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<SEC-DOCUMENT>0000948572-99-000004.txt : 19990902
<SEC-HEADER>0000948572-99-000004.hdr.sgml : 19990902
ACCESSION NUMBER: 0000948572-99-000004
CONFORMED SUBMISSION TYPE: 10-K
PUBLIC DOCUMENT COUNT: 2
CONFORMED PERIOD OF REPORT: 19981231
FILED AS OF DATE: 19990326
DATE AS OF CHANGE: 19990901
FILER:
COMPANY DATA:
COMPANY CONFORMED NAME: HARTFORD FINANCIAL SERVICES GROUP INC/DE
CENTRAL INDEX KEY: 0000874766
STANDARD INDUSTRIAL CLASSIFICATION: 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: 99574341
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
FORMER COMPANY:
FORMER CONFORMED NAME: ITT HARTFORD GROUP INC /DE
DATE OF NAME CHANGE: 19930328
</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, 1998
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
6.375% Notes due November 1, 2008
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 26, 1999, there were outstanding 226,826,658 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
$12,180,499,554 based on the closing price of $54.0625 per share of the Common
Stock on the New York Stock Exchange on February 26, 1999.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1999 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 9
3 Legal Proceedings 9
4 Submission of Matters to a Vote of Security Holders 9
PART II 5 Market for The Hartford's Common Stock and Related
Stockholder Matters 9
6 Selected Financial Data 10
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
7A Quantitative and Qualitative Disclosures About Market Risk 44
8 Financial Statements and Supplementary Data 44
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 44
PART III 10 Directors and Executive Officers of The Hartford 44
11 Executive Compensation 44
12 Security Ownership of Certain Beneficial Owners
and Management 44
13 Certain Relationships and Related Transactions 44
PART IV 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 44
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, founded in 1810, is the oldest of The Hartford's
subsidiaries. The Hartford writes insurance and reinsurance in the United States
and internationally. At December 31, 1998, total assets and total stockholders'
equity of The Hartford were $150.6 billion and $6.4 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.
Pursuant to 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") 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 19% of the
equity ownership in HLI and approximately 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% of the equity ownership in HLI and approximately 96% 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, 1998, The Hartford continued to maintain an approximate 81%
equity ownership in HLI.
In connection with the Offering, The Hartford reported a $368 equity 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.
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh")
subsidiary to Norwich Union, a leading provider of general and life insurance in
the United Kingdom. The Hartford received approximately $525, before costs of
sale, and reported an after-tax net realized capital gain of $33 related to the
transaction. The Hartford retained ownership of Excess Insurance Co. Ltd.,
London & Edinburgh's property and casualty insurance and reinsurance subsidiary,
which discontinued writing new business in 1993.
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 Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A").
REPORTING SEGMENTS
The Hartford's reporting segments consist of Commercial, Personal, Reinsurance,
Life, International and Other Operations. While not considered a segment, the
Company also reports results for North American Property & Casualty, which
includes the combined underwriting results of the Commercial, Personal and
Reinsurance segments, along with income and expense items not directly allocable
to these segments, such as net investment income and net realized capital gains
and losses. Other Operations include operations which have ceased writing new
business. Also included in Other Operations is the effect of an approximate 19%
minority interest in HLI's operating results. The following is a description of
each segment, including a discussion of principal products, methods of
distribution and competitive environments. Additional information on The
Hartford's reporting segments may be found in the MD&A on pages 11 to 44 and
Note 17 of Notes to Consolidated Financial Statements.
NORTH AMERICAN PROPERTY & CASUALTY
North American Property & Casualty is the ninth largest property and casualty
insurance operation in the United States based on written premiums for the year
ended December 31, 1997, according to A.M. Best. North American Property &
Casualty generated $7.4 billion in revenues, $6.1 billion in written premiums
and $604 in net income in 1998. Total assets
- 2 -
<PAGE>
for North American Property & Casualty were $21.6 billion as of December 31,
1998.
COMMERCIAL
The Commercial segment provides insurance coverages to commercial accounts
throughout the United States and Canada. Commercial is organized into three
customer markets: 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. The Commercial segment had $3.2
billion in written premiums and a $213 underwriting loss in 1998.
Principal Products
- - ------------------
The Commercial segment offers workers' compensation, property, automobile,
liability, marine, agricultural and bond coverages.
Methods of Distribution
- - -----------------------
The Commercial segment provides insurance products and services through its home
office located in Hartford, Connecticut, and multiple domestic regional and
district office locations and insurance centers. The segment markets its
products nationwide utilizing a variety of distribution networks including the
use of approximately 5,700 independent agents, wholesalers 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.
Competition
- - -----------
The commercial insurance industry is a highly challenging environment in which
the Commercial segment 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
commercial industry. This competitive environment is created by tremendous price
competition, consolidation and globalization of companies, excess capital within
the commercial insurance industry, exploration and utilization of alternative
distribution techniques and emphasis on cost containment and reduction.
PERSONAL
The Hartford ranks among the largest carriers of personal lines insurance. The
Personal segment provides insurance coverages to individuals throughout the
United States. Personal is organized to provide customized products and services
to five markets: the membership of The American Association of Retired Persons
("AARP") through a direct marketing operation; customers who prefer local agent
involvement through a network of independent agents in the standard personal
lines market and in the non-standard automobile market through Omni Insurance
Group, Inc. ("Omni"), which was acquired in 1998; customers of financial
institutions through an affinity center which began in 1996 and customer service
for all health insurance products offered through AARP's Health Care Options
effective January 1, 1998. AARP's exclusive licensing arrangement continues
through the year 2002 for automobile, homeowners and home-based business and
through 2007 for Health Care Options, thus providing the Personal segment with
an important competitive advantage. The Personal segment had $2.2 billion in
written premiums and $77 in underwriting income in 1998.
Principal Products
- - ------------------
The Personal segment provides homeowners, automobile, home-based business and
fire coverages to individuals across North America, including a special program
designed exclusively for members of AARP.
Methods of Distribution
- - -----------------------
The Personal segment reaches diverse markets through multiple distribution
channels. The segment markets directly to the 33 million members of AARP, sells
its products through independent agents and also markets through affinity groups
and financial institutions.
Competition
- - -----------
The personal lines marketplace continues to become increasingly more
competitive, especially in the personal automobile line. The past few years have
produced favorable returns in personal lines, allowing companies to drive prices
down and utilize varied distribution channels to increase marketshare.
Multi-line property and casualty companies are also anxious to grow in the
personal market to bolster the impact of the soft commercial market. In the
absence of renewal price increases, consumer shopping declines, forcing
companies to offer greater price incentives and product features to attract new
prospects. Agency companies wishing to grow are offering agents greater
incentives to move business from competitors in order to increase market share
in a stagnant market.
A major competitive advantage of the Personal segment 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 Personal segment'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.
- 3 -
<PAGE>
REINSURANCE
The Hartford is a major global reinsurer, with operations in the United States,
Canada, the United Kingdom, Spain, Germany, Hong Kong and Taiwan. The
Reinsurance segment had $711 in written premiums and a $36 underwriting loss in
1998.
Principal Products
- - ------------------
The Reinsurance segment offers a full range of treaty and facultative
reinsurance products including property, casualty, marine, fidelity, surety,
finite risk and specialty coverages.
Methods of Distribution
- - -----------------------
The Reinsurance segment assumes insurance from other insurers, primarily through
reinsurance brokers in the worldwide reinsurance market.
Competition
- - -----------
The worldwide property and casualty reinsurance market is extremely competitive.
Deepening soft market conditions make profitable growth difficult to maintain.
Consolidation in the market has created fewer, but stronger competitors.
Finally, nontraditional solutions could reduce demand for traditional
reinsurance products.
LIFE
The Life segment is conducted principally by HLI, a leading financial services
and insurance organization providing investment products such as variable
annuities and mutual funds, individual and corporate owned life insurance and
employee benefits products. Among the fastest growing major life insurance
groups for the past several years, The Hartford's consolidated domestic life
insurance operations are ranked as the fourth largest in the United States based
on statutory assets as of December 31, 1997, according to A.M. Best's latest
available data. Growth in the Life segment's total assets has been primarily
driven by variable annuity sales and equity market appreciation. The Company was
ranked the number one writer of individual variable annuities in the United
States for 1998 according to Variable Annuity and Research Data Service
("VARDS") with a 10% market share. In addition, mutual fund assets of
approximately $2.5 billion at December 31, 1998 were more than double prior year
levels. According to the latest results published by Life Insurance Marketing
and Research Association (LIMRA), the Company was the second largest provider of
group disability insurance in the United States for the nine months ended
September 30, 1998. In addition, in the past year, the Life segment's total
assets have grown 21% to $122.0 billion at December 31, 1998. The Life segment
generated $5.8 billion in revenues and earned $386 in 1998.
The Life segment, headquartered in Simsbury, Connecticut, has the following
reportable operations: Investment Products, Individual Life, Employee Benefits
and Corporate Owned Life Insurance ("COLI"). The Life segment separately reports
its international operations and items that are not directly allocable to any of
its reportable operations in an Other category.
Principal Products
- - ------------------
The Investment Products operation 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 operation reflects the
diverse nature of the market. These products include individual variable
annuities, fixed market value adjusted (MVA) annuities, retail mutual funds,
deferred compensation and retirement plan services, structured settlement
contracts and other special purpose annuity contracts. The Individual Life
Insurance operation, 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. The
Employee Benefits operation sells group life and group disability insurance as
well as other products including stop loss and supplementary medical coverage to
employers and employer sponsored plans. The COLI operation includes life
insurance products sold for funding of other post employment benefits and other
non-qualified benefit programs provided by corporations.
Methods of Distribution
- - -----------------------
The Life segment sells a variety of individual and group financial services and
insurance products primarily through 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 Investment
Products operation primarily distributes through broker-dealers and financial
institutions for individual sales, and through employees of the Company for
institutional sales. Securing an important distribution channel in August 1998,
the Company purchased all of the outstanding shares of PLANCO Financial
Services, Inc. and its affiliate, PLANCO, Incorporated, the nation's largest
wholesaler of annuities. The Individual Life Insurance operation distributes its
products through a sales office system of qualified life insurance professionals
who have access to an extensive network of licensed life insurance agents as
well as through broker-dealers and independent life insurance marketing
organizations. The Employee Benefits operation uses an experienced group of
Company employees managed through a regional sales office system to distribute
its products through a variety of distribution outlets including insurance
agents, brokers, associations and third-party administrators. The COLI operation
uses a group of experienced Company employees who work with specialized brokers
and consultants to distribute its products.
Competition
- - -----------
The Life segment competes with numerous 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 and products offered, customer
service, financial strength ratings
- 4 -
<PAGE>
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. With a 10% market share, the Company
was rated the number one writer of individual variable annuities for 1998
according to VARDS.
INTERNATIONAL
The Hartford's International segment consists primarily of Western European
companies offering a variety of insurance products designed to meet the needs of
local customers. These companies include Zwolsche Algemeene ("Zwolsche"),
located in the Netherlands, Belgium and Luxembourg, ITT Ercos in Spain and,
until its sale by The Hartford in November 1998 as previously discussed, London
& Edinburgh headquartered in the United Kingdom. In January 1998, a 49% interest
in People's Insurance Company Limited ("People's Insurance") in Singapore was
acquired. The International segment generated $1.6 billion in revenues and $92
in net income in 1998. Assets totaled $2.5 billion at December 31, 1998.
Principal Products
- - ------------------
Zwolsche sells property and casualty, life and asset management products and
services. Personal lines products at Zwolsche include automobile,
hospitalization and homeowners. Commercial lines 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 lines property and casualty, and life insurance products. London &
Edinburgh offered both personal and commercial lines property and casualty
insurance. Personal lines included automobile, homeowners and creditor
(including credit life) products. Commercial lines included property and
liability products sold to small to medium-sized clients. London & Edinburgh
also provided marine products within the London market. People's Insurance
writes property and casualty products, primarily automobile.
Methods of Distribution
- - -----------------------
The International segment conducts its business primarily through independent
brokers who are compensated on a commission basis. Zwolsche also distributes, as
did London & Edinburgh until its sale, its 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 with pricing set freely by the market.
OTHER OPERATIONS
The Hartford's Other Operations consist of the property and casualty insurance
operations of The Hartford which have ceased writing new business. These
operations primarily include First State Insurance Company, located in Boston,
Massachusetts, Fencourt and Heritage Reinsurance Companies, Ltd., both
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 systems, or competitive
issues.
Included in Other Operations is the effect of an approximate 19% 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 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 $423 and $449 as of December 31, 1998
and 1997, respectively, and amortization of the discount had no material effect
on net income during 1998, 1997 and 1996, respectively.
- 5 -
<PAGE>
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, [1]
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Liabilities for unpaid claims and
claim adjustment expenses [2] $8,052 $8,506 $9,045 $9,346 $10,630 $10,843 $10,920 $11,229 $12,412 $12,453 $12,662
CUMULATIVE PAID CLAIMS AND CLAIM
EXPENSES
One year later 2,192 2,441 2,619 2,727 2,639 2,625 2,709 2,489 2,622 2,526 --
Two years later 3,543 3,983 4,383 4,400 4,333 4,266 4,247 4,088 4,163 -- --
Three years later 4,591 5,217 5,538 5,606 5,493 5,336 5,361 5,148 -- -- --
Four years later 5,491 6,009 6,377 6,457 6,294 6,184 6,120 -- -- -- --
Five years later 6,072 6,619 7,017 7,086 6,964 6,758 -- -- -- -- --
Six years later 6,553 7,111 7,515 7,637 7,425 -- -- -- -- -- --
Seven years later 6,956 7,516 7,973 8,024 -- -- -- -- -- -- --
Eight years later 7,309 7,905 8,318 -- -- -- -- -- -- -- --
Nine years later 7,649 8,220 -- -- -- -- -- -- -- -- --
Ten years later 7,941 -- -- -- -- -- -- -- -- -- --
LIABILITIES REESTIMATED
One year later 8,204 8,860 9,299 10,659 10,876 10,945 11,173 12,179 12,364 12,276 --
Two years later 8,390 8,987 10,622 10,980 11,092 11,148 12,289 12,162 12,245 -- --
Three years later 8,499 10,254 10,918 11,209 11,309 12,227 12,262 12,088 -- -- --
Four years later 9,777 10,533 11,198 11,534 12,425 12,280 12,250 -- -- -- --
Five years later 10,081 10,775 11,533 12,628 12,518 12,309 -- -- -- -- --
Six years later 10,318 11,147 12,617 12,747 12,576 -- -- -- -- -- --
Seven years later 10,713 12,206 12,713 12,863 -- -- -- -- -- -- --
Eight years later 11,753 12,302 12,835 -- -- -- -- -- -- -- --
Nine years later 11,836 12,439 -- -- -- -- -- -- -- -- --
Ten years later 11,987 -- -- -- -- -- -- -- -- -- --
DEFICIENCY (REDUNDANCY) $3,935 $3,933 $3,790 $3,517 $1,946 $1,466 $1,330 $859 $(167) $(177) $--
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS
FOR THE YEARS ENDED DECEMBER 31, [1]
1993 1994 1995 1996 1997 1998
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
NET RESERVE [2] $10,843 $10,920 $11,229 $12,412 $12,453 $12,662
Reinsurance recoverables 5,339 5,107 4,858 4,328 4,005 3,286
- - ------------------------------------------------------------------------------------------------------------------------------------
GROSS RESERVE $16,182 $16,027 $16,087 $16,740 $16,458 $15,948
- - ------------------------------------------------------------------------------------------------------------------------------------
NET REESTIMATED RESERVE $12,309 $12,250 $12,088 $12,245 $12,276
Reestimated reinsurance 5,899 5,618 5,062 4,221 3,968
recoverables
- - ------------------------------------------------------------------------------------------------------------------------------------
GROSS REESTIMATED RESERVE $18,208 $17,868 $17,150 $16,466 $16,244
- - ------------------------------------------------------------------------------------------------------------------------------------
GROSS DEFICIENCY/(REDUNDANCY) $2,026 $1,841 $1,063 $(274) $(214)
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] The above tables have been restated to exclude London & Edinburgh as a
result of its sale on November 16, 1998.
[2] 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.
</FN>
</TABLE>
<TABLE>
<CAPTION>
1993 1994 1995 1996 1997 1998
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Liabilities, net and gross of reinsurance for
unpaid claims and claim adjustment expenses $504 $495 $550 $500 $505 $501
excluded
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
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.
</FN>
</TABLE>
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
- 6 -
<PAGE>
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 also include unearned premiums, premium deposits, claims incurred but
not reported and claims reported but not yet paid. 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 accounting
practices.
CEDED REINSURANCE
Consistent 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.
Consistent 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, 1998, 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 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 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 3 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 that 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
- 7 -
<PAGE>
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 that 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. The Monetary Authority of
Singapore, the regulatory body in Singapore, does not currently allow foreign
companies to own a majority share of local companies.
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, 1999.
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 1999
Proxy Statement. In addition to those executive officers who are listed in the
1999 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"):
JOSEPH H. GAREAU, 52, 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
- 8 -
<PAGE>
Fire. Mr. Gareau was elected Vice President of Hartford Fire in 1987.
JOHN N. GIAMALIS, 41, has been Senior Vice President and Controller of The
Hartford since December 1998. He joined The Hartford in January 1997,
functioning as Vice President and Corporate Controller and Director of Corporate
Financial Reporting and Analysis. Prior to joining The Hartford, Mr. Giamalis
held senior financial positions in the insurance and technology industries and
served in public accounting as Senior Manager with Deloitte & Touche.
HELEN G. GOODMAN, 58, has been Senior Vice President, Human Resources of
Hartford Fire since 1994 and became Group 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, 55, has been Senior Vice President, Corporate Relations and
Government Affairs of Hartford Fire since 1993 and became Group 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.
MICHAEL S. WILDER, 57, has been Senior Vice President of Hartford Fire since
1987 and General Counsel of Hartford Fire since 1975. He became Group 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 218 thousand square feet of office space in the Netherlands,
12 thousand square feet in Spain, 7 thousand square feet in Singapore and 600
square feet of office space in the United Kingdom. In addition, The Hartford
leases approximately 5.0 million square feet throughout the United States and 24
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, after consideration
of provisions made for potential losses and costs of defense, 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".
On May 21, 1998, the Board of Directors authorized a two-for-one stock split
effected in the form of a 100% stock dividend distributed on July 15, 1998 to
shareholders of record as of June 24, 1998. 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, restated
to reflect the effect of the stock split.
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- - -------------------------- --------- --------- --------- --------
1998
Common Stock Price
High $54.56 $57.50 $59.56 $57.75
Low 44.75 52.38 44.75 38.19
Dividends Declared 0.21 0.21 0.21 0.22
- - -------------------------- --------- --------- --------- --------
1997
Common Stock Price
High $40.38 $43.13 $44.00 $46.78
Low 32.81 34.31 39.88 39.72
Dividends Declared 0.20 0.20 0.20 0.20
- - -------------------------- --------- --------- --------- --------
As of February 26, 1999, there were approximately 55,000 shareholders of record.
On October 15, 1998, The Hartford's Board of Directors approved a 5% increase in
the quarterly dividend to $0.22 per share. Dividend decisions will be based on
and affected by a number of factors, including the operating results and
financial requirements of The Hartford and the impact of regulatory restrictions
discussed in the Capital Resources and Liquidity section of the MD&A under
"Liquidity Requirements".
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".
- 9 -
<PAGE>
<TABLE>
<CAPTION>
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS)
1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA
Total revenues [1] $ 15,022 $ 13,461 $ 12,577 $ 12,247 $ 11,249
Income (loss) before cumulative effect of
accounting changes [2] 1,015 1,332 (99) 559 632
Net income (loss) [2] [3] 1,015 1,332 (99) 559 644
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 150,632 $ 131,743 $ 108,840 $ 93,855 $ 76,765
Long-term debt and redeemable preferred stock 1,548 1,482 1,032 1,022 682
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 1,250 1,000 1,000 -- --
Total stockholders' equity 6,423 6,085 4,520 4,702 3,184
- - ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE DATA [4] [5]
BASIC EARNINGS PER SHARE
Income (loss) before cumulative effect of
accounting changes [2] $ 4.36 $ 5.64 $ (0.42) $ 2.39 $ 2.70
Net income (loss) [2] [3] 4.36 5.64 (0.42) 2.39 2.75
DILUTED EARNINGS PER SHARE
Income (loss) before cumulative effect of
accounting changes [2] 4.30 5.58 (0.42) 2.37 2.68
Net income (loss) [2] [3] 4.30 5.58 (0.42) 2.37 2.74
DIVIDENDS DECLARED PER COMMON SHARE [6] 0.85 0.80 0.80 3.33 0.97
- - ------------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [7] 102.9 102.3 105.2 104.5 102.5
Worldwide Property & Casualty [7] [8] 103.7 103.6 105.0 103.6 100.9
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Certain reclassifications to prior periods have been made to conform to the
current period presentation. Also, 1998 includes $624 related to the
recapture of an in force block of COLI business from MBL Life Assurance Co.
of New Jersey.
[2] 1997 includes an equity gain of $368, or $1.56 basic/$1.54 diluted earnings
per share, resulting from the initial public offering of HLI. 1996 includes
other charges of $693, after-tax, or $2.96 basic/diluted earnings per
share, consisting primarily of environmental and asbestos reserve increases
and recognition of losses on guaranteed investment contract business (for
additional information, see MD&A).
[3] 1994 includes $12, after-tax, or $0.05 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.
[4] On May 21, 1998, the Board of Directors of The Hartford Financial Services
Group, Inc. declared a two-for-one stock split effected in the form of a
100% stock dividend distributed on July 15, 1998 to shareholders of record
as of June 24, 1998. Share and per share data have been restated to reflect
the effect of the split.
[5] Actual number of weighted average common shares outstanding at December 31,
1995 of 234.2 and actual number of weighted average common shares
outstanding and dilutive potential common shares at December 31, 1995 of
235.4 are retroactively presented for all prior periods.
[6] Prior to the Distribution on December 19, 1995, dividends that The Hartford
declared were paid to ITT, which then paid dividends to its shareholders.
[7] 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 North American Property & Casualty (for additional
information, see MD&A) and 114.6 for Worldwide Property & Casualty.
[8] Combined ratios exclude the results of the Other Operations segment for all
periods presented.
</FN>
</TABLE>
Outlined in the table below are U.S. Industry Combined Ratios for each of the
five years ended December 31:
<TABLE>
<CAPTION>
1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
U.S. Industry Combined Ratios [a] 105.0 101.8 105.9 106.4 108.4
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[a] U.S. Industry Combined Ratio information obtained from A.M. Best. Combined
ratio for 1998 is an A.M. Best estimate prepared as of January 1999.
</FN>
</TABLE>
- 10 -
<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 ("MD&A") addresses the financial condition of The Hartford Financial
Services Group, Inc. and its subsidiaries ("The Hartford" or the "Company") as
of December 31, 1998, compared with December 31, 1997, and its results of
operations for the three years ended December 31, 1998, 1997 and 1996. This
discussion 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. 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
Consolidated Results of Operations: Operating Summary 11
North American Property & Casualty 13
Commercial 14
Personal 15
Reinsurance 16
Life 17
International 20
Other Operations 22
Reserves 23
Environmental and Asbestos Claims 23
Investments 25
Capital Markets Risk Management 28
Capital Resources and Liquidity 39
Regulatory Initiatives and Contingencies 41
Effect of Inflation 43
Accounting Standards 43
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
<TABLE>
<CAPTION>
OVERVIEW
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums and other considerations $ 11,616 $ 10,479 $ 10,180
Net investment income 3,102 2,655 2,523
Net realized capital gains (losses) 304 327 (126)
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 15,022 13,461 12,577
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 8,613 7,977 8,942
Amortization of deferred policy acquisition costs and other expenses 4,934 4,149 3,953
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 13,547 12,126 12,895
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1,475 1,335 (318)
Equity gain on HLI initial public offering -- 368 --
- - ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 1,475 1,703 (318)
Income tax expense (benefit) 388 334 (219)
- - ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 1,087 1,369 (99)
Minority interest in consolidated subsidiary (72) (37) --
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 1,015 1,332 (99)
Less: Net realized capital gains, after-tax [1] 199 215 57
Other items, after-tax -- 368 (693)
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 816 $ 749 $ 537
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] 1996 excludes GIC (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 (for additional information,
see Note 16 of Notes to Consolidated Financial Statements) and certain other
items. Core earnings is an internal performance measure used by the Company in
the management of its operations. Management believes that this performance
measure delineates the results of operations of the Company's ongoing businesses
in a manner that allows for a better understanding of the underlying trends in
the Company's current business. However, core earnings should only be analyzed
in conjunction with, and not in lieu of, net income and may not be comparable to
other performance measures used by the Company's competitors.
