-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, Vx1oRs3aOCeIy48WCa4y/HN2Wr4R1nOu76s8P1cZYr6/IdUEbXgbRr2nTz/mPCtP 4x5P9/Kx3d6i9wI8zaa9Lg== 0000948572-98-000051.txt : 19990902 0000948572-98-000051.hdr.sgml : 19990902 ACCESSION NUMBER: 0000948572-98-000051 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980930 FILED AS OF DATE: 19981116 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-Q SEC ACT: SEC FILE NUMBER: 001-13958 FILM NUMBER: 98751881 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 10-Q 1 THE HARTFORD FINANCIAL SERVICES GROUP, INC. ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 30, 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) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] As of October 31, 1998, there were outstanding 227,968,443 shares of Common Stock, $0.01 par value per share, of the registrant. INDEX PART I. FINANCIAL INFORMATION - - ------------------------------ Item 1. Financial Statements Page ---- Consolidated Statements of Income - Third Quarter and Nine Months Ended September 30, 1998 and 1997 3 Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 4 Consolidated Statements of Changes in Stockholders' Equity - Nine Months Ended September 30, 1998 and 1997 5 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 22 PART II. OTHER INFORMATION - - --------------------------- Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 22 Signature 23 - 2 - PART I. FINANCIAL INFORMATION Item 1. FINANCIAL STATEMENTS
THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Income Third Quarter Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- (In millions, except for per share data) 1998 1997 1998 1997 -------------------------------------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) Revenues Earned premiums and other considerations $ 2,934 $ 2,533 $ 8,612 $ 7,498 Net investment income 691 642 2,060 1,909 Net realized capital gains 15 179 189 252 -------------------------------------------------------------------------------------------------------------------------- Total revenues 3,640 3,354 10,861 9,659 ------------------------------------------------------------------------------------------------------------------- Benefits, claims and expenses Benefits, claims and claim adjustment expenses 2,125 1,929 6,271 5,815 Amortization of deferred policy acquisition costs 537 463 1,591 1,394 Other expenses 665 517 1,960 1,456 -------------------------------------------------------------------------------------------------------------------------- Total benefits, claims and expenses 3,327 2,909 9,822 8,665 ------------------------------------------------------------------------------------------------------------------- Operating income 313 445 1,039 994 Equity gain on HLI initial public offering -- -- -- 368 -------------------------------------------------------------------------------------------------------------------------- Income before income taxes and minority interest 313 445 1,039 1,362 Income tax expense 80 130 273 264 -------------------------------------------------------------------------------------------------------------------------- Income before minority interest 233 315 766 1,098 Minority interest in consolidated subsidiary (19) (16) (52) (21) -------------------------------------------------------------------------------------------------------------------------- Net income $ 214 $ 299 $ 714 $ 1,077 =================================================================================================================== Basic earnings per share $ 0.92 $ 1.26 $ 3.04 $ 4.56 Diluted earnings per share $ 0.91 $ 1.25 $ 3.00 $ 4.51 -------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 232.2 236.5 234.5 236.0 Weighted average common shares outstanding and dilutive potential common shares 235.6 239.5 238.0 238.8 -------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share $ 0.21 $ 0.20 $ 0.63 $ 0.60 --------------------------------------------------------------------------------------------------------------------------
See Notes to Consolidated Financial Statements. - 3 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Balance Sheets September 30, December 31, (In millions, except for share data) 1998 1997 - - --------------------------------------------------------------------------------------------------------------------------------- Assets (Unaudited) Investments Fixed maturities, available for sale, at fair value (amortized cost of $34,295 and $34,061) $ 35,734 $ 35,053 Equity securities, available for sale, at fair value (cost of $1,376 and $1,509) 1,522 1,922 Policy loans, at outstanding balance 3,745 3,759 Other investments, at cost 689 388 - - --------------------------------------------------------------------------------------------------------------------------------- Total investments 41,690 41,122 Cash 135 140 