foreign subsidiaries, the related foreign currency and the impact to the net
equity investment based upon a 10% change in foreign currency rates at December
31, 1997.
Impact of 10%
Changes
Net Equity ----------------
Company Investment -10% +10% Currency
- --------------------- ------------- -------- ------- -----------
ITT London &
Edinburgh $362 $(36) $36 Sterling
Zwolsche Algemeene 353 (35) 35 Guilder
ITT Ercos 53 (1) 1 Pesetas
- --------------------- ------------- -------- ------- -----------
Currency exchange risk also exists with respect to investments in foreign equity
securities. Forward foreign contracts with a notional amount of $51 are used to
hedge this risk.
LIFE OPERATIONS
Interest Rate Risk
- ------------------
The life operations' general and guaranteed separate account exposure to
interest rate risk relates to the market price and/or cash flow variability
associated with changes in market interest rates. Changes in interest rates can
potentially impact the life operations' profitability. Under certain
circumstances of interest rate volatility, the life operations could be exposed
to disintermediation risk and reduction in net interest rate spread or profit
margins. For the life operations' non-guaranteed separate accounts, exposure is
not significant as the policyholder assumes substantially all of the investment
risk.
The life operations' general account and guaranteed separate account investment
portfolios primarily consist of investment-grade, fixed maturity securities,
including corporate bonds, asset backed securities, commercial mortgage backed
securities and collateralized mortgage obligations. The fair value of these and
the life operations' other invested assets fluctuates depending on the interest
rate environment and other general economic conditions. During periods of
declining interest rates, paydowns on residential mortgage backed securities and
collateralized mortgage obligations increase as the underlying mortgages are
prepaid. During such periods, the Company generally will not be able to reinvest
the proceeds of any such prepayments at comparable yields. Conversely, during
periods of rising interest rates, the rate of prepayments generally slows, also
exposing the Company to the possibility of asset/liability cash flow and yield
mismatch. For further discussion of the Company's risk management techniques to
manage this market risk, see the "Asset and Liability Management Strategies Used
to Manage Market Risk" discussed below.
As described above, the life operations hold a significant fixed maturity
portfolio which includes both fixed and variable rate features. The following
table reflects the principal amounts of the life operations' general and
guaranteed separate account fixed and variable rate fixed maturity portfolios,
at December 31, 1997, along with the respective weighted average coupons, by
estimated maturity year. Expected maturities differ from contractual maturities
due to call or prepayment provisions. The weighted average coupon on variable
rate securities is based upon spot rates as of December 31, 1997, and is
primarily based upon LIBOR. Callable bonds and notes are distributed to either
call dates or maturity depending on which date produces the most conservative
yield. Asset backed securities, collateralized mortgage obligations and mortgage
backed securities are distributed to maturity year based on estimates of the
rate of future prepayments of principal over the remaining life of the
securities. These estimates are developed using prepayment speeds provided in
broker consensus data. Such estimates are derived from prepayment speeds
previously experienced at the interest rate levels projected for the underlying
collateral. Actual prepayment experience may vary from these estimates.
Financial instruments with certain leverage features have been included in each
of the fixed maturity categories. These instruments have not been separately
displayed because they were immaterial to the life investment portfolio.
- 31 -
<PAGE>
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES - CALLABLE
Fixed Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Par value $ 37 $ 50 $ 28 $ 13 $ 12 $ 566 $ 706 $ 668
Weighted average coupon 10.5% 7.5% 7.7% 7.6% 7.7% 5.4% 6.0%
Variable Rate
Par value $ 66 $ 33 $ 28 $ 44 $ 15 $ 981 $ 1,167 $ 1,106
Weighted average coupon 6.4% 6.9% 7.1% 6.0% 6.4% 6.5% 6.5%
BONDS AND NOTES - OTHER
Fixed Rate
Par value $ 3,024 $ 1,413 $ 1,305 $ 1,242 $ 1,058 $ 7,306 $ 15,348 $ 15,127
Weighted average coupon 3.2% 6.8% 7.1% 7.5% 7.7% 6.2% 5.9%
Variable Rate
Par value $ 140 $ 47 $ 138 $ -- $ 84 $ 900 $ 1,309 $ 1,352
Weighted average coupon 5.1% 1.3% 6.4% -- 5.7% 5.4% 5.3%
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 211 $ 251 $ 447 $ 566 $ 240 $ 573 $ 2,288 $ 2,325
Weighted average coupon 6.9% 6.6% 6.7% 7.0% 6.8% 7.3% 7.0%
Variable Rate
Par value $ 40 $ 183 $ 237 $ 304 $ 358 $ 837 $ 1,959 $ 1,959
Weighted average coupon 6.2% 6.2% 6.2% 6.7% 6.2% 6.4% 6.4%
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 29 $ 171 $ 572 $ 308 $ 78 $ 581 $ 1,739 $ 1,695
Weighted average coupon 6.5% 6.0% 6.1% 5.6% 5.6% 6.0% 5.9%
Variable Rate
Par value $ 28 $ 12 $ 27 $ 14 $ 6 $ 359 $ 446 $ 424
Weighted average coupon 6.8% 6.6% 4.2% 6.7% 3.4% 7.7% 7.3%
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 4 $ 45 $ 184 $ 112 $ 134 $ 969 $ 1,448 $ 1,441
Weighted average coupon 8.6% 7.4% 6.9% 7.7% 7.0% 7.4% 7.3%
Variable Rate
Par value $ 20 $ 83 $ 90 $ 70 $ 165 $ 382 $ 810 $ 821
Weighted average coupon 6.1% 7.5% 6.9% 6.6% 6.5% 7.3% 7.0%
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 4 $ 25 $ 3 $ 41 $ 2 $ 501 $ 576 $ 590
Weighted average coupon 7.3% 7.0% 7.4% 6.2% 8.1% 7.4% 7.3%
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 24 $ 24 $ 24
Weighted average coupon -- -- -- -- -- 6.5% 6.5%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 32 -
<PAGE>
The table below provides information as of December 31, 1997 on debt obligations
and reflects principal cash flows and related weighted average interest rate by
maturity year.
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT
Fixed Rate
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Amount $ 50 $ -- $ -- $ -- $ -- $ -- $ 50 $ 50
Weighted average interest rate 5.8% -- -- -- -- -- 5.8%
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 650 $ 650 $ 674
Weighted average interest rate -- -- -- -- -- 7.4% 7.4%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Asset and Liability Management Strategies Used to Manage Market Risk
- --------------------------------------------------------------------
The life operations employ several risk management tools to quantify and manage
market risk arising from its investments and interest sensitive liabilities. For
certain portfolios, 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 efficiently fund obligations, hedge against
risks that affect the value of certain liabilities and adjust broad investment
risk characteristics as a result of any significant changes in market risks. As
an end user of derivatives, the life operations use a variety of derivatives,
including swaps, caps, floors, forwards and exchange-traded financial futures
and options, in order to hedge exposure primarily to interest rate risk on
anticipated investment purchases or existing assets and liabilities. Notional
amounts pertaining to derivatives totaled $10.9 billion at December 31, 1997
($6.6 billion related to insurance investments and $4.3 billion related to life
insurance liabilities). The strategies described below are used to manage the
aforementioned risks.
Anticipatory Hedging -- For certain liabilities, life operations commits to the
price of the product prior to receipt of the associated premium or deposit.
Anticipatory hedges are routinely executed to offset the impact of changes in
asset prices arising from interest rate changes pending the receipt of premium
or deposit and the subsequent 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, 1997 was $255.
Liability Hedging -- Several products obligate the life operations to credit a
return to the contractholder which is indexed to a market rate. To hedge risks
associated with these products, the life operation 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
operations to customize contract terms and conditions to customer objectives and
satisfies the operation'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, 1997 was $4.3 billion.
Asset Hedging -- To meet the various life policyholder obligations and to
provide cost effective prudent investment risk diversification, the life
operations may combine two or more financial instruments to achieve the
investment characteristics of a fixed maturity security or that match an
associated liability. The use of derivative instruments in this regard
effectively transfers unwanted investment risks or attributes to others. The
selection of the appropriate derivative instruments 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, 1997 was
$3.2 billion.
Portfolio Hedging -- The life operation 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 desired levels.
Portfolio hedges reduce the mismatch between assets and liabilities and offset
the potential impact to cash flows caused by changes in interest rates. The
notional amount of portfolio hedges as of December 31, 1997 was $3.1 billion.
The following tables provide information as of December 31, 1997 on derivative
instruments used in accordance with the aforementioned hedging strategies. For
interest rate swaps, caps and floors, the tables present notional amounts with
weighted average pay and receive rates for swaps and weighted average strike
rates for caps and floors by maturity year. For interest rate futures, the
tables present contract amount and weighted average settlement price by expected
maturity year.
- 33 -
<PAGE>
<TABLE>
<CAPTION>
1997
INTEREST RATE SWAPS 1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional value $ 120 $ 151 $ 69 $ 198 $ 39 $ 297 $ 874 $ (19)
Weighted average pay rate 5.9% 6.4% 6.5% 6.7% 6.7% 6.5% 6.5%
Weighted average receive rate 7.1% 6.2% 5.9% 6.1% 5.9% 5.8% 6.1%
Pay Variable/Receive Fixed
Notional value $ 749 $ 995 $ 428 $ 351 $ 449 $ 1,240 $ 4,212 $ 172
Weighted average pay rate 5.9% 5.9% 5.9% 6.0% 5.9% 5.9% 5.9%
Weighted average receive rate 6.4% 6.5% 6.8% 7.0% 6.7% 7.5% 6.9%
Pay Variable /Receive Different Variable
Notional value $ 83 $ 161 $ 275 $ 50 $ 291 $ 721 $ 1,581 $ (3)
Weighted average pay rate 6.0% 5.9% 5.9% 5.9% 7.7% 6.5% 6.4%
Weighted average receive rate 6.0% 6.8% 6.1% 9.6% 6.1% 7.0% 6.7%
- ---------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- ---------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE CAPS - LIBOR BASED
Purchased
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional value $ -- $ -- $ -- $ 5 $ -- $ 38 $ 43 $ 3
Weighted average strike rate (4.0 - 5.9%) -- -- -- 5.9% -- 5.2% 5.2%
Notional value $ 50 $ -- $ -- $ -- $ -- $ 35 $ 85 $ 1
Weighted average strike rate (6.0 - 7.9%) 7.0% -- -- -- -- 6.6% 6.8%
Notional value $ 37 $ -- $ -- $ -- $ 13 $ 210 $ 260 $ 2
Weighted average strike rate (8.0 - 9.9%) 8.6% -- -- -- 9.0% 8.4% 8.5%
Notional value $ -- $ 16 $ 10 $ -- $ 26 $ -- $ 52 $ --
Weighted average strike rate (10.0 - 11.9%) -- 11.8% 11.5% -- 10.1% -- 10.9%
Issued
Notional value $ 50 $ -- $ -- $ -- $ -- $ 13 $ 63 $ --
Weighted average strike rate (6.0 - 7.9%) 7.0% -- -- -- -- 7.2% 7.0%
Notional value $ -- $ -- $ -- $ 4 $ -- $ 13 $ 17 $ --
Weighted average strike rate (8.0 - 9.9%) -- -- -- 8.9% -- 8.3% 8.5%
INTEREST RATE CAPS - CMT BASED
Purchased
Notional value $ 200 $ -- $ 343 $ -- $ -- $ 18 $ 561 $ --
Weighted average strike rate (6.0 - 7.9%) 7.5% -- 7.8% -- -- 7.0% 7.6%
Notional value $ -- $ -- $ 95 $ 100 $ 100 $ -- $ 295 $ --
Weighted average strike rate (8.0 - 9.9%) -- -- 8.0% 8.0% 9.5% -- 8.5%
Issued
Notional value $ -- $ -- $ 343 $ -- $ -- $ 18 $ 361 $ --
Weighted average strike rate (6.0 - 7.9%) -- -- 7.8% -- -- 7.5% 7.8%
Notional value $ -- $ -- $ -- $ 100 $ 100 $ -- $ 200 $ --
Weighted average strike rate (8.0 - 9.9%) -- -- -- 8.0% 9.5% -- 8.8%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 34 -
<PAGE>
<TABLE>
<CAPTION>
1997
1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
INTEREST RATE FLOORS - LIBOR BASED
Purchased
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional value $ -- $ 100 $ -- $ -- $ -- $ -- $ 100 $ --
Weighted average strike rate (4.0 - 5.9%) -- 4.2% -- -- -- -- 4.2%
Notional value $ -- $ -- $ -- $ -- $ -- $ 65 $ 65 $ 5
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- 7.0% 7.0%
Issued
Notional value $ -- $ -- $ 10 $ 10 $ 39 $ 204 $ 263 $ (4)
Weighted average strike rate (4.0 - 5.9%) -- -- 5.1% 4.9% 5.3% 5.3% 5.3%
Notional value $ -- $ -- $ -- $ -- $ -- $ 27 $ 27 $ (3)
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- 7.8% 7.8%
INTEREST RATE FLOORS - CMT BASED
Purchased
Notional value $ 300 $ -- $ 100 $ -- $ -- $ 150 $ 550 $ 4
Weighted average strike rate (4.0 - 5.9%) 5.8% -- 5.8% -- -- 5.5% 5.7%
Notional value $ 81 $ 40 $ 10 $ 500 $ -- $ -- $ 631 $ 9
Weighted average strike rate (6.0 - 7.9%) 6.3% 6.5% 6.0% 6.0% -- -- 6.1%
Issued
Notional value $ -- $ -- $ -- $ 540 $ -- $ -- $ 540 $ (2)
Weighted average strike rate (4.0 - 5.9%) -- -- -- 5.0% -- -- 5.0%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1997
INTEREST RATE FUTURES 1998 1999 2000 2001 2002 Thereafter TOTAL Fair Value
- ----------------------------------------------------------------------------------------------------------------------------------
Long
<S> <C> <C> <C> <C> <C> <C> <C>
Contract amount/notional $ 19 $ -- $ -- $ -- $ -- $ -- $ 19 N/A
Weighted average settlement price $ 121 $ -- $ -- $ -- $ -- $ -- $ 121 N/A
Short
Contract amount/notional $ 22 $ 3 $ 25 $ -- $ -- $ -- $ 50 N/A
Weighted average settlement price $ 94 $ 94 $ 94 $ -- $ -- $ -- $ 94 N/A
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
N/A - Not applicable.
</FN>
</TABLE>
Life Insurance Liability Characteristics
- ----------------------------------------
Life operations' insurance liabilities, other than non-guaranteed separate
accounts, are primarily related to accumulation vehicles such as fixed or
variable annuities and investment contracts and other insurance products such as
long-term disability and term life insurance.
Asset Accumulation Vehicles
While interest rate risk associated with these insurance products has been
reduced through the use of market value adjustment features and 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
targeted returns.
Fixed Rate -- Products in this category require the life operations 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. Product examples include fixed rate annuities
with a market value adjustment and fixed rate guaranteed investment contracts.
Contract duration is dependent on the policyholder's choice of guarantee period.
Indexed -- Products in this category are similar to the fixed rate asset
accumulation vehicles but require the life operations 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.
Interest Credited -- 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.
Product examples include universal life contracts and the general account
portion of the life operations' variable annuity products.
Liability duration is short to intermediate-term.
- 35 -
<PAGE>
Other Insurance Products
Long-term Pay Out Liabilities -- Products in this category are long-term in
nature and may contain significant actuarial (including mortality and morbidity)
pricing and cash flow risks. The cash flows associated with these policy
liabilities are not interest rate 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 that the actual
timing of the cash flows differ from those anticipated resulting in an
investment return lower than that 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.
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 and the variability in the timing of the expected cash flows.
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.
Matching the duration of investments with respective policyholder obligations is
an explicit objective of the life operations' management strategy. The estimated
cash flows of insurance policy liabilities based upon internal actuarial
assumptions as of December 31, 1997 are reflected in the table below by expected
maturity year.