- 11 -
<PAGE>
Revenues for 1998 increased $1.6 billion, or 12%, from 1997. This improvement
was due primarily to higher aggregate fees earned on growth in account values in
the Investment Products and Individual Life operations resulting from strong
sales and equity market appreciation, the recapture of an in force block of
corporate owned life insurance ("COLI") business (referred to as "MBL
Recapture") previously ceded to MBL Life Assurance Co. of New Jersey ("MBL
Life"), an increase in earned premiums and service fee revenues in the Personal
segment and higher net investment income. Partially offsetting these increases
were lower net realized capital gains. In addition, revenues for 1998 also
increased as a result of proceeds from the sale of renewal rights and other
considerations related to the Industrial Risk Insurance pool ("IRI
transaction"). (For an analysis of net investment income and net realized
capital gains, see the Investments section.)
In 1998, core earnings increased $67, or 9%, from 1997 primarily due to an
increase in fees earned resulting from growth in account values in the
Investment Products and Individual Life operations due to strong sales and
equity market appreciation, an increase in net other considerations, primarily
as a result of the IRI transaction, and higher net investment income. Partially
offsetting these increases were a decrease in underwriting results, primarily
the result of higher catastrophe losses, as well as an increase in other
non-underwriting expenses.
Revenues for 1997 increased $884, or 7%, from 1996. The growth was primarily due
to increases in fee income earned on separate account assets, higher group life
and disability sales and premium growth in the Reinsurance segment and business
written under an exclusive licensing arrangement with The American Association
of Retired Persons ("AARP"). Partially offsetting this increase was a decrease
in 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 net realized capital gains also
contributed to the revenue increase.
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 Investment Products operation, the
reduction of incurred environmental and asbestos losses and a reduction of
losses on guaranteed investment contract ("GIC") business. Soft market
conditions related to automobile insurance in the United Kingdom and increased
debt service costs partially offset the increase.
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 2 of Notes to
Consolidated Financial Statements and Capital Resources and Liquidity section
under "The Offering".)
Net income for 1996 includes other charges related to environmental and asbestos
reserve increases, net of taxes, of $429 in North American Property & Casualty
and $81 in Other Operations (as discussed in the Environmental and Asbestos
Claims section), recognition of losses on GIC business of $169 (as discussed in
the Life section) and other, primarily foreign tax-related items, of $2 in each
of North American Property & Casualty and the Life segment and $10 in Other
Operations.
INCOME TAXES
The effective tax rates for 1998, 1997 and 1996 were 26%, 25% and 20%,
respectively, excluding the impact of other items, as discussed above, 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 pre-tax
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 1998, 1997 and 1996 were $407,
$(37) and $170, 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 approximate 19%
minority interest in HLI's operating results. (For additional information, see
Note 2 of Notes to Consolidated Financial Statements and Capital Resources and
Liquidity section under "The Offering".)
PER COMMON SHARE
On May 21, 1998, the Board of Directors authorized a two-for-one stock split
effected in the form of a 100% stock dividend distributed on July 15, 1998 to
shareholders of record as of June 24, 1998. The following table represents per
common share data, restated to reflect the effect of the stock split, and return
on equity for the past three years:
1998 1997 1996
- - -----------------------------------------------------------------
Basic earnings per share $4.36 $5.64 ($0.42)
Weighted average common shares
outstanding 232.8 236.0 234.5
Diluted earnings per share $4.30 $5.58 ($0.42)
Weighted average common shares
outstanding and dilutive potential
common shares 236.2 238.9 234.5
Return on equity [1] 18.7% 28.3% (2.3)%
- - -----------------------------------------------------------------
[1] 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.
- 12 -
<PAGE>
SEGMENT RESULTS
The Hartford's reporting segments consist of Commercial, Personal, Reinsurance,
Life, International and Other Operations. While the measure of profit or loss
used by The Hartford's management in evaluating performance is core earnings for
the Life, International and Other Operations segments, the Commercial, Personal
and Reinsurance segments are evaluated by The Hartford's management primarily
based upon underwriting results. While not considered a segment, the Company
also reports and evaluates core earnings results for North American Property &
Casualty, which include the combined underwriting results of the Commercial,
Personal and Reinsurance segments, along with income and expense items not
directly allocable to these segments such as net investment income and net
realized capital gains and losses. Other Operations include operations which
have ceased writing new business. Also, included in Other Operations is the
effect of an approximate 19% minority interest in HLI's operating results.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided and capital contributions. Certain reinsurance stop loss agreements
exist between the segments which specify that one segment will reimburse another
for losses incurred in excess of a predetermined limit. Also, one segment may
purchase group annuity contracts from another to fund pension costs and claim
annuities to settle casualty claims.
The following is a summary of underwriting results by segment within North
American Property & Casualty.
1998 1997 1996
- - -----------------------------------------------------------------
Commercial $ (213) $ (149) $ (206)
Personal 77 37 (110)
Reinsurance (36) (14) (10)
- - -----------------------------------------------------------------
TOTAL [1] $ (172) $ (126) $ (326)
- - -----------------------------------------------------------------
[1] 1996 excludes the impact of a $660, before-tax, environmental and asbestos
charge.
The following is a summary of core earnings and net income (loss).
CORE EARNINGS 1998 1997 1996
- - -----------------------------------------------------------------
N. A. Property & Casualty $ 457 $ 433 $ 270
Life 386 306 200
International 42 46 79
Other Operations (69) (36) (12)
- - -----------------------------------------------------------------
CORE EARNINGS $ 816 $ 749 $ 537
- - -----------------------------------------------------------------
NET INCOME (LOSS) 1998 1997 1996
- - -----------------------------------------------------------------
N. A. Property & Casualty $ 604 $ 583 $ (151)
Life 386 306 24
International 92 110 127
Other Operations [1] (67) 333 (99)
- - -----------------------------------------------------------------
NET INCOME (LOSS) $ 1,015 $ 1,332 $ (99)
- - -----------------------------------------------------------------
[1] 1997 includes a $368 equity gain resulting from the initial public offering
of HLI.
A description of North American Property & Casualty, along with each reporting
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.
<TABLE>
<CAPTION>
NORTH AMERICAN PROPERTY & CASUALTY
OPERATING SUMMARY
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Underwriting revenue
Earned premiums $ 6,006 $ 5,704 $ 5,657
Other considerations [1] 363 156 104
Net investment income 824 777 661
Net realized capital gains 231 231 15
- - ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 7,424 6,868 6,437
--------------------------------------------------------------------------------------------------------------------------
Underwriting expenses
Benefits, claims and claim adjustment expenses 4,287 4,069 4,994
Amortization of deferred policy acquisition costs and other
underwriting expenses 1,891 1,761 1,649
Other non-underwriting expenses 486 311 193
- - ------------------------------------------------------------------------------------------------------------------------------------
Total benefits, claims and expenses 6,664 6,141 6,836
--------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 760 727 (399)
Income tax expense (benefit) 156 144 (248)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 604 583 (151)
Less: Net realized capital gains, after-tax 147 150 10
Other items, after-tax [2] -- -- (431)
- - ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 457 $ 433 $ 270
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Other considerations represent servicing fee revenues and for 1998, $55 of
proceeds related to the IRI transaction.
[2] Other items include environmental and asbestos reserve increases, net of
taxes, of $429 and other, primarily foreign tax-related items, of $2.
</FN>
</TABLE>
As discussed above, The Hartford's management reviews and evaluates the
performance of the three segments within North American Property & Casualty,
Commercial, Personal and Reinsurance, primarily on an underwriting results
basis. The
- 13 -
<PAGE>
combined underwriting results, along with items not directly allocable to the
individual segments, are used in determining net income and core earnings of
North American Property & Casualty. Items not directly allocable to the
individual segments include net investment income, net realized capital gains
and losses, other non-underwriting expenses, income taxes and certain other
items.
The following is a summary of North American Property & Casualty core earnings
by major component after-tax. Core earnings exclude net realized capital gains
and other items.
1998 1997 1996
- - ----------------------------------------------------------------
Underwriting results [1] $ (112) $ (82) $ (212)
Net other considerations 52 3 15
Net investment income 656 619 531
Interest and other non-
underwriting expenses [2] (139) (107) (64)
- - ----------------------------------------------------------------
CORE EARNINGS $ 457 $ 433 $ 270
- - ----------------------------------------------------------------
[1] 1996 excludes the impact of a $429, after-tax, environmental and asbestos
charge.
[2] Excludes expenses related to other considerations.
Underwriting results are discussed in each of the Commercial, Personal and
Reinsurance segment sections. Net investment income is discussed in the
Investments section.
Core earnings in 1998 for North American Property & Casualty were $457, an
increase of $24, or 6%, from 1997. The increase was primarily due to a $37, or
6%, increase in net investment income and a $49 increase in net other
considerations (primarily as a result of the IRI transaction), partially offset
by a $30, or 37%, decrease in after-tax underwriting results and a $32, or 30%,
increase in interest and other non-underwriting expenses.
Core earnings in 1997 for North American Property & Casualty 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 net investment income, partially offset by a $12, or 80%, decrease
in net other considerations and a $43, or 67%, increase in interest and other
non-underwriting expenses.
Interest and other non-underwriting expenses increased $32 in 1998 from 1997 and
$43 in 1997 from 1996, on an after-tax basis. The increase in 1998 was primarily
the result of an increase in certain corporate benefit and outside services
expenses, while the 1997 increase was primarily the result of increased debt
costs from additional borrowings and a reallocation of debt costs to North
American Property & Casualty.
<TABLE>
<CAPTION>
COMMERCIAL
OPERATING SUMMARY
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Written premiums $ 3,188 $ 3,190 $ 3,253
- - ----------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 3,222 $ 3,190 $ 3,293
Benefits, claims and claim adjustment expenses 2,250 2,225 2,380
Amortization of deferred policy acquisition costs and other
underwriting expenses 1,185 1,114 1,119
- - -------------------------------------------------------------------------------- -------------------------------------------------
UNDERWRITING RESULTS $ (213) $ (149) $ (206)
------------------------------------------------------------------------------------------------------------------------
Combined ratio 106.2 104.5 105.8
- - ----------------------------------------------------------------------------------------------------------------------------------
Other considerations [1] $ 163 $ 97 $ 104
- - ----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Other considerations represent fee revenues earned on servicing businesses
and for 1998, included $55 of proceeds related to the IRI transaction.
</FN>
</TABLE>
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 markets: 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 slightly in 1998 compared to 1997. Solid premium
growth in the small commercial businesses, Select Customer and Commercial
Affinity, as well as in the bond and agricultural lines, totaled 11% in 1998
compared to 1997. These growth businesses represented 42% of the Commercial
segment's written premiums and contributed 4% to the segment's total written
premium growth. Enhanced product offerings, specific geographic expansion
strategies and partnerships with other entities were the primary drivers of
these growth businesses. These increases, however, were offset by declines in
the middle and large national account businesses primarily due to intense price
competition in the casualty lines, where disciplined underwriting allowed
business to move to other carriers rather than under pricing in order to
- 14 -
<PAGE>
retain accounts. In addition, the disposal of IRI in early 1998 and another unit
in late 1997, with combined written premiums of $53 in 1997, contributed to the
lack of growth in the Commercial segment. Excluding the impact of the disposed
businesses, 1998 total Commercial written premiums would have increased 2% over
1997.
Underwriting results decreased $64, or 1.7 combined ratio points, in 1998 as
compared with 1997. Increases in property catastrophe losses of $70, or 2.1
combined ratio points, were the primary factor in the decline, as catastrophe
experience was worse in 1998 as compared to the highly favorable experience in
the prior year. In addition, intense price competition in the mid and
large-sized marketplace has resulted in reduced profit margins, as decreases in
rate and price, particularly in the workers' compensation line, have outpaced
loss cost savings. The Commercial segment, however, does continue to experience
the benefit of its extensive cost containment strategies which mitigate the rate
and price pressure on underwriting results.
Written premiums decreased $63, or 2%, in 1997 compared with 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 the segment's total
written 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 1997, underwriting results improved $57, or 1.3 combined ratio points,
compared with the prior year. 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. Also, favorable loss and loss expense development
trends, particularly in workers' compensation and other casualty lines, were
generated through the execution of the segment's total cost containment strategy
which included 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 premiums from large national accounts.
OUTLOOK
Difficult market conditions and intense price competition within many markets of
the commercial sector are likely to continue into the foreseeable future. The
combined effects of excess capital, decreasing demand and new forms of
competition have particularly impacted the mid-to-large commercial accounts
markets over the past few years. In response to these conditions, the Commercial
segment has undertaken several major strategic actions, with many completed in
1998. Pricing actions in the mid-to-large account marketplace were initiated
during 1998 and are expected to have a positive impact on profitability in 1999.
Strategic alliances have been formed with several major national and regional
banks, insurance and other companies to market commercial products to their
customers. Investments in such areas as advertising, product research and
development, technology and staff training have continued, in an effort to
heighten brand awareness, increase product offerings, further develop
alternative distribution channels and improve productivity. Management believes
the result of these and other actions taken may counterbalance the negative
external factors in the commercial market and position the Commercial segment
for improved written premium growth in 1999 and beyond, while maintaining core
profitability.
<TABLE>
<CAPTION>
PERSONAL
OPERATING SUMMARY
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Written premiums $ 2,220 $ 1,893 $ 1,864
- - ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 2,068 $ 1,869 $ 1,835
Benefits, claims and claim adjustment expenses 1,477 1,371 1,555
Amortization of deferred policy acquisition costs and other
underwriting expenses 514 461 390
- - ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ 77 $ 37 $ (110)
--------------------------------------------------------------------------------------------------------------------------
Combined ratio 97.1 98.6 105.2
- - ------------------------------------------------------------------------------------------------------------------------------------
Other considerations [1] $ 200 $ 59 $ --
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Other considerations represent service fee revenues earned on AARP's Health
Care Options (discussed below).
</FN>
</TABLE>
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 five markets: the membership of AARP through
a direct marketing operation; customers who prefer local agent involvement
through a network of independent agents in the standard personal lines market
and in the non-standard automobile market through Omni Insurance Group, Inc.
("Omni"), which was acquired in 1998; customers of financial institutions
through an affinity center which began in 1996 and is building from the AARP
operation competencies; and customer service for all health insurance products
offered through AARP's Health Care Options effective January 1, 1998. AARP's
exclusive licensing arrangement continues through the year 2002 for automobile,
homeowners and home-based business and through 2007 for
- 15 -
<PAGE>
Health Care Options, thus providing the Personal segment with an important
competitive advantage.
Written premiums increased $327, or 17%, in 1998 compared with 1997. The
acquisition of Omni accounted for $167, or 9%, of the written premiums increase.
As of December 31, 1998, non-standard auto coverage through Omni was available
in 19 states compared with 13 states at the time of acquisition. Favorable
underwriting experience was passed through to AARP members in reduced rates, and
the program posted a written premiums increase of $65, or 5%, contributing 3% to
the segment's total written premium growth in 1998. Agency experienced
substantial premium growth improvement in 1998 with an increase of $67, or 11%,
contributing 4% to the segment's total written premium growth. A primary driver
of this premium growth was the strategic shift from homeowners to automobile
coverages which began in 1997. The Affinity unit, which is still in a start-up
phase, experienced growth of $28, or 105%, in 1998, contributing 1% to the
segment's total written premium growth.
Underwriting results improved by $40, with a corresponding 1.5 point improvement
in the combined ratio, in 1998 compared with 1997. The combined ratio decrease
resulted from loss cost improvements in automobile and homeowners from expanded
cost containment initiatives, effecting the combined ratio by 3.8 points.
Offsetting this improvement were significantly higher property catastrophes in
1998 of $71 compared to $32 in 1997, impacting the combined ratio by 1.8 points,
and increased underwriting expenses impacting the combined ratio by 0.5 points.
Property catastrophe and other severe weather-related experience was unusually
low in 1997. The increase in underwriting expenses was primarily from
investments in growth initiatives, acquisition costs related to premium growth
and from investment in the Affinity unit start-up organization, partially offset
by lower dividends to policyholders.
Written premiums increased $29, or 2%, in 1997 compared to 1996 due primarily to
strong growth in AARP premiums of $78, or 7%, contributing 4% to the segment's
total written premium growth, which benefited from the favorable expansion of
this demographic group. Partially offsetting the increase in AARP was a decline
in Agency premiums of $49, or 7%, contributing a reduction of 3% to the
segment's total written premiums. The Agency 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. AARP written premiums of $1.3 billion
represented 67% of the 1997 Personal premiums, up from 64% in 1996.
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.
OUTLOOK
Intense competition in the personal markets will remain in the foreseeable
future, primarily in the personal automobile line. Several major strategic
actions have been initiated over the past two years, with many completed in
1998. Aggressive entry into and subsequent expansion in the non-standard
personal automobile insurance market through the acquisition of Omni, in early
1998, provides the Personal segment with a highly-regarded and well-established
franchise as a leverage for future growth. (For additional information, see the
Capital Resources and Liquidity section under "Omni".) Strategic alliances have
been formed with several major national and regional banks to market personal
products to their customers. The Hartford Customer Services Group contracted
with AARP to service its group health insurance plan partners and recipients
beginning January 1, 1998. Investments in such areas as advertising, product
research and development, agency relations, technology and staff training have
continued, in an effort to heighten brand awareness, increase product offerings,
further develop alternative distribution channels and improve productivity. As a
result of these and other actions taken, management believes the Personal
segment is positioned for continued written premium growth increases in 1999 and
beyond, while maintaining core profitability.
<TABLE>
<CAPTION>
REINSURANCE
Operating Summary
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Written premiums $ 711 $ 688 $ 571
- - ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 716 $ 645 $ 529
Benefits, claims and claim adjustment expenses 560 473 399
Amortization of deferred policy acquisition costs and other
underwriting expenses 192 186 140
- - ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (36) $ (14) $ (10)
--------------------------------------------------------------------------------------------------------------------------
Combined ratio 105.7 102.6 102.1
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 16 -
<PAGE>
The Hartford assumes reinsurance worldwide through its ten Hartford Reinsurance
Company ("HartRe") offices located in Hartford, San Francisco, Miami,
Philadelphia, Toronto, London, Madrid, Munich, Hong Kong and Taipei. HartRe
primarily writes treaty reinsurance through professional reinsurance brokers
covering various property, casualty, specialty and marine classes of business.
Written premiums increased $23, or 3%, in 1998 primarily due to the acquisition
of renewal rights for the reinsurance business of a large Italian insurance
company and a significant single finite risk account. Partially offsetting these
increases were reductions in North American and European premiums caused by rate
reductions arising from market conditions and the impact of unfavorable foreign
exchange rates on Hong Kong premiums. Written premiums increased $117, or 20%,
in 1997 primarily due to the acquisition in late 1996 of renewal rights for the
business of Security Re and San Francisco Re.
Underwriting results for 1998 decreased $22, or 3.1 combined ratio points, from
1997 due primarily to the impact of higher net property catastrophe losses of
$47, which were somewhat offset by increased new business premiums in finite
casualty which has a lower combined ratio than traditional casualty lines.
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.
OUTLOOK
The reinsurance market is highly competitive and prices remain relatively soft
in most product lines in most parts of the world. While HartRe remains focused
on its long-term goals, the discipline of writing profitable business will be
maintained, even at the expense of premium growth. On a positive note,
responsible buyers are looking to establish core relationships with a select
group of financially strong reinsurers which possess specialized product and
geographic spread, service capabilities, and expertise. HartRe stands ready to
capitalize on these strengths in view of the changing marketplace.
<TABLE>
<CAPTION>
LIFE
OPERATING SUMMARY [1]
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums and other considerations $ 3,833 $ 3,163 $ 3,069
Net investment income 1,955 1,536 1,530
Net realized capital losses -- -- (219)
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 5,788 4,699 4,380
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 3,227 2,671 2,727
Amortization of deferred policy acquisition costs and other expenses 1,976 1,548 1,622
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 5,203 4,219 4,349
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 585 480 31
Income tax expense 199 174 7
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 386 306 24
Less: Net realized capital losses, after-tax [2] -- -- (5)
Other items, after-tax [3] -- -- (171)
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 386 $ 306 $ 200
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Life results are presented before the effect of an approximate 19% minority
interest in HLI, which is reflected in Other Operations.
[2] 1996 excludes GIC (discussed below) net realized capital losses of $137,
after-tax, which is included in other items.
[3] Other items primarily consist of a $169, after-tax, third quarter 1996 loss
in GIC.
</FN>
</TABLE>
The Life segment consists of the following reportable operations: Investment
Products, Individual Life, Employee Benefits and COLI. The Life segment includes
in an Other category its international operations, which are primarily located
in Latin America, and corporate items not directly allocable to any of its
reportable operations.
On May 22, 1997, HLI, the holding company parent of The Hartford's significant
life subsidiaries, completed the initial public offering of approximately 19% of
its common stock. (For additional information, see Capital Resources and
Liquidity section under "The Offering".)
Revenues increased $1.1 billion, or 23%, to $5.8 billion in 1998 from $4.7
billion in 1997. The increase was due to the continued growth of revenues in the
Investment Products operation of $274 and the Individual Life operation of $57
as a result of higher aggregate fees earned on growth in account values due to
strong sales and equity market appreciation. Additionally, revenues in the COLI
operation increased $587 primarily due to the fourth quarter of 1998 recapture
of an in force block of COLI business previously ceded to MBL Life. Higher
revenues in the Employee Benefits operation of $109, primarily due to strong
sales and renewals, also contributed to the revenue increase.
Core earnings increased $80, or 26%, to $386 in 1998 from $306 in 1997,
primarily as a result of an increase in earnings in the Investment Products
operation of $64 and in the Individual Life operation of $9, both of which were
driven by fees earned on increased separate account assets due to strong sales
and equity market appreciation. Additionally, earnings in the
- 17 -
<PAGE>
Employee Benefits operation increased $13 principally due to an increase in
group insurance revenue and favorable mortality and morbidity experience.
Revenues increased $319, or 7%, to $4.7 billion in 1997 from $4.4 billion in
1996. The growth was primarily due to the Investment Products operation where
revenues increased $503 in 1997 from 1996 as a result of fee income earned on
growth in separate account assets due to strong annuity sales and equity market
appreciation. Investment Products revenues were also impacted by the segment's
GIC business, where revenues increased $205, primarily as a result of net
realized capital losses in the third quarter of 1996. Additionally, strong sales
and renewals related to the Employee Benefits operation contributed $237 to the
revenue growth. Partially offsetting these increases was a decrease in COLI
revenues of $380 due to the HIPA Act of 1996, which virtually eliminated all new
sales of leveraged COLI.
Core earnings increased $106, or 53%, to $306 in 1997 from $200 in 1996,
primarily as a result of an increase in earnings in the Investment Products
operation of $107. This growth was the result of increased earnings of $51 from
individual annuity products which was driven by fees earned on an increase in
total account value due to strong sales and equity market appreciation, as well
as a reduction in losses of $50 in the GIC business as a result of actions taken
in the third quarter of 1996. Earnings in the Employee Benefits operation
increased $13 principally due to growth in group insurance revenue and favorable
mortality and morbidity experience. In addition, earnings in the Individual Life
operation increased $12 due to fees earned on total account value which grew due
to strong sales and equity market appreciation. Partially offsetting these
increases was a decrease in core earnings of $27 in Other due primarily to an
increase in capital allocated to the operations, 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".) In addition, the 1997 results were impacted by a $6
operating loss related to the Life segment's international operations.