Premiums receivable and agents' balances 2,222 1,873 Reinsurance recoverables 10,266 10,839 Deferred policy acquisition costs 4,658 4,181 Deferred income tax 974 955 Other assets 3,134 2,502 Separate account assets 77,985 70,131 - - --------------------------------------------------------------------------------------------------------------------------------- Total assets $ 141,064 $ 131,743 ========================================================================================================================= Liabilities Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 18,216 $ 18,376 Life 5,825 5,271 Other policy claims and benefits payable 20,819 21,143 Unearned premiums 3,243 2,895 Short-term debt 231 291 Long-term debt 1,482 1,482 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,250 1,000 Other liabilities 5,158 4,672 Separate account liabilities 77,985 70,131 - - --------------------------------------------------------------------------------------------------------------------------------- 134,209 125,261 Commitments and Contingencies, Note 6 Minority Interest in Consolidated Subsidiary 468 397 Stockholders' Equity Common stock - authorized 400,000,000, issued 238,258,675 and 239,374,389 shares, par value $0.01 2 2 Additional paid-in capital 1,573 1,641 Retained earnings 4,224 3,658 Treasury stock, at cost - 8,936,418 and 3,421,949 shares (338) (48) Accumulated other comprehensive income 926 832 - - --------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity 6,387 6,085 ========================================================================================================================= Total liabilities and stockholders' equity $ 141,064 $ 131,743 =========================================================================================================================
See Notes to Consolidated Financial Statements. - 4 - THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Changes in Stockholders' Equity
Nine Months Ended September 30, 1998 Accumulated Other Comprehensive Income ------------------------------- Common Stock/ Treasury Unrealized Gain Cumulative Outstanding Additional Retained Stock, on Securities, Translation Shares (Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands) - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, beginning of period 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 period as adjusted $1,643 $3,658 $(48) $853 $(21) $6,085 235,952 Comprehensive income Net income 714 714 Other comprehensive income, net of tax (2) Unrealized gain on securities 69 69 (3) Cumulative translation adjustments 25 25 ----------- Total other comprehensive income 94 ----------- Total comprehensive income 808 ----------- Issuance of shares under incentive and stock purchase plans 12 40 52 1,606 Tax benefit on employee stock options and awards 15 15 Treasury stock acquired (95) (330) (425) (8,236) Dividends declared on common stock (148) (148) - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, end of period $1,575 $4,224 $(338) $922 $4 $6,387 229,322 ===================================================================================================================================
Nine Months Ended September 30, 1997 Accumulated Other Comprehensive Income ------------------------------- Common Stock/ Treasury Unrealized Gain Cumulative Outstanding Additional Retained Stock, on Securities, Translation Shares (Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands) - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, beginning of period 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 period as adjusted $1,643 $2,515 $(30) $352 $40 $4,520 235,113 Comprehensive income Net income 1,077 1,077 Other comprehensive income, net of tax (2) Unrealized gain on securities 415 415 (3) Cumulative translation adjustments (72) (72) ----------- Total other comprehensive income 343 ----------- Total comprehensive income 1,420 ----------- Issuance of shares under incentive and stock purchase plans 26 26 1,503 Treasury stock acquired (8) (8) (16) (200) Dividends declared on common stock (142) (142) - - ----------------------------------------------------------------------------------------------------------------------------------- Balance, end of period $1,661 $3,450 $(38) $767 $(32) $5,808 236,416 =================================================================================================================================== (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 4 of Notes to Consolidated Financial Statements. (2) Unrealized gain on securities is net of tax of $38 and $228 as of September 30, 1998 and 1997, respectively. There is no tax effect on cumulative translation adjustments. (3) Net of reclassification adjustment for gains realized in net income of $123 and $165 for the nine months ended September 30, 1998 and 1997, respectively.