<TABLE>
<CAPTION>
(dollars in billions)
- ----------------------------------------------------------------------------------------------------------------------------------
DESCRIPTION [1] 1998 1999 2000 2001 2002 Thereafter TOTAL
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Fixed rate asset accumulation vehicles $ 2.9 $ 1.8 $ 1.9 $ 1.2 $ 0.6 $ 4.3 $ 12.7
Weighted average credited rate 6.6% 7.1% 6.9% 6.9% 7.1% 6.6% 6.8%
Indexed asset accumulation vehicles $ 0.1 $ 0.1 $ -- $ -- $ -- $ -- $ 0.2
Weighted average credited rate 5.7% 6.3% -- -- -- -- 5.9%
Interest credited asset accumulation vehicles $ 4.2 $ 0.6 $ 0.4 $ 0.4 $ 0.5 $ 4.7 $ 10.8
Weighted average credited rate 5.7% 6.0% 6.0% 6.0% 6.1% 5.9% 5.8%
Long-term pay out liabilities $ 0.4 $ 0.3 $ 0.2 $ 0.1 $ 0.1 $ 1.2 $ 2.3
Short-term pay out liabilities $ 0.5 $ -- $ -- $ -- $ -- $ -- $ 0.5
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] As of December 31, 1997, the fair value of the life operations investment
contracts including guaranteed separate accounts was $21.9 billion.
</FN>
</TABLE>
Sensitivity to Changes in Interest Rates
- ----------------------------------------
For liabilities whose cash flows are not substantially affected by changes in
interest rates ("fixed liabilities") and where investment experience is
substantially absorbed by the life operations, the sensitivity of the net
economic value (discounted present value of asset cash flows less the discounted
present value of liability cash flows) of those portfolios to 100 basis point
shifts in interest rates is shown in the table below. These fixed liabilities
represent about 60% of the life operations' general and guaranteed separate
account liabilities. The remaining liabilities generally allow the life
operation significant flexibility to adjust credited rates to reflect actual
investment experience and thereby pass through a substantial portion of actual
investment experience to the policyholder. The fixed liability portfolios are
managed and monitored relative to defined objectives and are analyzed regularly
by management for internal risk management purposes using scenario simulation
techniques, and evaluated annually consistent with regulatory requirements.
Change in Net Economic Value
December 31, 1997
--------------------------------
Basis point shift - 100 + 100
- ------------------------------- --------------- ----------------
Amount $ 5 $ (10)
Percent of liability value 0.03% (0.06%)
- ------------------------------- -- ------------ --- ------------
- 36 -
<PAGE>
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of The
Hartford and its ability to generate strong cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The capital structure of The Hartford consists of debt, minority interest
and equity, summarized as follows:
<TABLE>
<CAPTION>
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term debt $ 291 $ 500 $ 886
Long-term debt 1,482 1,032 1,022
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely parent junior subordinated debentures ("QUIPS") 1,000 1,000 --
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 2,773 $ 2,532 $ 1,908
----------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ 351 $ -- $ --
----------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities, net of tax $ 5,232 $ 4,168 $ 4,457
Unrealized gain on securities, net of tax 853 352 245
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 6,085 $ 4,520 $ 4,702
----------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 8,356 $ 6,700 $ 6,365
----------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] 53% 61% 43%
Debt to capitalization [2] 33% 38% 30%
- ---------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Excludes unrealized gain on securities, net of tax, of $46.
[2] Excludes unrealized gain on securities, net of tax.
</FN>
</TABLE>
CAPITALIZATION
The Hartford's total capitalization excluding unrealized gain on securities, net
of tax, increased by $1.7 billion in 1997. This change primarily was the result
of earnings and the effects of the Offering (see below) and additional net
borrowings, partially offset by dividends declared on The Hartford's common
stock. The Company's debt to equity and debt to capitalization ratios (both
excluding unrealized gain on securities, net of tax) improved in 1997 as
compared to 1996, primarily as a result of earnings and the impact of the
Offering, partially offset by increased debt.
In 1996, total capitalization excluding unrealized gain on securities, net of
tax, increased by $335 from 1995 as a result of additional net borrowings,
partially offset by the net loss and dividends declared on The Hartford's common
stock. The Company's debt to equity and debt to capitalization ratios (both
excluding unrealized gain on securities, net of tax) increased in 1996 as
compared to 1995, primarily as a result of increased debt.
THE OFFERING
On February 10, 1997, HLI, the holding company parent of The Hartford's
significant life insurance subsidiaries, filed a registration statement, as
amended, with the Securities and Exchange Commission relating to the initial
public offering of HLI Class A common stock (the "Offering"). Pursuant to the
Offering on May 22, 1997, HLI sold to the public 26 million shares at $28.25 per
share and received proceeds, net of offering expenses, of $687.
The 26 million shares sold in the Offering represented approximately 18.6% of
the equity ownership in HLI and approximately 4.4% of the combined voting power
of HLI's Class A and Class B common stock. The Hartford owns all of the 114
million outstanding shares of Class B common stock of HLI, representing
approximately 81.4% of the equity ownership in HLI and approximately 95.6% of
the combined voting power of HLI's Class A and Class B common stock. Holders of
Class A common stock generally have identical rights to the holders of Class B
common stock except that the holders of Class A common stock are entitled to one
vote per share while holders of Class B common stock are entitled to five votes
per share on all matters submitted to a vote of HLI's stockholders. Also, each
share of Class B common stock is convertible into one share of Class A common
stock (a) upon the transfer of such share of Class B common stock by the holder
thereof to a non-affiliate (except where the shares of Class B common stock so
transferred represent 50% or more of all the outstanding shares of common stock,
calculated without regard to the difference in voting rights between the classes
of common stock) or (b) in the event that the number of shares of outstanding
Class B common stock is less than the 50% of all the common stock then
outstanding. As of December 31, 1997, The Hartford continued to maintain an
81.4% equity ownership in HLI.
In connection with the Offering, The Hartford reported a $368 gain related to
the increased value of its equity ownership in HLI. Management used or will use
the proceeds from the Offering to reduce certain debt outstanding, to fund
growth initiatives and for other general corporate purposes. 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.
DEBT
Total debt in 1997 increased $241 compared to a $624 increase in the prior year.
The Hartford used the proceeds of these additional borrowings to fund the
insurance operations of its
- 37 -
<PAGE>
subsidiaries and to repay outstanding commercial paper and other short-term
debt.
As of December 31, 1997, The Hartford had an unsecured aggregate $2.0 billion
credit facility with twenty-seven participating banks which is comprised of a
$1.5 billion five year revolving credit facility with four years remaining 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, 1997, there were no outstanding
borrowings under the facility.
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.
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. On June 12, 1997, HLI
issued and sold $650 of unsecured redeemable long-term debt in the form of notes
and debentures. Of this amount, $200 was in the form of 6.90% notes due June 15,
2004, $200 of 7.10% notes due June 15, 2007, and $250 of 7.65% debentures due
June 15, 2027. Interest on each of the notes and debentures is payable
semi-annually on June 15 and December 15, of each year, commencing December 15,
1997. HLI also issued $50 of short-term debt in the form of commercial paper.
HLI used the proceeds from these issuances for the repayment of short-term debt
and for other general corporate purposes.
In the first quarter of 1997, HLI borrowed $1.1 billion against a $1.3 billion
unsecured short-term credit facility with four banks. During the second quarter
of 1997, HLI retired the borrowing with proceeds from the Offering and the new
debt issuances (discussed above), and subsequently reduced the capacity of its
unsecured short-term credit facility from $1.3 billion to $250.
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-term 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, 1997.
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 7 and 8 of Notes to Consolidated Financial
Statements.)
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 8 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 8 of Notes to Consolidated Financial
Statements.)
DIVIDENDS
In 1997, The Hartford declared $189 and paid $190 in dividends to shareholders.
In 1996, The Hartford declared $188 and paid $140 in dividends to shareholders.
On October 16, 1997, The Hartford declared a dividend on its common stock of
$0.40 per share payable on January 2, 1998 to all shareholders of record as of
December 1, 1997.
On February 19, 1998, The Hartford's Board of Directors approved a 5% increase
in its quarterly dividend to $0.42 per share. The dividend will be payable on
April 1, 1998 to shareholders of record as of March 2, 1998. The Hartford
expects to continue paying quarterly dividends on its common stock of $0.42 per
share throughout 1998. Dividend decisions will be based on, and affected by, a
number of factors, including the operating results and financial requirements of
The Hartford and the impact of the regulatory restrictions discussed in
Liquidity Requirements below.
- 38 -
<PAGE>
TREASURY STOCK
In December 1997, The Hartford's Board of Directors authorized the repurchase of
up to $1.0 billion of the Company's outstanding common stock over a three-year
period beginning with the first quarter of 1998. During 1997, to make shares
available to employees pursuant to certain stock-based benefit plans, The
Hartford repurchased 550,000 shares of its common stock in the open market at a
total cost of $45.
RATINGS
The following table summarizes The Hartford's significant U.S. member companies'
current financial ratings from the major independent rating organizations.
A.M. DUFF & STANDARD
BEST PHELPS & POOR'S MOODY'S
- ----------------------------------------------------------------
INSURANCE RATINGS:
Hartford Fire A+ AA AA Aa3
Hartford Life A+ AA+ AA Aa3
Hartford Life & Accident A+ AA+ AA Aa3
The Hartford Life &
Annuity A+ AA+ AA Aa3
- ----------------------------------------------------------------
OTHER RATINGS:
The Hartford Financial
Services Group, Inc.:
Senior debt -- A+ A A2
Commercial paper -- D-1 A-1 P-1
Hartford Life, 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
- ----------------------------------------------------------------
In January 1998, ratings from Duff & Phelps and Standard & Poor's were
reaffirmed for The Hartford's significant U.S. member companies. In September
1997, A.M. Best removed the ratings of The Hartford's significant member
companies from under review and reaffirmed the ratings.
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 its credit facility. The principal sources of funds are premiums
and investment income as well as maturities and sales of invested assets. The
Hartford Financial Services Group, Inc. is a holding company which receives
operating cash flow in the form of dividends from its subsidiaries, enabling it
to service debt, pay dividends on The Hartford's common stock and pay business
expenses.
Dividends to The Hartford Financial Services Group, Inc. from its subsidiaries
are restricted. The payment of dividends by Connecticut-domiciled insurers is
limited under the insurance holding 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. The total amount of statutory dividends which may be paid by the
insurance subsidiaries of The Hartford Financial Services Group, Inc. in 1998,
without prior approval, is $810.
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 the Investments and Capital Markets Risk Management sections.
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, 1997, each of The Hartford's insurance subsidiaries within the
North American Property & Casualty and Life segments had more than sufficient
capital to meet the NAIC's RBC requirements.
- 39 -
<PAGE>
CASH FLOW
1997 1996 1995
- ----------------------------------------------------------------
Net cash provided by
operating activities $ 2,045 $ 994 $ 1,094
Net cash used for
investing activities $ (2,247) $ (1,035) $ (1,597)
Net cash provided by
financing activities $ 239 $ 59 $ 533
Cash - end of year $ 140 $ 112 $ 95
- ----------------------------------------------------------------
During 1997, cash provided by operating activities increased from the prior year
due primarily to strong revenue growth in the Life segment combined with lower
paid losses at the North American Property & Casualty segment resulting from
lower property catastrophe and other severe weather-related losses. Cash
provided by financing activities increased from the prior year due to proceeds
of the Offering partially offset by declines in investment-type contracts
written in the Life segment. The increase in cash used for investing activities
reflects the investment of the additional proceeds generated by operating and
financing activities.
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. The changes in cash provided by both investing and financing
activities between 1996 and 1995 was primarily due to declines in
investment-type contracts written in the Life segment coupled with increases in
investment-type contract maturities.
Operating cash flows in each of the last three years have been more than
adequate to meet liquidity requirements.
OMNI
On February 12, 1998, The Hartford completed the purchase of all outstanding
shares of Omni Insurance Group, Inc. ("Omni"), a holding company of two
non-standard auto insurance subsidiaries licensed in 25 states and the District
of Columbia. The Hartford paid cash of $31.75 per share, plus transaction costs,
for a total of $189. The acquisition will be reported as a purchase transaction
and accordingly, the results of Omni's operations will be included in The
Hartford's consolidated financial statements from the closing date of the
transaction.
REGULATORY INITIATIVES AND CONTINGENCIES
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. 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. President Clinton's 1998 Federal Budget Proposal
currently contains certain recommendations for modifying tax rules related to
the treatment of variable annuities and COLI by contractholders, which if
enacted as described, could have a material adverse impact on the Company's
sales of these products. It is too early to determine whether these tax
proposals will ultimately be enacted by Congress and the potential impact, if
any, to the Company's financial condition or results of operations. 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 $19 in 1997, $14 in 1996 and $15
in 1995.
NAIC PROPOSALS
The NAIC has been developing several model laws and regulations, including a
Model Investment Law and amendments to the Model Holding Company System
Regulatory Act (the "Holding Act Amendments"). The Model Investment Law defines
the investments which are permissible for property and casualty and life
insurers to hold, and the Holding Act Amendments address the types of activities
in which subsidiaries and affiliates may engage. The NAIC adopted these models
in 1997 and 1996, but the laws have not been enacted for insurance companies
domiciled in the State of Connecticut, such as Hartford Fire Insurance Company.
Even if enacted in Connecticut or other states in which The Hartford's
subsidiaries are domiciled, it is expected that these laws will neither
significantly change The Hartford's investment strategies nor have any material
adverse effect on The Hartford's liquidity or financial position.
The NAIC is expected to adopt its codification of Statutory Accounting
Principles ("SAP") in early 1998 with a proposed effective date of January 1,
1999. The American Institute of Certified Public Accountants (AICPA) has not yet
determined whether SAP will qualify as an Other Comprehensive Basis of
Accounting ("OCBOA"). If SAP is granted OCBOA status and is adopted by The
Hartford's domiciliary states, the Company will make the necessary changes
required for implementation. These changes are not anticipated to have a
material impact on the statutory financial statements of the Company.
- 40 -
<PAGE>
YEAR 2000
The Year 2000 issue relates to the ability or inability of computer systems to
properly process information and data containing or related to dates beginning
with the year 2000 and beyond. The Year 2000 issue exists because, historically,
many computer systems that are in use today were developed years ago when a year
was identified using a two-digit field rather than a four-digit field. As
information and data containing or related to the century date are introduced to
computer hardware, software and other systems, date sensitive systems may
recognize the year 2000 as "1900", or not at all, which may result in computer
systems processing information incorrectly. This, in turn, may significantly and
adversely affect the integrity and reliability of information databases and may
result in a wide variety of adverse consequences to a company. In addition, Year
2000 problems that occur with third parties with which a company does business,
such as suppliers, computer vendors, distributors and others, may also adversely
affect any given company.
As an insurance and financial services company, The Hartford has thousands of
individual and business customers that have insurance policies, annuities,
mutual funds and other financial products of The Hartford. Nearly all of these
policies and products contain date sensitive data, such as policy expiration
dates, birth dates, premium payment dates, and the like. In addition, The
Hartford has business relationships with numerous third parties that affect
virtually all aspects of The Hartford's business, including, without limitation,
suppliers, computer hardware and software vendors, insurance agents and brokers,
securities broker-dealers and other distributors of financial products.
Beginning in 1990, The Hartford began working on making its computer systems
Year 2000 ready, either through installing new programs or replacing systems. In
January 1998, The Hartford commenced a company-wide program to further identify,
assess and remediate the impact of Year 2000 problems in The Hartford's business
segments. The Hartford currently anticipates that this internal program will be
substantially completed by the end of 1998, and testing of computer systems will
continue through 1999. The costs of addressing the Year 2000 issue that have
been incurred by The Hartford through the year ended December 31, 1997 have not
been material to The Hartford's financial condition or results of operations.
The Hartford will continue to incur costs related to its Year 2000 efforts and
is in the process of attempting to determine the approximate total costs to be
incurred in the future, which costs are not currently anticipated to be material
to the Company's financial condition or results of operations.
In addition, as part of its Year 2000 program, The Hartford is identifying third
parties with which it has significant business relations in order to attempt to
assess the potential impact on The Hartford of their Year 2000 issues and
remediation plans. The Hartford currently anticipates that it will substantially
complete this evaluation by the end of 1998, and will conduct systems testing
with certain third parties through 1999. The Hartford does not have control over
these third parties and, as a result, The Hartford cannot currently determine to
what extent future operating results may be adversely affected by the failure of
these third parties to successfully address their Year 2000 issues. However, The
Hartford expects to develop plans to attempt to minimize identified third party
exposures.
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.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Consolidated
Financial Statements.
- 41 -
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the Capital Markets Risk Management section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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 1998 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 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 December 18, 1997, The Hartford filed a Form 8-K, reporting under Item 5,
Other Events, that The Hartford's Board of Directors authorized the repurchase
of up to $1.0 billion of The Hartford's outstanding common stock.
(c) See Item 14(a)(3).
(d) See Item 14(a)(2).