<TABLE>
<CAPTION>
SUMMARY RESULTS
1998 1997 1996
--------------------------------- ---------------------------------- ----------------------------------
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>
Investment Products $ 1,784 $ 266 $ 266 $ 1,510 $ 202 $ 202 $ 1,007 $ 95 $ (79)
Individual Life 567 65 65 510 56 56 472 44 44
Employee Benefits 1,809 71 71 1,700 58 58 1,463 45 45
Corporate Owned Life
Insurance 1,567 24 24 980 27 27 1,360 26 26
Other 61 (40) (40) (1) (37) (37) 78 (10) (12)
- - ------------------------------------------------------------------------------------------------------------------------------------
Total $ 5,788 $ 386 $ 386 $ 4,699 $ 306 $ 306 $ 4,380 $ 200 $ 24
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Core earnings represent after-tax operational results excluding, as
applicable, net realized capital gains or losses and certain other items,
primarily GIC charges in 1996.
</FN>
</TABLE>
The following describes each operation, including products and services offered,
and analyzes the above results.
Investment Products
- - -------------------
The Investment Products operation focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired through the sale of individual annuities and other investment
products. The individual annuity products offered include individual variable
annuities, fixed market value adjusted (MVA) annuities and fixed and variable
immediate annuities. The other investment products offered include retail mutual
funds, deferred compensation and retirement plan services, structured settlement
contracts, other special purpose annuity contracts and investment management
services. The Company was ranked the number one writer of individual variable
annuities in the United States for 1998 according to Variable Annuity and
Research Data Service (VARDS) with a 10% market share. In addition, mutual fund
assets of approximately $2.5 billion at December 31, 1998 were more than double
prior year levels.
Revenues in 1998 increased $274, or 18%, to $1.8 billion from $1.5 billion in
1997. This growth was driven by individual annuity revenues which increased $268
over the prior year due to fee income earned on growth in separate account
assets. Average individual variable annuity account values increased $14.9
billion, or 38%, to $54.6 billion in 1998 from $39.7 billion in 1997, primarily
due to continued strong sales of individual variable annuities as well as equity
market appreciation. Individual variable annuity sales reached $9.9 billion and
$9.7 billion in 1998 and 1997, respectively. Associated with the strong sales
and continued growth in Investment Products, amortization of deferred costs
increased $76 and other expenses increased $107 over prior year levels.
Substantial growth in total average account values in 1998, coupled with
continued operating efficiencies, increased the operation's core earnings $64,
or 32%, to $266 in 1998 from $202 in 1997.
Revenues increased $503, or 50%, to $1.5 billion in 1997 from $1.0 billion in
1996. This increase was primarily due to improved individual annuity revenues
which increased $253, reflecting a substantial increase in aggregate fees earned
as a
- 18 -
<PAGE>
result of the operation's growing block of separate account assets. Average
individual variable annuity account values increased $13.1 billion to $39.7
billion in 1997 from $26.6 billion in 1996, primarily due to strong sales of
individual variable annuities, as well as equity market appreciation. In
addition, $205 of the revenue increase was related to GIC business, which was
primarily impacted by $219 of net realized capital losses in the third quarter
of 1996. Associated with the strong sales and continued growth in this
operation, benefits, claims and expenses grew $67 over the prior year. A 27%
growth in total average account value in 1997, coupled with operating
efficiencies and a reduction in losses of $50 primarily as a result of actions
taken in the third quarter of 1996 related to GIC, increased core earnings $107
to $202 in 1997 from $95 in 1996.
Individual Life
- - ---------------
The Individual Life operation, 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.
Revenues in 1998 increased $57, or 11%, to $567 from $510 in 1997, reflecting
the impact of applying cost of insurance charges and variable life fees earned
on the growing block of variable life insurance. Variable life average account
values increased $562, or 67%, to $1.4 billion in 1998 from $840 in 1997 due to
strong sales of $127 in 1998, a 30% increase over prior year levels, as well as
equity market appreciation. Total benefits, claims and claim adjustment expenses
and amortization of deferred costs increased $18 and $21, respectively, over
prior year levels. The growth in the Individual Life operation's account values,
particularly variable life, resulted in an increase in core earnings of $9, or
16%, in 1998.
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. Total 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 operation's account values, particularly variable life,
along with favorable mortality experience contributed to an increase in core
earnings of $12 in 1997.
Employee Benefits
- - -----------------
The Employee Benefits operation sells group life and group disability insurance
as well as other products including stop loss and supplementary medical coverage
to employers and employer sponsored plans. According to the latest results
published by Life Insurance Marketing and Research Association (LIMRA), the
Company was the second largest provider of group disability insurance in the
United States for the nine months ended September 30, 1998.
Revenues increased $109, or 6%, to $1.8 billion in 1998 from $1.7 billion in
1997. This increase in revenues was driven by strong sales of fully insured
business, excluding buyouts, which were $397 in 1998, an increase of $68, or
21%, compared to 1997. This growth in new sales was driven by group life and
group disability business where sales, excluding buyouts, grew 20% compared to
the prior year. Expenses increased $96, or 6%, as compared to the prior year
primarily due to higher benefits, claims and claim adjustment expenses
associated with this growing block of business. As a result of increased premium
revenue, an increased level of investment in tax-exempt securities and favorable
mortality and morbidity experience, core earnings increased $13, or 22%, to $71
in 1998 from $58 in 1997.
Similar factors generated an increase in revenues of $237, or 16%, to $1.7
billion in 1997 from $1.5 billion in 1996. Sales of fully insured business,
excluding buyouts, were $329 in 1997, an increase of $91, or 38%, compared to
1996. Expenses increased $224, or 16%, as compared to the prior year primarily
due to higher benefits, claims and claim adjustment expenses. As a result, core
earnings increased $13, or 29%, to $58 in 1997 from $45 in 1996.
Corporate Owned Life Insurance
- - ------------------------------
The COLI operation includes life insurance products sold for funding of other
post employment benefits and other non-qualified benefit programs provided by
corporations, and also includes business sold on a leveraged basis.
Revenues in this operation increased $587, or 60%, to $1.6 billion in 1998 from
$980 in 1997. This increase was primarily due to revenues of $624 related to the
recapture of an in force block of leveraged COLI business from MBL Life in the
fourth quarter of 1998, as discussed earlier. In addition, revenues increased
due to fee income on growing variable COLI account values, partially offset by
declines in fees on leveraged COLI as that block of business continues to
decline due to the HIPA Act of 1996. Benefits, claims and expenses increased
$593, or 63%, to $1.5 billion in 1998 from $938 in 1997 due primarily to the MBL
Recapture discussed previously. Core earnings declined $3, or 11%, to $24 in
1998 from $27 in 1997 as the growth in the Company's variable COLI business was
offset by the declining block of leveraged COLI. The MBL Recapture had no impact
on core earnings or net income in 1998.
COLI revenues decreased $380, or 28%, to $980 in 1997 from $1.4 billion in 1996.
Expenses also declined, primarily due to a $394 decrease in dividends to
policyholders. These decreases were primarily the result of the HIPA Act of 1996
discussed above. Core earnings of $27 in 1997 were consistent with 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
- 19 -
<PAGE>
Life segment's asset and fully insured premium 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,
protect themselves and their families against disability or death and prepare
their estates for an efficient transfer of wealth between generations. Certain
proposed legislative initiatives which could impact the Life segment are
discussed in the Regulatory Initiatives and Contingencies section.
<TABLE>
<CAPTION>
INTERNATIONAL
OPERATING SUMMARY
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums and other considerations $ 1,413 $ 1,452 $ 1,338
Net investment income 164 185 183
Net realized capital gains 70 95 73
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,647 1,732 1,594
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 946 1,037 920
Amortization of deferred policy acquisition costs and other expenses 576 533 482
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,522 1,570 1,402
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 125 162 192
Income tax expense 33 52 65
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income 92 110 127
Less: Net realized capital gains, after-tax 50 64 48
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 42 $ 46 $ 79
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The International segment includes direct insurance business written by Zwolsche
Algemeene ("Zwolsche") located in the Netherlands, Belgium and Luxembourg, ITT
Ercos in Spain, People's Insurance Company Limited ("People's Insurance"), of
which The Hartford acquired a 49% interest in January 1998, in Singapore and
London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh") in the United
Kingdom, until its sale by The Hartford in November 1998, as discussed below.
These companies offer property and casualty products in both personal and
commercial lines as well as life insurance products and services designed to
meet the needs of local customers. In addition, Other primarily represents
People's Insurance and home office expenses associated with managing
international operations.
On November 16, 1998, The Hartford completed the sale of London & Edinburgh to
Norwich Union, a leading provider of general and life insurance in the United
Kingdom. The Hartford received approximately $525, before costs of sale, for the
ongoing operations of London & Edinburgh. The Hartford retained ownership of
Excess Insurance Co. Ltd., London & Edinburgh's property and casualty insurance
and reinsurance subsidiary, which discontinued writing new business in 1993.
Excess Insurance Co. Ltd. is included in The Hartford's Other Operations
segment. The gain from the sale of London & Edinburgh of $33, after-tax, has
been reported in the investment results of North American Property & Casualty.
London & Edinburgh's operating results are included in the International segment
results through the date of sale and, therefore, are not comparable to prior
year results.
In 1998, revenues of $1.6 billion were $85, or 5%, lower than 1997, primarily
due to the sale of London & Edinburgh which reflects operating results to the
date of sale. Excluding London & Edinburgh, revenue growth over 1997 was 5%.
Market conditions in property and casualty business in the Netherlands were very
competitive, resulting in nominal premium growth, while life business produced
modest growth. Zwolsche revenue was down 4% due to lower net realized capital
gains and a negative foreign exchange impact due to weakness in the Dutch
Guilder. ITT Ercos revenues were up significantly due to 62% growth in
automobile written premiums. Also, People's Insurance contributed $22 of
revenues in 1998. Foreign exchange impacts on total revenues were negligible in
1998 as the strength in the Sterling offset weakness in the Guilder.
Core earnings of $42 in 1998 decreased $4, or 9%, from 1997. The decrease in
core earnings from 1997 was due to declining automobile underwriting results at
ITT Ercos, a slightly higher casualty loss ratio and higher expenses related to
Year 2000 and Euro conversion initiatives at Zwolsche and higher home office
expenses in Other. Partially offsetting these decreases were a $6 increase at
London and Edinburgh due to results reflecting operations through the date of
sale. The increase at London & Edinburgh was due to improved personal lines
results, including automobile, offset by higher losses from weather events,
losses related to professional liability claims and a lower effective tax rate.
A negative foreign exchange impact of $1 resulted primarily from weakness in the
Guilder.
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 London & Edinburgh to
underwrite exclusively 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 the Sterling
which overall had a negative foreign exchange impact on revenues of $17.
- 20 -
<PAGE>
Core earnings of $46 in 1997 decreased $33, or 42%, from 1996. The decrease in
core earnings was due to a $33 decrease in after-tax underwriting results in the
automobile line at London & Edinburgh and unfavorable foreign exchange of $5 in
the Netherlands, due to the strengthening of the U.S. dollar.
<TABLE>
<CAPTION>
SUMMARY RESULTS 1998 1997 1996
--------------------------------- ---------------------------------- ----------------------------------
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>
London & Edinburgh $ 1,117 $ 20 $ 31 $ 1,225 $ 14 $ 27 $ 1,056 $ 48 $ 50
Zwolsche 413 31 68 432 33 83 459 32 76
ITT Ercos 95 (2) -- 75 2 3 78 3 4
Other 22 (7) (7) -- (3) (3) 1 (4) (3)
- - ------------------------------------------------------------------------------------------------------------------------------------
Total $ 1,647 $ 42 $ 92 $ 1,732 $ 46 $ 110 $ 1,594 $ 79 $ 127
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Core earnings represent after-tax operational results excluding, as
applicable, net realized capital gains or losses.
</FN>
</TABLE>
London & Edinburgh
- - ------------------
As previously discussed, on November 16, 1998, the sale of London & Edinburgh to
Norwich Union was completed and 1998 reported results are for the period ended
at this date and, therefore, are not comparable to prior year results. During
1998, the United Kingdom market continued to be very competitive. However,
revenue growth of approximately $70 in the creditor line of business and
revenues of approximately $40 from the addition of homeowners business more than
offset reduced growth in automobile and most lines within the commercial
business. For the ten month period ended October 31, 1998, property and casualty
revenue growth was 7%. During 1998, foreign exchange had a positive impact on
revenues of $10.
Core earnings for the period ended November 16, 1998 were $20. During 1998,
improved underwriting results in personal lines were offset by higher losses
from weather events and losses associated with professional liability claims.
While overall operating results improved in 1998 versus the prior year, soft
market conditions continued to prevail in most areas.
In 1997, revenues at 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. 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.
Zwolsche
- - --------
In 1998, revenues at Zwolsche of $413 decreased $19, or 4%, from 1997. In local
currency, 1998 total revenues decreased by 1%. The decrease in local currency
revenues was primarily due to a 22% decrease in net realized capital gains which
more than offset net written premium growth of 1% and 2% in property and
casualty and life operations, respectively, and overall net investment income
growth of 11%. The property and casualty market remained very competitive in
1998 while the life business continued to be reasonably priced. Strengthening in
the U.S. dollar against the Guilder resulted in a negative foreign exchange
impact on revenues of $14.
In 1998, core earnings at Zwolsche of $31 decreased $2, or 6%, from 1997. On a
local currency basis, core earnings also decreased 6% from 1997. Life core
earnings increased 4% on a local currency basis, with continued favorable
operating performance in savings and asset management product areas. Property
and casualty core earnings on a local currency basis decreased 18% due to a
slightly increased loss ratio and higher expenses associated with Year 2000 and
Euro conversion initiatives. A strengthening U.S. dollar against the Guilder
negatively impacted core earnings by $1.
In 1997, revenues at Zwolsche 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 the 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.
ITT Ercos
- - ---------
In 1998, revenues at ITT Ercos of $95 increased $20, or 27%, from 1997. On a
local currency basis, revenues also increased 27% from 1997. Property and
casualty net written premiums increased 38% on a local currency basis, with
automobile business up 62%. This significant increase was attributable to a new
centralized agent service center combined with risk segmentation and pricing
initiatives. Life net written premiums
- 21 -
<PAGE>
increased 12% on a local currency basis due to further penetration of the
existing agent distribution network.
In 1998, the core earnings loss of $2 decreased $4 from 1997. In the property
and casualty business, the combined ratio of 105.6 increased from 98.1 in 1997.
This increase was primarily due to a significantly higher automobile loss ratio
that resulted from higher claims due to increased frequency and severity.
Various actions, including rate increases and agent cancellations, have been
implemented to remediate this situation.
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.
In 1997, core earnings of $2 decreased $1, or 33%, from 1996. 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.
OUTLOOK
The outlook at Zwolsche for 1999 is for slow written premium growth in property
and casualty due to continued soft market conditions. Continued moderate growth
is expected for life operations. Growth expectations for life savings and
pension products in the Netherlands continues to be positive due to their tax
advantages and the expected continuation of a 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 1999 as the government
continues to review moving certain social security programs into the private
sector. In February 1998, Zwolsche obtained a bank license to support the growth
of the life and asset management business in the Netherlands and established a
company in Luxembourg to support the growth of its Belgium life operation.
The outlook for ITT Ercos in the Spanish market is for continued strong growth,
primarily in automobile. Management expects ITT Ercos will continue to build on
its unique centralized service business model and segmented underwriting and
pricing skills. ITT Ercos is reviewing various alternative distribution
opportunities and has developed an enhanced strategy to grow its life business.
Management expects the Spanish market to have growth opportunities in life and
savings products in the years ahead.
The International segment continues to explore acquisition opportunities in
Western Europe, Latin America and Asia. People's Insurance is intended to
provide a base of operations for further Asian development.
<TABLE>
<CAPTION>
OTHER OPERATIONS
OPERATING SUMMARY
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earned premiums and other considerations $ 1 $ 4 $ 12
Net investment income 159 157 149
Net realized capital gains 3 1 5
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 163 162 166
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 153 200 301
Amortization of deferred policy acquisition costs and other expenses (income) 5 (4) 7
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 158 196 308
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 5 (34) (142)
Equity gain on HLI initial public offering -- 368 --
- - ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 5 334 (142)
Income tax benefit -- (36) (43)
- - ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 5 370 (99)
Minority interest in consolidated subsidiary (72) (37) --
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (67) 333 (99)
Less: Net realized capital gains, after-tax 2 1 4
Other items, after-tax -- 368 (91)
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ (69) $ (36) $ (12)
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Other Operations consist of property and casualty operations of The Hartford
which have discontinued writing new business. These operations primarily include
First State Insurance Company, Fencourt Reinsurance Company, Ltd., Heritage
Reinsurance Company, Ltd. and Excess Insurance Company Limited. 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.
- 22 -
<PAGE>
Other items for 1997 consisted of a $368 non-taxable equity gain following the
sale of approximately 19% of The Hartford's principal Life subsidiary, HLI. (For
additional information, see Note 2 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 have remained flat since 1996. Core earnings included a decrease of $72
and $37 in 1998 and 1997, respectively, which represented an approximate 19%
minority interest in HLI's operating results. (For additional information
regarding HLI's results, see the Life section.) Excluding minority interest,
core earnings increased $2 in 1998 over 1997 and $13 in 1997 over 1996.
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 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 North American Property & Casualty along with the 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 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
- 23 -
<PAGE>
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, along with the U.S. exposures of The Hartford's International segment
and exposures of the Other Operations segment. 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, 1998, 1997 and 1996, was as follows (net of reinsurance):
<TABLE>
<CAPTION>
ENVIRONMENTAL AND ASBESTOS CLAIMS
CLAIMS AND CLAIM ADJUSTMENT EXPENSES
1998 1997 1996
-------------------------------- -------------------------------- ------------------------------
Environ. Asbestos Total Environ. Asbestos Total Environ. Asbestos Total
--------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Beginning liability $ 1,312 $ 688 $ 2,000 $ 1,439 $ 717 $ 2,156 $ 926 $ 410 $ 1,336
Claims and claim adjustment
expenses incurred -- 6 6 -- 2 2 603 322 925
Claims and claim adjustment
expenses paid (150) (64) (214) (113) (45) (158) (124) (35) (159)
Other [1] (18) 18 -- (14) 14 -- 34 20 54
- - ------------------------------------------------------------------------------------------------------------------------------------
Ending liability [2] $ 1,144 $ 648 $ 1,792 $ 1,312 $ 688 $ 2,000 $ 1,439 $ 717 $ 2,156
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Other represents reclassifications of beginning reserves between
environmental and asbestos for 1998 and 1997 and represents
reclassifications of reserves that were not previously identified as
environmental and asbestos for 1996.
[2] The ending liabilities are net of reinsurance on reported and unreported
claims of $1,711, $1,853 and $1,972 for 1998, 1997 and 1996, respectively.
As of December 31, 1998, 1997 and 1996, reserves for environmental and
asbestos, gross of reinsurance, were $1,850 and $1,653, $2,165 and $1,688,
and $2,342 and $1,786, respectively.
</FN>
</TABLE>
The Hartford's pre-tax operating income has been impacted over the last three
years by incurred environmental and asbestos claims and claim adjustment
expenses, net of reinsurance, as follows: $6 in 1998, $2 in 1997 and $925 in
1996.
The Hartford believes that the environmental and asbestos reserves reported at
December 31, 1998 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.
- 24 -
<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 North
American Property & Casualty, Life, International and Other Operations. The
investment portfolios are managed based on the underlying characteristics and
nature of each operation's respective liabilities and managed within established
risk parameters. (For a further discussion on The Hartford's approach to
managing risks, see the Capital Markets Risk Management section.)
The investment portfolios of North American Property & Casualty, Life,
International and Other Operations are managed by distinct investment strategy
groups which are accountable to senior management. They are responsible for
monitoring and managing the 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 Financial Services Group, Inc., executes
the investment plan of the strategy groups for North American Property &
Casualty, Life and Other Operations, 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 North American Property & Casualty is to maximize
the 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 $15.1 billion at December 31, 1998 and were comprised
of fixed maturities of $14.3 billion and other investments of $823, primarily
equity securities. At December 31, 1997, total invested assets were $15.0
billion and were comprised of fixed maturities of $13.5 billion and $1.5 billion
in other investments, primarily equity securities.
Fixed Maturities by Type
- - ----------------------------------------------------------------
1998 1997
- - ----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- - ----------------------------------------------------------------
Municipal - tax-exempt $ 8,804 61.5% $ 7,873 58.5%
Corporate 2,119 14.8% 2,257 16.8%
Commercial MBS 834 5.8% 687 5.1%
Gov't/Gov't agencies - For. 501 3.5% 459 3.4%
ABS 500 3.5% 559 4.2%
CMO 415 2.9% 483 3.6%
MBS - agency 348 2.4% 540 4.0%
Gov't/Gov't agencies - U.S. 46 0.3% 32 0.2%
Municipal - taxable 24 0.2% 31 0.2%
Short-term 663 4.6% 479 3.6%
Redeemable pref'd stock 65 0.5% 56 0.4%
- - ----------------------------------------------------------------
Total fixed maturities $ 14,319 100.0% $ 13,456 100.0%
================================================================
During 1998, North American Property & Casualty adjusted its investment strategy
to increase its allocation to municipal tax-exempt bonds while decreasing its
allocation to agency mortgage backed securities ("MBS") and corporate bonds. In
addition, the percentage ownership of equity securities to total invested assets
significantly decreased, primarily as a result of continued opportunities taken
in a favorable equity market and the redeployment of these funds to fixed
maturities.
The taxable equivalent duration of the December 31, 1998 fixed maturity
portfolio was 4.8 years compared to 4.7 years at December 31, 1997. Duration is
defined as the market price sensitivity of the portfolio to parallel shifts in
the yield curve.
INVESTMENT RESULTS
The table below summarizes North American Property & Casualty results.
1998 1997 1996
- - -----------------------------------------------------------------
Net investment income, before-tax $ 824 $ 777 $ 661
Net investment income, after-tax[1] $ 658 $ 619 $ 531
Yield on average invested assets,
before-tax [2] 5.8% 5.9% 5.5%
Yield on average invested assets,
after-tax [1] [2] 4.6% 4.7% 4.4%
Net realized capital gains,
before-tax $ 231 $ 231 $ 15
- - ----------------------------------------------------------------
[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, 1998, net investment income (both before and
after-tax) increased by 6% over 1997. This increase was the result of higher
invested asset levels as a result of repayment of allocated advances by HLI. In
addition, the reallocation of assets from equities to fixed maturities
throughout the year positively impacted both before and after-tax net investment
income. After-tax net investment income was also favorably impacted by the
reallocation from taxable to tax-exempt bonds. The decline in before and
after-tax yields on average invested assets reflects declining interest rates,
primarily impacting taxable bonds.
For the year ended December 31, 1997, before and after-tax net investment income
increased 18% and 17%, respectively. These increases were 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 (QUIPS) and 1997 repayment of allocated advances by HLI, partially
offset by the 1997 North American Property & Casualty's share of repayment of
short-term debt. The increase in both before and after-tax yields was primarily
due to increased allocations to higher yielding asset backed securities ("ABS")
and commercial MBS ("CMBS") along with an increase in securities rated below
investment grade.
Net realized capital gains for 1998 were unchanged from 1997. During the year,
net gains from the sale of fixed maturities and equity securities were partially
offset by a $7 after-tax impairment of asset backed securities securitized and
serviced by Commercial Financial Services, Inc. ("CFS"). (For additional
information on CFS, see Note 15 of Notes to
- 25 -
<PAGE>
Consolidated Financial Statements under "Investments".) Net realized capital
gains also include a $33, after-tax gain from the sale of London & Edinburgh.
Net realized capital gains increased to $231 in 1997 from $15 in 1996 primarily
as a result of opportunities in a favorable equity market, partially offset by
real estate writedowns of $31.
LIFE
The primary investment objective of the Life segment's general account 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 $24.9 billion at December
31, 1998 and were comprised of $17.7 billion of fixed maturities, $6.7 billion
of policy loans and other investments of $503. At December 31, 1997, invested
assets totaled $21.0 billion 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 9.9% and 11.2% as of
December 31, 1998 and 1997, respectively, increased primarily as a result of the
MBL Recapture. These loans are secured by the cash value of the life policy and
do not mature in a conventional sense, but expire in conjunction with the
related policy liabilities.