See Notes to Consolidated Financial Statements. - 5 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Cash Flows Nine Months Ended September 30, ---------------------------------- (In millions) 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------------ (Unaudited) Operating Activities Net income $ 714 $ 1,077 Adjustments to reconcile net income to net cash provided by operating activities Increase in receivables, payables and accruals (242) (201) (Increase) decrease in reinsurance recoverables and other related assets 289 (37) Increase in deferred policy acquisition costs (460) (487) Accrued and deferred income taxes (98) 282 Increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 588 899 Minority interest in consolidated subsidiary 52 21 Equity gain on HLI initial public offering -- (368) Net realized capital gains (189) (252) Depreciation and amortization 78 59 Other, net 51 296 - - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by operating activities 783 1,289 ============================================================================================================================== Investing Activities Purchase of investments (27,143) (33,619) Sale of investments 9,769 20,923 Maturity of investments 17,427 11,060 Purchase of affiliates (359) -- Additions to plant, property and equipment (88) (62) - - ------------------------------------------------------------------------------------------------------------------------------ Net cash used for investing activities (394) (1,698) ============================================================================================================================== Financing Activities Short-term debt, net (60) (418) Issuance of long-term debt -- 650 Proceeds from issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 250 -- Net disbursements for investment and universal life-type contracts charged from policyholder accounts (52) (308) Net proceeds from sale of minority interest in subsidiary -- 687 Dividends paid (146) (142) Acquisition of treasury stock (425) (16) Proceeds from issuances under incentive and stock purchase plans 37 26 - - ------------------------------------------------------------------------------------------------------------------------------ Net cash provided by (used for) financing activities (396) 479 - - ------------------------------------------------------------------------------------------------------------------------------ Foreign exchange rate effect on cash 2 (4) - - ------------------------------------------------------------------------------------------------------------------------------ Net increase (decrease) in cash (5) 66 Cash - beginning of period 140 112 - - ------------------------------------------------------------------------------------------------------------------------------ Cash - end of period $ 135 $ 178 ============================================================================================================================== Supplemental Disclosure of Cash Flow Information: - - ------------------------------------------------- Net Cash Paid (Refunds Received) During the Period For: Income taxes $ 308 $ (45) Interest $ 147 $ 141
See Notes to Consolidated Financial Statements. - 6 - THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in millions except for share data unless otherwise stated) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying unaudited consolidated financial statements of The Hartford Financial Services Group, Inc. ("The Hartford" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim periods. Less than majority-owned entities in which The Hartford has at least a 20% interest are reported on an equity basis. In the opinion of management, these statements include all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented. For a description of accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in The Hartford's 1997 Form 10-K Annual Report. Certain reclassifications have been made to prior year financial information to conform to the current year classification of transactions and accounts. 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 4). Accordingly, all issued, outstanding and weighted average shares, as well as per share amounts, have been adjusted. (b) Changes in 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. The SOP classifies insurance and reinsurance contracts for which the deposit method is appropriate into those that 1) transfer only significant timing risk, 2) transfer only significant underwriting risk, 3) transfer neither significant timing nor underwriting risk and 4) have an indeterminate risk. 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 September 1998, the Securities and Exchange Commission stated that until the Emerging Issues Task Force concludes its discussion regarding the accounting for combined structured notes, 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 recently 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. Included in net income for the third quarter and nine months ended September 30, 1998, were $26 and $58, respectively, of after-tax net realized capital losses and approximately $2 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 ("GAAP"). Had the transactions been accounted for as units, based upon recently prescribed GAAP for such types of transactions entered into after September 24, 1998, net income would have been approximately $24 and $56 higher for the third quarter and nine months ended September 30, 1998, respectively. In June 1998, the Financial Accounting Standards Board 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. The Hartford is currently in the process of quantifying the impact of SFAS No. 133. 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 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. 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 Changes in Stockholders' Equity. - 7 - NOTE 2. DEBT 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. 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 June 8, 1998, Hartford Life, Inc. ("HLI"), a public company in which The Hartford has an approximately 81% equity interest, 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 below, HLI had $750 remaining on this shelf registration on September 30, 1998. NOTE 3. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES 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 strategic 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 Subordinate Debentures at maturity or upon earlier redemption. HLI has the right to redeem the Series A Junior Subordinated Debt Securities 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 Series A Junior Subordinated Debt Securities 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. NOTE 4. STOCKHOLDERS' EQUITY 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. NOTE 5. EARNINGS PER SHARE The Company adopted SFAS No. 128, "Earnings per Share", effective December 15, 1997, and as a result, the Company's reported earnings per share for September 30, 1997 were restated to reflect the effect of reporting diluted earnings per share. The following tables present a reconciliation of income and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share. - 8 -