- 42 -
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, 1997 F-3
Consolidated Balance Sheets as of December 31, 1997 and 1996 F-4
Consolidated Statements of Stockholders' Equity for the three
years ended December 31, 1997 F-5
Consolidated Statements of Cash Flows for the three years ended
December 31, 1997 F-6
Notes to Consolidated Financial Statements F-7-27
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 The Hartford Financial Services Group, Inc., formerly ITT
Hartford Group, Inc., and its subsidiaries ("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 their 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 THE HARTFORD FINANCIAL SERVICES GROUP, INC.:
We have audited the accompanying Consolidated Balance Sheets of The Hartford
Financial Services Group, Inc. (a Delaware corporation), formerly ITT Hartford
Group, Inc., and its subsidiaries ("The Hartford") as of December 31, 1997 and
1996, and the related Consolidated Statements of Income, Stockholders' Equity
and Cash Flows for each of the three years in the period ended December 31,
1997. 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, 1997 and 1996, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1997 in conformity with generally accepted accounting principles.
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
January 27, 1998
F-2
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
-----------------------------------------------------
(In millions, except for per share data) 1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C>
Earned premiums and other considerations $ 10,323 $ 10,076 $ 9,628
Net investment income 2,655 2,523 2,420
Net realized capital gains (losses) 327 (126) 102
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 13,305 12,473 12,150
--------------------------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 7,977 8,942 7,769
Amortization of deferred policy acquisition costs 1,888 1,678 1,658
Other expenses 2,105 2,171 1,981
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 11,970 12,791 11,408
--------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1,335 (318) 742
Equity gain on HLI initial public offering 368 -- --
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES, DIVIDENDS ON SUBSIDIARY
PREFERRED STOCK AND MINORITY INTEREST 1,703 (318) 742
Income tax expense (benefit) 334 (219) 180
Dividends on subsidiary preferred stock -- -- 3
- ---------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 1,369 (99) 559
Minority interest in consolidated subsidiary (37) -- --
- ---------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,332 $ (99) $ 559
===========================================================================================================================
Basic earnings per share $ 11.29 $ (0.84) $ 4.77
Diluted earnings per share $ 11.16 $ (0.84) $ 4.75
- ---------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding [1] 118.0 117.3 117.1
Weighted average common shares outstanding and
dilutive potential common shares [1] 119.4 117.3 117.7
- ---------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 1.60 $ 1.60 $ --
- ---------------------------------------------------------------------------------------------------------------------------
<FN>
[1] 1995 weighted average common shares outstanding represents actual
number of common shares outstanding at December 31, 1995.
</FN>
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED BALANCE SHEETS
As of December 31,
----------------------------------
(In millions, except for share data) 1997 1996
- ------------------------------------------------------------------------------------------ ---------------- -----------------
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of $34,061 and
<S> <C> <C>
$31,178) $ 35,053 $ 31,449
Equity securities, available for sale, at fair value (cost of $1,509 and $1,581) 1,922 1,865
Policy loans, at outstanding balance 3,759 3,839
Other investments, at cost 388 486
- ------------------------------------------------------------------------------------------ ---------------- -----------------
Total investments 41,122 37,639
Cash 140 112
Premiums receivable and agents' balances 1,873 1,797
Reinsurance recoverables 10,839 11,229
Deferred policy acquisition costs 4,181 3,535
Deferred income tax 955 1,480
Other assets 2,502 2,596
Separate account assets 70,131 50,452
- ------------------------------------------------------------------------------------------ ---------------- -----------------
TOTAL ASSETS $ 131,743 $ 108,840
------------------------------------------------------------------------------------------ ---------------- -----------
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 18,376 $ 18,303
Life 5,271 4,371
Other policy claims and benefits payable 21,143 22,220
Unearned premiums 2,895 2,797
Short-term debt 291 500
Long-term debt 1,482 1,032
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely parent junior subordinated debentures 1,000 1,000
Other liabilities 4,672 3,645
Separate account liabilities 70,131 50,452
- ------------------------------------------------------------------------------------------ ---------------- -----------------
125,261 104,320
COMMITMENTS AND CONTINGENCIES, NOTE 15
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 397 --
STOCKHOLDERS' EQUITY
Common stock - authorized 200,000,000, issued 119,989,999 and 119,194,412 shares, par
value $0.01 1 1
Additional paid-in capital 1,659 1,642
Retained earnings 3,658 2,515
Treasury stock, at cost - 2,013,779 and 1,638,000 shares (65) (30)
Cumulative translation adjustments (21) 40
Unrealized gain on securities, net of tax 853 352
- ------------------------------------------------------------------------------------------ ---------------- -----------------
TOTAL STOCKHOLDERS' EQUITY 6,085 4,520
==================================================================================== ================ =================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 131,743 $ 108,840
==================================================================================== ================ =================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
Amounts Shares
(in millions) (in thousands)
------------------------------------------ ----------------------------------
1997 1996 1995 1997 1996 1995
------------------------------------------ ----------------------------------
COMMON STOCK AND ADDITIONAL PAID-IN CAPITAL
<S> <C> <C> <C> <C> <C>
Balance, beginning of year $ 1,643 $ 1,637 $ 1,357 119,194 118,762 --
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
Issuance of shares under incentive
and stock purchase plans 29 6 -- 796 432 --
Other (12) -- 250 -- -- 55
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 1,660 1,643 1,637 119,990 119,194 118,762
- ----------------------------------------------------------------------------------------------------------------------------------
RETAINED EARNINGS
Balance, beginning of year 2,515 2,802 3,022
Net income (loss) 1,332 (99) 559
Dividends declared on common stock (189) (188) (779)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 3,658 2,515 2,802
- ----------------------------------------------------------------------------------------------------------------------------------
TREASURY STOCK, AT COST
Balance, beginning of year (30) (30) -- (1,638) (1,638) --
Issuance of shares under incentive
and stock purchase plans 10 -- -- 174 -- --
Treasury stock acquired (45) -- -- (550) -- --
Common stock issued to a subsidiary
of the Company -- -- (30) -- -- (1,408)
Other -- -- -- -- -- (230)
- ----------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (65) (30) (30) (2,014) (1,638) (1,638)
- ----------------------------------------------------------------------------------------------------------------------------------
CUMULATIVE TRANSLATION ADJUSTMENTS
Balance, beginning of year 40 48 24
Translation adjustments (61) (8) 24
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year (21) 40 48
- ------------------------------------------------------------------------------------------------------------------------------------
UNREALIZED GAIN (LOSS) ON SECURITIES, NET OF TAX
Balance, beginning of year 352 245 (1,219)
Net change in unrealized gains (losses) on
investment securities, net of tax 501 107 1,464
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, end of year 853 352 245
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL COMMON STOCKHOLDERS' EQUITY AND $ 6,085 $ 4,520 $ 4,702 117,976 117,556 117,124
COMMON SHARES OUTSTANDING
====================================================================================================================================
<FN>
[1] For information regarding The Hartford Distribution, see Note 2 of Notes to
Consolidated Financial Statements.
</FN>
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------------------------
(IN MILLIONS) 1997 1996 1995
- ------------------------------------------------------------------------------- ----------------- ---------------- ---------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 1,332 $ (99) $ 559
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Increase in receivables, payables and accruals (61) (38) (45)
Decrease in reinsurance recoverables and other related assets 206 611 320
Increase in deferred policy acquisition costs (662) (589) (413)
Accrued and deferred income taxes 340 (449) (56)
Increase in liabilities for future policy benefits, unpaid claims and
claim adjustment expenses and unearned premiums 1,021 968 804
Minority interest in consolidated subsidiary 37 -- --
Equity gain on HLI initial public offering (368) -- --
Net realized capital (gains) losses (327) 126 (102)
Depreciation and amortization 85 81 85
Other, net 442 383 (58)
- ------------------------------------------------------------------------------- ----------------- ---------------- ---------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 2,045 994 1,094
- ------------------------------------------------------------------------------- ----------------- ---------------- ---------------
INVESTING ACTIVITIES
Purchase of investments (47,642) (33,424) (43,153)
Sale of investments 14,677 14,602 14,759
Maturity of investments 30,827 17,856 26,873
Additions to plant, property and equipment (109) (69) (76)
- ------------------------------------------------------------------------------- ----------------- ---------------- ---------------
NET CASH USED FOR INVESTING ACTIVITIES (2,247) (1,035) (1,597)
- ------------------------------------------------------------------------------- ----------------- ---------------- ---------------
FINANCING ACTIVITIES
Short-term debt, net (409) (286) (90)
Issuance of long-term debt 650 -- 500
Repayment of long-term debt -- (100) --
Net proceeds from issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely parent junior
subordinated debentures -- 969 --
Investments, advances and dividends to ITT Industries, Inc. -- -- (314)
Net receipts from (disbursements for) investment and universal life-type
contracts credited to (charged from) policyholder accounts (483) (390) 523
Redemption of subsidiary preferred stock -- -- (86)
Net proceeds from sale of minority interest in subsidiary 687 -- --
Dividends paid (190) (140) --
Acquisition of treasury stock (45) -- --
Proceeds from issuances under incentive and stock purchase plans 29 6 --
- ------------------------------------------------------------------------------- ----------------- ---------------- ---------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 239 59 533
=============================================================================== ================= ================ ===============
Foreign exchange rate effect on cash (9) (1) 10
- ------------------------------------------------------------------------------- ----------------- ---------------- ---------------
Net increase in cash 28 17 40
Cash - beginning of year 112 95 55
- ------------------------------------------------------------------------------- ----------------- ---------------- ---------------
CASH - END OF YEAR $ 140 $ 112 $ 95
=============================================================================== ================= ================ ===============
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- ------------------------------------------------
NET CASH PAID (REFUNDS RECEIVED) DURING THE YEAR FOR:
<S> <C> <C> <C>
Income taxes $ (37) $ 170 $ 302
Interest $ 212 $ 142 $ 95
NONCASH FINANCING ACTIVITIES:
Capital contribution $ -- $ -- $ 180
Dividends paid $ -- $ -- $ 395
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE DATA UNLESS OTHERWISE STATED)
1. SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The Hartford Financial Services Group, Inc., formerly 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
In December 1997, the American Institute of Certified Public Accountants issued
Statement Of Position ("SOP") No. 97-3, "Accounting by Insurance and Other
Enterprises for Insurance-Related Assessments". This SOP addresses accounting by
insurance and other enterprises for assessments related to insurance activities
including recognition, measurement and disclosure of guaranty fund or other
assessments. SOP 97-3 will be effective for fiscal years beginning after
December 15, 1998, and is not expected to have a material impact on the
Company's financial condition or results of operations.
In February 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per
Share". This statement establishes standards for computing and presenting
earnings per share ("EPS") and applies to entities with publicly held common
stock or potential common stock. SFAS No. 128 simplifies the standards for
computing earnings per share previously found in Accounting Principles Board
Opinion No. 15, "Earnings per Share", and makes them comparable to international
EPS standards. It replaces the presentation of primary EPS with the presentation
of basic EPS. It also requires dual presentation of basic and diluted EPS on the
face of the income statement for all entities with complex capital structures
and requires a disclosure reconciling the computation of basic EPS to the
computation of diluted EPS. This statement is effective for financial statements
for both interim and annual periods ending after December 15, 1997. For
additional information, see Note 10.
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 FASB issued 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 did not have and is not
expected to have a material effect on the Company's financial condition or
results of operations.
F-7
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
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 was 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 11.
The Hartford's cash flows were not impacted by these changes in accounting
principles.
(C) INVESTMENTS
The Hartford's investments in fixed maturities include bonds, redeemable
preferred stock 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.
Policy loans are carried at outstanding balance which approximates fair value.
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.
The Company's accounting policy for impairment recognition 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, for securities expected to be sold, an
other than temporary impairment charge is recognized if the Company does not
expect the fair value of a security to recover to cost or amortized cost prior
to the expected date of sale. Once an impairment charge has been recorded, the
Company then continues to review the other than temporary impaired securities
for appropriate valuation on an ongoing basis. During 1996, it was determined
that certain individual securities within the investment portfolio supporting
the Company's block of traditional guaranteed rate contract business written
prior to 1995 ("Closed Book GRC") could not recover to amortized cost prior to
sale. Therefore, an other than temporary impairment loss of $88 after-tax was
recorded.
(D) DERIVATIVE INSTRUMENTS
The Hartford utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or to control transaction costs. The
Company is considered an "end user" of derivative instruments and as such does
not make a market or trade in these instruments for the express purpose of
earning trading profits. The Hartford's accounting for derivative 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. Derivative instruments used to hedge fixed maturities or equities are
carried at fair value with the after-tax difference from cost reflected in
Stockholders' Equity. Derivative instruments used to hedge other invested assets
or liabilities are carried at cost.
Derivative instruments 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. Derivative instruments
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.
Derivative instruments 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 an adjustment to the cost basis of the purchased
asset. Gains or losses on futures used in invested asset risk management are
deferred and adjusted into the cost basis of the hedged asset when the futures
contracts are closed, except for futures used in duration hedging which are
deferred and adjusted into the cost basis on a quarterly basis. The adjustments
to the cost basis are
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) DERIVATIVE INSTRUMENTS (CONTINUED)
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
adjusted into the basis of 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 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 or liability and amortized over the asset or
liability life. Gains or losses on termination of such positions are adjusted
into the basis of the asset or liability and amortized over the remaining 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.
(E) SEPARATE ACCOUNTS
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 accounts, wherein the Company contractually guarantees
either a minimum return or account value to the policyholder.
(F) DEFERRED POLICY ACQUISITION COSTS
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.
LIFE INSURANCE OPERATIONS - 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.
(G) FUTURE POLICY BENEFITS, UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
PROPERTY AND CASUALTY INSURANCE OPERATIONS - 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 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 follows:
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) FUTURE POLICY BENEFITS, UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
(CONTINUED)
December 31,
------------------------------
1997 1996 1995
------------------------------
BEGINNING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-GROSS $18,303 $17,536 $17,435
Reinsurance recoverables 4,414 4,939 5,317
- -----------------------------------------------------------------
BEGINNING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-NET 13,889 12,597 12,118
- -----------------------------------------------------------------
ADD PROVISION FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES
Current year 5,065 5,075 5,041
Prior years [1] 98 1,049 254
- -----------------------------------------------------------------
TOTAL PROVISION FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES 5,163 6,124 5,295
- -----------------------------------------------------------------
LESS PAYMENTS
Current year 1,961 2,082 1,905
Prior years 3,039 2,797 3,032
- -----------------------------------------------------------------
TOTAL PAYMENTS 5,000 4,879 4,937
- -----------------------------------------------------------------
Foreign currency translation (24) 47 6
ITT Ercos [2] -- -- 34
Other reclassifications -- -- 81
- -----------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-NET 14,028 13,889 12,597
Reinsurance recoverables 4,348 4,414 4,939
- -----------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-GROSS $18,376 $18,303 $17,536
- -----------------------------------------------------------------
[1] See Note 15(b) Environmental and Asbestos Claims. Excludes the effects of
foreign exchange adjustments.
[2] 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 heavily populated areas. The Company generally
seeks to reduce its exposure to catastrophe losses through individual risk
selection and the purchase of catastrophe reinsurance.
LIFE INSURANCE OPERATIONS - 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, which are the result of sales of
group long-term and short-term disability, stop loss, Medicare supplement and
individual disability products, 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 following table displays the development of the claim reserves (included in
future policy benefits in the Consolidated Balance Sheets) resulting primarily
from group disability products.
December 31,
--------------------------------
1997 1996 1995
--------------------------------
BEGINNING CLAIM RESERVES-GROSS $1,496 $1,254 $1,115
Reinsurance recoverables 53 35 38
- -----------------------------------------------------------------
BEGINNING CLAIM RESERVES-NET 1,443 1,219 1,077
- -----------------------------------------------------------------
INCURRED EXPENSES RELATED TO
Current year 890 799 632
Prior years (51) (66) (28)
- -----------------------------------------------------------------
TOTAL INCURRED 839 733 604
- -----------------------------------------------------------------
PAID EXPENSES RELATED TO
Current year 274 236 227
Prior years 333 273 235
- -----------------------------------------------------------------
TOTAL PAID 607 509 462
- -----------------------------------------------------------------
ENDING CLAIM RESERVES-NET 1,675 1,443 1,219
Reinsurance recoverables 71 53 35
- -----------------------------------------------------------------
ENDING CLAIM RESERVES-GROSS $1,746 $1,496 $1,254
- -----------------------------------------------------------------
(H) REVENUE RECOGNITION
PROPERTY AND CASUALTY INSURANCE OPERATIONS - Property and casualty insurance
premiums are earned principally on a pro rata basis over the lives of the
policies and include accruals for ultimate premium revenue anticipated under
auditable and retrospectively rated policies. Unearned premiums represent the
portion of premiums written applicable to the unexpired terms of policies in
force. Unearned premiums also include estimated and unbilled premium
adjustments.