Fixed Maturities by Type
- - ----------------------------------------------------------------
1998 1997
- - ----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- - ----------------------------------------------------------------
Corporate $ 7,898 44.6% $ 7,970 47.3%
ABS 2,465 13.9% 3,199 19.0%
Commercial MBS 2,036 11.5% 1,606 9.5%
Municipal - tax-exempt 916 5.2% 171 1.0%
CMO 831 4.7% 978 5.8%
Gov't/Gov't agencies - For. 530 3.0% 502 3.0%
MBS - agency 503 2.9% 514 3.1%
Municipal - taxable 223 1.3% 267 1.6%
Gov't/Gov't agencies - U.S. 166 0.9% 241 1.4%
Short-term 2,119 12.0% 1,395 8.3%
Redeemable preferred Stock 5 -- 5 --
- - ----------------------------------------------------------------
Total fixed maturities $ 17,692 100.0% $ 16,848 100.0%
================================================================
During 1998, the Life segment, in executing its investment strategy, increased
its allocation to municipal tax-exempt securities with the objective of
increasing after-tax yields, and also increased its allocation to CMBS while
decreasing its allocation to ABS. The increase in short-term investments as of
December 31, 1998 as compared to 1997 is primarily related to the settlement of
the MBL Recapture in the fourth quarter 1998 which resulted in short-term
investment proceeds of approximately $300.
As of December 31, 1998 and 1997, approximately 22.8% and 22.6%, respectively,
of the Life segment's fixed maturities were 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 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) 1998 1997 1996
- - ----------------------------------------------------------------
Net investment income - ex.
policy loans $ 1,166 $ 1,111 $ 1,053
Policy loan income 789 425 477
-----------------------------
Net investment income - total $ 1,955 $ 1,536 $ 1,530
Yield on average invested assets [1] 7.9% 7.6% 7.7%
Net realized capital losses $ -- $ -- $ (219)
================================================================
[1] Represents net investment income (excluding net realized capital losses)
divided by average invested assets at cost (fixed maturities at amortized
cost). In 1998, average invested assets were calculated assuming the MBL
Recapture proceeds were received on January 1, 1998.
For the year ended December 31, 1998, total before-tax net investment income
increased 27% from 1997, primarily due to an increase in policy loan income as a
result of the MBL Recapture. The increase in yields on average invested assets
was due to the increase in policy loan income and, to a lesser extent, an
increase in fixed maturities rated BBB.
For the year ended December 31, 1997, the decrease in before-tax yield was
primarily attributable to declining market interest rates.
There were no net realized capital gains or losses for the year ended December
31, 1998, unchanged from 1997. During 1998, realized capital gains from the sale
of fixed maturities and equity securities were offset by after-tax realized
capital losses including $21 related to the other than temporary impairment
charge associated with asset backed securities securitized and serviced by CFS.
(For additional information on CFS, see Note 15 of Notes to Consolidated
Financial Statements under "Investments".)
The 1996 capital losses of $219 were primarily attributable to the writedown and
sale of certain securities within GIC.
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 Zwolsche, ITT Ercos and People's Insurance (acquired in
January 1998) which are engaged in property and casualty and life insurance
operations. Investment results of London & Edinburgh were reflected in income
until its sale in November 1998. Investments are made with durations and in
currencies that reflect the nature of each company's liabilities.
Invested assets, excluding separate accounts, were $1.2 billion at December 31,
1998 and were comprised of fixed maturities of $844 and other investments of
$350, primarily equity securities. At December 31, 1997, invested assets, which
included London & Edinburgh of $1.7 billion, totaled $2.7
- 26 -
<PAGE>
billion and were comprised of fixed maturities of $2.3 billion and other
investments of $407, primarily equity securities.
Fixed Maturities by Type
- - -------------------------------------------------------------------
1998 1997
- - -------------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- - -------------------------------------------------------------------
Gov't/Gov't agencies - For. $ 611 72.4% $ 829 36.5%
Corporate 109 12.9% 414 18.3%
Gov't/Gov't agencies - U.S. -- -- 19 0.8%
Short-term 124 14.7% 1,007 44.4%
- - -------------------------------------------------------------------
Total fixed maturities $ 844 100.0% $ 2,269 100.0%
- - -------------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the International segment's results.
(before-tax) 1998 1997 1996
- - -----------------------------------------------------------------
Net investment income $ 164 $ 185 $ 183
Yield on average invested assets [1] 7.0% 7.2% 7.4%
Net realized capital gains $ 70 $ 95 $ 73
- - ----------------------------------------------------------------
[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, 1998, net investment income decreased 11%
primarily as a result of the sale of London & Edinburgh in November 1998.
Excluding London & Edinburgh, net investment income increased 13% despite a
continued trend of lower yields in Europe. This growth was primarily due to an
increase in life business at Zwolsche in the Netherlands and the acquisition of
The Hartford's 49% interest in People's Insurance in Singapore in January 1998.
For the year ended December 31, 1997, both net investment income and yield were
relatively flat as compared to 1996.
The decrease in net realized capital gains in 1998 was primarily due to the
weakening of the equity market in the Netherlands. Net realized capital gains
increased in 1997 from 1996 as a result of opportunities taken in a favorable
equity market.
OTHER OPERATIONS
The investment objective of Other Operations is to ensure the full and timely
payment of all liabilities. The ongoing strategy is to match asset and liability
cash flows in the early years and to match asset and liability durations in the
long-term.
Invested assets were $2.5 billion at both December 31, 1998 and December 31,
1997 and were mostly comprised of fixed maturities.
Fixed Maturities by Type
- - ----------------------------------------------------------------
1998 1997
- - ----------------------------------------------------------------
Type Fair Value Percent Fair Value Percent
- - ----------------------------------------------------------------
Corporate $ 1,603 64.7% $ 1,530 61.7%
ABS 224 9.0% 142 5.7%
Commercial MBS 145 5.9% 149 6.0%
Gov't/Gov't agencies - U.S. 82 3.3% 88 3.5%
Gov't/Gov't agencies - For. 50 2.0% 83 3.3%
MBS - agency 41 1.7% 56 2.3%
Municipal - taxable 40 1.6% 39 1.6%
CMO 20 0.8% 27 1.1%
Short-term 262 10.6% 357 14.4%
Redeemable preferred Stock 9 0.4% 9 0.4%
- - ----------------------------------------------------------------
Total fixed maturities $ 2,476 100.0% $ 2,480 100.0%
- - ----------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Other Operations results.
(before-tax) 1998 1997 1996
- - -----------------------------------------------------------------
Net investment income $ 159 $ 157 $ 149
Yield on average invested assets [1] 6.6% 6.7% 6.5%
Net realized capital gains $ 3 $ 1 $ 5
- - ----------------------------------------------------------------
[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, 1998, both before-tax net investment income and
yield on average invested assets remained relatively flat compared to the prior
year.
For the year ended December 31, 1997, before-tax net investment income increased
5%, while before-tax yields increased slightly. 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.
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 $81.3 billion as of December 31, 1998, wherein the policyholder assumes
substantially all the risk and reward, and guaranteed separate accounts totaling
$10.3 billion as of December 31, 1998, wherein The Hartford contractually
guarantees either a minimum return or the account value to the policyholder. As
of December 31, 1997, non-guaranteed separate accounts totaled $59.4 billion and
guaranteed separate accounts totaled $10.7 billion.
Investment objective varies by fund account type, 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 annuities and modified guaranteed life insurance, and
generally include market value adjustment features to mitigate the risk of
disintermediation.
- 27 -
<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 purchased 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 securities rated investment grade and has
established exposure limits, diversification standards and review procedures for
all credit risks including borrower, issuer and counterparty. Creditworthiness
of specific obligors is determined by an internal credit assessment and ratings
assigned by nationally recognized ratings agencies. Obligor, asset sector and
industry concentrations are subject to established limits and 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, 1998 and 1997, over 95% of the fixed maturity portfolio was
invested in securities rated investment grade.
Fixed Maturities by Credit Quality
- - ----------------------------------------------------------------
1998 1997
- - ----------------------------------------------------------------
Credit Quality Fair Value Percent Fair Value Percent
- - ----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 805 4.7% $ 1,083 6.1%
agencies
AAA 6,570 38.2% 6,337 35.4%
AA 3,209 18.7% 3,426 19.1%
A 3,409 19.8% 3,096 17.3%
BBB 1,508 8.8% 1,352 7.6%
BB & below 682 3.9% 767 4.3%
Short-term 1,016 5.9% 1,832 10.2%
- - ----------------------------------------------------------------
Total fixed maturities $17,199 100.0% $ 17,893 100.0%
================================================================
LIFE OPERATIONS
As of December 31, 1998 and 1997, over 98% of the fixed maturity portfolio was
invested in securities rated investment grade.
Fixed Maturities by Credit Quality
- - ----------------------------------------------------------------
1998 1997
- - ----------------------------------------------------------------
Credit Quality Fair Value Percent Fair Value Percent
- - ----------------------------------------------------------------
U.S. Gov't/Gov't agencies $ 2,596 9.3% $ 2,907 10.6%
agencies
AAA 3,907 14.0% 4,252 15.4%
AA 2,716 9.7% 2,990 10.9%
A 8,878 31.8% 9,351 33.9%
BBB 7,019 25.2% 5,966 21.7%
BB & below 492 1.8% 205 0.7%
Short-term 2,298 8.2% 1,880 6.8%
- - ----------------------------------------------------------------
Total fixed maturities $27,906 100.0% $ 27,551 100.0%
================================================================
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 makes portfolio adjustments to manage these risks
within established limits.
The Company analyzes interest rate risk using various models including
multi-scenario cash flow projection models that
- 28 -
<PAGE>
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 at December 31, 1998 and 1997, totaled $11.3
billion and $11.1 billion, respectively.
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, generally in the
opposite direction of the item being hedged. The total notional amount of
derivatives used for hedging interest rate risk as of December 31, 1998 and
1997, was $75 and $125, respectively.
The principal amounts of the fixed and variable rate fixed maturity portfolios,
along with the respective weighted average coupons ("WAC") by estimated maturity
year at December 31, 1998, are reflected in the following table. Comparative
totals are included as of December 31, 1997. Expected maturities differ from
contractual maturities due to call or prepayment provisions. The weighted
average coupon on variable rate securities is based on spot rates as of December
31, 1998 and 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.
- 29 -
<PAGE>
<TABLE>
<CAPTION>
1998 1997
1999 2000 2001 2002 2003 Thereafter Total Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALLABLE BONDS
Fixed Rate
Par value $ 104 $ 105 $ 101 $ 177 $ 199 $ 6,355 $ 7,041 $ 6,172
WAC 7.1% 7.7% 7.2% 6.0% 5.9% 5.3% 5.4% 5.5%
Fair value $ 7,262 $ 6,341
Variable Rate
Par value $ 1 $ 3 $ 3 $ 3 $ 3 $ 204 $ 217 $ 257
WAC 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 6.4%
Fair value $ 170 $ 232
BONDS - OTHER
Fixed Rate
Par value $ 1,149 $ 423 $ 545 $ 412 $ 539 $ 3,698 $ 6,766 $ 8,327
WAC 5.4% 7.1% 6.9% 6.7% 6.4% 6.2% 6.3% 6.5%
Fair value $ 7,070 $ 8,620
Variable Rate
Par value $ -- $ -- $ -- $ -- $ -- $ 188 $ 188 $ 70
WAC -- -- -- -- -- 5.8% 5.8% 6.5%
Fair value $ 160 $ 57
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 55 $ 79 $ 85 $ 102 $ 65 $ 205 $ 591 $ 657
WAC 6.9% 7.0% 7.0% 6.8% 6.4% 6.9% 6.8% 6.8%
Fair value $ 571 $ 668
Variable Rate
Par value $ -- $ -- $ 50 $ 2 $ 8 $ 40 $ 100 $ 30
WAC -- -- 6.2% 6.3% 6.2% 6.2% 6.2% 6.6%
Fair value $ 102 $ 30
COLLATERIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 104 $ 96 $ 65 $ 38 $ 18 $ 95 $ 416 $ 491
WAC 7.1% 6.9% 7.1% 7.3% 7.8% 7.8% 7.3% 7.0%
Fair value $ 423 $ 493
Variable Rate
Par value $ 2 $ 2 $ 3 $ 2 $ 1 $ 3 $ 13 $ 17
WAC 6.3% 6.4% 7.3% 6.9% 7.1% 7.2% 6.9% 7.9%
Fair value $ 12 $ 17
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 18 $ 30 $ 45 $ 36 $ 35 $ 630 $ 794 $ 702
WAC 6.9% 6.8% 7.0% 7.2% 7.1% 7.0% 7.0% 7.2%
Fair value $ 830 $ 724
Variable Rate
Par value $ 4 $ 4 $ 5 $ 8 $ 9 $ 166 $ 196 $ 108
WAC 6.7% 6.7% 6.8% 7.0% 7.0% 7.2% 7.1% 7.3%
Fair value $ 200 $ 112
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 53 $ 47 $ 44 $ 37 $ 32 $ 193 $ 406 $ 587
WAC 7.0% 6.9% 6.8% 6.7% 6.7% 6.9% 6.9% 7.3%
Fair value $ 395 $ 596
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The increase in fixed rate callable bonds from 1997 to 1998 was primarily due to
the reallocation of taxable bonds to tax-exempt municipal bonds. The decrease in
fixed rate other bonds was partially due to the sale of London & Edinburgh which
held over $1.6 billion in fixed maturities at December 31, 1997, and to the
reallocation to tax-exempt bonds.
The following table provides information as of December 31, 1998 on interest
rate swaps used to manage interest rate risk on
- 30 -
<PAGE>
fixed maturities and presents notional amounts with weighted average pay and
receive rates by maturity year. Comparative totals are included as of December
31, 1997. The weighted average pay rate is based on spot rates as of December
31, 1998 and 1997.
<TABLE>
<CAPTION>
1998 1997
INTEREST RATE SWAPS 1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Pay Variable/Receive Fixed
Notional value $ -- $ -- $ -- $ 25 $ -- $ 50 $ 75 $ 125
Weighted average pay rate -- -- -- 5.3% -- 5.4% 5.4% 5.8%
Weighted average receive rate -- -- -- 6.5% -- 6.7% 6.6% 6.6%
Fair value $ 4 $ 3
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The table below provides information as of December 31, 1998 on debt obligations
and QUIPS and reflects principal cash flows and related weighted average
interest rate by maturity year. Comparative totals are included as of December
31, 1997.
<TABLE>
<CAPTION>
1998 1997
1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM DEBT
Fixed Rate
Amount $ 31 $ -- $ -- $ -- $ -- $ -- $ 31 $ 241
Weighted average interest rate 5.4% -- -- -- -- -- 5.4% 7.8%
Fair value $ 31 $ 244
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ 200 $ 299 $ -- $ 399 $ 898 $ 832
Weighted average interest rate -- -- 8.3% 6.4% -- 6.9% 7.0% 7.2%
Fair value $ 943 $ 856
CUMULATIVE QUARTERLY INCOME PREFERRED
SECURITIES (QUIPS) [1]
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 1,000 $ 1,000 $ 1,000
Weighted average interest rate -- -- -- -- -- 8.025% 8.025% 8.025%
Fair value $ 1,031 $ 1,034
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Represents Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Junior Subordinated Debentures.
</FN>
</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 equity prices.
The operations occasionally use equity futures to hedge against a change in
value on the anticipated purchase or sale of equity securities. As of December
31, 1998 and 1997, there were no outstanding derivative instruments hedging
equity price risk.
The following table reflects equity securities owned at December 31, 1998 and
1997, grouped by major market type.
1998 1997
Fair Value Percent Fair Value Percent
- - -----------------------------------------------------------------
Equity Securities
Domestic
Large cap $ 390 42.2% $ 793 45.5%
Midcap/small cap 105 11.3% 293 16.8%
Foreign
EAFE [1]/Canadian 411 44.3% 562 32.3%
Emerging 20 2.2% 93 5.4%
- - -----------------------------------------------------------------
Total $ 926 100.0% $ 1,741 100.0%
- - -----------------------------------------------------------------
[1] Europe, Australia, Far East countries index.
While the allocation to major market types remained consistent from 1997 to
1998, total equities has decreased due to the redeployment from equity
securities to fixed maturities.
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
- 31 -
<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, 1998 and 1997. The property and casualty operations also had immaterial
exposures to the Singapore Dollar, British Sterling and Spanish Peseta.
Impact of 10%
Net Equity Changes
Company Investment -10% +10% Currency [1]
- - ------------------- ------------- ------- -------- -------------
1998
Zwolsche $348 $(35) $35 Guilder
1997
London &
Edinburgh $362 $(36) $36 Sterling
Zwolsche 353 (35) 35 Guilder
- - ------------------- ------------- ------- -------- -------------
[1] On January 1, 1999, the Netherlands and Spain became members of the
European Monetary Union and their currencies, the Guilder and Peseta, were
replaced by the Euro.
Currency exchange risk also exists with respect to investments in foreign equity
securities. Forward foreign contracts with a notional amount of $43 and $51 were
used to manage this risk at December 31, 1998 and 1997, respectively. Exposure
to currency exchange risk on the Sterling has decreased from 1997 due to the
sale of London & Edinburgh.
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, the
Company's 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 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 declines,
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,
along with the respective weighted average coupons by estimated maturity year at
December 31, 1998. Comparative totals are included as of December 31, 1997.
Expected maturities differ from contractual maturities due to call or prepayment
provisions. The weighted average coupon on variable rate securities is based on
spot rates as of December 31, 1998 and 1997, and is primarily based on 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.
- 32 -
<PAGE>
<TABLE>
<CAPTION>
1998 1997
1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
CALLABLE BONDS
Fixed Rate
Par value $ 49 $ 31 $ 53 $ 40 $ 56 $ 854 $ 1,083 $ 706
WAC 7.8% 7.3% 5.8% 7.1% 8.4% 5.1% 5.6% 6.0%
Fair value $ 1,080 $ 668
Variable Rate
Par value $ 40 $ 52 $ 39 $ 14 $ -- $ 937 $ 1,082 $ 1,167
WAC 6.7% 7.3% 5.4% 5.9% -- 5.9% 6.0% 6.5%
Fair value $ 982 $ 1,106
BONDS - OTHER
Fixed Rate
Par value $ 2,882 $ 1,379 $ 1,319 $ 1,022 $ 1,133 $ 7,993 $ 15,728 $ 15,348
WAC 6.6% 7.0% 7.4% 7.5% 6.8% 5.7% 6.3% 5.9%
Fair value $ 15,755 $ 15,127
Variable Rate
Par value $ 90 $ 176 $ 14 $ 81 $ 90 $ 702 $ 1,153 $ 1,309
WAC 5.1% 5.9% 5.4% 5.4% 5.4% 5.9% 5.8% 5.3%
Fair value $ 1,114 $ 1,352
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 472 $ 442 $ 436 $ 209 $ 145 $ 449 $ 2,153 $ 2,288
WAC 6.7% 6.9% 6.8% 6.7% 6.4% 6.9% 6.8% 7.0%
Fair value $ 2,074 $ 2,325
Variable Rate
Par value $ 187 $ 256 $ 356 $ 208 $ 193 $ 530 $ 1,730 $ 1,959
WAC 6.1% 6.1% 6.3% 5.9% 6.6% 6.0% 6.1% 6.4%
Fair value $ 1,683 $ 1,959
COLLATERIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 456 $ 400 $ 167 $ 129 $ 88 $ 185 $ 1,425 $ 1,739
WAC 6.0% 6.0% 6.0% 6.7% 7.0% 7.2% 6.5% 5.9%
Fair value $ 1,371 $ 1,695
Variable Rate
Par value $ 43 $ 20 $ 8 $ 6 $ 6 $ 183 $ 266 $ 446
WAC 6.3% 6.8% 7.2% 8.4% 8.4% 6.0% 6.2% 7.3%
Fair value $ 264 $ 424
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 53 $ 112 $ 133 $ 139 $ 96 $ 1,234 $ 1,767 $ 1,448
WAC 7.6% 6.7% 7.6% 7.1% 6.8% 7.1% 7.1% 7.3%
Fair value $ 1,784 $ 1,441
Variable Rate
Par value $ 109 $ 235 $ 50 $ 135 $ 132 $ 499 $ 1,160 $ 810
WAC 6.7% 6.6% 7.0% 6.3% 6.9% 6.9% 6.7% 7.0%
Fair value $ 1,075 $ 821
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 88 $ 82 $ 73 $ 60 $ 52 $ 368 $ 723 $ 576
WAC 7.1% 6.9% 6.7% 6.7% 6.7% 8.3% 7.6% 7.3%
Fair value $ 682 $ 590
Variable Rate
Par value $ 1 $ 2 $ 1 $ 1 $ 1 $ 5 $ 11 $ 24
WAC 7.8% 8.4% 8.6% 8.6% 8.6% 8.8% 8.6% 6.5%
Fair value $ 10 $ 24
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 33 -
<PAGE>
The table below provides information as of December 31, 1998 on debt obligations
and TruPS and reflects principal cash flows and related weighted average
interest rate by maturity year. Comparative totals are included as of December
31, 1997.
<PAGE>
<TABLE>
<CAPTION>
1998 1997
1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
SHORT-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 50
Weighted average interest rate -- -- -- -- -- -- -- 5.8%
Fair value $ -- $ 50
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 650 $ 650 $ 650
Weighted average interest rate -- -- -- -- -- 7.4% 7.4% 7.4%
Fair value $ 710 $ 674
TRUST PREFERRED SECURITIES (TRUPS) [1]
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 250 $ 250 $ --
Weighted average interest rate -- -- -- -- -- 7.4% 7.4% --
Fair value $ 254 $ --
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Represents Company Obligated Mandatorily Redeemable Preferred Securities of
Subsidiary Trusts Holding Solely Junior Subordinated Debentures.
</FN>
</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 $11.2 billion at December 31, 1998
($6.0 billion related to insurance investments and $5.2 billion related to life
insurance liabilities). At December 31, 1997, notional amounts pertaining to
derivatives totaled $10.9 billion ($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 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, 1998
and 1997 was $712 and $255, respectively.
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, 1998 and 1997 was $5.2 and $4.3 billion,
respectively.
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, 1998 and
1997, was $3.8 and $3.2 billion, respectively.
- 34 -
<PAGE>
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, 1998 and 1997, was $1.5
and $3.1 billion, respectively.
The following tables provide information as of December 31, 1998 with
comparative totals for 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 table presents contract
amount and weighted average settlement price by expected maturity year.