Third Quarter Ended Nine Months Ended ------------------------------------- ----------------------------------- Per Share Per Share September 30, 1998 Income Shares Amount Income Shares Amount --------------------------------------------------------------------------------------------------------------------------------- Basic Earnings per Share Income available to common shareholders $ 214 232.2 $ 0.92 $ 714 234.5 $ 3.04 ------------- ---------- Diluted Earnings per Share Options and contingently issuable shares -- 3.4 -- 3.5 ------------------------ ------------------------- Income available to common shareholders plus assumed conversions $ 214 235.6 $ 0.91 $ 714 238.0 $ 3.00 --------------------------------------------------------------------------------------------------------------------------------- September 30, 1997 --------------------------------------------------------------------------------------------------------------------------------- Basic Earnings per Share Income available to common shareholders $ 299 236.5 $ 1.26 $ 1,077 236.0 $ 4.56 ------------- ---------- Diluted Earnings per Share Options and contingently issuable shares -- 3.0 -- 2.8 ------------------------ ------------------------- Income available to common shareholders plus assumed conversions $ 299 239.5 $ 1.25 $ 1,077 238.8 $ 4.51 ---------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share are computed based on the weighted average number of shares outstanding during the period. Diluted earnings per share include the dilutive effect of outstanding stock 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. NOTE 6. COMMITMENTS AND CONTINGENCIES (a) Litigation The Hartford is involved in various legal actions, some of which involve claims for substantial amounts. In the opinion of management, the ultimate liability with respect to such lawsuits is not expected to be material to the consolidated financial condition, results of operations or cash flows of The Hartford. (b) Environmental and Asbestos Claims Information regarding environmental and asbestos claims may be found in the Environmental and Asbestos Claims section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. (c) Investments As of September 30, 1998, The Hartford held $162 million of asset-backed securities securitized and serviced by Commercial Financial Services Inc. ("CFS"). In October 1998, the Company became aware of allegations of improper activities at CFS. CFS has engaged an independent accounting firm and outside legal counsel to investigate these allegations. Currently, these securities are performing in line with expectations. Based upon information available at this time, the Company is presently unable to determine the amount of potential loss, if any, related to the securities. NOTE 7. SUBSEQUENT EVENT 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 sold through intermediaries 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 has discontinued writing new business. - 9 - Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in millions except per share data unless otherwise stated) Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") addresses the financial condition of The Hartford as of September 30, 1998, compared with December 31, 1997, and its results of operations for the third quarter and nine months ended September 30, 1998 compared with the equivalent 1997 periods. This discussion should be read in conjunction with the MD&A included in The Hartford's 1997 Form 10-K Annual Report. Certain of the statements contained herein (other than statements of historical fact) are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty which are, in many instances, beyond the Company's control and have been made based upon management's expectations and beliefs concerning future developments and their potential effect upon The Hartford. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on The Hartford will be those anticipated by management. Actual results could differ materially from those expected by The Hartford, depending on the outcome of certain factors, including 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 10 North American Property & Casualty 11 Life 12 International 13 Other Operations 14 Environmental and Asbestos Claims 14 Investments 16 Capital Markets Risk Management 18 Capital Resources and Liquidity 19 Regulatory Initiatives and Contingencies 20 Accounting Standards 22 CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
Operating Summary Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1998 1997 1998 1997 -------------- -------------- -------------- ----------- Total revenues $ 3,640 $ 3,354 $ 10,861 $ 9,659 - - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 214 $ 299 $ 714 $ 1,077 Less: Net realized capital gains, after-tax 10 116 123 165 Equity gain on HLI initial public offering -- -- -- 368 - - ------------------------------------------------------------------------------------------------------------------------------------ Core earnings $ 204 $ 183 $ 591 $ 544 ====================================================================================================================================
The Hartford defines "core earnings" as after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes, allocated Distribution items and certain other items. Core earnings is an internal performance measure used by the Company in the management of its operations. Management believes that this performance measure delineates the results of operations of the Company's ongoing lines of business in a manner that allows for a better understanding of the underlying trends in the Company's current business. However, core earnings should only be analyzed in conjunction with, and not in lieu of, net income and may not be comparable to other performance measures used by the Company's competitors. Revenues for the third quarter and nine months ended September 30, 1998 increased $286, or 9%, and $1,202, or 12%, respectively, over the comparable prior year periods. Contributing to the improvement in both periods were increases in the aggregate fees earned on separate account assets and fees associated with new variable corporate owned life insurance ("COLI") sales, an increase in earned premiums and service fee revenue and higher net investment income, partially offset by lower net realized capital gains. In addition, revenues for the nine month period also increased as the 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.) Core earnings increased $21, or 11%, and $47, or 