LIFE INSURANCE OPERATIONS - Revenues for universal life-type policies and
investment products consist of policy charges for the cost of insurance, policy
administration and surrender charges assessed to policy account balances and are
recognized in the period in which services are provided. Premiums for
traditional life insurance policies are recognized as revenues when they are due
from policyholders. 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.
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(I) 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.
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 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, 1997, all known liabilities covered by this
agreement had 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.
3. THE OFFERING
On February 10, 1997, Hartford Life, Inc. ("HLI"), the holding company parent of
The Hartford's significant life insurance subsidiaries, filed a registration
statement, as amended, with the Securities and Exchange Commission relating to
the initial public offering of HLI Class A common stock (the "Offering").
Pursuant to the Offering on May 22, 1997, HLI sold to the public 26 million
shares at $28.25 per share and received proceeds, net of offering expenses, of
$687.
The 26 million shares sold in the Offering represented approximately 18.6% of
the equity ownership in HLI and approximately 4.4% of the combined voting power
of HLI's Class A and Class B common stock. The Hartford owns all of the 114
million outstanding shares of Class B common stock of HLI, representing
approximately 81.4% of the equity ownership in HLI and approximately 95.6% of
the combined voting power of HLI's Class A and Class B common stock. Holders of
Class A common stock generally have identical rights to the holders of Class B
common stock except that the holders of Class A common stock are entitled to one
vote per share while holders of Class B common stock are entitled to five votes
per share on all matters submitted to a vote of HLI's stockholders. Also, each
share of Class B common stock is convertible into one share of Class A common
stock (a) upon the transfer of such share of Class B common stock by the holder
thereof to a non-affiliate (except where the shares of Class B common stock so
transferred represent 50% or more of all the outstanding shares of common stock,
calculated without regard to the difference in voting rights between the classes
of common stock) or (b) in the event that the number of shares of outstanding
Class B common stock is less than the 50% of all the common stock then
outstanding. As of December 31, 1997, The Hartford continued to maintain an
81.4% equity ownership in HLI.
In connection with the Offering, The Hartford reported a $368 gain related to
the increased value of its equity ownership in HLI. 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.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS
For the years ended December 31,
----------------------------------------------------------
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
(A) COMPONENTS OF NET INVESTMENT INCOME
<S> <C> <C> <C>
Interest income $ 2,561 $ 2,454 $ 2,384
Dividends from unaffiliated companies 48 55 38
Real estate income 4 7 34
Other investment income 93 54 36
- ---------------------------------------------------------------------------------------------------------------------------------
Gross investment income 2,706 2,570 2,492
Less: Investment expenses 51 47 72
- ---------------------------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 2,655 $ 2,523 $ 2,420
=================================================================================================================================
(B) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
Fixed maturities $ 41 $ (247) $ 63
Equity securities 279 135 77
Real estate and other 7 (11) (35)
Less: Increase in liability to policyholders for net
realized capital gains -- 3 3
- ---------------------------------------------------------------------------------------------------------------------------------
NET REALIZED CAPITAL GAINS (LOSSES) $ 327 $ (126) $ 102
=================================================================================================================================
(C) UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES
Gross unrealized gains $ 503 $ 336 $ 199
Gross unrealized losses (81) (52) (49)
- ---------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains 422 284 150
Deferred income taxes 148 98 52
- ---------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains, net of tax 274 186 98
Balance - beginning of year 186 98 10
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED INVESTMENT GAINS $ 88 $ 88 $ 88
=================================================================================================================================
(D) UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized gains $ 1,101 $ 717 $ 943
Gross unrealized losses (109) (446) (667)
Minority interest in consolidated subsidiary (71) -- --
Unrealized gains credited to policyholders (30) (13) (51)
- ---------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains 891 258 225
Deferred income taxes 312 92 78
- ---------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains, net of tax 579 166 147
Balance - beginning of year 166 147 (1,229)
- ---------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED INVESTMENT GAINS $ 413 $ 19 $ 1,376
=================================================================================================================================
</TABLE>
F-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
(E) FIXED MATURITY INVESTMENTS
As of December 31, 1997
-------------------------------------------------------------------
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) $ 378 $ 7 $ (1) $ 384
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset backed 2,342 85 (36) 2,391
States, municipalities and political subdivisions 7,984 398 (1) 8,381
International governments 1,763 108 (11) 1,860
Public utilities 1,302 37 (3) 1,336
All other corporate including international 9,565 365 (40) 9,890
All other corporate - asset backed 6,481 79 (11) 6,549
Short-term investments 3,238 -- -- 3,238
Certificates of deposit 941 19 (6) 954
Redeemable preferred stock 67 3 -- 70
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 34,061 $ 1,101 $ (109) $ 35,053
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
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>
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 1997 by estimated maturity year are shown to the right. Expected
maturities differ from contractual maturities due to call or prepayment
provisions. Asset backed securities, including mortgage backed securities and
collateralized mortgage obligations, are distributed to maturity year based on
the Company's estimates of the rate of future prepayments of principal over the
remaining lives of the securities. These estimates are developed using
prepayment speeds provided in broker consensus data. Such estimates are derived
from prepayment speeds experienced at the interest rate levels projected for the
applicable underlying collateral. Actual prepayment experience may vary from
these estimates.
Amortized
MATURITY Cost Fair Value
- ----------------------------------------------------------------
One year or less $ 5,267 $ 5,320
Over one year through five years 10,821 11,030
Over five years through ten years 9,591 9,877
Over ten years 8,382 8,826
- ----------------------------------------------------------------
TOTAL $ 34,061 $ 35,053
================================================================
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(E) FIXED MATURITY INVESTMENTS (CONTINUED)
Sales of fixed maturities, excluding short-term fixed maturities, for the years
ended December 31, 1997, 1996 and 1995 resulted in proceeds of $13.4 billion,
$11.3 billion and $10.7 billion, gross gains of $264, $161 and $210 and gross
losses (including writedowns) of $(223), $(408) and $(147), respectively. Sales
of equity security investments for the years ended December 31, 1997, 1996 and
1995 resulted in proceeds of $1.5 billion, $1.4 billion and $1.7 billion, gross
gains of $343, $184 and $150 and gross losses of $(64), $(49) and $(73),
respectively.
(F) CONCENTRATION OF CREDIT RISK
The Hartford is not exposed to any significant credit concentration risk of a
single issuer greater than 10% of stockholders' equity.
(G) DERIVATIVE INSTRUMENTS
The Hartford utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or to control transactions costs. The
Company is considered an "end user" of derivative instruments and as such does
not make a market or trade in these instruments for the express purpose of
earning trading profits.
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities.
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. Credit
risk is measured as the amount owed to The Hartford based on current market
conditions and potential payment obligations between the Company and its
counterparties. Credit exposures are quantified weekly and netted, and
collateral is pledged to or held by the Company to the extent the current value
of derivative instruments exceed exposure policy thresholds.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to The Hartford's Finance
Committee. The notional amounts of derivative contracts represent the basis upon
which pay or receive amounts are calculated and are not reflective of credit
risk. Notional amounts pertaining to derivative instruments (excluding
guaranteed separate accounts) totaled $7.9 billion and $11.1 billion ($5.8
billion and $8.3 billion primarily related to life insurance investments, $2.1
billion and $2.6 billion on life insurance liabilities and $17 and $200 related
to debt) at December 31, 1997 and 1996, respectively.
A summary of derivative instruments for The Hartford, segregated by major
investment and liability category, was as follows as of December 31, 1997 and
1996:
<TABLE>
<CAPTION>
1997 AMOUNT HEDGED (NOTIONAL AMOUNTS)
- ----------------------------------------------------------------------------------------------------------------------------------
Total Purchased Foreign Total
Carrying Issued Caps Caps & Interest Currency Notional
ASSETS HEDGED Value & Floors Floors Futures [2] Rate Swaps Swaps [3] Amount
- ----------------------------------------------------------------------------------------------------------------------------------
Asset backed securities (excluding
<S> <C> <C> <C> <C> <C> <C> <C>
inverse floaters and anticipatory) $ 8,863 $ 500 $ 1,419 $ 28 $ 343 $ -- $ 2,290
Inverse floaters [1] 76 47 80 -- 25 -- 152
Anticipatory [4] -- -- -- 19 254 -- 273
Other bonds and notes 22,876 497 596 22 1,846 94 3,055
Short-term investments 3,238 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 35,053 1,044 2,095 69 2,468 94 5,770
Equity securities, policy loans and
other investments 6,069 -- -- -- 51 -- 51
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 41,122 $ 1,044 $ 2,095 $ 69 $ 2,519 $ 94 $ 5,821
LONG-TERM DEBT 1,482 -- -- -- -- 17 17
OTHER POLICY CLAIMS 21,143 10 150 -- 1,889 -- 2,049
==================================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS - NOTIONAL VALUE $ 1,054 $ 2,245 $ 69 $ 4,408 $ 111 $ 7,887
==================================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS - FAIR VALUE $ (8) $ 23 $ -- $ 41 $ (6) $ 50
==================================================================================================================================
</TABLE>
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
(G) DERIVATIVE INSTRUMENTS (CONTINUED)
1996 AMOUNT HEDGED (NOTIONAL AMOUNTS)
- ------------------------------------------------------------------------------------------------------------------------------------
Total Purchased Foreign Total
Carrying Issued Caps Caps, Floors & Interest Currency Notional
ASSETS HEDGED Value & Floors Options Futures [2] Rate Swaps Swaps [3] 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 [1] 408 98 856 -- 346 -- 1,300
Anticipatory [4] -- -- -- 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
LONG-TERM DEBT 1,032 -- -- -- 200 -- 200
OTHER POLICY CLAIMS 22,220 10 150 -- 2,468 -- 2,628
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE INSTRUMENTS - NOTIONAL VALUE $ 1,064 $ 4,208 $ 337 $ 5,344 $ 125 $ 11,078
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE INSTRUMENTS - FAIR VALUE $ (10) $ 38 $ -- $ -- $ (9) $ 19
- ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Inverse floaters are variations of collateralized mortgage obligations 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 Company uses a variety of derivative
instruments, primarily interest rate swaps and caps and floors.
[2] As of December 31, 1997 and 1996, over 59% and 71% , respectively, of the
notional futures contracts expire within one year.
[3] As of December 31, 1997 and 1996, over 16% and 42%, respectively, of
foreign currency swaps expire within one year; the balance mature over the
succeeding nine years.
[4] 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. As of December 31, 1997, the Company had
$2.7 of net deferred gains for futures and interest rate swaps. The
Hartford expects to basis adjust the $2.7 of deferred gains in 1998. At
December 31, 1996, the Company had $5.7 in net deferred gains for futures
and interest rate swaps, of which $5.9 was basis adjusted in 1997.
</FN>
</TABLE>
A reconciliation between notional amounts as of December 31, 1997 and 1996 by
derivative type and strategy is as follows:
<TABLE>
<CAPTION>
December 31, 1996 Maturities/ December 31, 1997
Notional Amount Additions Terminations [1] Notional Amount
- ----------------------------------------------------------------------------------------------------------------------------------
BY DERIVATIVE TYPE
<S> <C> <C> <C> <C>
Caps $ 1,862 $ 33 $ 630 $ 1,265
Floors 3,399 32 1,532 1,899
Swaps/ Forwards 5,469 2,221 3,171 4,519
Futures 337 330 598 69
Options 11 125 1 135
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 11,078 $ 2,741 $ 5,932 $ 7,887
- ----------------------------------------------------------------------------------------------------------------------------------
BY STRATEGY
Liability $ 2,828 $ 268 $ 1,030 $ 2,066
Anticipatory 392 446 565 273
Asset 2,381 1,289 1,091 2,579
Portfolio 5,477 738 3,246 2,969
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 11,078 $ 2,741 $ 5,932 $ 7,887
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] During 1997, the Company had no significant gain or loss on terminations of
hedge positions using derivative financial instruments.
</FN>
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", requires
disclosure of fair value information of financial instruments. For certain
financial instruments where quoted market prices are not available, other
independent valuation techniques and assumptions are used. Because considerable
judgment is used, these estimates are not necessarily indicative of amounts that
could be realized in a current market exchange. SFAS No. 107 excludes certain
financial instruments from disclosure, including insurance contracts, other than
financial guarantees and investment contracts. The Hartford uses the following
methods and assumptions in estimating the fair value of each class of financial
instrument.
Fair value for fixed maturities and marketable equity securities approximates
those quotations published by applicable stock exchanges or received from other
reliable sources.
For policy loans, carrying amounts approximate fair value.
Fair value for other invested assets, which primarily consist of partnerships
and trusts, is based on external market valuations from partnership and trust
management.
Other policy claims and benefits payable fair value information is determined by
estimating future cash flows, discounted at the current market rate.
For short-term debt, carrying amounts approximate fair value.
Fair value for long-term debt and QUIPS (represents company obligated
mandatorily redeemable preferred securities of subsidiary trusts holding solely
parent junior subordinated debentures) is based on external valuation using
discounted future cash flows at current market interest rates.
The fair value of derivative financial instruments, including swaps, caps,
floors, futures, options and forward commitments, is determined using a pricing
model which is validated through periodic comparison to dealer quoted prices.
The carrying amounts and fair values of The Hartford's financial instruments at
December 31, 1997 and 1996 were as follows:
1997 1996
------------------ ------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- -----------------------------------------------------------------
ASSETS
Fixed maturities $35,053 $35,053 $31,449 $31,449
Equity securities 1,922 1,922 1,865 1,865
Policy loans 3,759 3,759 3,839 3,839
Other investments 388 463 486 516
LIABILITIES
Other policy claims and
benefits payable [1] 11,769 11,755 11,707 11,469
Short-term debt 291 294 500 500
Long-term debt 1,482 1,530 1,032 1,044
QUIPS [2] 1,000 1,034 1,000 993
- -----------------------------------------------------------------
[1] Excludes corporate owned life insurance ("COLI"), reinsurance recoverables
and universal life insurance contracts with a carrying amount of $9.4
billion and $10.5 billion at December 31, 1997 and 1996, respectively.
[2] Represents company obligated mandatorily redeemable preferred securities of
subsidiary trusts holding solely parent junior subordinated debentures.
6. SEPARATE ACCOUNTS
The Hartford maintained separate account assets and liabilities totaling $70.1
billion and $50.5 billion at December 31, 1997 and 1996, 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 $59.4 billion and
$39.9 billion at December 31, 1997 and 1996, respectively, wherein the
policyholder assumes the investment risk, and guaranteed separate accounts
totaling $10.7 billion and $10.6 billion at December 31, 1997 and 1996,
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 $1.9 billion and $2.0 billion at December
31, 1997 and 1996, 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.
Separate account management fees were $699, $538 and $387 in 1997, 1996 and
1995, respectively. The guaranteed separate accounts include modified guaranteed
individual annuity and modified guaranteed life insurance. The average credited
interest rate on these contracts was 6.5% at December 31, 1997. The assets that
support these liabilities were comprised of $10.4
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
6. SEPARATE ACCOUNTS (CONTINUED)
billion in fixed maturities as of December 31, 1997. The portfolios are
segregated from other investments and are managed so as to minimize liquidity
and interest rate risk. In order 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
derivative instruments which totaled $119 and $86 in carrying value and $3.2
billion and $2.4 billion in notional amounts as of December 31, 1997 and 1996,
respectively.
<TABLE>
<CAPTION>
7. DEBT 1997 1996
-----------------------------------------------------------------------------------
Weighted Average Weighted Average
Amount Interest Rate [1] Amount Interest Rate [1]
- ----------------------------------------------------------------------------------------------------------------------------------
SHORT-TERM DEBT
<S> <C> <C> <C> <C>
Commercial paper $ 91 5.9% $ 445 6.0%
Bank loans and other short-term debt -- -- 55 5.6%
Current maturities of long-term debt 200 8.2% -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $ 291 7.5% $ 500 6.0%
==================================================================================================================================
LONG-TERM DEBT
DOMESTIC
Notes, due 1998 $ -- -- $ 200 8.2%
Notes, due 2001 200 8.3% 200 8.3%
Notes, due 2002 300 6.4% 300 6.4%
Notes, due 2004 200 7.0% -- --
Notes, due 2007 200 7.2% -- --
Notes, due 2015 198 7.3% 198 7.3%
Notes, due 2027 250 7.8% -- --
INTERNATIONAL
Notes, due 2002 134 8.1% 134 6.4%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 1,482 7.4% $ 1,032 7.3%
==================================================================================================================================
<FN>
[1] Represents the weighted average interest rate at the end of the period.