<TABLE>
<CAPTION>
1998 1997
INTEREST RATE SWAPS 1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay Fixed/Receive Variable
Notional value $ 125 $ 96 $ 148 $ 222 $ 110 $ 682 $ 1,383 $ 874
Weighted average pay rate 6.1% 5.0% 6.1% 5.1% 5.9% 6.1% 5.9% 6.5%
Weighted average receive rate 5.7% 5.4% 5.3% 5.4% 5.4% 5.4% 5.4% 6.1%
Fair value $ (66) $ (19)
Pay Variable/Receive Fixed
Notional value $ 975 $ 552 $ 274 $ 379 $ 605 $ 2,140 $ 4,925 $ 4,212
Weighted average pay rate 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.3% 5.9%
Weighted average receive rate 6.5% 6.5% 7.2% 6.4% 5.8% 6.2% 6.3% 6.9%
Fair value $ 160 $ 172
Pay Variable /Receive Different Variable
Notional value $ 157 $ 210 $ 91 $ 235 $ 83 $ 627 $ 1,403 $ 1,581
Weighted average pay rate 5.4% 5.5% 5.4% 5.0% 4.9% 5.5% 5.2% 6.4%
Weighted average receive rate 6.8% 5.5% 7.3% 5.2% 4.9% 5.8% 5.8% 6.7%
Fair value $ (2) $ (3)
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1998 1997
INTEREST RATE CAPS - LIBOR BASED 1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchased
Notional value $ -- $ -- $ 5 $ -- $ 11 $ 26 $ 42 $ 43
Weighted average strike rate (4.0 - 5.9%) -- -- 5.9% -- 5.3% 5.1% 5.2% 5.2%
Fair value $ 1 $ 3
Notional value $ -- $ -- $ -- $ -- $ -- $ 35 $ 35 $ 85
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- 6.6% 6.6% 6.8%
Fair value $ 1 $ 1
Notional value $ -- $ -- $ -- $ 10 $ 68 $ 122 $ 200 $ 260
Weighted average strike rate (8.0 - 9.9%) -- -- -- 8.9% 8.6% 8.4% 8.5% 8.5%
Fair value $ 1 $ 2
Notional value $ 5 $ 10 $ -- $ 26 $ -- $ -- $ 41 $ 52
Weighted average strike rate (10.0 - 11.9%) 11.8% 11.5% -- 10.1% -- -- 10.7% 10.9%
Fair value $ -- $ --
Issued
Notional value $ -- $ -- $ -- $ -- $ -- $ 13 $ 13 $ 63
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- 7.2% 7.2% 7.0%
Fair value $ -- $ --
Notional value $ -- $ -- $ -- $ -- $ 7 $ 6 $ 13 $ 17
Weighted average strike rate (8.0 - 9.9%) -- -- -- -- 8.2% 8.6% 8.3% 8.5%
Fair value $ -- $ --
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
- 35 -
<PAGE>
<TABLE>
<CAPTION>
1998 1997
INTEREST RATE CAPS - CMT BASED [1] 1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchased
Notional value $ -- $ 344 $ -- $ -- $ 250 $ 17 $ 611 $ 561
Weighted average strike rate (6.0 - 7.9%) -- 7.8% -- -- 7.7% 7.0% 7.7% 7.6%
Fair value $ -- $ --
Notional value $ -- $ -- $ 100 $ 100 $ 250 $ 500 $ 950 $ 295
Weighted average strike rate (8.0 - 9.9%) -- -- 8.0% 9.5% 8.7% 8.7% 8.7% 8.5%
Fair value $ 1 $ --
Issued
Notional value $ -- $ 344 $ -- $ -- $ -- $ 17 $ 361 $ 361
Weighted average strike rate (6.0 - 7.9%) -- 7.8% -- -- -- 7.5% 7.8% 7.8%
Fair value $ -- $ --
Notional value $ -- $ -- $ 100 $ 100 $ -- $ -- $ 200 $ 200
Weighted average strike rate (8.0 - 9.9%) -- -- 8.0% 9.5% -- -- 8.8% 8.8%
Fair value $ -- $ --
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 1997
INTEREST RATE FLOORS - LIBOR BASED 1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchased
Notional value $ 100 $ -- $ -- $ -- $ -- $ -- $ 100 $ 100
Weighted average strike rate (4.0 - 5.9%) 4.2% -- -- -- -- -- 4.2% 4.2%
Fair value $ -- $ --
Notional value $ -- $ -- $ -- $ -- $ -- $ 65 $ 65 $ 65
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- 7.0% 7.0% 7.0%
Fair value $ 7 $ 5
Issued
Notional value $ -- $ 10 $ 10 $ 36 $ 68 $ 116 $ 240 $ 263
Weighted average strike rate (4.0 - 5.9%) -- 5.1% 4.9% 5.3% 5.4% 5.3% 5.3% 5.3%
Fair value $ (7) $ (4)
Notional value $ -- $ -- $ -- $ -- $ -- $ 27 $ 27 $ 27
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- 7.8% 7.8% 7.8%
Fair value $ (4) $ (3)
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1998 1997
INTEREST RATE FLOORS - CMT BASED [1] 1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Purchased
Notional value $ -- $ 100 $ -- $ -- $ 150 $ -- $ 250 $ 550
Weighted average strike rate (4.0 - 5.9%) -- 5.8% -- -- 5.5% -- 5.6% 5.7%
Fair value $ 8 $ 4
Notional value $ 40 $ 10 $ -- $ -- $ -- $ -- $ 50 $ 631
Weighted average strike rate (6.0 - 7.9%) 6.5% 6.0% -- -- -- -- 6.4% 6.1%
Fair value $ 1 $ 9
Issued
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 540
Weighted average strike rate (4.0 - 5.9%) -- -- -- -- -- -- -- 5.0%
Fair value $ -- $ (2)
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] CMT represents the Constant Maturity Treasury Rate.
</FN>
</TABLE>
- 36 -
<PAGE>
<TABLE>
<CAPTION>
1998 1997
INTEREST RATE FUTURES 1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Long
Contract amount/notional $ 12 $ -- $ -- $ -- $ -- $ -- $ 12 $ 19
Weighted average settlement price $ 106 $ -- $ -- $ -- $ -- $ -- $ 106 $ 121
Fair value N/A N/A
Short
Contract amount/notional $ 220 $ 20 $ -- $ -- $ -- $ -- $ 240 $ 50
Weighted average settlement price $ 127 $ 95 $ -- $ -- $ -- $ -- $ 124 $ 94
Fair value N/A N/A
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
N/A - Not Applicable.
</FN>
</TABLE>
Currency Exchange Risk
- - ----------------------
The life operations have immaterial currency exposures to the Brazilian Real and
Argentine Peso.
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.
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.
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.
Management of 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, 1998 are reflected in the
table below by expected maturity year. Comparative totals are included for
December 31, 1997.
- 37 -
<PAGE>
<TABLE>
<CAPTION>
(dollars in billions)
1998 1997
DESCRIPTION [1] 1999 2000 2001 2002 2003 Thereafter TOTAL Total
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate asset accumulation vehicles $ 2.1 $ 1.8 $ 1.3 $ 0.7 $ 1.4 $ 3.6 $ 10.9 $ 12.7
Weighted average credited rate 6.6% 7.0% 6.8% 6.4% 5.4% 7.0% 6.6% 6.8%
Indexed asset accumulation vehicles $ 0.2 $ 0.1 $ -- $ -- $ -- $ -- $ 0.3 $ 0.2
Weighted average credited rate 5.2% 5.1% -- -- -- -- 5.1% 5.9%
Interest credited asset accumulation vehicles $ 5.0 $ 0.7 $ 0.9 $ 0.6 $ 0.5 $ 5.6 $ 13.3 $ 10.8
Weighted average credited rate 5.9% 5.7% 5.7% 5.9% 5.9% 5.9% 5.9% 5.8%
Long-term pay out liabilities $ 0.4 $ 0.4 $ 0.2 $ 0.2 $ 0.2 $ 1.3 $ 2.7 $ 2.3
Short-term pay out liabilities $ 0.7 $ -- $ -- $ -- $ -- $ -- $ 0.7 $ 0.5
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] As of December 31, 1998 and 1997, the fair value of the life operations
investment contracts including guaranteed separate accounts was $21.7 and
$21.9 billion, respectively.
</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 are shown in the following tables. These fixed
liabilities represented about 60% of the life operations' general and guaranteed
separate account liabilities at December 31, 1998 and 1997. 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
1998 1997
-----------------------------------------
Basis point shift - 100 + 100 - 100 + 100
- - --------------------------------------------------------------------
Amount $ 7 $ (16) $ 5 $ (10)
Percent of liability value 0.05% (0.10)% 0.03% (0.06)%
- - --------------------------------------------------------------------
- 38 -
<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 for the past three years summarized as follows:
<TABLE>
<CAPTION>
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term debt $ 31 $ 291 $ 500
Long-term debt 1,548 1,482 1,032
Company obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely junior subordinated debentures (QUIPS and TruPS) 1,250 1,000 1,000
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 2,829 $ 2,773 $ 2,532
------------------------------------------------------------------------------------------------------------------------------
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ 414 $ 351 $ --
------------------------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities, net of tax $ 5,612 $ 5,232 $ 4,168
Unrealized gain on securities, net of tax 811 853 352
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 6,423 $ 6,085 $ 4,520
------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION [2] $ 8,855 $ 8,356 $ 6,700
------------------------------------------------------------------------------------------------------------------------------
Debt to equity [2] [3] 50% 53% 61%
Debt to capitalization [2] [3] 32% 33% 38%
- - -----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Excludes unrealized gain on securities, net of tax, of $51 and $46 as of
December 31, 1998 and 1997, respectively.
[2] Excludes unrealized gain on securities, net of tax.
[3] Excluding QUIPS and TruPS, the debt to equity ratios were 28%, 34% and 37%,
and the debt to capitalization ratios were 18%, 21% and 23%, as of December
31, 1998, 1997 and 1996, respectively.
</FN>
</TABLE>
CAPITALIZATION
The Hartford's total capitalization, excluding unrealized gain on securities,
net of tax, increased by $499 as of December 31, 1998 compared to 1997. This
change primarily was the result of earnings and additional net borrowings,
partially offset by dividends declared on The Hartford's common stock and the
effect of treasury stock acquired, net of reissuances for incentive and stock
purchase plans.
The Hartford's total capitalization excluding unrealized gain on securities, net
of tax, increased by $1.7 billion in 1997 from 1996. This change primarily was
the result of earnings, 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.
THE OFFERING
Pursuant to the initial public offering of HLI Class A common stock (the
"Offering") on May 22, 1997, Hartford Life, Inc. ("HLI"), the holding company
parent of The Hartford's significant life insurance subsidiaries, 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 19% of the
equity ownership in HLI and approximately 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% of the equity ownership in HLI and approximately 96% 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, 1998, The Hartford continued to maintain an approximate 81%
equity ownership in HLI.
In connection with the Offering, The Hartford reported a $368 equity gain in
1997 related to the increased value of its equity ownership in HLI. Management
used 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 1998 increased $56 compared to a $241 increase in the prior year.
The Hartford used the proceeds of these net additional borrowings for general
corporate purposes. (For additional information regarding Debt, see Note 6 of
Notes to Consolidated Financial Statements.)
- 39 -
<PAGE>
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES ("QUIPS AND "TRUPS")
For a discussion of Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures,
see Note 7 of Notes to Consolidated Financial Statements.
STOCKHOLDERS' EQUITY
Stock Split in the Form of a Stock Dividend - For a discussion of the stock
split in the form of a stock dividend, see Note 8 of Notes to Consolidated
Financial Statements.
Dividends - The Hartford declared $199 and paid $197 in dividends to
shareholders in 1998, and declared $189 and paid $190 in 1997.
On October 15, 1998, The Hartford's Board of Directors approved a 5% increase in
the quarterly dividend to $0.22 per share, payable January 4, 1999 to
shareholders of record as of December 1, 1998.
Treasury Stock - During 1998, The Hartford repurchased 10,759,773 shares of its
common stock in the open market at a total cost of $547 under the Company's $1.0
billion repurchase program announced in December 1997. Some of these repurchased
shares were reissued pursuant to certain stock-based benefit plans.
RATINGS
The following table summarizes The Hartford's significant U.S. member companies'
financial ratings from the major independent rating organizations as of February
19, 1999.
A.M. Duff & Standard
Best Phelps & Poor's Moody's
- - ----------------------------------------------------------------
Insurance Ratings:
Hartford Fire A+ AA AA Aa3
Hartford Life Insurance
Company A+ AA+ AA Aa3
Hartford Life & Accident A+ AA+ AA Aa3
Hartford Life & Annuity A+ AA+ AA Aa3
- - ----------------------------------------------------------------
Other Ratings:
The Hartford Financial
Services Group, Inc.:
Senior debt a+ A+ A A2
Commercial paper D-1 A-1 P-1
Hartford Capital I and
II quarterly income
preferred securities a+ A BBB+ a2
Hartford Life, Inc.:
Senior debt a+ A+ A A2
Commercial paper -- D-1 A-1 P-1
Hartford Life, Inc.:
Capital I trust
preferred securities a+ A BBB+ a2
- - ----------------------------------------------------------------
On February 8, 1999, A.M. Best assigned first time ratings of a+ ("strong") to
The Hartford Financial Services Group, Inc.'s senior debt, Hartford Capital I
and II quarterly income preferred securities, Hartford Life, Inc.'s senior debt
and Hartford Life, Inc.'s Capital I trust preferred securities.
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 operating 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 its 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. These laws
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 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 total amount of statutory dividends which may be paid to The Hartford
Financial Services Group, Inc. by its insurance subsidiaries in 1999, without
prior approval, is $852.
The primary uses of funds are to pay claims, policy benefits, operating expenses
and commissions, and to purchase new investments. In addition, The Hartford has
a policy of carrying 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
- 40 -
<PAGE>
(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, 1998, each of The Hartford's
insurance subsidiaries within North American Property & Casualty and the Life
segment had more than sufficient capital to meet the NAIC's RBC requirements.
CASH FLOW
1998 1997 1996
- - -----------------------------------------------------------------
Net cash provided by
operating activities $ 907 $ 2,045 $ 994
Net cash provided by (used
for) investing activities $ 411 $ (2,247) $ (1,035)
Net cash (used for) provided
by financing activities $ (1,340) $ 239 $ 59
Cash - end of year $ 123 $ 140 $ 112
- - -----------------------------------------------------------------
During 1998, the decrease in cash provided by operating activities was primarily
the result of lower underwriting cash flows, due in part to higher claim
payments on catastrophes, an increase in income taxes paid and timing in the
settlement of other receivables and payables. The decrease in cash (used for)
provided by financing activities was primarily the result of proceeds from the
HLI offering in May 1997, treasury stock purchases in 1998 in accordance with
the Company's share repurchase program and a decrease in investment-type
contracts written in the Life segment. The change in cash provided by (used for)
investing activities primarily reflects net investment proceeds used to fund
financing activities.
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 by North American Property & Casualty 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 reflected the
investment of the additional proceeds generated by operating and financing
activities.
Operating cash flows in each of the last three years have been more than
adequate to meet liquidity requirements.
ACQUISITIONS
On August 26, 1998, HLI completed the purchase of all outstanding shares of
PLANCO Financial Services, Inc. ("PLANCO") and its affiliate, PLANCO,
Incorporated. PLANCO, a primary distributor of HLI's annuity and investment
products, is the nation's largest wholesaler of individual annuities and has
played a significant role in HLI's growth over the past decade. As a wholesaler,
PLANCO distributes HLI's annuity and investment products, including fixed and
variable annuities, mutual funds and single premium variable life insurance, as
well as providing sales support to registered representatives, financial
planners and broker-dealers at brokerage firms and banks across the United
States. The acquisition has been accounted for as a purchase and accordingly,
the results of PLANCO's operations have been included in The Hartford's
consolidated financial statements from the closing date of the transaction.
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 has been reported as a purchase transaction
and accordingly, the results of Omni's operations have been 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 life
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. In particular, President
Clinton's 1999 Federal Budget Proposal currently contains certain
recommendations for modifying tax rules related to the treatment of COLI by
contractholders which, if enacted as described, could have a material adverse
impact on the Company's sales of these products. The budget proposal also
includes provisions which would result in a significant increase in the "DAC
tax" on certain of the Company's products and would apply a tax to the Company's
policyholder surplus account. It is too early to determine whether these tax
proposals will ultimately be enacted by Congress. Therefore, the potential
impact to the Company's financial condition or results of operations cannot be
reasonably estimated at this time. 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 and
Federal catastrophe fund legislation. Measures which may significantly impact
the company overall include tort reform, privacy and new restrictions and
liability for managed care plans, and financial services modernization
legislation.
- 41 -
<PAGE>
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 $23 in 1998, $19 in 1997 and $14
in 1996.
NAIC PROPOSALS
The NAIC developed 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 adopted the Codification of Statutory Accounting Principles ("SAP") in
March, 1998. The proposed effective date for the statutory accounting guidance
is January 1, 2001. It is expected that each of The Hartford's domiciliary
states will adopt SAP and 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 Hartford.
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
The Company distributes its annuity, life and certain property and casualty
insurance products through a variety of distribution channels, including
broker-dealers, banks, wholesalers, its own internal sales force and other third
party marketing organizations. The Company periodically negotiates provisions
and renewals of these relationships, and there can be no assurance that such
terms will remain acceptable to the Company or such service providers. An
interruption in the Company's continuing relationship with certain of these
third parties could materially affect the Company's ability to market its
products.
YEAR 2000
IN GENERAL
The Year 2000 issue relates to the ability or inability of computer hardware,
software and other information technology ("IT") systems, as well as non-IT
systems, such as equipment and machinery with imbedded chips and
microprocessors, 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 IT and non-IT systems that are in use today were
developed years ago when a year was identified using a two-digit date field
rather than a four-digit date field. As information and data containing or
related to the century date are introduced to date sensitive systems, these
systems may recognize the year 2000 as "1900", or not at all, which may result
in systems processing information incorrectly. This, in turn, may significantly
and adversely affect the integrity and reliability of information databases of
IT systems, may cause the malfunctioning of certain non-IT systems, 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.
The integrity and reliability of The Hartford's IT systems, as well as the
reliability of its non-IT systems, are integral aspects of The Hartford's
business. The Hartford issues insurance policies, annuities, mutual funds and
other financial products to individual and business customers, nearly all which
contain date sensitive data, such as policy expiration dates, birth dates and
premium payment dates. In addition, various IT systems support communications
and other systems that integrate The Hartford's various business segments and
field offices, including The Hartford's foreign operations. The Hartford also
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, many of which
provide date sensitive data to The Hartford, and whose operations are important
to The Hartford's business.
INTERNAL YEAR 2000 EFFORTS AND TIMETABLE
Beginning in 1990, The Hartford began working on making its IT systems Year 2000
ready, either through installing new programs or replacing systems. Since
January 1998, The Hartford's Year 2000 efforts have focused on the remaining
Year 2000 issues related to IT and non-IT systems in all of The Hartford's
business segments. These Year 2000 efforts include the following five main
initiatives: (1) identifying and assessing Year 2000 issues; (2) taking actions
to remediate IT and non-IT systems so that they are Year 2000 ready; (3) testing
IT and non-IT systems for Year 2000 readiness; (4) deploying such remediated and
tested systems back into their respective production environments; and (5)
conducting internal and external integrated testing of such systems. As of
December 31, 1998, The Hartford substantially completed initiatives (1) through
(4) of its internal Year 2000 efforts. The Hartford has
- 42 -
<PAGE>
begun initiative (5), and management currently anticipates that such activity
will continue into the fourth quarter of 1999.
Third Party Year 2000 Efforts and Timetable
The Hartford's Year 2000 efforts include assessing the potential impact on The
Hartford of third parties' Year 2000 readiness. The Hartford's third party Year
2000 efforts include the following three main initiatives: (1) identifying third
parties which have significant business relationships with The Hartford,
including, without limitation, insurance agents, brokers, third party
administrators, banks and other distributors and servicers of financial
products, and inquiring of such third parties regarding their Year 2000
readiness; (2) evaluating such third parties' responses to The Hartford's
inquiries; and (3) based on the evaluation of third party responses (or a third
party's failure to respond) and the significance of the business relationship,
conducting additional activities with respect to third parties as determined to
be necessary in each case. These activities may include conducting additional
inquiries, more in-depth evaluations of Year 2000 readiness and plans, and
integrated IT systems testing. The Hartford has completed the first third party
initiative and, as of early 1999, had substantially completed evaluating third
party responses received. The Hartford has begun conducting the additional
activities described in initiative (3), and management currently anticipates
that it will continue to do so through the end of 1999. However, notwithstanding
these third party Year 2000 efforts, 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 adequately address their Year 2000 issues.
Year 2000 Costs
The costs of The Hartford's Year 2000 program that were incurred through the
year ended December 31, 1997 were not material to The Hartford's financial
condition or results of operations. The after-tax costs of The Hartford's Year
2000 efforts for the year ended December 31, 1998 were approximately $23.
Management currently estimates that after-tax costs related to the Year 2000
program to be incurred in 1999 will be approximately $15 to $25. These costs are
being expensed as incurred.
Risks and Contingency Plans
If significant Year 2000 problems arise, including problems arising with third
parties, failures of IT and non-IT systems could occur, which in turn could
result in substantial interruptions in The Hartford's business. In addition, The
Hartford's investing activities are an important aspect of its business, and The
Hartford may be exposed to the risk that issuers of investments held by it will
be adversely impacted by Year 2000 issues. Given the uncertain nature of Year
2000 problems that may arise, especially those related to the readiness of third
parties discussed above, management cannot determine at this time whether the
consequences of Year 2000 related problems that could arise will have a material
impact on The Hartford's financial condition or results of operations.
The Hartford is in the process of developing certain contingency plans so that
if, despite its Year 2000 efforts, Year 2000 problems ultimately arise, the
impact of such problems may be avoided or minimized. These contingency plans are
being developed based on, among other things, known or reasonably anticipated
circumstances and potential vulnerabilities. The contingency planning also
includes assessing the dependency of The Hartford's business on third parties
and their Year 2000 readiness. The Hartford currently anticipates that internal
and external contingency plans will be substantially complete by the end of the
second quarter of 1999. However, in many contexts, Year 2000 issues are dynamic,
and ongoing assessments of business functions, vulnerabilities and risks must be
made. As such, new contingency plans may be needed in the future and/or existing
plans may need to be modified as circumstances warrant.
Insurance Claims
As an insurer, The Hartford may incur claims and claim adjustment expenses,
including attorneys' fees and other legal expenses, resulting from claims from
insureds who may incur losses as a result of Year 2000 problems. To the extent
claims are made, insurance coverage, if any, will depend upon the provisions of
the policies and the facts and circumstances of each claim. It is not possible
to determine in advance whether and to what extent insureds would incur losses,
the amount of the losses, or whether any such losses would be covered under The
Hartford's insurance policies. Because of this uncertainty, it is also not
possible to determine in advance whether such claims and claim adjustment
expenses would have a material impact upon The Hartford's financial condition or
results of operations.
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.
- 43 -
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information required by this item is said forth in the Capital Markets Risk
Management section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations and is incorporated herein by reference.
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 1999 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) Reports on Form 8-K - None
(c) See Item 14(a)(3).
(d) See Item 14(a)(2).
- 44 -
<PAGE>
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page(s)
Report of Management F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the three years
ended December 31, 1998 F-3
Consolidated Balance Sheets as of December 31, 1998 and 1997 F-4
Consolidated Statements of Stockholders' Equity for
the three years ended December 31, 1998 F-5-6
Consolidated Statements of Cash Flows for the three years
ended December 31, 1998 F-7
Notes to Consolidated Financial Statements F-8-30
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. 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 ensure 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) and its subsidiaries as
of December 31, 1998 and 1997, and the related Consolidated Statements of
Income, Stockholders' Equity and Cash Flows for each of the three years in the
period ended December 31, 1998. These consolidated financial statements and the
schedules referred to below are the responsibility of the Company'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
Financial Services Group, Inc. and its subsidiaries as of December 31, 1998 and
1997, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 1998 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 26, 1999
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) 1998 1997 1996
----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Earned premiums and other considerations $ 11,616 $ 10,479 $ 10,180
Net investment income 3,102 2,655 2,523
Net realized capital gains (losses) 304 327 (126)
---------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 15,022 13,461 12,577
--------------------------------------------------------------------------------------------------------------------
Benefits, claims and expenses
Benefits, claims and claim adjustment expenses 8,613 7,977 8,942
Amortization of deferred policy acquisition costs 2,020 1,888 1,678
Other expenses 2,914 2,261 2,275
---------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 13,547 12,126 12,895
--------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1,475 1,335 (318)
Equity gain on HLI initial public offering -- 368 --
----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 1,475 1,703 (318)
Income tax expense (benefit) 388 334 (219)
----------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 1,087 1,369 (99)
Minority interest in consolidated subsidiary (72) (37) --
----------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,015 $ 1,332 $ (99)
============================================================================================================================
Basic earnings (loss) per share $ 4.36 $ 5.64 $ (0.42)
Diluted earnings (loss) per share $ 4.30 $ 5.58 $ (0.42)
----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 232.8 236.0 234.5
Weighted average common shares outstanding and
dilutive potential common shares 236.2 238.9 234.5
----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 0.85 $ 0.80 $ 0.80
============================================================================================================================
</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) 1998 1997
- - ------------------------------------------------------------------------------------------- ----------------- ----------------
<S> <C> <C>
ASSETS
Investments
-----------
Fixed maturities, available for sale, at fair value (amortized cost of $34,191 and
$34,061) $ 35,331 $ 35,053
Equity securities, available for sale, at fair value (cost of $846 and $1,509) 1,066 1,922
Policy loans, at outstanding balance 6,687 3,759
Other investments, at cost 612 388
- - ------------------------------------------------------------------------------------------- ----------------- ----------------
Total investments 43,696 41,122
Cash 123 140
Premiums receivable and agents' balances 1,833 1,873
Reinsurance recoverables 4,978 10,839
Deferred policy acquisition costs 4,579 4,181
Deferred income tax 1,085 955
Other assets 2,759 2,502
Separate account assets 91,579 70,131
- - ------------------------------------------------------------------------------------------- ----------------- ----------------
TOTAL ASSETS $ 150,632 $ 131,743
=================================================================================== == ============== == =============
LIABILITIES
Future policy benefits, unpaid claims and claim adjustment expenses
Property and casualty $ 16,449 $ 18,376
Life 6,088 5,271
Other policy claims and benefits payable 19,774 21,143
Unearned premiums 2,478 2,895
Short-term debt 31 291
Long-term debt 1,548 1,482
Company obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely junior subordinated debentures 1,250 1,000
Other liabilities 4,547 4,672
Separate account liabilities 91,579 70,131
- - ------------------------------------------------------------------------------------------- ----------------- ----------------
143,744 125,261
COMMITMENTS AND CONTINGENCIES, NOTE 15
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 465 397
STOCKHOLDERS' EQUITY
Common stock - authorized 400,000,000, issued 238,705,675 and 239,374,389 shares, par
value $0.01 2 2
Additional paid-in capital 1,591 1,641
Retained earnings 4,474 3,658
Treasury stock, at cost - 11,310,598 and 3,421,949 shares (455) (48)
Accumulated other comprehensive income 811 832
- - ------------------------------------------------------------------------------------------- ----------------- ----------------
TOTAL STOCKHOLDERS' EQUITY 6,423 6,085
----------------------------------------------------------------------------------- ----------------- ----------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 150,632 $ 131,743
=================================================================================== == ============== == =============
</TABLE>
See Notes to Consolidated Financial Statements.