9%, for the third quarter and nine months ended September 30, 1998, respectively, from the comparable prior year periods. Contributing to the increase in both periods were higher fee income earned on increasing account values in the Annuity division of the Life segment and an increase in net investment income, partially offset by increased underwriting losses, primarily the result of higher catastrophe losses in the North American Property & Casualty segment totaling $40 and $125, - 10 - after-tax, for the third quarter and nine months ended September 30, 1998, respectively, compared to $16 and $35, after-tax, for the same periods in 1997. In addition, core earnings for the nine month period also were higher as a result of proceeds from the IRI transaction, partially offset by additional reserves associated with the IRI transaction. The effective tax rates for the third quarter and nine months ended September 30, 1998, excluding the equity gain on Hartford Life, Inc. ("HLI"), were 26% and 26%, respectively, compared to 29% and 27% for the comparable periods in 1997. Tax-exempt interest earned on invested assets was a principal cause of effective tax rates lower than the 35% U.S. statutory rate. Net income for the nine months ended September 30, 1997 includes a $368 equity gain resulting from the initial public offering of HLI's Class A common stock ("The Offering") on May 22, 1997 as discussed in The Hartford's 1997 Form 10-K Annual Report in Note 3 of Notes to Consolidated Financial Statements and in the Capital Resources and Liquidity section under "The Offering". HLI is the holding company parent of The Hartford's significant life insurance subsidiaries. For a discussion of the impact to net income of combined structured note transactions, see Note 1(b) of Notes to the Consolidated Financial Statements. SEGMENT RESULTS The Hartford's reporting segments consist of North American Property & Casualty, Life, International and Other Operations. Included in Other Operations is the effect of an approximately 19% minority interest in HLI's operating results. The following is a summary of core earnings and net income by segment.
Third Quarter Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------- Core earnings 1998 1997 1998 1997 - - ----------------------------------------------------------------------------------------------------------------------------------- North American Property & Casualty $ 112 $ 109 $ 327 $ 313 Life 100 83 278 219 International 9 8 35 35 Other Operations (17) (17) (49) (23) - - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 204 $ 183 $ 591 $ 544 - - ----------------------------------------------------------------------------------------------------------------------------------- Net income - - ----------------------------------------------------------------------------------------------------------------------------------- North American Property & Casualty $ 112 $ 214 $ 405 $ 429 Life 100 83 278 219 International 18 19 78 84 Other Operations (16) (17) (47) 345 - - ----------------------------------------------------------------------------------------------------------------------------------- Total $ 214 $ 299 $ 714 $ 1,077 ===================================================================================================================================
The sections that follow analyze each segment's results. Specific topics such as environmental and asbestos reserves and investment results are discussed separately following the segment overviews. NORTH AMERICAN PROPERTY & CASUALTY Operating Summary
Third Quarter Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------- 1998 1997 1998 1997 -------------- -------------- -------------- ---------- Total revenues $ 1,848 $ 1,836 $ 5,502 $ 5,142 - - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 112 $ 214 $ 405 $ 429 Less: Net realized capital gains, after-tax -- 105 78 116 - - ----------------------------------------------------------------------------------------------------------------------------------- Core earnings $ 112 $ 109 $ 327 $ 313 - - -----------------------------------------------------------------------------------------------------------------------------------
Revenues for the North American Property & Casualty segment increased $12, or 1%, for the third quarter and $360, or 7%, for the nine months ended September 30, 1998, compared with the same periods in 1997. The increase for the quarter resulted from a $140 increase in earned premiums, a $22 increase in servicing revenues and a $12 increase in net investment income before-tax, offset by a decrease in before-tax net realized capital gains of $162. The increase for the nine months resulted from a $183 increase in earned premiums, a $130 increase in servicing revenues, proceeds of $55 from the IRI transaction and an increase of $50 in net investment income, partially offset by a $58 decrease in before-tax net realized capital gains. The primary contributor to the increase in servicing revenues was the Hartford Customer Services Group, which provides customer and telemarketing services for The American Association of Retired Persons ("AARP") Health Care Options program as of January 1, 1998, generating $20 of the revenue increase for the quarter and $120 of the increase for the nine month period. - 11 - Core earnings were up $3, or 3%, for the quarter and increased $14, or 4%, for the first nine months of 1998, compared to the same periods in 1997. The increase for the quarter was primarily due to an increase in after-tax net investment income, partially offset by increases in adjusted underwriting losses and other expenses. The increase for the nine month period was primarily due to increased after-tax net investment income and after-tax proceeds from the IRI transaction, partially offset by increased underwriting losses due to property catastrophe losses and additional reserves associated with the IRI transaction. UNDERWRITING RESULTS Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses. The following table displays written premiums, underwriting results and combined ratios for The Hartford's North American Property & Casualty segment:
Third Quarter Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------- 1998 1997 1998 1997 -------------------------------------------------------- Written premiums $ 1,585 $ 1,449 $ 4,616 $ 4,376 Underwriting results, before-tax $ (37) $ (32) $ (159) $ (92) Combined ratio [1] 102.5 102.4 103.4 101.9 - - ----------------------------------------------------------------------------------------------------------------------------------- [1] "Combined ratio" is a common industry measurement of property and casualty underwriting profitability. This ratio is the sum of the ratio of incurred claims and claim adjustment expenses to premiums earned and the ratio of underwriting expenses incurred to premiums written.