</FN>
</TABLE>
(A) SHORT-TERM DEBT
The Hartford's commercial paper ranks equally with its other unsecured and
unsubordinated indebtedness. As of December 31, 1997, The Hartford had an
unsecured aggregate $2.0 billion credit facility with twenty-seven participating
banks which is comprised of a $1.5 billion five year revolving credit facility
with four years remaining 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, 1997, there were no
outstanding borrowings under the facility.
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 the first quarter of 1997, HLI borrowed $1.1 billion against a $1.3 billion
unsecured short-term credit facility with four banks. During the second quarter
of 1997, HLI retired the borrowing with proceeds from the Offering and the new
debt issuances (discussed below), and subsequently reduced the capacity of its
unsecured short-term credit facility from $1.3 billion to $250.
(B) 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, 1997.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
7. DEBT (CONTINUED)
(B) LONG-TERM DEBT (CONTINUED)
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. On June 12, 1997, HLI
issued and sold $650 of unsecured redeemable long-term debt in the form of notes
and debentures. Of this amount, $200 was in the form of 6.90% notes due June 15,
2004, $200 of 7.10% notes due June 15, 2007, and $250 of 7.65% debentures due
June 15, 2027. Interest on each of the notes and debentures is payable
semi-annually on June 15 and December 15, of each year, commencing December 15,
1997. HLI used the proceeds from these issuances for the repayment of short-term
debt and for other general corporate purposes.
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 8.
Interest expense incurred related to short- and long-term debt totaled $131,
$108 and $101 for 1997, 1996 and 1995, respectively.
8. 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 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 $82 and $40 in 1997 and
1996, respectively.
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
9. STOCKHOLDERS' EQUITY
(A) COMMON STOCK
In December 1997, The Hartford's Board of Directors authorized the repurchase of
up to $1.0 billion of the Company's outstanding common stock over a three-year
period beginning with the first quarter of 1998. Shares repurchased in the open
market are carried at cost and reflected as a reduction to stockholders' equity.
Treasury shares subsequently reissued are reduced from treasury stock on a
weighted average cost basis.
(B) PREFERRED STOCK
During 1995, pursuant to The Hartford's Rights Agreement dated as of November 1,
1995 between The Hartford and The Bank of New York as Rights Agent, The Hartford
authorized the issuance of 50,000,000 shares of Series A Participating
Cumulative Preferred Stock ("Series A 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, 1997.
(C) STATUTORY RESULTS
For the years ended December 31,
-------------------------------------
1997 1996 1995
- ------------------------------------------------------------------
STATUTORY NET INCOME (LOSS)
Property and casualty
operations $ 1,822 $ (103) $ 428
Life operations 246 190 133
- ------------------------------------------------------------------
TOTAL $ 2,068 $ 87 $ 561
- ------------------------------------------------------------------
STATUTORY SURPLUS
Property and casualty
operations $ 6,025 $ 2,749 $ 2,617
Life operations 1,806 1,448 1,319
- ------------------------------------------------------------------
TOTAL $ 7,831 $ 4,197 $ 3,936
- ------------------------------------------------------------------
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. The total amount of statutory dividends which may be paid by the
insurance subsidiaries of The Hartford Financial Services Group, Inc.
in 1998, without prior approval, is $810.
The domestic insurance subsidiaries of The Hartford Financial Services 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.
10. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share", effective December 15,
1997, and as a result, the Company's reported earnings per share for 1996 and
1995 were restated to reflect the effect of reporting diluted earnings per
share. The following tables present a reconciliation of income and shares used
in calculating basic earnings per share to those used in calculating diluted
earnings per share.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
<TABLE>
<CAPTION>
10. EARNINGS PER SHARE (CONTINUED)
1997 Income Shares Per Share Amount
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
<S> <C> <C> <C>
Income available to common shareholders $ 1,332 118.0 $ 11.29
-------------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- 1.4
------------------------------
Income available to common shareholders plus assumed conversions $ 1,332 119.4 $ 11.16
==================================================================================================================================
1996 Income Shares Per Share Amount
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Income available to common shareholders $ (99) 117.3 $ (0.84)
-------------------
DILUTED EARNINGS PER SHARE
Options and contingently issuable shares -- --
------------------------------
Income available to common shareholders plus assumed conversions $ (99) 117.3 $ (0.84)
==================================================================================================================================
1995 Income Shares Per Share Amount
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE [1]
Income available to common shareholders $ 559 117.1 $ 4.77
-------------------
DILUTED EARNINGS PER SHARE
Options -- 0.6
------------------------------
Income available to common shareholders plus assumed conversions $ 559 117.7 $ 4.75
==================================================================================================================================
<FN>
[1] Represents actual number of common shares outstanding at December 31, 1995.
</FN>
</TABLE>
Basic earnings per share are computed based on the weighted average number of
shares outstanding during the year. Diluted earnings per share include the
dilutive effect of outstanding options, using the treasury stock method, and
also contingently issuable shares. Under the treasury stock method, exercise of
options is assumed with the proceeds used to purchase common stock at the
average market price for the period. The difference between the number of shares
assumed issued and number of shares purchased represents the dilutive shares.
Contingently issuable shares are included upon satisfaction of certain
conditions related to the contingency. The impact of the treasury stock method
for 1996 was antidilutive.
11. STOCK COMPENSATION PLANS
Prior to the Distribution, certain employees of The Hartford were granted awards
under ITT's stock incentive plans. Effective December 19, 1995, employees of The
Hartford who had awards outstanding under these plans were offered substitute
awards under The Hartford 1995 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, options granted may be either non-qualified options or incentive
stock options qualifying under Section 422A of the Internal Revenue Code. The
aggregate number of shares of stock which may be awarded in any one year is
subject to an annual limit. The maximum number of shares of stock for which
awards may be granted under the Plan in each year is 1.5% of the total issued
and outstanding shares of The Hartford common stock and treasury stock as
reported in the Annual Report on Form 10-K of the Company for the preceding year
plus unused portions of such limit from prior years. Also, no more than
5,000,000 shares of The Hartford common stock will be cumulatively available for
awards of incentive stock options. As of December 31, 1997, The Hartford has not
issued any incentive stock options under the Plan.
Performance awards of common stock granted under the Plan become payable upon
the attainment of specific performance goals achieved over a three year period
and restricted stock granted is subject to a restriction period. On a cumulative
basis, no more than 20% of the aggregate number of shares which may be awarded
under the Plan will be available for performance shares and restricted stock.
All options granted have an exercise price equal to the fair market value price
of the Company's common stock on the date of grant, and an option's maximum term
is ten years. Certain options become exercisable over a three year period
commencing with the date of grant, while certain other 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.
During the fourth quarter of 1997, the Company awarded special performance based
options and restricted stock to certain key executives under the Plan. The
awards will vest only if the Company's stock trades at certain predetermined
levels for ten consecutive days by March 1, 2001. Vested options cannot be
exercised and restricted shares disposed of until March 1, 2001.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
11. STOCK COMPENSATION PLANS (CONTINUED)
During the fourth quarter of 1996, the Company established The 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 134,344 and 39,214 shares were sold in 1997 and
1996, respectively. Additionally, during 1997, The Hartford established employee
stock purchase plans for certain employees of the Company's international
subsidiaries. Under these plans, participants may purchase common stock of The
Hartford at a fixed option price at the end of a three year period.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretations in accounting for its stock-based compensation plans.
Accordingly, in the measurement of compensation expense, the Company utilizes
the excess of market price over exercise price on the first date that both the
number of shares and award price are known. For the years ended December 31,
1997, 1996 and 1995, compensation expense related to the Company's two stock
based compensation plans was immaterial. Had compensation cost for the Company's
incentive stock plan and ESPP been determined based on the fair value at the
grant dates for awards under those plans consistent with the method of SFAS No.
123, "Accounting for Stock-Based Compensation", the Company's net income (loss)
and earnings (loss) per share would have been reduced to the pro forma amounts
indicated as follows:
1997 1996 1995
- ----------------------------------- --------- --------- ---------
Net income (loss):
As reported $1,332 $ (99) $559
Pro forma [1] [2] $1,319 $(106) $556
Basic earnings (loss) per share:
As reported $11.29 $(0.84) $4.77
Pro forma [1] [2] $11.18 $(0.90) $4.74
Diluted earnings (loss) per share:
As reported $11.16 $(0.84) $4.75
Pro forma [1] [2] $11.05 $(0.90) $4.72
- ----------------------------------- --------- --------- ---------
[1] The pro forma disclosures are not representative of the effects on net
income and earnings per share in future years.
[2] Includes The Hartford's ownership share of compensation costs related to
HLI's incentive stock plan and employee stock purchase plan determined in
accordance with SFAS No. 123.
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 1997, 1996 and 1995: dividend yield of 1.7% for
1997 and 2.9% for both 1996 and 1995, expected price variability of 22.1% for
1997 and 20.8% for 1996 and 1995, risk-free interest rates of 6.04% for the 1997
grants and 5.71% and 6.30% for the 1996 and 1995 grants, respectively; and
expected lives of six years for 1997 and five years for 1996 and 1995.
A summary of the status of non-qualified options included in the Company's
incentive stock plan as of December 31, 1997, 1996 and 1995 and changes during
the years ended December 31, 1997 and 1996 and the period December 19, 1995
through December 31, 1995, is presented below:
<TABLE>
<CAPTION>
1997 1996 1995
------------------------------- ------------------------------- ----------------------------
Weighted Average Weighted Average Weighted Average
(shares in thousands) Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beg. of year [1] 4,388 $40.87 3,369 $35.16 3,370 $35.16
Granted 1,558 80.45 1,431 52.05 -- --
Exercised (680) 35.95 (380) 31.92 (1) 33.38
Canceled/expired (91) 47.09 (32) 45.86 -- --
---------- ----------- -----------
Outstanding at end of year 5,175 53.32 4,388 40.87 3,369 35.16
- ----------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 2,592 38.49 2,138 34.47 1,451 29.78
Weighted average fair value of
options granted $23.15 $11.21 $10.01
==================================================================================================================================
<FN>
[1] 1995 represents balance transferred at December 19, 1995 and includes 1,129
shares issued in 1995.
</FN>
</TABLE>
The weighted average fair value of shares sold under the ESPP was $18.46 and
$16.50 in 1997 and 1996, respectively.
The following table summarizes information about stock options outstanding and
exercisable (shares in thousands) at December 31, 1997:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
-------------------------------------------------------------- ----------------------------------------
Number Outstanding Weighted Average Weighted Average Number Weighted
Range of at December 31, 1997 Remaining Exercise Price Exercisable at Average
Exercise Prices Contractual Life December 31, 1997 Exercise Price
----------------- ---------------------- -------------------- ------------------ ----- --------------------- ------------------
<S> <C> <C> <C> <C> <C>
$17.68 - $21.04 197 3.2 $19.06 197 $19.06
32.74 - 43.41 2,174 6.5 37.77 1,915 37.03
46.75 - 58.25 1,243 7.8 51.97 471 51.99
60.13 - 73.63 789 9.0 72.15 9 69.58
76.00 - 88.94 772 10.0 88.80 -- --
----------------- ---------------------- -------------------- ------------------ ----- --------------------- ------------------
$17.68 - $88.94 5,175 7.6 $53.32 2,592 $38.49
----------------- ---------------------- -------------------- ------------------ ----- --------------------- ------------------
</TABLE>
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. 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,
------------------------------------------
1997 1996
- -------------------------------------------------------------------------------------------------------------
ACTUARIAL PRESENT VALUE OF
<S> <C> <C>
Vested benefit obligation $ 1,218 $ 1,090
Accumulated benefit obligation 1,346 1,207
- -------------------------------------------------------------------------------------------------------------
Actuarial present value of projected benefit obligation $ 1,657 $ 1,467
Plan assets at fair value, primarily listed U.S. stocks and bonds 1,686 1,478
- -------------------------------------------------------------------------------------------------------------
Plan assets in excess of projected benefit obligation 29 11
Unrecognized net (gain) loss (42) 10
Unrecognized prior service cost 65 72
Unrecognized net obligation at January 1, 1986 7 9
- -------------------------------------------------------------------------------------------------------------
PENSION ASSET $ 59 $ 102
=============================================================================================================
Assumptions used in the accounting for the plans in 1997 and 1996 were:
Benefit discount rate 7.50% 8.00%
Expected long-term rate of return on plan assets 9.75% 9.75%
Rate of increase in compensation levels 4.25% 4.25%
=============================================================================================================
</TABLE>
Total pension costs for 1997, 1996 and 1995 include the following components:
<TABLE>
<CAPTION>
For the years ended December 31,
---------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
DEFINED BENEFIT PLANS
<S> <C> <C> <C>
Service cost - benefits earned during the year $ 61 $ 56 $ 48
Interest cost on projected benefit obligation 113 104 96
Actual return on plan assets (297) (189) (271)
Net amortization 180 80 170
- ----------------------------------------------------------------------------------------------------------------------------------
NET PENSION COST $ 57 $ 51 $ 43
==================================================================================================================================
</TABLE>
(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 U.S.
employees are eligible to participate in this plan under which designated
contributions may be invested in common stock of The Hartford or certain other
investments. These contributions are matched, up to 3% of compensation, by the
Company. In addition, the Company allocates 0.5% of base salary to the plan for
each eligible employee. Matching Company contributions are used to acquire The
Hartford common stock. The cost to The Hartford for the above plans was
approximately $22, $20 and $19 for 1997, 1996 and 1995, respectively.
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
12. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT
PLANS (CONTINUED)
(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
1997, 1996 and 1995:
1997 1996 1995
- ---------------------------------------------------------------
Service cost $ 7 $ 6 $ 6
Interest cost 20 18 21
Return on assets (8) (7) (6)
Net deferral (24) (23) (23)
- ---------------------------------------------------------------
NET BENEFIT $ (5) $ (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, 1997 and 1996 and the principal assumptions inherent in
their determination:
1997 1996
- ----------------------------------------------------------------
Accumulated postretirement benefit
obligation $ 295 $ 252
Plan assets at fair value, primarily
listed U.S. stocks and bonds 88 77
- ----------------------------------------------------------------
Accumulated postretirement benefit
obligation in excess of plan assets (207) (175)
Unrecognized net (gain) loss 2 (24)
Unrecognized past service liability (211) (234)
- ----------------------------------------------------------------
LIABILITY RECOGNIZED IN THE
BALANCE SHEET $ (416) $ (433)
================================================================
Benefit discount rate 7.50% 8.00%
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 8.5% for 1997, 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 $8 and the annual expense by $1. To the extent that actual
experience differs from the inherent assumptions, the effect will be amortized
over the average future service of the covered active employees.
13. 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 reinsurance 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 concentrations
of credit risk.
The effect of reinsurance on property and casualty premiums written and earned
was as follows:
For the years ended December 31,
--------------------------------------
1997 1996 1995
- ----------------------------------------------------------------
PREMIUMS WRITTEN
Direct $ 7,000 $ 6,798 $ 6,898
Assumed 932 903 825
Ceded (770) (795) (803)
- ----------------------------------------------------------------
NET $ 7,162 $ 6,906 $ 6,920
================================================================
PREMIUMS EARNED
Direct $ 6,882 $ 6,850 $ 6,895
Assumed 900 878 817
Ceded (782) (837) (822)
- ----------------------------------------------------------------
NET $ 7,000 $ 6,891 $ 6,890
================================================================
Reinsurance cessions which reduce claims and claim expenses incurred were $492,
$651 and $678 for the years ended December 31, 1997, 1996 and 1995,
respectively.
Life insurance net retained premiums were comprised of the following:
For the years ended December 31,
--------------------------------------
1997 1996 1995
- -----------------------------------------------------------------
Gross premiums $ 3,519 $ 3,200 $ 2,447
Assumed 165 406 613
Ceded (361) (421) (322)
- -----------------------------------------------------------------
NET RETAINED PREMIUMS $ 3,323 $ 3,185 $ 2,738
=================================================================
Life insurance recoveries, which reduce death and other benefits, approximated
$205, $239 and $162 for the years ended December 31, 1997, 1996 and 1995,
respectively.