F-4
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FOR THE YEAR ENDED DECEMBER 31, 1998
Accumulated Other
Comprehensive Income
------------------------------- Outstanding
Common Stock/ Treasury Unrealized Gain Cumulative Shares
Additional Retained Stock, on Securities, Translation (In
(Dollars in millions) Paid-in Capital Earnings at Cost net of tax Adjustments Total thousands)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF YEAR AS
PREVIOUSLY REPORTED $1,660 $3,658 $(65) $853 $(21) $6,085 117,976
Two-for-one stock split [1] (17) 17 117,976
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR AS ADJUSTED 1,643 3,658 (48) 853 (21) 6,085 235,952
Comprehensive income
Net income 1,015 1,015
Other comprehensive income, net
of tax [2]
Unrealized gain on securities (42) (42)
[3]
Cumulative translation adjustments 21 21
-----------
Total other comprehensive income (21)
-----------
Total comprehensive income 994
===========
Issuance of shares under incentive
and stock purchase plans (2) 70 68 2,203
Tax benefit on employee stock
options and awards 22 22
Treasury stock acquired (70) (477) (547) (10,760)
Dividends declared on common stock (199) (199)
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $1,593 $4,474 $(455) $811 $-- $6,423 227,395
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
FOR THE YEAR ENDED DECEMBER 31, 1997
Accumulated Other
Comprehensive Income
------------------------------- Outstanding
Common Stock/ Treasury Unrealized Gain Cumulative Shares
Additional Retained Stock, on Securities, Translation (In
(Dollars in millions) Paid-in Capital Earnings at Cost net of tax Adjustments Total thousands)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF YEAR AS
PREVIOUSLY REPORTED $1,643 $2,515 $(30) $352 $40 $4,520 117,556
Two-for-one stock split [1] 117,557
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR AS ADJUSTED 1,643 2,515 (30) 352 40 4,520 235,113
Comprehensive income
Net income 1,332 1,332
Other comprehensive income, net
of tax [2]
Unrealized gain on securities 501 501
[3]
Cumulative translation adjustments (61) (61)
-----------
Total other comprehensive income 440
-----------
Total comprehensive income 1,772
===========
Issuance of shares under incentive
and stock purchase plans 22 5 27 1,939
Treasury stock acquired (22) (23) (45) (1,100)
Dividends declared on common stock (189) (189)
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $1,643 $3,658 $(48) $853 $(21) $6,085 235,952
===================================================================================================================================
</TABLE>
See Notes to Consolidated Financial Statements.
.
F-5
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (CONTINUED)
FOR THE YEAR ENDED DECEMBER 31, 1996
Accumulated Other
Comprehensive Income
------------------------------- Outstanding
Common Stock/ Treasury Unrealized Gain Cumulative Shares
Additional Retained Stock, on Securities, Translation (In
(Dollars in millions) Paid-in Capital Earnings at Cost net of tax Adjustments Total thousands)
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
BALANCE, BEGINNING OF YEAR AS
PREVIOUSLY REPORTED $1,637 $2,802 $(30) $245 $48 $4,702 117,124
Two-for-one stock split [1] 117,125
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, BEGINNING OF YEAR AS ADJUSTED 1,637 2,802 (30) 245 48 4,702 234,249
Comprehensive income
Net loss (99) (99)
Other comprehensive income, net
of tax [2]
Unrealized gain on securities 107 107
[3]
Cumulative translation adjustments (8) (8)
-----------
Total other comprehensive income 99
-----------
Total comprehensive income --
-----------
Issuance of shares under incentive
and stock purchase plans 6 6 864
Dividends declared on common stock (188) (188)
- - -----------------------------------------------------------------------------------------------------------------------------------
BALANCE, END OF YEAR $1,643 $2,515 $(30) $352 $40 $4,520 235,113
===================================================================================================================================
<FN>
[1] On May 21, 1998, the Board of Directors authorized a two-for-one stock
split effected in the form of a 100% stock dividend distributed on July 15,
1998 to shareholders of record as of June 24, 1998. Information has been
restated on a retroactive basis to reflect the effect of the stock split.
For additional information, see Note 8 of Notes to Consolidated Financial
Statements.
[2] Unrealized gain on securities is net of tax of $(17), $267 and $58 for the
years ended December 31, 1998, 1997 and 1996, respectively. There is no tax
effect on cumulative translation adjustments.
[3] Net of reclassification adjustment for gains realized in net income of
$199, $215 and $57 for the years ended December 31, 1998, 1997 and 1996,
respectively.
</FN>
</TABLE>
See Notes to Consolidated Financial Statements
F-6
<PAGE>
<TABLE>
<CAPTION>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
-------------------------------------------------
(In millions) 1998 1997 1996
- - --------------------------------------------------------------------------------- ---------------- ----------------- --------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,015 $ 1,332 $ (99)
ADJUSTMENTS TO RECONCILE NET INCOME (LOSS) TO NET CASH PROVIDED BY OPERATING
ACTIVITIES
Change in receivables, payables and accruals (69) (61) (38)
Decrease in reinsurance recoverables and other related assets 622 206 611
Increase in deferred policy acquisition costs (594) (662) (589)
Change in accrued and deferred income taxes (67) 340 (449)
Increase in liabilities for future policy benefits, unpaid claims and claim
adjustment expenses and unearned premiums 266 1,021 968
Minority interest in consolidated subsidiary 72 37 --
Equity gain on HLI initial public offering -- (368) --
Net realized capital (gains) losses (304) (327) 126
Depreciation and amortization 103 85 81
Other, net (137) 442 383
- - --------------------------------------------------------------------------------- -- ------------- --- ------------- -- -----------
NET CASH PROVIDED BY OPERATING ACTIVITIES 907 2,045 994
================================================================================= == ============= === ============= == ===========
Investing Activities
Purchase of investments (32,724) (47,642) (33,424)
Sale of investments 13,700 14,677 14,602
Maturity of investments 19,388 30,827 17,856
Proceeds from sale of affiliate 514 -- --
Purchase of affiliates (359) -- --
Additions to plant, property and equipment (108) (109) (69)
- - --------------------------------------------------------------------------------- -- ------------- --- ------------- -- -----------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 411 (2,247) (1,035)
================================================================================= == ============= === ============= == ===========
FINANCING ACTIVITIES
Short-term debt, net (60) (409) (286)
Issuance of long-term debt 200 650 --
Repayment of long-term debt (200) -- (100)
Net proceeds from issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trusts holding solely junior
subordinated debentures 250 -- 969
Net disbursements for investment and universal life-type contracts charged
against policyholder accounts (835) (483) (390)
Net proceeds from sale of minority interest in subsidiary -- 687 --
Dividends paid (197) (190) (140)
Acquisition of treasury stock (547) (45) --
Proceeds from issuances of shares under incentive and stock purchase plans 49 29 6
- - --------------------------------------------------------------------------------- -- ------------- --- ------------- -- -----------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (1,340) 239 59
================================================================================= == ============= === ============= == ===========
Foreign exchange rate effect on cash 5 (9) (1)
- - --------------------------------------------------------------------------------- -- ------------- --- ------------- -- -----------
Net (decrease) increase in cash (17) 28 17
Cash - beginning of year 140 112 95
- - --------------------------------------------------------------------------------- -- ------------- --- ------------- -- -----------
CASH - END OF YEAR $ 123 $ 140 $ 112
================================================================================= == ============= === ============= == ===========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
- - -------------------------------------------------
NET CASH PAID (REFUNDS RECEIVED) DURING THE YEAR FOR:
Income taxes $ 407 $ (37) $ 170
Interest $ 220 $ 212 $ 142
</TABLE>
Noncash Investing Activities
- - ----------------------------
Due to the recapture of an in force block of business previously ceded to MBL
Life Assurance Co. of New Jersey, reinsurance recoverables of $4,546 were
exchanged for the fair value of assets comprised of $4,354 in policy loans and
$192 in other assets.
See Notes to Consolidated Financial Statements.
F-7
<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. and 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.
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh")
subsidiary to Norwich Union, a leading provider of general and life insurance in
the United Kingdom. For purposes of these financial statements London &
Edinburgh's operating results are included in The Hartford's results of
operations through the date of sale. (For additional information, see Note 18.)
The consolidated financial statements have been prepared on the basis of
generally accepted accounting principles which differ materially from the
accounting prescribed by various insurance regulatory authorities. All material
intercompany transactions and balances between The Hartford, its subsidiaries
and affiliates have been eliminated.
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 the current year classification of transactions and accounts. In
addition, the consolidated financial statements have been restated to reflect a
two-for-one stock split effected in the form of a stock dividend (see Note 8).
Accordingly, all issued, outstanding and weighted average shares, as well as per
share amounts, have been adjusted.
(B) CHANGES IN ACCOUNTING PRINCIPLES
In November 1998, the Emerging Issues Task Force ("EITF") reached consensus on
issue 98-15, "Structured Notes Acquired for a Specific Investment Strategy".
This issue requires companies to account for structured notes acquired for a
specific investment strategy, as a unit. Affected companies that entered into
these notes prior to September 25, 1998 are required to either restate prior
period financial statements to conform with the prescribed unit accounting
model, or disclose the related impact on earnings for all periods presented and
cumulatively over the life of the instruments had the registrant accounted for
the structure as a unit. Had the Company accounted for certain structured note
transactions as a unit, based upon the consensus reached in EITF 98-15,
after-tax, net income for the year ended December 31, 1998 would have been
approximately $25 higher. Included in net income for the year ended December 31,
1998 was $26 of after-tax net realized capital losses and approximately $1 of
after-tax net investment income related to combined structured note
transactions, which were accounted for in accordance with then current generally
accepted accounting principles.
In October 1998, The American Institute of Certified Public Accountants
("AICPA") issued Statement of Position ("SOP") 98-7, "Accounting for Insurance
and Reinsurance Contracts That Do Not Transfer Insurance Risk". This SOP
provides guidance on the method of accounting for insurance and reinsurance
contracts that do not transfer insurance risk, defined in the SOP as the deposit
method. This SOP is effective for financial statements for fiscal years
beginning after June 15, 1999 and is not expected to have a material impact on
the Company's financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard establishes accounting and
reporting guidance for derivative instruments, including certain derivative
instruments embedded in other contracts. The standard requires, among other
things, that all derivatives be carried on the balance sheet at fair value. The
standard also specifies hedge accounting criteria under which a derivative can
qualify for special accounting. In order to receive special accounting, the
derivative instrument must qualify as either a hedge of the fair value or the
variability of the cash flow of a qualified asset or liability. Special
accounting for qualifying hedges provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of the
corresponding changes in value of the hedged item. SFAS No. 133 will be
effective for fiscal years beginning after June 15, 1999. Initial application
for The Hartford will begin for the first quarter of the year 2000. While The
Hartford is currently in the process of quantifying the impact of SFAS No. 133,
the Company is reviewing its derivative holdings in order to take actions needed
to minimize potential volatility, while at the same time maintaining the
economic protection needed to support the goals of its business.
In March 1998, the AICPA issued SOP No. 98-1, "Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use". This SOP provides
guidance on accounting for
F-8
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(B) CHANGES IN ACCOUNTING PRINCIPLES (CONTINUED)
costs of internal use software and in determining whether software is for
internal use. The SOP defines internal use software as software that is
acquired, internally developed, or modified solely to meet internal needs and
identifies stages of software development and accounting for the related costs
incurred during the stages. This statement is 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 1998, the FASB issued SFAS No. 132, "Employers' Disclosures about
Pensions and Other Postretirement Benefits". The new standard revises and
improves disclosure requirements of FASB Statements No. 87, "Employers'
Accounting for Pensions", No. 88, "Employers' Accounting for Settlements and
Curtailments of Defined Benefit Pension Plans and for Termination Benefits", and
No. 106, "Employers' Accounting for Postretirement Benefits Other Than
Pensions". SFAS No. 132 does not change the recognition or measurement of
pension or postretirement benefit plans, but standardizes disclosure
requirements for pensions and other postretirement benefits, eliminates certain
disclosures and requires additional information, including a disclosure of
changes in the benefit obligation and changes in the fair value of plan assets
by reconciling beginning and ending balances. The Company adopted SFAS No. 132
in 1998. For additional information, see Note 11.
Effective January 1, 1998, The Hartford adopted SFAS No. 130, "Reporting
Comprehensive Income", which establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. The objective of this statement is to report a measure of
all changes in equity of an enterprise that result from transactions and other
economic events of the period other than transactions with owners. Comprehensive
income is the total of net income and all other nonowner changes in equity.
Accordingly, the Company has reported comprehensive income in the Consolidated
Statements of Stockholders' Equity.
In December 1997, the AICPA issued 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 June 1997, the FASB issued SFAS No. 131, "Disclosures about Segments of an
Enterprise and Related Information". The new standard requires public business
enterprises to disclose certain financial and descriptive information about
reportable operating segments in annual financial statements and in condensed
financial statements of interim periods. Operating segments are components of an
enterprise about which separate financial information is available that is
evaluated regularly by the chief operating decision maker in deciding how to
allocate resources and in assessing performance. SFAS No. 131 also establishes
standards for related disclosures about products and services, geographic areas
and major customers. The Company adopted SFAS No. 131 in 1998. For additional
information, see Note 17.
The Hartford's cash flows were not impacted by adopting 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 the life and pension
policyholders' share, are reported as a component of revenues 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.
(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", AICPA SOP 86-2, "Accounting for Options", and various EITF
pronouncements. Written options are used, in all cases in
F-9
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(D) DERIVATIVE INSTRUMENTS (CONTINUED)
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. In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities". Initial application for The Hartford will
begin for the first quarter of the year 2000. For further discussion of SFAS No.
133, see (b) Changes In Accounting Principles.
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
correlation threshold for hedge designation is 80% to 120%. If correlation,
which is assessed monthly and measured based on a rolling three month average,
falls outside the range of 80% to 120%, 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 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 the 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
F-10
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(F) DEFERRED POLICY ACQUISITION COSTS (CONTINUED)
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:
For the years ended December
31,
------------------------------
1998 1997 1996
------------------------------
BEGINNING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-GROSS $18,376 $18,303 $17,536
Reinsurance recoverables 4,348 4,414 4,939
- - -----------------------------------------------------------------
BEGINNING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-NET 14,028 13,889 12,597
- - -----------------------------------------------------------------
ADD PROVISION FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES
Current year 5,404 5,065 5,075
Prior years [1] (152) 98 1,049
- - -----------------------------------------------------------------
TOTAL PROVISION FOR UNPAID CLAIMS
AND CLAIM ADJUSTMENT EXPENSES 5,252 5,163 6,124
- - -----------------------------------------------------------------
LESS PAYMENTS
Current year 2,275 1,961 2,082
Prior years 2,876 3,039 2,797
- - -----------------------------------------------------------------
TOTAL PAYMENTS 5,151 5,000 4,879
- - -----------------------------------------------------------------
Foreign currency translation (1) (24) 47
Reserves resulting from 86 -- --
acquisitions
Other [2] (1,051) -- --
- - -----------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-NET 13,163 14,028 13,889
Reinsurance recoverables 3,286 4,348 4,414
- - -----------------------------------------------------------------
ENDING LIABILITIES FOR UNPAID
CLAIMS AND CLAIM ADJUSTMENT
EXPENSES-GROSS $16,449 $18,376 $18,303
- - -----------------------------------------------------------------
[1] See Note 15(b) Environmental and Asbestos Claims. Excludes the effects of
foreign exchange adjustments.
[2] 1998 includes $1,067 related to the sale of London & Edinburgh (see Note
18).
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.
F-11
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
1. SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
(G) FUTURE POLICY BENEFITS, UNPAID CLAIMS AND CLAIM ADJUSTMENT EXPENSES
(CONTINUED)
For the years ended December
31,
--------------------------------
1998 1997 1996
--------------------------------
BEGINNING CLAIM RESERVES-GROSS $1,746 $1,496 $1,254
Reinsurance recoverables 71 53 35
- - -----------------------------------------------------------------
BEGINNING CLAIM RESERVES-NET 1,675 1,443 1,219
- - -----------------------------------------------------------------
INCURRED EXPENSES RELATED TO
Current year 902 890 799
Prior years (48) (51) (66)
- - -----------------------------------------------------------------
TOTAL INCURRED 854 839 733
- - -----------------------------------------------------------------
PAID EXPENSES RELATED TO
Current year 334 274 236
Prior years 382 333 273
- - -----------------------------------------------------------------
TOTAL PAID 716 607 509
- - -----------------------------------------------------------------
ENDING CLAIM RESERVES-NET 1,813 1,675 1,443
Reinsurance recoverables 125 71 53
- - -----------------------------------------------------------------
ENDING CLAIM RESERVES-GROSS $1,938 $1,746 $1,496
=================================================================
(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.
(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 OFFERING
Pursuant to 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") 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 19% of the
equity ownership in HLI and approximately 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% of the equity ownership in HLI and approximately 96% 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, 1998, The Hartford continued to maintain an approximate 81%
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-12
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS
(A) COMPONENTS OF NET INVESTMENT INCOME
For the years ended December 31,
----------------------------------------------------------
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Interest income $ 3,018 $ 2,561 $ 2,454
Dividends 32 48 55
Other investment income 91 97 61
- - ----------------------------------------------------------------------------------------------------------------------------------
Gross investment income 3,141 2,706 2,570
Less: Investment expenses 39 51 47
- - ----------------------------------------------------------------------------------------------------------------------------------
Net investment income $ 3,102 $ 2,655 $ 2,523
==================================================================================================================================
(B) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
Fixed maturities $ (72) $ 41 $ (247)
Equity securities 302 279 135
Real estate and other [1] 74 7 (11)
Less: Increase in liability to policyholders for net
realized capital gains -- -- 3
- - ----------------------------------------------------------------------------------------------------------------------------------
Net realized capital gains (losses) $ 304 $ 327 $ (126)
==================================================================================================================================
<FN>
[1] 1998 includes a $55, before-tax, gain on the sale of London & Edinburgh.
</FN>
</TABLE>
<TABLE>
<CAPTION>
(C) UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES
<S> <C> <C> <C>
Gross unrealized gains $ 283 $ 503 $ 336
Gross unrealized losses (60) (81) (52)
Minority interest in consolidated subsidiary (3) (3) --
- - ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains 220 419 284
Deferred income taxes 76 145 98
- - ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains, net of tax 144 274 186
Balance - beginning of year 274 186 98
- - ----------------------------------------------------------------------------------------------------------------------------------
CHANGE IN UNREALIZED GAINS (LOSSES) ON EQUITY SECURITIES $ (130) $ 88 $ 88
==================================================================================================================================
(D) UNREALIZED GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized gains $ 1,318 $ 1,101 $ 717
Gross unrealized losses (178) (109) (446)
Minority interest in consolidated subsidiary (77) (71) --
Net unrealized gains credited to policyholders (32) (30) (13)
- - ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains 1,031 891 258
Deferred income taxes 364 312 92
- - ----------------------------------------------------------------------------------------------------------------------------------
Net unrealized gains, net of tax 667 579 166
Balance - beginning of year 579 166 147
- - ----------------------------------------------------------------------------------------------------------------------------------
Change in unrealized gains (losses) on fixed maturities $ 88 $ 413 $ 19
==================================================================================================================================
</TABLE>
F-13
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
<TABLE>
<CAPTION>
(E) FIXED MATURITY INVESTMENTS
As of December 31, 1998
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BONDS AND NOTES
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) $ 287 $ 7 $ -- $ 294
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset backed 1,846 34 (9) 1,871
States, municipalities and political subdivisions 9,501 512 (6) 10,007
International governments 1,578 143 (29) 1,692
Public utilities 1,259 52 (3) 1,308
All other corporate including international 9,357 436 (65) 9,728
All other corporate - asset backed 6,439 105 (54) 6,490
Short-term investments 2,978 3 (2) 2,979
Certificates of deposit 871 22 (10) 883
Redeemable preferred stock 75 4 -- 79
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 34,191 $ 1,318 $ (178) $ 35,331
===================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1997
--------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BONDS AND NOTES
U.S. Gov't and Gov't agencies and authorities
(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>
The amortized cost and estimated fair value of fixed maturity investments at
December 31, 1998 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 $ 4,644 $ 4,677
Over one year through five years 8,736 8,912
Over five years through ten years 10,759 11,236
Over ten years 10,052 10,506
- - -----------------------------------------------------------------
Total $ 34,191 $ 35,331
=================================================================
Sales of fixed maturities, excluding short-term fixed maturities, for the years
ended December 31, 1998, 1997 and 1996 resulted in proceeds of $9.2 billion,
$13.4 billion and $11.3 billion, gross gains of $230, $264 and $161 and gross
losses of $(302), $(223)
F-14
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(E) FIXED MATURITY INVESTMENTS (CONTINUED)
and $(408), respectively. In 1996, gross realized capital losses include an
other than temporary impairment of $137 related to the Company's block of
guaranteed investment contract business written prior to 1995. Sales of equity
security investments for the years ended December 31, 1998, 1997 and 1996
resulted in proceeds of $2.2 billion, $1.5 billion and $1.4 billion, gross gains
of $636, $343 and $184 and gross losses of $(334), $(64) and $(49),
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 $7.7 billion and $7.9 billion ($5.0
billion and $5.8 billion primarily related to life insurance investments, and
$2.7 billion and $2.1 billion on life insurance liabilities) at December 31,
1998 and 1997, respectively.
A summary of derivative instruments for The Hartford, segregated by major
investment and liability category, was as follows as of December 31, 1998 and
1997:
<TABLE>
<CAPTION>
1998 AMOUNT HEDGED (NOTIONAL AMOUNTS)
------------------------------------------------------------------------------
Total Purchased Foreign Total
Carrying Issued Caps Caps, Floors & Interest Currency Notional
ASSETS HEDGED Value & Floors Options Futures [1] Rate Swaps Swaps [2] Amount
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset backed securities (excluding
anticipatory) $ 8,361 $ 44 $ 258 $ 3 $ 1,109 $ -- $ 1,414
Anticipatory [3] -- -- -- -- 712 -- 712
Other bonds and notes 23,802 461 597 18 1,661 93 2,830
Short-term investments 3,168 -- -- -- -- -- --
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 35,331 505 855 21 3,482 93 4,956
Equity securities, policy loans and
other investments 8,365 -- -- -- 31 -- 31
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 43,696 $ 505 $ 855 $ 21 $ 3,513 $ 93 $ 4,987
LONG-TERM DEBT $ 1,548 -- -- -- -- -- --
OTHER POLICY CLAIMS $ 19,774 1,100 50 -- 1,592 16 2,758
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE INSTRUMENTS - NOTIONAL VALUE $ 1,605 $ 905 $ 21 $ 5,105 $ 109 $ 7,745
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE INSTRUMENTS - FAIR VALUE $ (6) $ 19 $ -- $ 59 $ (5) $ 67
- - ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-15
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS (CONTINUED)
(G) DERIVATIVE INSTRUMENTS (CONTINUED)
1997 Amount Hedged (Notional Amounts)
-----------------------------------------------------------------------------
Total Purchased Foreign Total
Carrying Issued Caps Caps & Interest Currency Notional
ASSETS HEDGED Value & Floors Floors Futures [1] Rate Swaps Swaps [2] Amount
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset backed securities (excluding
anticipatory) $ 8,939 $ 547 $ 1,499 $ 28 $ 368 $ -- $ 2,442
Anticipatory [3] -- -- -- 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
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] As of December 31, 1998 and 1997, 5% and 59%, respectively, of the notional
futures contracts mature within one year.