The North American Property & Casualty segment's written premiums increased $136, or 9%, for the third quarter and $240, or 5%, for the nine months ended September 30, 1998, compared to the same prior year periods. The improvement for both periods resulted from increases in Personal and Reinsurance operations, partially offset by a slight decrease in Commercial operations. Personal written premiums increased $97, or 20%, for the quarter and $234, or 16%, for the nine months ended September 30, 1998. This contributed 7% and 5% of growth to the North American Property & Casualty segment for the third quarter and nine months ended September 30, 1998, respectively. All three customer divisions within Personal (AARP, Agency and Affinity) produced premium growth for both 1998 periods over 1997. In addition, the acquisition of Omni Insurance Group, Inc., completed on February 12, 1998, contributed $46 and $106, respectively, to the written premium increase for the quarter and nine months ended September 30, 1998. Reinsurance written premiums increased $47, or 28%, for the third quarter and $23, or 4%, for the nine months ended September 30, 1998. This contributed 3% and 1% of growth to the North American Property & Casualty segment for the third quarter and nine months ended September 30, 1998, respectively. A single finite-risk account written in the third quarter in excess of $70 generated the premium increases for both 1998 periods over 1997. Absent this transaction, Reinsurance premiums decreased primarily due to continued softening in reinsurance pricing and increased customer risk retentions. Commercial written premiums decreased $8, or 1%, for the third quarter and $17, or 1%, for the nine months ended September 30, 1998, resulting in a 1% decrease to the North American Property & Casualty segment for both periods. For the quarter, 8% growth in Select Customers and 21% growth in Affinity were offset by declines in Key Accounts of 6%, Major/National of 7% and Other Specialty of 18%. For the nine months, growth in Select Customers of 8%, Affinity of 16% and Marine/Agriculture of 9% were offset by decreases in Major/National Accounts of 12% and Other Specialty of 31%. These decreases were primarily due to increased conversion of workers' compensation to high deductible policies and the elimination of Industrial Risk Insurance premiums in 1998 as a result of the IRI transaction. For the third quarter and nine months ended September 30, 1998, underwriting results, before-tax, deteriorated over the comparable prior year periods by $5, or 0.1 combined ratio points and $67, or 1.5 combined ratio points, respectively. The deterioration in both 1998 periods was due to significantly increased property catastrophe losses, partially offset by increased earned premiums. Also contributing to the nine month deterioration was the establishment of additional reserves in connection with the IRI transaction in the first quarter of 1998 upon review of existing claims and outstanding reinsurance assets of the Industrial Risk Insurers pool. LIFE Operating Summary [1]
Third Quarter Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------- 1998 1997 1998 1997 -------------- -------------- -------------- ---------- Total revenues $ 1,287 $ 1,058 $ 3,846 $ 3,155 - - ----------------------------------------------------------------------------------------------------------------------------------- Net income/Core earnings $ 100 $ 83 $ 278 $ 219 =================================================================================================================================== [1] Life results are presented before the effect of the approximately 19% minority interest in HLI, which is reflected in Other Operations.