As of December 31, 1997, the Company had reinsurance recoverables of $5.0
billion from Mutual Benefit Life Assurance Corporation ("Mutual Benefit"),
supported by assets in a security trust of $5.0 billion (including policy loans
of $4.5 billion). The risk of Mutual Benefit becoming insolvent is
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
13. REINSURANCE (CONTINUED)
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.
14. INCOME TAX
<TABLE>
<CAPTION>
For the years ended December 31,
------------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES, DIVIDENDS ON
SUBSIDIARY PREFERRED STOCK AND MINORITY INTEREST
<S> <C> <C> <C>
U.S. Federal $ 1,551 $ (529) $ 599
International 152 211 143
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME (LOSS) BEFORE INCOME TAXES,
DIVIDENDS ON SUBSIDIARY PREFERRED STOCK AND
MINORITY INTEREST $ 1,703 $ (318) $ 742
==================================================================================================================================
INCOME TAX EXPENSE (BENEFIT)
Current - U.S. Federal $ 83 $ 84 $ 247
International 54 83 64
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT 137 167 311
- ----------------------------------------------------------------------------------------------------------------------------------
Deferred - U.S. Federal 192 (381) (142)
International 5 (5) 11
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED 197 (386) (131)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE (BENEFIT) $ 334 $ (219) $ 180
==================================================================================================================================
</TABLE>
Deferred tax assets (liabilities) include the following for the years ended
December 31:
<TABLE>
<CAPTION>
1997 1996
---------------------------------------------------------------------
U.S. Federal International U.S. Federal International
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discounted loss reserves $ 804 $ 1 $ 793 $ 1
Net operating loss carryforwards -- -- 154 --
Employee benefits 132 (9) 138 (10)
Earnings from foreign subsidiaries 131 -- 123 --
Other insurance related items 30 (62) 51 (70)
Reserve for bad debts 31 -- 26 --
Accelerated depreciation 16 (1) 17 (1)
Unrealized gains (440) (45) (141) (47)
Other 251 -- 319 3
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 955 $ (116)* $ 1,480 $ (124) *
==================================================================================================================================
<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 $366 at December 31, 1997,
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,
------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. Federal statutory rate $ 596 $ (111) $ 260
Tax-exempt interest (110) (97) (53)
Non-taxable equity gain on HLI initial public offering (129) -- --
Foreign tax rate differential (1) (2) (1)
Other (22) (9) (26)
- ----------------------------------------------------------------------------------------------------------------------------------
PROVISION (BENEFIT) FOR INCOME TAX $ 334 $ (219) $ 180
==================================================================================================================================
</TABLE>
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
15. COMMITMENTS AND CONTINGENCIES
(A) LITIGATION
The Hartford is involved in various legal actions, some of which involve claims
for substantial amounts. In the opinion of management, the ultimate liability
with respect to such lawsuits is not expected to be material to the consolidated
financial condition, results of operations or cash flows of The Hartford.
(B) ENVIRONMENTAL AND ASBESTOS CLAIMS
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 Other Operations 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, 1997, 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.
(C ) LEASE COMMITMENTS
Total rental expense on operating leases was $134 in 1997, $110 in 1996 and $121
in 1995. Future minimum lease commitments are as follows:
1998 $ 96
1999 86
2000 64
2001 69
2002 55
Thereafter 260
- ------------------------------------------------ --- -----------
TOTAL $ 630
================================================ === ===========
16. 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. 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.
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.
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
16. TRANSACTIONS WITH AFFILIATES (CONTINUED)
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 represented a portion of the
total ITT holdings in that company.
17. SUBSEQUENT EVENT (UNAUDITED)
On February 12, 1998, The Hartford completed the purchase of all outstanding
shares of Omni Insurance Group, Inc. ("Omni"), a holding company of two
non-standard auto insurance subsidiaries licensed in 25 states and the District
of Columbia. The Hartford paid cash of $31.75 per share, plus transaction costs,
for a total of $189. The acquisition will be reported as a purchase transaction
and accordingly, the results of Omni's operations will be included in The
Hartford's consolidated financial statements from the closing date of the
transaction.
18. BUSINESS SEGMENT INFORMATION
The Hartford provides insurance and financial services in the United States,
Canada, Western Europe, Latin America and Asia. The Company's primary 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.
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
REVENUES
<S> <C> <C> <C>
North American P&C $ 6,712 $ 6,333 $ 6,337
Life 4,699 4,380 4,090
International 1,732 1,594 1,508
- ----------------------------------------------------------------------------------------------------------------------------------
Operations before other 13,143 12,307 11,935
Other Operations 162 166 215
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 13,305 $ 12,473 $ 12,150
==================================================================================================================================
OPERATING INCOME (LOSS)
North American P&C $ 727 $ (399) $ 334
Life 480 31 226
International 162 192 189
Other -- -- (6)
- ----------------------------------------------------------------------------------------------------------------------------------
Operations before other 1,369 (176) 743
Other Operations (34) (142) (1)
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME (LOSS) $ 1,335 $ (318) $ 742
==================================================================================================================================
ASSETS
North American P&C $ 21,011 $ 19,262 $ 18,309
Life 100,980 79,933 65,962
International 4,734 4,334 3,813
Other -- 2 1
- ----------------------------------------------------------------------------------------------------------------------------------
Operations before other 126,725 103,531 88,085
Other Operations 5,018 5,309 5,770
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 131,743 $ 108,840 $ 93,855
==================================================================================================================================
</TABLE>
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
18. BUSINESS SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
GEOGRAPHICAL SEGMENT INFORMATION
REVENUES
<S> <C> <C> <C>
North America $ 11,391 $ 10,698 $ 10,480
Western Europe and other 1,914 1,775 1,670
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 13,305 $ 12,473 $ 12,150
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS)
North America $ 1,175 $ (567) $ 557
Western Europe and other 160 249 185
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OPERATING INCOME (LOSS) $ 1,335 $ (318) $ 742
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
North America $ 125,156 $ 103,025 $ 88,487
Western Europe and other 6,587 5,815 5,368
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 131,743 $ 108,840 $ 93,855
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
19. QUARTERLY RESULTS FOR 1997 AND 1996 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------------------------------------------------------------------------------------
1997 1996 1997 1996 1997 1996 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 3,118 $ 3,278 $ 3,142 $ 3,026 $ 3,306 $ 2,836 $ 3,739 $ 3,333
Benefits, claims and expenses $ 2,844 $ 3,164 $ 2,867 $ 2,847 $ 2,861 $ 3,701 $ 3,398 $ 3,079
Net income (loss) [1] $ 204 $ 96 $ 574 $ 143 $ 299 $ (543) $ 255 $ 205
Basic earnings per share $ 1.73 $ 0.82 $ 4.86 $ 1.22 $ 2.53 $ (4.63) $ 2.16 $ 1.75
Diluted earnings per share $ 1.71 $ 0.81 $ 4.81 $ 1.21 $ 2.50 $ (4.63) $ 2.14 $ 1.73
Weighted average common shares
outstanding 117.7 117.2 118.0 117.2 118.2 117.2 118.0 117.3
Weighted average common shares
outstanding and dilutive potential
common shares 119.1 117.9 119.4 117.9 119.7 117.2 119.4 118.4
- ----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] September 30, 1996 includes charges of $693, after-tax, consisting
primarily of environmental and asbestos reserve increases and recognition
of losses on the closed book of guaranteed rate contract business.
</FN>
</TABLE>
F-27
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE I
<TABLE>
<CAPTION>
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
(In millions) As of December 31, 1997
----------------------------------------------------------
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) $ 378 $ 384 $ 384
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset backed 2,342 2,391 2,391
States, municipalities and political subdivisions 7,984 8,381 8,381
International governments 1,763 1,860 1,860
Public utilities 1,302 1,336 1,336
All other corporate including international 9,565 9,890 9,890
All other corporate - asset backed 6,481 6,549 6,549
Short-term investments 3,238 3,238 3,238
Certificates of deposit 941 954 954
Redeemable preferred stock 67 70 70
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 34,061 35,053 35,053
- ----------------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES
Common stocks
Public utilities 27 36 36
Banks, trusts and insurance companies 119 176 176
Industrial and miscellaneous 1,363 1,710 1,710
Nonredeemable preferred stocks -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES 1,509 1,922 1,922
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 35,570 36,975 36,975
- ----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE 26 25 26
OTHER INVESTMENTS
Mortgage loans on real estate 2 2 2
Policy loans 3,759 3,759 3,759
Investments in partnerships and trusts 152 190 152
Futures, options and miscellaneous 208 246 208
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INVESTMENTS 4,121 4,197 4,121
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 39,717 $ 41,197 $ 41,122
==================================================================================================================================
</TABLE>
S-1
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE II
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION OF THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(REGISTRANT)
(In millions) As of December 31,
---------------------------------------
BALANCE SHEETS 1997 1996
- ----------------------------------------------------------------------------------------------------------------------------------
ASSETS
<S> <C> <C>
Receivables from affiliates $ 27 $ 44
Other assets 264 205
Investment in affiliates 7,820 6,740
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 8,111 6,989
- ----------------------------------------------------------------------------------------------------------------------------------
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt 241 500
Long-term debt 698 898
Company obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely parent junior subordinated
debentures 1,000 1,000
Other liabilities 87 71
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,026 2,469
TOTAL STOCKHOLDERS' EQUITY 6,085 4,520
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,111 $ 6,989
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
(In millions)
STATEMENTS OF INCOME For the years ended December 31,
----------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings (loss) of subsidiaries $ 1,434 $ (6) $ 619
Interest expense (net of interest income) 155 139 92
Other expenses 2 4 --
- ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT 1,277 (149) 527
Income tax benefit (55) (50) (32)
- ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,332 $ (99) $ 559
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-2
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE II
<TABLE>
<CAPTION>
CONDENSED FINANCIAL INFORMATION OF
THE HARTFORD FINANCIAL SERVICES GROUP, INC. (CONTINUED)
(REGISTRANT)
(In millions)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
------------------------------------------------------------
1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
<S> <C> <C> <C>
Net income (loss) $ 1,332 $ (99) $ 559
Undistributed earnings of subsidiaries (610) 362 (505)
Change in working capital (26) (87) 133
- ----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 696 176 187
- ----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital contribution to subsidiary (31) (625) (281)
- ----------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (31) (625) (281)
- ----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Increase (decrease) in debt (459) (386) 408
Net proceeds from issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trusts holding
solely parent junior subordinated debentures -- 969 --
Dividends paid (190) (140) --
Investments, advances and dividends to ITT Industries, Inc. -- -- (314)
Acquisition of treasury stock (45) -- --
Proceeds from issuances under incentive and stock purchase plans 29 6 --
- ----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY FINANCING ACTIVITIES (665) 449 94
- ----------------------------------------------------------------------------------------------------------------------------------
Net change in cash -- -- --
Cash - beginning of year -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ -- $ -- $ --
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------
NET CASH PAID DURING THE YEAR FOR:
<S> <C> <C> <C>
Interest $ 157 $ 132 $ 86
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Capital contribution $ -- $ -- $ 180
Dividends paid $ -- $ -- $ 395
</TABLE>
S-3
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE III
<TABLE>
<CAPTION>
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(In millions)
Future
Policy
Benefits, Other
Deferred Unpaid Policy Earned
Policy Claims and Claims and Premiums Net Net Realized
Acquisition Claim Unearned Benefits and Other Investment Capital
Segment Costs Adjustment Premiums Payable Considerations Income Gains(Losses)
Expenses
- --------------------------------------------------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C> <C> <C> <C>
North American P&C $ 532 $ 12,053 $ 2,141 $ -- $ 5,704 $ 777 $ 231
Life 3,361 4,939 43 21,139 3,163 1,536 --
International 288 1,943 711 4 1,452 185 95
- --------------------------------------------------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 4,181 18,935 2,895 21,143 10,319 2,498 326
Other Operations -- 4,712 -- -- 4 157 1
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 4,181 $ 23,647 $ 2,895 $ 21,143 $ 10,323 $ 2,655 $ 327
==========================================================================================================================
1996
North American P&C $ 485 $ 12,012 $ 2,077 $ -- $ 5,657 $ 661 $ 15
Life 2,800 3,986 40 22,213 3,069 1,530 (219)
International 250 1,670 680 7 1,338 183 73
- --------------------------------------------------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 3,535 17,668 2,797 22,220 10,064 2,374 (131)
Other Operations -- 5,006 -- -- 12 149 5
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 3,535 $ 22,674 $ 2,797 $ 22,220 $ 10,076 $ 2,523 $ (126)
==========================================================================================================================
1995
North American P&C $ 490 $ 11,127 $ 2,066 $ -- $ 5,662 $ 646 $ 29
Life 2,220 3,514 40 22,763 2,643 1,451 (4)
International 234 1,504 590 7 1,303 158 47
- --------------------------------------------------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 2,944 16,145 2,696 22,770 9,608 2,255 72
Other Operations 1 5,285 70 -- 20 165 30
- --------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 2,945 $ 21,430 $ 2,766 $ 22,770 $ 9,628 $ 2,420 $ 102
==========================================================================================================================
<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>
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1997, 1996 AND 1995
(CONTINUED)
(In millions)
Benefits, Amortization
Claims and of Deferred
Claim Policy
Adjustment Acquisition Other Net
Segment Expenses Costs Expenses Written
Premiums
- --------------------------------------------------------------------------------
1997
<S> <C> <C> <C> <C>
North American P&C $ 4,069 $ 1,196 $ 720 $ 5,771
Life 2,671 345 1,203 N/A
International 1,037 346 187 1,387
- --------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 7,777 1,887 2,110 7,158
Other Operations 200 1 (5) 4
- --------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 7,977 $ 1,888 $ 2,105 $ 7,162
================================================================================
1996
North American P&C $ 4,994 $ 1,154 $ 584 $ 5,688
Life 2,727 241 1,381 N/A
International 920 284 198 1,207
- --------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 8,641 1,679 2,163 6,895
Other Operations 301 (1) 8 11
- --------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 8,942 $ 1,678 $ 2,171 $ 6,906
================================================================================
1995
North American P&C $ 4,315 $ 1,178 $ 516 $ 5,670
Life 2,395 205 1,264 N/A
International 865 276 178 1,234
- --------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 7,575 1,659 1,958 6,904
Other Operations 194 (1) 23 16
- --------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 7,769 $ 1,658 $ 1,981 $ 6,920
================================================================================
<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>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE IV
<TABLE>
<CAPTION>
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, 1997
<S> <C> <C> <C> <C> <C>
Life insurance in force $ 407,860 $ 174,659 $ 42,746 $ 275,947 15%
============================================================================================================================
INSURANCE REVENUES
Property and casualty insurance $ 6,882 $ 782 $ 900 $ 7,000 13%
Life insurance 2,507 280 58 2,285 3%
Accident and health insurance 1,012 81 107 1,038 10%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 10,401 $ 1,143 $ 1,065 $ 10,323 10%
============================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1996
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%
============================================================================================================================
</TABLE>
S-5
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE V
<TABLE>
<CAPTION>
VALUATION AND QUALIFYING ACCOUNTS
Charged to
Balance Costs and Translation Write-offs/ Balance
January 1, Expenses Adjustment Payments/Other December 31,
- --------------------------------------------------------------------------------------------------------------------------------
1997
----
<S> <C> <C> <C> <C> <C>
Allowance for doubtful accounts $ 113 $ 24 $ -- $ (19) $ 118
Accumulated depreciation of plant,
property and equipment 617 82 (2) (69) 628
1996
----
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
- --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-6
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
SCHEDULE VI
<TABLE>
<CAPTION>
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>
1997 $ 449 $ 5,065 $ 98 $ 5,000
1996 $ 472 $ 5,075 $ 1,049 $ 4,879
1995 $ 451 $ 5,041 $ 254 $ 4,937
- ----------------------------------------------------------------------------------------------------------------------------------
<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 6.1%,
6.9% and 6.3% for 1997, 1996 and 1995, 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.