[2] As of December 31, 1998 and 1997, 9% and 16%, respectively, of foreign
currency swaps mature within one year.
[3] 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, 1998, the Company had
$0.6 of net deferred gains for futures and interest rate swaps. The
Hartford expects to basis adjust the entire $0.6 of deferred gains in 1999.
As of December 31, 1997, the Company had $2.7 in net deferred gains for
futures and interest rate swaps which were basis adjusted in 1998.
</FN>
</TABLE>
A reconciliation between notional amounts as of December 31, 1998 and 1997 by
derivative type and strategy is as follows:
<TABLE>
<CAPTION>
December 31, 1997 Maturities/ December 31, 1998
Notional Amount Additions Terminations [1] Notional Amount
- - ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BY DERIVATIVE TYPE
Caps $ 1,265 $ 1,000 $ 338 $ 1,927
Floors 1,899 -- 1,316 583
Swaps/ Forwards 4,519 2,878 2,183 5,214
Futures 69 233 281 21
Options 135 50 185 --
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 7,887 $ 4,161 $ 4,303 $ 7,745
- - ------------------------------------------------------------------------------------------------------------------------------------
BY STRATEGY
Liability $ 2,066 $ 1,358 $ 666 $ 2,758
Anticipatory 273 652 213 712
Asset 2,579 1,397 987 2,989
Portfolio 2,969 754 2,437 1,286
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 7,887 $ 4,161 $ 4,303 $ 7,745
- - ------------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] During 1998, the Company had no significant gain or loss on terminations of
hedge positions using derivative financial instruments.
</FN>
</TABLE>
4. 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
F-16
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
4. FAIR VALUE OF FINANCIAL INSTRUMENTS (CONTINUED)
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 and TruPS (which represent company
obligated mandatorily redeemable preferred securities of subsidiary trusts
holding solely 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, 1998 and 1997 were as follows:
1998 1997
------------------- -------------------
Carrying Fair Carrying Fair
Amount Value Amount Value
- - ------------------------------------------------------------------
ASSETS
Fixed maturities $35,331 $35,331 $35,053 $35,053
Equity securities 1,066 1,066 1,922 1,922
Policy loans 6,687 6,687 3,759 3,759
Other investments 612 681 388 463
LIABILITIES
Other policy claims and
benefits payable [1] $11,723 $11,740 $11,769 $11,755
Short-term debt 31 31 291 294
Long-term debt 1,548 1,653 1,482 1,530
QUIPS/TruPS 1,250 1,285 1,000 1,034
- - ------------------------------------------------------------------
[1] Excludes corporate owned life insurance ("COLI"), reinsurance recoverables
and universal life insurance contracts with a carrying amount of $8.0
billion and $9.4 billion at December 31, 1998 and 1997, respectively.
5. SEPARATE ACCOUNTS
The Hartford maintained separate account assets and liabilities totaling $91.6
billion and $70.1 billion at December 31, 1998 and 1997, respectively, which are
reported at fair value. Separate account assets, which are segregated from other
investments, reflect two categories of risk assumption: non-guaranteed separate
accounts totaling $81.3 billion and $59.4 billion at December 31, 1998 and 1997,
respectively, wherein the policyholder assumes the investment risk, and
guaranteed separate accounts totaling $10.3 billion and $10.7 billion at
December 31, 1998 and 1997, respectively, wherein The Hartford contractually
guarantees either a minimum return or the account value to the policyholder.
Included in the non-guaranteed category were policy loans totaling $1.8 billion
and $1.9 billion at December 31, 1998 and 1997, 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 and other revenues were $911, $699 and $538 in
1998, 1997 and 1996, respectively. The guaranteed separate accounts include
fixed market value adjusted ("MVA") individual annuity and modified guaranteed
life insurance. The average credited interest rate on these contracts was 6.6%
at December 31, 1998. The assets that support these liabilities were comprised
of $10.1 billion in fixed maturities as of December 31, 1998. The portfolios are
segregated from other investments and are managed to minimize liquidity and
interest rate risk. In order to minimize the risk of disintermediation
associated with early withdrawals, fixed MVA annuity and modified guaranteed
life insurance contracts carry a graded surrender charge as well as a market
value adjustment. Additional investment risk is hedged using a variety of
derivatives which totaled $41 and $119 in carrying value and $3.6 billion and
$3.2 billion in notional amounts as of December 31, 1998 and 1997, respectively.
F-17
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
<TABLE>
<CAPTION>
6. DEBT 1998 1997
------------------------------------------------------------------------------------
Weighted Average Weighted Average
Amount Interest Rate [1] Amount Interest Rate [1]
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
SHORT-TERM DEBT
Commercial paper $ 31 5.4% $ 91 5.9%
Current maturities of long-term debt -- -- 200 8.2%
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL SHORT-TERM DEBT $ 31 5.4% $ 291 7.5%
===================================================================================================================================
LONG-TERM DEBT
DOMESTIC
Notes, due 2001 $ 200 8.3% $ 200 8.3%
Notes, due 2002 299 6.4% 300 6.4%
Notes, due 2004 200 7.0% 200 7.0%
Notes, due 2007 200 7.2% 200 7.2%
Notes, due 2008 200 6.4% -- --
Notes, due 2015 199 7.3% 198 7.3%
Notes, due 2027 250 7.8% 250 7.8%
INTERNATIONAL
Notes, due 2002 -- -- 134 8.1%
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $ 1,548 7.2% $ 1,482 7.4%
===================================================================================================================================
<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, 1998, The Hartford had a $1.5
billion five-year revolving credit facility with three years remaining with
thirty participating banks. This facility is available for general corporate
purposes and to provide additional support to the Company's commercial paper
program. At December 31, 1998, there were no outstanding borrowings under the
facility.
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 Junior Subordinated Debentures on
October 30, 1996 (see Note 7) and the issuance of unsecured redeemable long-term
debt on November 2, 1998, as discussed below, The Hartford had $1.05 billion
remaining on this shelf registration at December 31, 1998.
On November 2, 1998, The Hartford issued and sold $200 of unsecured redeemable
long-term debt in the form of 6.375% notes due November 1, 2008 under its $1.75
billion shelf registration. Interest on the notes is payable semi-annually on
May 1 and November 1 of each year, commencing May 1, 1999. The Hartford used the
net proceeds from the sale of the notes for the repayment of $200 of outstanding
commercial paper which was incurred to fund the repayment of the Company's $200
8.20% Senior Notes due at their maturity on October 15, 1998.
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,
F-18
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
6. DEBT (CONTINUED)
(B) LONG-TERM DEBT (CONTINUED)
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 June 8, 1998, HLI filed an omnibus registration statement with the Securities
and Exchange Commission for the issuance of up to $1.0 billion of debt and
equity securities, including up to $350 of previously registered but unsold
securities. After the issuance of Company Obligated Mandatorily Redeemable
Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated
Debentures on June 29, 1998 discussed in Note 7, HLI had $750 remaining on this
shelf registration on December 31, 1998.
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 7.
Interest expense incurred related to short- and long-term debt totaled $125,
$131 and $108 for 1998, 1997 and 1996, respectively.
7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES ("QUIPS" AND "TRUPS")
On June 29, 1998, Hartford Life Capital I, a special purpose Delaware trust
formed by HLI, issued 10,000,000, 7.2% Trust Preferred Securities, Series A
("Series A Preferred Securities"). The proceeds from the sale of the Series A
Preferred Securities were used to acquire $250 of 7.2% Series A Junior
Subordinated Deferrable Interest Debentures ("Junior Subordinated Debentures")
issued by HLI. HLI used the proceeds from the offering for the retirement of its
outstanding commercial paper, for acquisitions and for other general corporate
purposes.
The Series A Preferred Securities represent undivided beneficial interests in
Hartford Life Capital I's assets, which consist solely of the Junior
Subordinated Debentures. HLI owns all of the beneficial interests represented by
Series A Common Securities of Hartford Life Capital I. Holders of Series A
Preferred Securities are entitled to receive cumulative cash distributions
accruing from June 29, 1998, the date of issuance, and payable quarterly in
arrears commencing July 15, 1998 at the annual rate of 7.2% of the stated
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 upon earlier redemption. HLI has
the right to redeem the Junior Subordinated Debentures on or after June 30, 2003
or earlier upon the occurrence of certain events. Holders of Series A Preferred
Securities generally have no voting rights.
The Junior Subordinated Debentures bear interest at the annual rate of 7.2% of
the principal amount, payable quarterly in arrears commencing June 29, 1998, and
mature on June 30, 2038. The Junior Subordinated Debentures are unsecured and
rank junior and subordinate in right of payment to all present and future senior
debt of HLI and are effectively subordinated to all existing and future
liabilities of its subsidiaries.
HLI has the right at any time, and from time to time, to defer payments of
interest on the Junior Subordinated Debentures for a period not exceeding 20
consecutive quarters up to the debentures' maturity date. During any such
period, interest will continue to accrue and HLI may not declare or pay any cash
dividends or distributions on, or purchase, HLI's capital 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. HLI
will have the right at any time to dissolve the Trust and cause the Junior
Subordinated Debentures to be distributed to the holders of the Series A
Preferred Securities and the Series A Common Securities. HLI has guaranteed, on
a subordinated basis, all of the Hartford Life Capital I obligations under the
Series A Preferred Securities, including payment of the redemption price and any
accumulated and unpaid distributions upon dissolution, winding up or liquidation
to the extent funds are available.
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 ("Hartford Series A Preferred Securities"). The
proceeds from the sale of Hartford Series A Preferred Securities were used to
acquire $500 of Junior Subordinated Deferrable Interest Debentures, Series A
("Hartford 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.
Hartford 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 Hartford 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 Hartford Series A Preferred
Security. The Hartford Series A Preferred Securities are subject to mandatory
redemption upon repayment of the Hartford Junior Subordinated Debentures at
maturity or their earlier redemption. Holders of Hartford Series A Preferred
Securities have limited voting rights.
F-19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
7. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES ("QUIPS" AND "TRUPS")
(CONTINUED)
The Hartford 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 Hartford 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 Hartford 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 Hartford 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 Hartford 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 Hartford 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
Hartford 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 $91, $82 and $40 in 1998,
1997 and 1996, respectively.
8. STOCKHOLDERS' EQUITY
(A) COMMON STOCK
On May 21, 1998, The Hartford's shareholders approved an increase in the number
of authorized common shares from 200,000,000 to 400,000,000. On that date, the
Board of Directors declared a two-for-one stock split effected in the form of a
100% stock dividend distributed on July 15, 1998 to shareholders of record as of
June 24, 1998. Agreements concerning stock options and other commitments payable
in shares of the Company's common stock either provide for the issuance of the
additional shares due to the declaration of the stock split or have been
modified to reflect the stock split. In addition, retroactive adjustments to
treasury stock and additional paid-in capital have been made to reflect the
stock split. All references to issued, outstanding and weighted average shares,
as well as per share amounts, have been adjusted to reflect the stock split in
the consolidated financial statements and related notes. Par value per common
share remained unchanged at $0.01.
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 1998, The Hartford
repurchased 10,759,773 shares of its common stock in the open market at a total
cost of $547. Some of these repurchased shares were reissued pursuant to certain
stock-based benefit plans. 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 $0.01 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, 1998, 1997 and 1996.
F-20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
8. STOCKHOLDERS' EQUITY (CONTINUED)
(C) STATUTORY RESULTS
For the years ended December 31,
-----------------------------------
1998 1997 1996
- - -------------------------------------------------------------------
STATUTORY NET INCOME (LOSS)
Property and casualty
operations $ 497 $ 1,822 $ (103)
Life operations 290 246 190
- - -------------------------------------------------------------------
TOTAL $ 787 $ 2,068 $ 87
- - -------------------------------------------------------------------
STATUTORY SURPLUS
Property and casualty
operations $ 6,705 $ 6,025 $ 2,749
Life operations 2,144 1,806 1,448
- - -------------------------------------------------------------------
TOTAL $ 8,849 $ 7,831 $ 4,197
- - -------------------------------------------------------------------
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 1999,
without prior approval, is $852.
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.
9. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share", effective December 15,
1997. The following tables present a reconciliation of income and shares used in
calculating basic earnings (loss) per share to those used in calculating diluted
earnings (loss) per share.
<TABLE>
<CAPTION>
1998 Income Shares Per Share Amount
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Basic Earnings per Share
Income available to common shareholders $ 1,015 232.8 $ 4.36
------------------
Diluted Earnings per Share
Options -- 3.4
----------------------------
Income available to common shareholders plus assumed conversions $ 1,015 236.2 $ 4.30
===================================================================================================================================
1997 Income Shares Per Share Amount
- - -----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings per Share
Income available to common shareholders $ 1,332 236.0 $ 5.64
------------------
Diluted Earnings per Share
Options and contingently issuable shares -- 2.9
----------------------------
Income available to common shareholders plus assumed conversions $ 1,332 238.9 $ 5.58
===================================================================================================================================
1996 Income Shares Per Share Amount
- - -----------------------------------------------------------------------------------------------------------------------------------
Basic Earnings (Loss) per Share
Loss available to common shareholders $ (99) 234.5 $ (0.42)
------------------
Diluted Earnings (Loss) per Share
Options and contingently issuable shares -- --
----------------------------
Loss available to common shareholders plus assumed conversions $ (99) 234.5 $ (0.42)
===================================================================================================================================
</TABLE>
Basic earnings (loss) per share are computed based on the weighted average
number of shares outstanding during the year. Diluted earnings (loss) 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.
10. STOCK COMPENSATION PLANS
Under The Hartford 1995 Incentive Stock Plan (the "Plan"), awards granted may be
in the form of options, non-qualified or incentive stock options qualifying
under Section 422A of the Internal Revenue Code, stock appreciation rights,
performance shares or restricted stock, or any combination of the foregoing. The
aggregate number of shares of stock which may be awarded is subject to a maximum
limit applicable to all awards for the duration of the Plan and an annual limit
applicable to all awards
F-21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. STOCK COMPENSATION PLANS (CONTINUED)
for any plan year. The maximum limit is 15% of the total of the 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 year ended December 31,
1997, such issued and outstanding shares being adjusted for the two-for-one
stock split effected in the form of a 100% stock dividend distributed on July
15, 1998 (see Note 8). The annual limit is 1.65% of the total of the 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 fiscal year ended
immediately prior to any plan year. Any unused portion of the annual limit for
any plan year is carried forward and made available for awards in succeeding
plan years. As of December 31, 1998, the Company had not exceeded the maximum
and annual limits. Also, no more than 10,000,000 shares of The Hartford common
stock are cumulatively available for awards of incentive stock options. As of
December 31, 1998, The Hartford had 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 are 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.
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 5,400,000 shares of stock to eligible
employees under the ESPP, and 220,911, 268,688 and 78,428 shares were sold in
1998, 1997 and 1996, respectively. The weighted average fair value of the
discount under the ESPP was $12.20, $9.23 and $8.25 in 1998, 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 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,
1998, 1997 and 1996, 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:
1998 1997 1996
- - ----------------------------------- --------- --------- ---------
Net income (loss):
As reported $1,015 $1,332 $ (99)
Pro forma [1] [2] $988 $1,319 $ (106)
Basic earnings (loss) per share:
As reported $4.36 $5.64 $(0.42)
Pro forma [1] [2] $4.24 $5.59 $(0.45)
Diluted earnings (loss) per share:
As reported $4.30 $5.58 $(0.42)
Pro forma [1] [2] $4.19 $5.52 $(0.45)
- - ----------------------------------- --------- --------- ---------
[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 1998, 1997 and 1996: dividend yield of 1.7% for
1998 and 1997, and 2.9% for 1996, expected price variability of 25.7% for 1998,
22.1% for 1997 and 20.8% for 1996, risk-free interest rates of 4.89% for the
1998 grants, 6.04% for the 1997 grants and 5.71% for the 1996 grants; and
expected lives of five years for 1998, six years for 1997 and five years for
1996.
A summary of the status of non-qualified options included in the Company's
incentive stock plan as of December 31, 1998, 1997 and 1996 and changes during
the years ended December 31, 1998, 1997 and 1996 is presented below:
F-22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
10. STOCK COMPENSATION PLANS (CONTINUED)
<TABLE>
<CAPTION>
1998 1997 1996
------------------------------- ------------------------------- -----------------------------
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 10,350 $26.66 8,776 $20.44 6,738 $17.58
Granted 4,265 46.06 3,116 40.23 2,862 26.03
Exercised (1,909) 20.96 (1,360) 17.98 (760) 15.96
Canceled/Expired (228) 40.89 (182) 23.54 (64) 22.93
---------- ----------- -----------
Outstanding at end of year 12,478 33.89 10,350 26.66 8,776 20.44
- - -----------------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 5,671 23.58 5,184 19.25 4,276 17.24
Weighted average fair value of
options granted $12.20 $11.58 $5.61
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable (shares in thousands) at December 31, 1998:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
----------------------------------------------------------------- ----------------------------------------
Number Outstanding Weighted Average Weighted Average Number Weighted
Range of at December 31, 1998 Remaining Contractual Exercise Price Exercisable at Average
Exercise Prices Life (Years) December 31, 1998 Exercise Price
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
$ 8.84 - $10.52 252 2.4 $9.44 252 $9.44
16.37 - 24.50 3,170 5.6 19.12 3,159 19.11
25.88 - 38.57 3,460 7.1 30.20 1,958 29.12
38.88 - 58.94 5,596 9.2 45.64 302 46.20
- - -----------------------------------------------------------------------------------------------------------------------------------
$ 8.84 - $58.94 12,478 7.6 $33.89 5,671 $23.58
- - -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
11. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT
PLANS
The following tables set forth a reconciliation of beginning and ending balances
of the benefit obligation and fair value of plan assets as well as the funded
status of The Hartford's defined benefit pension and postretirement health care
and life insurance benefit plans for the years ended December 31, 1998 and 1997.
International plans represent an immaterial percentage of total pension assets,
liabilities and expense and, for reporting purposes, are combined with domestic
plans.
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------- ------------------------------
CHANGE IN BENEFIT OBLIGATION 1998 1997 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Benefit obligation - beginning of year $ 1,657 $ 1,467 $ 295 $ 252
Service cost 64 57 7 7
Interest cost 122 114 20 20
Plan participants' contributions -- -- 3 2
Actuarial loss 42 3 7 28
Change in Assumption:
Discount rate 127 101 -- --
Mortality table 21 -- -- --
Salary scale (23) -- -- --
Benefits paid (78) (85) (16) (14)
Foreign exchange rate changes 1 -- (10) --
Settlement [1] (133) -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
BENEFIT OBLIGATION - END OF YEAR $ 1,800 $ 1,657 $ 306 $ 295
- - -----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Reflects the sale of London & Edinburgh (see Note 18).
</FN>
</TABLE>
F-23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
11. PENSION PLANS AND POSTRETIREMENT HEALTH CARE AND LIFE INSURANCE BENEFIT
PLANS (CONTINUED)
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
------------------------------- ------------------------------
CHANGE IN PLAN ASSETS 1998 1997 1998 1997
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Fair value of plan assets - beginning of year $ 1,686 $ 1,478 $ 88 $ 77
Actual return on plan assets 318 295 5 11
Employer contribution 8 -- -- --
Benefits paid (80) (80) -- --
Expenses paid (4) (7) -- --
Settlement [1] (133) -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
FAIR VALUE OF PLAN ASSETS - END OF YEAR $ 1,795 $ 1,686 $ 93 $ 88
===================================================================================================================================
Funded status $ (5) $ 29 $ (213) $ (207)
Unrecognized net actuarial (gain) loss (91) (42) 12 2
Unrecognized prior service cost 56 65 (197) (211)
Unrecognized initial obligation (benefit) 6 7 -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
(ACCRUED) PREPAID BENEFIT COST $ (34) $ 59 $ (398) $ (416)
===================================================================================================================================
<FN>
[1] Reflects the sale of London & Edinburgh (see Note 18).
</FN>
</TABLE>
Assumptions used in the accounting for the plans were:
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997
- - -------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Benefit discount rate 7.00% 7.50%
Expected long-term rate of return on plan assets 9.75% 9.75%
Rate of increase in compensation levels 4.00% 4.25%
- - -------------------------------------------------------------------------------------------------------------
</TABLE>
For measurement purposes, a 7.8% annual rate of increase in the per capita cost
of covered health care benefits was assumed for 1998. The rate was assumed to
decrease gradually to 5.0% for 2003 and remain at that level thereafter.
Increasing the table of health care trend rates by one percent per year would
have the effect of increasing the benefit obligation and annual expense by $9
and $1, respectively, for the postretirement health care and life insurance
benefit plan for the year ended December 31, 1998.
Total pension cost for the years ended December 31, 1998, 1997 and 1996 include
the following components:
<TABLE>
<CAPTION>
Pension Benefits Other Benefits
----------------------------------- ---------------------------------
1998 1997 1996 1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Service cost (excludes expenses) $ 68 $ 61 $ 56 $ 7 $ 6 $ 6
Interest cost 122 113 104 20 20 18
Expected return on plan assets (138) (141) (189) (8) (7) (7)
Amortization of prior service cost 8 20 72 (23) (23) (23)
Amortization of unrecognized net (gains) losses 5 3 -- -- (1) --
Amortization of unrecognized net obligation arising
from initial application of SFAS No. 87 1 1 8 -- -- --
Loss due to curtailment [1] 1 -- -- -- -- --
Loss due to settlement [1] 16 -- -- -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
Net pension cost $ 83 $ 57 $ 51 $ (4) $ (5) $ (6)
- - -----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] Reflects the sale of London & Edinburgh (see Note 18).
</FN>
</TABLE>
The Hartford provides certain health care and life insurance benefits for
eligible retired employees. 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.
F-24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
12. INVESTMENT AND SAVINGS PLAN
Substantially all U.S. employees are eligible to participate in The Hartford's
Investment and Savings 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's common stock. The cost to The Hartford for the above plan was
approximately $24, $22 and $20 for 1998, 1997 and 1996, respectively.
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,
--------------------------------------
1998 1997 1996
- - ----------------------------------------------------------------
PREMIUMS WRITTEN
Direct $ 7,221 $ 7,000 $ 6,798
Assumed 866 932 903
Ceded (633) (770) (795)
- - ----------------------------------------------------------------
NET $ 7,454 $ 7,162 $ 6,906
================================================================
PREMIUMS EARNED
Direct $ 7,029 $ 6,882 $ 6,850
Assumed 872 900 878
Ceded (656) (782) (837)
- - ----------------------------------------------------------------
NET $ 7,245 $ 7,000 $ 6,891
================================================================
Reinsurance cessions which reduce claims and claim expenses incurred were $39,
$602 and $651 for the years ended December 31, 1998, 1997 and 1996,
respectively.
Life insurance net retained premiums were comprised of the following:
For the years ended December 31,
-------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------
Gross premiums $ 4,121 $ 3,519 $ 3,200
Assumed 98 165 406
Ceded (217) (361) (421)
- - -----------------------------------------------------------------
NET RETAINED PREMIUMS $ 4,002 $ 3,323 $ 3,185
=================================================================
Life insurance recoveries, which reduce death and other benefits, approximated
$119, $205 and $239 for the years ended December 31, 1998, 1997 and 1996,
respectively.
The Hartford has no significant reinsurance-related concentrations of credit
risk.