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
By: /s/ James J. Westervelt
---------------------------
James J. Westervelt
Senior Vice President and Group Controller
Date: March 27, 1998
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.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/S/ RAMANI AYER Chairman, President, Chief March 27, 1998
- ---------------------------------------- Executive Officer and Director
Ramani Ayer
/S/ LOWNDES A. SMITH Vice Chairman and Director March 27, 1998
- ----------------------------------------
Lowndes A. Smith
/S/ DAVID K. ZWIENER Executive Vice President, March 27, 1998
- ---------------------------------------- Chief Financial Officer and Director
David K. Zwiener
/S/ JAMES J. WESTERVELT Senior Vice President March 27, 1998
- ---------------------------------------- and Group Controller
James J. Westervelt
/S/ BETTE B. ANDERSON Director March 27, 1998
- ----------------------------------------
Bette B. Anderson
/S/ RAND V. ARASKOG Director March 27, 1998
- ----------------------------------------
Rand V. Araskog
/S/ ROBERT A. BURNETT Director March 27, 1998
- ----------------------------------------
Robert A. Burnett
/S/ DONALD R. FRAHM Director March 27, 1998
- ----------------------------------------
Donald R. Frahm
/S/ ARTHUR A. HARTMAN Director March 27, 1998
- ----------------------------------------
Arthur A. Hartman
/S/ PAUL G. KIRK, JR. Director March 27, 1998
- ----------------------------------------
Paul G. Kirk, Jr.
/S/ H. PATRICK SWYGERT Director March 27, 1998
- ----------------------------------------
H. Patrick Swygert
/S/ DEROY C. THOMAS Director March 27, 1998
- ----------------------------------------
DeRoy C. Thomas
/S/ GORDON I. ULMER Director March 27, 1998
- ----------------------------------------
Gordon I. Ulmer
</TABLE>
II-1
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1997
FORM 10-K
EXHIBITS INDEX
EXHIBIT #
- ---------
3.01 Amended and Restated Certificate of Incorporation of The Hartford
Financial Services Group, Inc., formerly known as ITT Hartford Group,
Inc., ("The Hartford"), amended effective May 2, 1997, was filed as
Exhibit 3.01 to The Hartford's Form 10-Q for the quarterly period ended
June 30, 1997 and is incorporated herein by reference.
3.02 Amended By-Laws of The Hartford, amended effective December 18, 1997,
are filed herewith.
4.01 Amended and Restated Certificate of Incorporation and By-Laws of The
Hartford (included as Exhibits 3.01 and 3.02, respectively).
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 incorporated by reference 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).
II-2
<PAGE>
EXHIBITS INDEX (CONTINUED)
EXHIBIT #
- ---------
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.
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") was filed
as Exhibit 4.16 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1996 and is incorporated herein by reference.
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, was filed as Exhibit 4.21 to The
Hartford's Form 10-K for the fiscal year ended December 31, 1996 and is
incorporated herein by reference.
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.
II-3
<PAGE>
EXHIBITS INDEX (CONTINUED)
EXHIBIT #
- ---------
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.
10.07 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 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.
10.09 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 was filed
as Exhibit 10.11 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1996 and is incorporated herein by reference.
10.10 364 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 was filed
as Exhibit 10.12 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1996 and is incorporated herein by reference.
10.11 80,000,000 brittish pound sterling 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.
10.12 Employment Agreement dated July 1, 1997 between The Hartford and Ramani
Ayer was filed as Exhibit 10.01 to The Hartford's Form 10-Q for the
quarterly period ended September 30, 1997 and is incorporated herein by
reference.
10.13 Employment Agreement dated July 1, 1997 between Hartford Life, Inc.
("Hartford Life"), The Hartford and Lowndes A. Smith was filed as
Exhibit 10.02 to The Hartford's Form 10-Q for the quarterly period ended
September 30, 1997 and is incorporated herein by reference.
10.14 Employment Agreement dated July 1, 1997 between The Hartford and David
K. Zwiener was filed as Exhibit 10.03 to The Hartford's Form 10-Q for
the quarterly period ended September 30, 1997 and is incorporated herein
by reference.
10.15 Form of Employment Protection Agreement between The Hartford and
fourteen executive officers of The Hartford is filed herewith.
10.16 The Hartford 1996 Restricted Stock Plan for Non-Employee Directors, as
amended, was filed as Exhibit 10.02 to The Hartford's Form 10-Q for the
quarterly period ended March 31, 1997 and is incorporated herein by
reference.
10.17 The Hartford 1995 Incentive Stock Plan, as amended, is filed herewith.
10.18 1996 The Hartford Deferred Restricted Stock Unit Plan was filed as
Exhibit 10.16 to The Hartford's Form 10-K for the fiscal year ended
December 31, 1996 and is incorporated herein by reference.
10.19 Master Intercompany Agreement among Hartford Life, The Hartford and with
respect to Articles VI and XII, Hartford Fire Insurance Company was
filed as Exhibit 10.01 to Hartford Life's Form 10-Q filed for the
quarterly period ended June 30, 1997 and is incorporated herein by
reference.
II-4
<PAGE>
EXHIBITS INDEX (CONTINUED)
EXHIBIT #
- ---------
10.20 Tax Sharing Agreement among The Hartford and its subsidiaries, including
Hartford Life, was filed as Exhibit 10.02 to Hartford Life's Form 10-Q
filed for the quarterly period ended June 30, 1997 and is incorporated
herein by reference.
10.21 Management Agreement between Hartford Life Insurance Company and The
Hartford Investment Management Company, was filed as Exhibit 10.03 to
Hartford Life's Form 10-Q filed for the quarterly period ended June 30,
1997 and is incorporated herein by reference.
10.22 Management Agreement among certain subsidiaries of Hartford Life and
Hartford Investment Services, Inc., was filed as Exhibit 10.04 to
Hartford Life's Form 10-Q filed for the quarterly period ended June 30,
1997 and is incorporated herein by reference.
10.23 Sublease Agreement between Hartford Fire Insurance Company and Hartford
Life was filed as Exhibit 10.05 to Hartford Life's Form 10-Q filed for
the quarterly period ended June 30, 1997 and is incorporated herein by
reference.
10.24 1997 Hartford Life, Inc. Incentive Stock Plan, as amended, was filed as
Exhibit 10.7 to Hartford Life's Form 10-K filed for the fiscal year
ended December 31, 1997 and is incorporated herein by reference.
10.25 1997 Hartford Life, Inc. Deferred Restricted Stock Unit Plan was filed
as Exhibit 10.08 to Hartford Life's Form 10-Q filed for the quarterly
period ended June 30, 1997 and is incorporated herein by reference.
10.26 1997 Hartford Life, Inc. Restricted Stock Plan for Non-Employee
Directors was filed as Exhibit 10.09 to Hartford Life's Form 10-Q filed
for the quarterly period ended June 30, 1997 and is incorporated herein
by reference.
10.27 Promissory Note dated February 20, 1997, executed by Hartford Life for
the benefit of Hartford Accident & Indemnity Company, was filed as
Exhibit 10.09 to Hartford Life's Registration Statement on Form S-1
(Amendment No. 2) dated April 24, 1997 (Registration No. 333-21459) and
is incorporated herein by reference.
10.28 Promissory Note dated April 4, 1997, executed by Hartford Life for the
benefit of Hartford Accident and Indemnity Company, was filed as Exhibit
10.16 to Hartford Life's Registration Statement on Form S-1 (Amendment
No. 2) dated April 24, 1997 (Registration No. 333-21459) and is
incorporated herein by reference.
12.01 Statement Re: Computation of Ratio of Earnings to Fixed Charges is filed
herewith.
21.01 Subsidiaries of The Hartford Financial Services 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 regarding the
audited financial statements is filed herewith.
27.01 Financial Data Schedule is filed herewith.
II-5
<PAGE>
EXHIBIT 3.02
Amended and Restated
BY-LAWS
of
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
adopted by the
Board of Directors
on
October 10, 1995
and
amended on
May 2, 1997
and
December 18, 1997
<PAGE>
Table of Contents
------------------
Section Page
------- ----
1 STOCKHOLDERS ............................................... 1
1.1 Place of Stockholders' Meetings ............................ 1
1.2 Day and Time of Annual Meetings of Stockholders ............ 1
1.3 Purposes of Annual Meetings ................................ 1
1.4 Special Meetings of Stockholders ........................... 2
1.5 Notice of Meetings of Stockholders ......................... 2
1.6 Quorum of Stockholders ..................................... 3
1.7 Chairman and Secretary of Meeting .......................... 3
1.8 Voting by Stockholders ..................................... 4
1.9 Proxies .................................................... 4
1.10 Inspectors ................................................. 4
1.11 List of Stockholders ....................................... 5
1.12 Confidential Voting ........................................ 6
1.13 Action by Written Consent .................................. 6
2 DIRECTORS .................................................. 6
2.1 Powers of Directors ........................................ 6
2.2 Number, Method of Election, Terms of Office of Directors ... 6
2.3 Vacancies on Board ......................................... 8
2.4 Meetings of the Board ...................................... 8
2.5 Quorum and Action .......................................... 9
2.6 Presiding Officer and Secretary of Meeting ................. 9
2.7 Action by Consent without Meeting .......................... 9
2.8 Standing Committees ........................................ 10
2.9 Other Committees ........................................... 11
2.10 Compensation of Directors .................................. 11
2.11 Independent Directors ...................................... 12
3 OFFICERS ................................................... 12
3.1 Officers, Titles, Elections, Terms ......................... 12
3.2 General Powers of Officers ................................. 14
3.3 Powers and Duties of the Chairman .......................... 14
3.4 Powers and Duties of the President ......................... 14
3.5 Powers and Duties of Executive Vice Presidents, Senior Vice 14
Presidents and Vice Presidents ............................. .
3.6 Powers and Duties of the Chief Financial Officer ........... 14
3.7 Powers and Duties of the Controller and Assistant Controllers 15
3.8 Powers and Duties of the Treasurer and Assistant Treasurers 15
3.9 Powers and Duties of the Secretary and Assistant Secretaries 16
4 INDEMNIFICATION ............................................ 16
4.1 Right to Indemnification and Effect of Amendments .......... 16
4.2 Insurance, Contracts and Funding ........................... 17
4.3 Indemnification; Not Exclusive Right ....................... 18
4.4 Advancement of Expenses .................................... 18
4.5 Indemnification Procedures; Presumptions
and Effect of Certain Proceedings; Remedies ................ 19
4.6 Indemnification of Employees and Agents .................... 23
4.7 Severability ............................................... 24
5 CAPITAL STOCK .............................................. 24
5.1 Stock Certificates ......................................... 24
5.2 Record Ownership ........................................... 25
5.3 Transfer of Record Ownership ............................... 25
5.4 Lost, Stolen or Destroyed Certificates ..................... 25
5.5 Transfer Agent; Registrar; Rules Respecting Certificates ... 25
5.6 Fixing Record Date for Determination of Stockholders of Record 25
6 SECURITIES HELD BY THE CORPORATION ......................... 26
6.1 Voting ..................................................... 26
6.2 General Authorization to Transfer Securities Held by the
Corporation ................................................ 26
7 DEPOSITARIES AND SIGNATORIES ............................... 27
7.1 Depositaries ............................................... 27
7.2 Signatories ................................................ 28
8 SEAL ....................................................... 28
9 FISCAL YEAR ................................................ 28
10 WAIVER OF OR DISPENSING WITH NOTICE ........................ 28
11 AMENDMENT OF BYLAWS ........................................ 29
12 OFFICES AND AGENT .......................................... 30
<PAGE>
BY-LAWS
OF
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(A DELAWARE CORPORATION, THE "CORPORATION")
1. STOCKHOLDERS.
1.1 Place of Stockholders' Meetings. All meetings of the stockholders of the
Corporation shall be held at such place or places, within or outside the state
of Delaware, as may be fixed by the Corporation's Board of Directors (the
"Board", and each member thereof a "Director") from time to time or as shall be
specified in the respective notices thereof.
1.2 Day and Time of Annual Meetings of Stockholders. An annual meeting of
stockholders shall be held at such place (within or outside the state of
Delaware), date and hour as shall be determined by the Board and designated in
the notice thereof.
1.3 Purposes of Annual Meetings. (a) At each annual meeting, the stockholders
shall elect the members of the Board for the succeeding year. At any such annual
meeting any business properly brought before the meeting may be transacted.
(b) To be properly brought before an annual meeting, business must be (i)
specified in the notice of the meeting (or any supplement thereto) given by or
at the direction of the Board, (ii) otherwise properly brought before the
meeting by or at the direction of the Board or (iii) otherwise properly brought
before the meeting by a stockholder. For business to be properly brought before
an annual meeting by a stockholder, the stockholder must have given written
notice thereof, either by personal delivery or by United States mail, postage
prepaid, to the Secretary, not later than 90 days in advance of the anniversary
date of the immediately preceding annual meeting (or not more than ten days
after the first public disclosure, which may include any public filing with the
Securities and Exchange Commission, of the Originally Scheduled Date of the
annual meeting, whichever is earlier). Any such notice shall set forth as to
each matter the stockholder proposes to bring
- 1 -
<PAGE>
before the annual meeting (i) a brief description of the business desired to be
brought before the meeting and the reasons for conducting such business at the
meeting and in the event that such business includes a proposal to amend either
the Certificate of Incorporation or By-laws of the Corporation, the language of
the proposed amendment, (ii) the name and address of the stockholder proposing
such business, (iii) a representation that the stockholder is a holder of record
of stock of the Corporation entitled to vote at such meeting and intends to
appear in person or by proxy at the meeting to propose such business,(iv) any
material interest of the stockholder in such business and (v) if the stockholder
intends to solicit proxies in support of such stockholder's proposal, a
representation to that effect. No business shall be conducted at an annual
meeting of stockholders except in accordance with this Section 1.3(b), and the
presiding officer of any annual meeting of stockholders may refuse to permit any
business to be brought before an annual meeting without compliance with the
foregoing procedures or if the stockholder solicits proxies in support of such
stockholder's proposal without such stockholder having made the representation
required by clause (v) of the preceding sentence. For purposes of this Section
1.3(b), the "Originally Scheduled Date" of any meeting of stockholders shall be
the date first publicly disclosed on which such meeting is scheduled to occur
regardless of whether such meeting is continued or adjourned and regardless of
whether any subsequent notice is given for such meeting or the record date of
such meeting is changed.
1.4 Special Meetings of Stockholders. Except as otherwise expressly required
by applicable law, special meetings of the stockholders or of any class or
series entitled to vote may be called for any purpose or purposes by the
Chairman or by a majority vote of the entire Board, to be held at such place
(within or outside the state of Delaware), date and hour as shall be determined
by the Board and designated in the notice thereof. Only such business as is
specified in the notice of any special meeting of the stockholders shall come
before such meeting.
1.5 Notice of Meetings of Stockholders. Except as otherwise expressly
required or permitted by applicable law, not less than ten days nor more than
sixty days before the date of every stockholders' meeting the Secretary shall
cause to be delivered to each stockholder of record entitled to vote at such
meeting written notice stating the place, day and time of the meeting and, in
the case of a special meeting, the purpose or purposes for which the meeting is
called. Except as provided in Section 1.6(d) or as otherwise expressly required
by applicable law, notice of
- 2 -
<PAGE>
any adjourned meeting of stockholders need not be given if the time and place
thereof are announced at the meeting at which the adjournment is taken. Any
notice, if mailed, shall be deemed to be given when deposited in the United
States mail, postage prepaid, addressed to the stockholder at the address for
notices to such stockholder as it appears on the records of the Corporation.
1.6 Quorum of Stockholders. (a) Unless otherwise expressly required by
applicable law, at any meeting of the stockholders, the presence in person or by
proxy of stockholders entitled to cast a majority of votes thereat shall
constitute a quorum for the entire meeting, notwithstanding the withdrawal of
stockholders entitled to cast a sufficient number of votes in person or by proxy
to reduce the number of votes represented at the meeting below a quorum. Shares
of the Corporation's stock belonging to the Corporation or to another
corporation, if a majority of the shares entitled to vote in an election of the
directors of such other corporation is held by the Corporation, shall neither be
counted for the purpose of determining the presence of a quorum nor entitled to
vote at any meeting of the stockholders.
(b) At any meeting of the stockholders at which a quorum shall be present, a
majority of those present in person or by proxy may adjourn the meeting from
time to time without notice other than announcement at the meeting. In the
absence of a quorum, the officer presiding thereat shall have power to adjourn
the meeting from time to time until a quorum shall be present. Notice of any
adjourned meeting other than announcement at the meeting shall not be required
to be given, except as provided in Section 1.6(d) below and except where
expressly required by applicable law.
(c) At any adjourned meeting at which a quorum shall be present, any business
may be transacted which might have been transacted at the meeting originally
called, but only those stockholders entitled to vote at the meeting as
originally noticed shall be entitled to vote at any adjournment or adjournments
thereof unless a new record date is fixed by the Board.
(d) If an adjournment is for more than thirty days, or if after the
adjournment a new record date is fixed for the adjourned meeting, a notice of
the adjourned meeting shall be given in the manner specified in Section 1.5 to
each stockholder of record entitled to vote at the meeting.
1.7 Chairman and Secretary of Meeting. The Chairman or, in his or her
absence, another officer of the Corporation
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designated by the Chairman, shall preside at meetings of the stockholders. The
Secretary shall act as secretary of the meeting, or in the absence of the
Secretary, an Assistant Secretary shall so act, or if neither is present, then
the presiding officer may appoint a person to act as secretary of the meeting.
1.8 Voting by Stockholders. (a) Except as otherwise expressly required by
applicable law, at every meeting of the stockholders each stockholder shall be
entitled to the number of votes specified in the Certificate of Incorporation or
any certificate of designations providing for the creation of any series of
Preferred Stock, in person or by proxy, for each share of stock standing in his
or her name on the books of the Corporation on the date fixed pursuant to the
provisions of Section 5.6 of these By-laws as the record date for the
determination of the stockholders who shall be entitled to receive notice of and
to vote at such meeting.
(b) When a quorum is present at any meeting of the stockholders, all
questions shall be decided by the vote of a majority in voting power of the
stockholders present in person or by proxy and entitled to vote at such meeting,
unless a question is one upon which by express provision of law, the Certificate
of Incorporation or these By-laws, a different vote is required, in which case
such express provision shall govern and control the decision of such question.
(c) Except as required by applicable law, the vote at any meeting of
stockholders on any question need not be by ballot, unless so directed by the
presiding officer of the meeting. On a vote by ballot, each ballot shall be
signed by the stockholder voting, or by his or her attorney-in-fact, if
authorized by proxy, and shall state the number of shares voted.
1.9 Proxies. Any stockholder entitled to vote at any meeting of stockholders
may vote either in person or by his or her attorney-in-fact or proxy. Every
proxy shall be in writing and shall be subscribed by the stockholder or his or
her duly authorized attorney-in-fact, but need not be sealed, witnessed or
acknowledged.
1.10 Inspectors. (a) The election of Directors and any other vote by ballot
at any meeting of the stockholders shall be supervised by one or more
inspectors. Such inspectors may be appointed by the Chairman before or at the
meeting. If the Chairman shall not have so appointed such inspectors or if one
or both inspectors so appointed shall refuse to serve or shall not be present,
such appointment shall
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be made by the officer presiding at the meeting. Each inspector, before entering
upon the discharge of his or her duties, shall take and sign an oath faithfully
to execute the duties of inspector with strict impartiality and according to the
best of his or her ability.
(b) The inspectors shall (i) ascertain the number of shares of the
Corporation outstanding and the voting power of each, (ii) determine the shares
represented at any meeting of stockholders and the validity of the proxies and
ballots, (iii) count all proxies and ballots, (iv) determine and retain for a
reasonable period a record of the disposition of any challenges made to any
determination by the inspectors, and (v) certify their determination of the
number of shares represented at the meeting, and their count of all proxies and
ballots. The inspectors may appoint or retain other persons or entities to
assist the inspectors in the performance of the duties of the inspectors.
(c) If there are three or more inspectors, the act of a majority shall
govern. On request of the officer presiding at such meeting, the inspectors
shall make a report of any challenge, question or matter determined by them and
execute a certificate of any fact found by them. Any report or certificate made
by them shall be prima face evidence of the facts therein stated and of the vote
as certified by them, and such report or certificate shall be filed with the
minutes of such meeting.
1.11 List of Stockholders. (a) At least ten days before every meeting of
stockholders, the Chief Financial Officer shall cause to be prepared and made a
complete list of the stockholders entitled to vote at the meeting, arranged in
alphabetical order and showing the address of each stockholder and the number of
shares registered in the name of each stockholder.
(b) During ordinary business hours for a period of at least ten days prior to
the meeting, such list shall be open to examination by any stockholder for any
purpose germane to the meeting, either at a place within the city where the
meeting is to be held, which place shall be specified in the notice of the
meeting, or if not so specified, at the place where the meeting is to be held.
(c) The list shall also be produced and kept at the time and place of the
meeting during the whole time of the meeting, and it may be inspected by any
stockholder who is present.
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(d) The stock ledger shall be the only evidence as to who are the
stockholders entitled to examine the stock ledger, the list required by this
Section 1.11 or the books of the Corporation, or to vote in person or by proxy
at any meeting of stockholders.
1.12 Confidential Voting. (a) Proxies and ballots that identify the votes of
specific stockholders shall be kept in confidence by the tabulators and the
inspectors of election unless (i) there is an opposing solicitation with respect
to the election or removal of Directors, (ii) disclosure is required by
applicable law, (iii) a stockholder expressly requests or otherwise authorizes
disclosure, or (iv) the Corporation concludes in good faith that a bona fide
dispute exists as to the authenticity of one or more proxies, ballots or votes,
or as to the accuracy of any tabulation of such proxies, ballots or votes.
(b) The tabulators and inspectors of election and any authorized agents or
other persons engaged in the receipt, count and tabulation of proxies and
ballots shall be advised of this By-law and instructed to comply herewith.
(c) The inspectors of election shall certify, to the best of their knowledge
based on due inquiry, that proxies and ballots have been kept in confidence as
required by this Section 1.12.
1.13 Action by Written Consent. Any action required or permitted to be taken
by the stockholders of the Corporation must be effected at a duly called annual
or special stockholders' meeting and may not be effected by consent in writing
by such stockholders.
2. DIRECTORS.
2.1 Powers of Directors. The business and affairs of the Corporation shall be
managed by or under the direction of the Board, which may exercise all the
powers of the Corporation except such as are by applicable law, the Certificate
of Incorporation or these By-laws required to be exercised or performed by the
stockholders.
2.2 Number, Method of Election, Terms of Office of Directors. The number of
Directors which shall constitute the whole Board shall be such as from time to
time shall be determined by resolution adopted by a majority of the entire
Board, but the number shall not be less than three nor more than twenty-five,
provided that the tenure of a Director shall not be affected by any decrease in
the number of Directors so made by the Board. Each Director shall hold
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office until the next annual meeting of stockholders and until his or her
successor is elected and qualified or until his or her earlier death,
retirement, resignation or removal from office in accordance with these By-laws
or any applicable law or pursuant to an order of a court. Directors need not be
stockholders of the Corporation or citizens of the United States of America.
Nominations of persons for election as Directors may be made by the Board or
by any stockholder entitled to vote for the election of Directors. Any
stockholder entitled to vote for the election of Directors may nominate a person
or persons for election as Directors only if written notice of such
stockholder's intent to make such nomination is given in accordance with the
procedures for bringing business before the meeting set forth in Section 1.3(b)
of these By-laws, either by personal delivery or by United States mail, postage
prepaid, to the Secretary not later than (i) with respect to an election to be
held at an annual meeting of stockholders, 90 days in advance of the anniversary
date of the immediately preceding annual meeting (or not more than ten days
after the first public disclosure, which may include any public filing with the
Securities and Exchange Commission, of the Originally Scheduled Date of the
annual meeting, whichever is earlier) and (ii) with respect to an election to be
held at a special meeting of stockholders for the election of Directors, the
close of business on the seventh day following the date on which notice of such
meeting is first given to stockholders. Each such notice shall set forth: (a)
the name and address of the stockholder who intends to make the nomination and
of the person or persons to be nominated; (b) a representation that the
stockholder is a holder of record of stock of the Corporation entitled to vote
at such meeting and intends to appear in person or by proxy at the meeting to
nominate the person or persons specified in the notice; (c) a description of all
arrangements or understandings between the stockholder and each nominee and any
other person or persons (naming such person or persons) pursuant to which the
nomination or nominations are to be made by the stockholder; (d) such other
information regarding each nominee proposed by such stockholder as would have
been required to be included in a proxy statement filed pursuant to the proxy
rules of the Securities and Exchange Commission had each nominee been nominated,
or intended to be nominated, by the Board;(e) the consent of each nominee to
serve as a Director if so elected and (f) if the stockholder intends to solicit
proxies in support of such stockholder's nominee(s), a representation to that
effect. The presiding officer of any meeting of stockholders to elect Directors
and the Board may refuse to acknowledge the nomination of any person not made in
compliance with the foregoing procedure or if the
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stockholder solicits proxies in support of such stockholder's nominee(s) without
such stockholder having made the representation required by clause (f) of the
preceding sentence. For purposes of this Section 2.2, the "Originally Scheduled
Date" of any meeting of stockholders shall be the date first publicly disclosed
on which such meeting is scheduled to occur regardless of whether such meeting
is continued or adjourned and regardless of whether any subsequent notice is
given for such meeting or the record date of such meeting is changed.
At each meeting of the stockholders for the election of Directors at which a
quorum is present, the persons receiving the greatest number of votes, up to the
number of Directors to be elected, shall be the Directors.
2.3 Vacancies on Board. (a) Any Director may resign from office at any time
by delivering a written resignation to the Chairman or the Secretary. The
resignation will take effect at the time specified therein, or, if no time is
specified, at the time of its receipt by the Corporation. The acceptance of a
resignation shall not be necessary to make it effective, unless expressly so
provided in the resignation.
(b) Any vacancy and any newly created Directorship resulting from any
increase in the authorized number of Directors may be filled by vote of a
majority of the Directors then in office, though less than a quorum, and any
Director so chosen shall hold office until the next annual election of Directors
by the stockholders and until a successor is duly elected and qualified or until
his or her earlier death, retirement, resignation or removal from office in
accordance with these By-laws or any applicable law or pursuant to an order of a
court. If there are no Directors in office, then an election of Directors may be
held in the manner provided by applicable law.
2.4 Meetings of the Board. (a) The Board may hold its meetings, both regular
and special, either within or outside the state of Delaware, at such places as
from time to time may be determined by the Board or as may be designated in the
respective notices or waivers of notice thereof.
(b) Regular meetings of the Board shall be held at such times and at such
places as from time to time shall be determined by the Board.
(c) The first meeting of each newly elected Board shall be held as soon as
practicable after the annual meeting of the stockholders and shall be for the
election of officers and
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the transaction of such other business as may come before it.
(d) Special meetings of the Board shall be held whenever called by direction
of the Chairman or at the request of Directors constituting one-third of the
number of Directors then in office.
(e) Members of the Board or any Committee of the Board may participate in a
meeting of the Board or Committee, as the case may be, by means of conference
telephone or similar communications equipment by means of which all persons
participating in the meeting can hear each other, and such participation shall
constitute presence in person at such meeting.
(f) The Secretary shall give notice to each Director of any meeting of the
Board by mailing the same at least two days before the meeting or by
telegraphing or delivering the same not later than the day before the meeting.
Such notice need not include a statement of the business to be transacted at, or
the purpose of, any such meeting. Any and all business may be transacted at any
meeting of the Board. No notice of any adjourned meeting need be given. No
notice to or waiver by any Director shall be required with respect to any
meeting at which the Director is present.
2.5 Quorum and Action. Except as otherwise expressly required by applicable
law, the Certificate of Incorporation or these By-laws, at any meeting of the
Board, the presence of at least one-third of the entire Board shall constitute a
quorum for the transaction of business; but if there shall be less than a quorum
at any meeting of the Board, a majority of those present may adjourn the meeting
from time to time. Unless otherwise provided by applicable law, the Certificate
of Incorporation or these By-laws, the vote of a majority of the Directors
present (and not abstaining) at any meeting at which a quorum is present shall
be necessary for the approval and adoption of any resolution or the approval of
any act of the Board.
2.6 Presiding Officer and Secretary of Meeting. The Chairman or, in the
absence of the Chairman, a member of the Board selected by the members present,
shall preside at meetings of the Board. The Secretary shall act as secretary of
the meeting, but in the Secretary's absence the presiding officer may appoint a
secretary of the meeting.
2.7 Action by Consent without Meeting. Any action required or permitted to be
taken at any meeting of the Board or of any Committee thereof may be taken
without a
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meeting if all members of the Board or Committee, as the case may be, consent
thereto in writing and the writing or writings are filed with the minutes of
proceedings of the Board or Committee.
2.8 Standing Committees. By resolution adopted by a majority of the entire
Board, the Board shall elect, from among its members, individuals to serve on
the Standing Committees established by this Section 2.8. Each Standing Committee
shall be comprised of such number of Directors, not less than three, as shall be
elected to such Committee, provided that no officer or employee of the
Corporation shall be eligible to serve on the Audit, Compensation and Personnel
or Nominating Committees. Each Committee shall keep a record of all its
proceedings and report the same to the Board. One-third of the members of a
Committee, but not less than two, shall constitute a quorum, and the act of a
majority of the members of a Committee present at any meeting at which a quorum
is present shall be the act of the Committee. Each Standing Committee shall meet
at the call of its chairman or any two of its members. The chairmen of the
various Committees shall preside, when present, at all meetings of such
Committees, and shall have such powers and perform such duties as the Board may
from time to time prescribe. The Standing Committees of the Board, and functions
of each, are as follows:
(a) Compensation and Personnel Committee. The Compensation and Personnel
Committee shall exercise the power of oversight of the compensation and benefits
of the employees of the Corporation, and shall be charged with evaluating
management performance, and establishing executive compensation. This Committee
shall have access to its own independent outside compensation counsel and shall
consist of a majority of independent directors. For purposes of this Section
2.8(a), "independent director" shall mean a Director who: (i) has not been
employed by the Corporation in an executive capacity within the past five years;
(ii) is not, and is not affiliated with a company or firm that is, an advisor or
consultant to the Corporation; (iii) is not affiliated with a significant
customer or supplier of the Corporation; (iv) has no personal services
contract(s) with the Corporation; (v) is not affiliated with a tax-exempt entity
that receives significant contributions from the Corporation; and (vi) is not a
familial relative of any person described by Clauses (i) through (v). This
By-law shall not be amended or repealed except by a majority of the voting power
of the stockholders present in person or by proxy and entitled to vote at any
meeting at which a quorum is present.
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(b) Audit Committee. The Audit Committee shall recommend the selection of the
independent auditors for the Corporation, confirm the scope of audits to be
performed by such auditors, review audit results and internal accounting and
control procedures and policies, review the fees paid to the Corporation's
independent auditors, and review and recommend approval of the audited financial
statements of the Corporation and the annual reports to stockholders. The Audit
Committee shall also review expense accounts of senior executives.
(c) Finance Committee. The Finance Committee shall have the responsibility
for reviewing capital expenditures and appropriations and maximizing the
effective use of the assets of the Corporation and its subsidiaries. The Finance
Committee shall also have the responsibility for directing investment allocation
and risk management policies.
(d) Legal and Public Affairs Committee. The Legal and Public Affairs
Committee shall review and consider major claims and litigation and legal,
regulatory, intellectual property and related governmental policy matters
affecting the Corporation and its subsidiaries. The Legal and Public Affairs
Committee shall review and approve management policies and programs relating to
compliance with legal and regulatory requirements, business ethics and
environmental matters. The Legal and Public Affairs Committee shall also review
and define the Corporation's social responsibilities, including issues of
significance to the Corporation, its stockholders and its employees.
(e) Nominating Committee. The Nominating Committee shall make recommendations
as to the organization, size and composition of the Board and Committees
thereof, propose nominees for election to the Board and the Committees thereof,
and consider the qualifications, compensation and retirement of Directors.
2.9 Other Committees. By resolution passed by a majority of the entire Board,
the Board may also appoint from among its members such other Committees,
Standing or otherwise, as it may from time to time deem desirable and may
delegate to such Committees such powers of the Board as it may consider
appropriate, consistent with applicable law, the Certificate of Incorporation
and these By-laws.
2.10 Compensation of Directors. Unless otherwise restricted by the
Certificate of Incorporation or these By-laws, Directors shall receive for their
services on the Board or any Committee thereof such compensation and benefits,
including the granting of options, together with
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expenses, if any, as the Board may from time to time determine. The Directors
may be paid a fixed sum for attendance at each meeting of the Board or Committee
thereof and/or a stated annual sum as a Director, together with expenses, if
any, of attendance at each meeting of the Board or Committee thereof. Nothing
herein contained shall be construed to preclude any Director from serving the
Corporation in any other capacity and receiving compensation therefor.
2.11 Independent Directors. (a) Independence of Nominees for Election as
Directors at the Annual Meeting. The persons nominated by the Board for