<TABLE>
<CAPTION>
14. INCOME TAX
For the years ended December 31,
-------------------------------------------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST
U.S. Federal $ 1,344 $ 1,551 $ (529)
International 131 152 211
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME (LOSS) BEFORE INCOME TAXES AND
MINORITY INTEREST $ 1,475 $ 1,703 $ (318)
- - -----------------------------------------------------------------------------------------------------------------------------------
INCOME TAX EXPENSE (BENEFIT)
Current - U.S. Federal $ 493 $ 83 $ 84
International 42 54 83
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CURRENT 535 137 167
- - -----------------------------------------------------------------------------------------------------------------------------------
Deferred - U.S. Federal (145) 192 (381)
International (2) 5 (5)
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DEFERRED (147) 197 (386)
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE (BENEFIT) $ 388 $ 334 $ (219)
===================================================================================================================================
</TABLE>
F-25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
14. INCOME TAX (CONTINUED)
Deferred tax assets (liabilities) include the following as of December 31:
<TABLE>
<CAPTION>
1998 1997
----------------------------------------------------------------------
U.S. Federal International U.S. Federal International
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Discounted loss reserves $ 790 $ -- $ 804 $ 1
Other insurance related items 612 (12) 495 (62)
Employee benefits 149 (4) 143 (9)
Earnings from foreign subsidiaries 109 -- 131 --
Reserve for bad debts 31 -- 30 --
Accelerated depreciation 22 -- 16 (1)
Unrealized gains (433) (106) (443) (45)
Other (195) 2 (221) --
- - -----------------------------------------------------------------------------------------------------------------------------------
Total $ 1,085 $ (120)* $ 955 $ (116)*
===================================================================================================================================
<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 $150 at December 31, 1998,
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,
-------------------------------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision (benefit) at U.S. Federal statutory rate $ 516 $ 596 $ (111)
Tax-exempt interest (128) (110) (97)
Non-taxable equity gain on HLI initial public offering -- (129) --
Foreign tax rate differential (6) (1) (2)
Other 6 (22) (9)
- - -----------------------------------------------------------------------------------------------------------------------------------
Provision (benefit) for income tax $ 388 $ 334 $ (219)
===================================================================================================================================
</TABLE>
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, after consideration of provisions made for
potential losses and costs of defense, is not expected to be material to the
consolidated financial condition, results of operations or cash flows of The
Hartford.
(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 North American
Property & Casualty, U.S. exposures of The Hartford's International segment and
exposures of the Other Operations segment. 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.
F-26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
The Hartford believes that the environmental and asbestos reserves reported at
December 31, 1998, 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 $188 in 1998, $134 in 1997 and $110
in 1996. Future minimum lease commitments are as follows:
1999 $ 105
2000 97
2001 80
2002 64
2003 56
Thereafter 225
- - ------------------------------------------------ --- -----------
TOTAL $ 627
================================================ === ===========
(D) TAX MATTERS
The Hartford's federal income tax returns are routinely audited by the Internal
Revenue Service. The Company is currently under audit for the years 1993 through
1995, with the audit for the years 1996 through 1997 expected to begin in early
1999. Management believes that adequate provision has been made in the financial
statements for items that may result from tax examinations and other tax related
matters.
(E) INVESTMENTS
As of December 31, 1998, The Hartford held $104 of asset backed securities
securitized and serviced by Commercial Financial Services Inc. ("CFS"), of which
$21 was included in the Company's guaranteed separate accounts. In October 1998,
the Company became aware of allegations of improper activities at CFS. On
December 11, 1998, CFS filed for protection under Chapter 11 of the Bankruptcy
Code. As of December 31, 1998, CFS continues to service the asset backed
securities, which remain current on payments of principal and interest; however,
the Company does not expect to recover all of its principal investment. Based
upon information available in the fourth quarter of 1998, the Company recognized
a $36, after-tax, writedown of its holdings in CFS of which $8 was related to
guaranteed separate accounts. The ultimate realizable amount depends on the
outcome of the bankruptcy of CFS, and the Company's estimates are therefore
subject to material change as new information becomes available. The Company is
presently unable to determine the amount of further potential loss, if any,
related to the securities.
16. TRANSACTIONS WITH AFFILIATES
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"). As a result of the Distribution, The Hartford became an
independent publicly traded company. Prior to the Distribution, The Hartford had
substantial dealings with ITT and its affiliates as described below.
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 (or any successor to each former ITT subsidiary), including related
attorney's fees and other out-of-pocket expenses. As of December 31, 1998, all
known liabilities covered by this agreement had been accrued.
17. SEGMENT INFORMATION
The Hartford provides insurance and financial services in the United States,
Canada, Western Europe, Latin America and Asia. The Hartford's reporting
segments consist of Commercial, Personal, Reinsurance, Life, International and
Other Operations. While the measure of profit or loss, used by The Hartford's
management in evaluating performance, is core earnings for the Life,
International and Other Operations segments, the Commercial, Personal and
Reinsurance segments are evaluated by The Hartford's management primarily based
upon underwriting results. The Hartford defines "core earnings" as after-tax
operational results excluding, as applicable, net realized capital gains or
losses, the cumulative effect of accounting changes, allocated Distribution
items (see Note 16) and certain other items. Core earnings is an internal
performance measure used by the Company in the management of its operations.
While not considered a segment, the Company also reports and evaluates core
earnings results for North American Property & Casualty, which includes the
combined underwriting results of the Commercial, Personal and Reinsurance
segments, along with income and expense items not directly allocable to these
segments such as net investment income.
F-27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. SEGMENT INFORMATION (CONTINUED)
The Commercial segment provides workers' compensation, property, automobile,
liability, marine, agricultural and bond coverages to commercial accounts
throughout the United States and Canada. Excess and surplus lines business not
normally written by standard lines insurers is also provided. The Personal
segment provides automobile, homeowners, home-based business and fire coverages
to individuals throughout the United States. The Reinsurance segment assumes
reinsurance worldwide through its ten Hartford Reinsurance Company ("HartRe")
offices located in Hartford, San Francisco, Miami, Philadelphia, Toronto,
London, Madrid, Munich, Hong Kong and Taipei. HartRe primarily writes treaty
reinsurance through professional reinsurance brokers covering various property,
casualty, specialty and marine classes of business. The Life segment markets a
variety of insurance and financial services which provide 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. 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. Other Operations include operations which have ceased writing
new business. Also, included in Other Operations is the effect of an approximate
19% minority interest in HLI's operating results. The following tables present
revenues, core earnings and total assets. Revenues are presented by segment and
for total North American Property & Casualty. Underwriting results and net other
considerations are presented for Commercial, Personal and Reinsurance segments
while core earnings is presented for North American Property & Casualty and the
segments of Life, International and Other Operations. Total assets, which are
not allocated to the three property and casualty segments, are presented for
North American Property & Casualty, Life, International and Other Operations. In
addition, revenues by geographical segment, determined based on customer
location, are also provided.
<TABLE>
<CAPTION>
REPORTING SEGMENT INFORMATION
For the years ended December 31,
-----------------------------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Earned premiums and other considerations
Commercial $ 3,385 $ 3,287 $ 3,397
Personal 2,268 1,928 1,835
Reinsurance 716 645 529
- - -----------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty earned premiums and other
considerations 6,369 5,860 5,761
Net investment income 824 777 661
Net realized capital gains 231 231 15
- - -----------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty 7,424 6,868 6,437
Life 5,788 4,699 4,380
International 1,647 1,732 1,594
Other Operations 163 162 166
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 15,022 $ 13,461 $ 12,577
===================================================================================================================================
</TABLE>
F-28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
17. SEGMENT INFORMATION (CONTINUED)
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
CORE EARNINGS AND NET INCOME (LOSS)
Underwriting results
Commercial $ (213) $ (149) $ (206)
Personal 77 37 (110)
Reinsurance (36) (14) (10)
- - -----------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty underwriting results (172) (126) (326)
Other considerations
Commercial 163 97 104
Personal 200 59 --
Net investment income 824 777 661
Other non-underwriting expenses (486) (311) (193)
Income taxes (72) (63) 24
- - -----------------------------------------------------------------------------------------------------------------------------------
North American Property & Casualty 457 433 270
Life 386 306 200
International 42 46 79
Other Operations (69) (36) (12)
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL CORE EARNINGS 816 749 537
Net realized capital gains, after-tax 199 215 57
Other items, after-tax [1] -- 368 (693)
- - -----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,015 $ 1,332 $ (99)
===================================================================================================================================
<FN>
[1] 1997 represents an equity gain resulting from the initial public offering
of HLI. 1996 consists primarily of environmental and asbestos reserve
increases and recognition of losses on guaranteed investment contract
business.
</FN>
</TABLE>
<TABLE>
<CAPTION>
As of December 31,
-----------------------------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
ASSETS
North American Property & Casualty $ 21,558 $ 21,011 $ 19,264
Life 122,022 100,980 79,933
International 2,470 4,734 4,334
Other Operations 4,582 5,018 5,309
- - -----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 150,632 $ 131,743 $ 108,840
===================================================================================================================================
GEOGRAPHICAL SEGMENT INFORMATION
For the years ended December 31,
-----------------------------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
REVENUES
North America $ 13,201 $ 11,547 $ 10,802
United Kingdom 1,212 1,278 1,177
Other 609 636 598
- - -----------------------------------------------------------------------------------------------------------------------------------
Total revenues $ 15,022 $ 13,461 $ 12,577
===================================================================================================================================
</TABLE>
F-29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
18. ACQUISITIONS AND DISPOSITIONS
(A) ACQUISITIONS
On August 26, 1998, HLI completed the purchase of all outstanding shares of
PLANCO Financial Services, Inc. ("PLANCO") and its affiliate, PLANCO,
Incorporated. PLANCO, a primary distributor of HLI's annuity and investment
products, has played a significant role in HLI's growth over the past decade. As
a wholesaler, PLANCO distributes HLI's annuity and investment products,
including fixed and variable annuities, mutual funds and single premium variable
life insurance, as well as providing sales support to registered
representatives, financial planners and broker-dealers at brokerage firms and
banks across the United States. The acquisition has been accounted for as a
purchase and accordingly, the results of PLANCO's operations have been included
in The Hartford's consolidated financial statements from the closing date of the
transaction.
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 has been reported as a purchase transaction
and accordingly, the results of Omni's operations have been included in The
Hartford's consolidated financial statements from the closing date of the
transaction.
(B) DISPOSITIONS
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh subsidiary to Norwich Union, a provider of
general and life insurance in the United Kingdom. The Hartford received
approximately $525, before costs of sale, and reported an after-tax net realized
capital gain of $33 related to the transaction. The Hartford retained ownership
of Excess Insurance Co. Ltd., London & Edinburgh's property and casualty
insurance and reinsurance subsidiary, which discontinued writing new business in
1993.
19. QUARTERLY RESULTS FOR 1998 AND 1997 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
----------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
----------------------------------------------------------------------------------------
1998 1997 1998 1997 1998 1997 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $ 3,728 $ 3,136 $ 3,493 $ 3,169 $ 3,640 $ 3,354 $ 4,161 $ 3,802
Benefits, claims and expenses $ 3,342 $ 2,862 $ 3,153 $ 2,894 $ 3,327 $ 2,909 $ 3,725 $ 3,461
Net income [1] $ 264 $ 204 $ 236 $ 574 $ 214 $ 299 $ 301 $ 255
Basic earnings per share [1] [2] $ 1.12 $ 0.87 $ 1.00 $ 2.43 $ 0.92 $ 1.26 $ 1.32 $ 1.08
Diluted earnings per share [1] [2] $ 1.10 $ 0.86 $ 0.99 $ 2.40 $ 0.91 $ 1.25 $ 1.30 $ 1.07
Weighted average common shares
outstanding [2] 235.8 235.4 235.4 236.0 232.2 236.5 228.0 236.0
Weighted average common shares
outstanding and dilutive potential
common shares [2] 239.1 238.2 239.1 238.8 235.6 239.5 231.2 238.9
- - ----------------------------------------------------------------------------------------------------------------------------------
<FN>
[1] June 30, 1997 includes an equity gain of $368, or $1.56 basic/$1.54 diluted
earnings per share, resulting from the initial public offering of HLI.
[2] On May 21, 1998, the Board of Directors authorized a two-for-one stock
split effected in the form of a 100% stock dividend distributed on July 15,
1998 to shareholders of record as of June 24, 1998. Share and per share
data have been restated to reflect the effect of the split.
</FN>
</TABLE>
F-30
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
<TABLE>
<CAPTION>
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
(In millions) As of December 31, 1998
----------------------------------------------------------
Amount at which
shown on Balance
Type of Investment Cost Fair Value Sheet
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds and Notes
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) $ 287 $ 294 $ 294
U.S. Gov't and Gov't agencies and authorities
(guaranteed and sponsored) - asset backed 1,846 1,871 1,871
States, municipalities and political subdivisions 9,501 10,007 10,007
International governments 1,578 1,692 1,692
Public utilities 1,259 1,308 1,308
All other corporate including international 9,357 9,728 9,728
All other corporate - asset backed 6,439 6,490 6,490
Short-term investments 2,978 2,979 2,979
Certificates of deposit 871 883 883
Redeemable preferred stock 75 79 79
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 34,191 35,331 35,331
- - ----------------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES
Common stocks
Public utilities 50 77 77
Banks, trusts and insurance companies 145 173 173
Industrial and miscellaneous 600 767 767
Nonredeemable preferred stocks 51 49 49
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES 846 1,066 1,066
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 35,037 36,397 36,397
- - ----------------------------------------------------------------------------------------------------------------------------------
REAL ESTATE 11 10 11
OTHER INVESTMENTS
Mortgage loans on real estate 231 231 231
Policy loans 6,687 6,687 6,687
Investments in partnerships and trusts 268 280 268
Futures, options and miscellaneous 102 160 102
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INVESTMENTS 7,288 7,358 7,288
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 42,336 $ 43,765 $ 43,696
- - ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-1
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
<TABLE>
<CAPTION>
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Registrant)
(In millions) As of December 31,
---------------------------------------
BALANCE SHEETS 1998 1997
- - ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Assets
Receivables from affiliates $ 56 $ 27
Other assets 264 264
Investment in affiliates 8,131 7,820
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 8,451 8,111
==================================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Short-term debt 31 241
Long-term debt 898 698
Company obligated mandatorily redeemable preferred securities of subsidiary
trusts holding solely parent junior subordinated
debentures 1,000 1,000
Other liabilities 99 87
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 2,028 2,026
TOTAL STOCKHOLDERS' EQUITY 6,423 6,085
- - ----------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 8,451 $ 8,111
==================================================================================================================================
(In millions)
STATEMENTS OF INCOME For the years ended December 31,
----------------------------------------------------------
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------------
Earnings (loss) of subsidiaries $ 1,105 $ 1,434 $ (6)
Interest expense (net of interest income) 149 155 139
Other (income) expenses (9) 2 4
- - ----------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX BENEFIT 965 1,277 (149)
Income tax benefit (50) (55) (50)
- - ----------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 1,015 $ 1,332 $ (99)
==================================================================================================================================
</TABLE>
S-2
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
<TABLE>
<CAPTION>
SCHEDULE II
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,
-------------------------------------------------------------
1998 1997 1996
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income (loss) $ 1,015 $ 1,332 $ (99)
Undistributed earnings of subsidiaries (302) (610) 362
Change in working capital 2 (26) (87)
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 715 696 176
- - -----------------------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Capital contribution to subsidiary (10) (31) (625)
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH USED FOR INVESTING ACTIVITIES (10) (31) (625)
- - -----------------------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in debt (10) (459) (386)
Net proceeds from issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trusts holding
solely parent junior subordinated debentures -- -- 969
Dividends paid (197) (190) (140)
Acquisition of treasury stock (547) (45) --
Proceeds from issuances of shares under incentive and stock
purchase plans 49 29 6
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (705) (665) 449
- - -----------------------------------------------------------------------------------------------------------------------------------
Net change in cash -- -- --
Cash - beginning of year -- -- --
- - -----------------------------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ -- $ -- $ --
===================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- - ------------------------------------------------
NET CASH PAID DURING THE YEAR FOR:
Interest $ 148 $ 157 $ 132
</TABLE>
S-3
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
<TABLE>
<CAPTION>
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
For the years ended December 31, 1998, 1997 and 1996
(In millions)
Future
Policy
Benefits, Other
Deferred Unpaid Claims Policy Earned
Policy and Claim Claims and Premiums Net
Acquisition Adjustment Unearned Benefits and Other Investment
Segment Costs Expenses Premiums Payable Considerations Income
- - ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1998
North American P&C $ 610 $ 11,958 $ 2,329 $ -- $ 6,369 $ 824
Life 3,842 5,717 42 19,767 3,833 1,955
International 127 645 107 7 1,413 164
- - ---------------------------------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 4,579 18,320 2,478 19,774 11,615 2,943
Other Operations -- 4,217 -- -- 1 159
- - ---------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 4,579 $ 22,537 $ 2,478 $ 19,774 $ 11,616 $ 3,102
=========================================================================================================
1997
North American P&C $ 532 $ 12,053 $ 2,141 $ -- $ 5,860 $ 777
Life 3,361 4,939 43 21,139 3,163 1,536
International 288 1,943 711 4 1,452 185
- - ---------------------------------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 4,181 18,935 2,895 21,143 10,475 2,498
Other Operations -- 4,712 -- -- 4 157
- - ---------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 4,181 $ 23,647 $ 2,895 $ 21,143 $ 10,479 $ 2,655
=========================================================================================================
1996
North American P&C $ 485 $ 12,012 $ 2,077 $ -- $ 5,761 $ 661
Life 2,800 3,986 40 22,213 3,069 1,530
International 250 1,670 680 7 1,338 183
- - ---------------------------------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 3,535 17,668 2,797 22,220 10,168 2,374
Other Operations -- 5,006 -- -- 12 149
- - ---------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 3,535 $ 22,674 $ 2,797 $ 22,220 $ 10,180 $ 2,523
=========================================================================================================
<FN>
Note:Certain reclassifications have been made to prior year financial
information to conform to current year presentation.
N/A - Not applicable to life insurance pursuant to Regulation S-X.
</FN>
</TABLE>
<TABLE>
<CAPTION>
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
For the years ended December 31, 1998, 1997 and 1996
(CONTINUED)
(In millions)
Benefits, Amortization
Claims and of Deferred
Net Realized Claim Policy Net
Capital Adjustment Acquisition Other Written
Segment Gains(Losses) Expenses Costs Expenses Premiums
- - ----------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
North American P&C $ 231 $ 4,287 $ 1,261 $ 1,116 $ 6,119
Life -- 3,227 441 1,535 N/A
International 70 946 319 257 1,334
- - ----------------------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 301 8,460 2,021 2,908 7,453
Other Operations 3 153 (1) 6 1
- - ----------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 304 $ 8,613 $ 2,020 $ 2,914 $ 7,454
==============================================================================================
1997
North American P&C $ 231 $ 4,069 $ 1,196 $ 876 $ 5,771
Life -- 2,671 345 1,203 N/A
International 95 1,037 346 187 1,387
- - ----------------------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER 326 7,777 1,887 2,266 7,158
Other Operations 1 200 1 (5) 4
- - ----------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ 327 $ 7,977 $ 1,888 $ 2,261 $ 7,162
==============================================================================================
1996
North American P&C $ 15 $ 4,994 $ 1,154 $ 688 $ 5,688
Life (219) 2,727 241 1,381 N/A
International 73 920 284 198 1,207
- - ----------------------------------------------------------------------------------------------
OPERATIONS BEFORE OTHER (131) 8,641 1,679 2,267 6,895
Other Operations 5 301 (1) 8 11
- - ----------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ (126) $ 8,942 $ 1,678 $ 2,275 $ 6,906
==============================================================================================
<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.
<TABLE>
<CAPTION>
SCHEDULE IV
REINSURANCE
Ceded to Assumed From Percentage of
Gross Other Other Net Amount Assumed
(In millions) Amount Companies Companies Amount to Net
- - ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1998
Life insurance in force $ 528,608 $ 195,920 $ 11,675 $ 344,363 3%
- - ----------------------------------------------------------------------------------------------------------------------------
INSURANCE REVENUES
Property and casualty insurance $ 7,029 $ 656 $ 872 $ 7,245 12%
Life insurance 3,014 157 62 2,919 2%
Accident and health insurance 1,107 60 36 1,083 3%
- - ----------------------------------------------------------------------------------------------------------------------------
TOTAL INSURANCE REVENUES $ 11,150 $ 873 $ 970 $ 11,247 9%
============================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1997
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%
============================================================================================================================
</TABLE>
S-5
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
<TABLE>
<CAPTION>
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
Charged to
Balance Costs and Translation Write-offs/ Balance
January 1, Expenses Adjustment Payments/Other December 31,
- - --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1998
----
Allowance for doubtful accounts $ 118 $ 36 $ -- $ (23) $ 131
Accumulated depreciation of plant,
property and equipment 628 84 2 (119) 595
1997
----
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
- - --------------------------------------------------------------------------------------------------------------------------------
</TABLE>
S-6
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
<TABLE>
<CAPTION>
SCHEDULE VI
SUPPLEMENTAL INFORMATION CONCERNING PROPERTY
AND CASUALTY INSURANCE OPERATIONS
Discount Claims and Claim Adjustment Expenses Paid Claims and
(In millions) Deducted From Incurred Related to: Claim Adjustment
---------------------------------------
Liabilities [1] Current Year Prior Years Expenses
- - -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Years ended December 31,
1998 $ 423 $ 5,404 $ (152) $ 5,151
1997 $ 449 $ 5,065 $ 98 $ 5,000
1996 $ 472 $ 5,075 $ 1,049 $ 4,879
- - -----------------------------------------------------------------------------------------------------------------------------------
<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 5.6%,
6.1% and 6.9% for 1998, 1997 and 1996, 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/ John N. Giamalis
------------------------------------
John N. Giamalis
Senior Vice President and Controller
Date: March 26, 1999
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ramani Ayer Chairman, President, Chief March 26, 1999
- - ---------------------- Executive Officer and Director
Ramani Ayer
/s/ Lowndes A. Smith Vice Chairman and Director March 26, 1999
- - ----------------------
Lowndes A. Smith
/s/ David K. Zwiener Executive Vice President, March 26, 1999
- - ---------------------- Chief Financial Officer and Director
David K. Zwiener
/s/ John N. Giamalis Senior Vice President March 26, 1999
- - ---------------------- and Controller
John N. Giamalis
/s/ Bette B. Anderson Director March 26, 1999
- - ----------------------
Bette B. Anderson
/s/ Rand V. Araskog Director March 26, 1999
- - ----------------------
Rand V. Araskog
/s/ Robert A. Burnett Director March 26, 1999
- - ----------------------
Robert A. Burnett
/s/ Donald R. Frahm Director March 26, 1999
- - ----------------------
Donald R. Frahm
/s/ Paul G. Kirk, Jr. Director March 26, 1999
- - ----------------------
Paul G. Kirk, Jr.
/s/ Frederic V. Salerno Director March 26, 1999
- - -----------------------
Frederic V. Salerno
/s/ Robert W. Selander Director March 26, 1999
- - ----------------------
Robert W. Selander
/s/ H. Patrick Swygert Director March 26, 1999
- - ----------------------
H. Patrick Swygert
/s/ DeRoy C. Thomas Director March 26, 1999
- - ----------------------
DeRoy C. Thomas
/s/ Gordon I. Ulmer Director March 26, 1999
- - ----------------------
Gordon I. Ulmer
II-1
<PAGE>
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
FORM 10-K
EXHIBITS INDEX
Exhibit #
- - ---------
3.01 Amended and Restated Certificate of Incorporation of The Hartford
Financial Services Group, Inc. ("The Hartford"), amended effective May
21, 1998, was filed as Exhibit 3.01 to The Hartford's Form 10-Q for the
quarterly period ended June 30, 1998 and is incorporated herein by
reference.
3.02 Amended By-Laws of The Hartford, amended effective February 18, 1999,
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, 7.30%
Debentures Due November 1, 2015 and 6.375% Notes Due November 1, 2008
(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 Form of The Hartford's 6.375% Notes due November 1, 2008 is filed
herewith.
4.10 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.
4.11 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.
4.12 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 #
- - ---------
4.13 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.
4.14 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.
4.15 Preferred Security Certificate for Hartford Capital I (included as
Exhibit E of the Trust Agreement incorporated by reference as Exhibit
4.12 hereto).
4.16 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.
4.17 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.
4.18 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.
4.19 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.
4.20 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).
4.21 Preferred Security Certificate for Hartford Capital II (included as
Exhibit E of Exhibit 4.18 that is incorporated by reference herein).
4.22 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
Ins