- 12 - Revenues increased $229, or 22%, and $691, or 22%, for the third quarter and nine months ended September 30, 1998, compared to the third quarter and nine months ended September 30, 1997, respectively. This increase was primarily attributable to the Annuity division which experienced a substantial increase in the aggregate fees earned which was driven by the division's increased level of assets under management. Despite the fact that the equity market did not experience significant appreciation during the third quarter of 1998, the division's assets under management have increased from prior year levels. Average total annuity account values increased $12.5 billion, or 20%, compared to the third quarter of 1997 and $12.0 billion, or 21%, compared to the nine months ended September 30, 1997. The increase in average annuity account values resulted in an increase in fee revenue of $66, or 36%, and $225, or 46%, compared to the third quarter and nine months ended September 30, 1997, respectively. The increase in account values was driven primarily by sales of individual variable annuities which remained strong at $2.4 billion and $7.6 billion for the third quarter and nine months ended September 30, 1998, respectively, compared to sales of $2.5 billion and $7.2 billion for the third quarter and nine months ended September 30, 1997, respectively. In addition, revenues in the Employee Benefits division increased $142, or 27%, and $404, or 25%, respectively, for the third quarter and nine months ended September 30, 1998 compared to the equivalent 1997 periods. This improvement was partially due to revenues related to the Group Insurance Operation which increased $47, or 12%, and $158, or 13%, respectively, for the third quarter and nine months ended September 30, 1998 compared to the equivalent 1997 periods, as a result of strong sales. Additionally, COLI revenues increased $55, or 34%, and $209, or 43%, for the third quarter and nine months ended September 30, 1998, respectively, as compared to the same periods in 1997, due to renewal premiums on leveraged COLI and increased fee income related to new sales of variable COLI. Core earnings increased $17, or 20%, and $59, or 27%, for the third quarter and nine months ended September 30, 1998, respectively, compared to the equivalent prior year periods, primarily due to growth in the Annuity, Individual Life and Employee Benefits divisions. Annuity earnings increased $14, or 26%, and $49, or 34%, respectively, compared to the prior year periods, as a result of higher fee income earned on increasing account values and continued operating efficiencies. Individual Life earnings increased $2, or 13%, and $7, or 18%, respectively, compared to the prior year periods, primarily as a result of continued growth in variable life account values. Employee Benefits' earnings increased $1, or 4%, for the third quarter of 1998 and decreased $1, or 2%, for the nine months ended 1998, compared to the respective prior year periods. Earnings in the Group Insurance operation increased $3, or 19%, and $9, or 21%, respectively, compared to the prior year periods, as a result of increased premium revenues and the benefit of favorable mortality and morbidity experience. Partially offsetting these increases was an operating loss from the Life segment's international operation of ($1) and ($5) for the third quarter and nine months ended September 30, 1998, respectively, compared to no earnings for the third quarter of 1997 and $3 for the nine months ended September 30, 1997. In addition, Employee Benefits' earnings related to COLI decreased $1 and $2, for the third quarter and nine months ended September 30, 1998, respectively, compared to the prior year periods. INTERNATIONAL Operating Summary
Third Quarter Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------- 1998 1997 1998 1997 -------------- -------------- -------------- ---------- Total revenues $ 465 $ 419 $ 1,389 $ 1,243 - - ----------------------------------------------------------------------------------------------------------------------------------- Net income $ 18 $ 19 $ 78 $ 84 Less: Net realized capital gains, after-tax 9 11 43 49 - - ----------------------------------------------------------------------------------------------------------------------------------- Core earnings $ 9 $ 8 $ 35 $ 35 ===================================================================================================================================
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 sold through intermediaries 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 has discontinued writing new business. Revenues for the third quarter and nine months ended September 30, 1998 increased $46, or 11%, and $146, or 12%, over the comparable periods in 1997. This increase was primarily due to earned premium growth of $44, or 12%, and $145, or 14%, respectively, for the third quarter and nine month periods, principally at London & Edinburgh, as a result of growth in creditor and property lines, partially offset by reductions in the motor business. In addition, for the nine month period, earned premiums increased $12, or 26%, at ITT Ercos primarily due to growth in the motor business. Net investment income increased $4, or 9%, and $9, or 7%, for the third quarter and nine month periods, respectively, as compared to the equivalent 1997 periods. Net realized capital gains decreased $2, or 13%, and $8, or 11% for the third quarter and nine month periods, respectively, as compared to the equivalent 1997 periods. (For an analysis of net investment income and net realized capital gains, see the Investments section.) Core earnings for the third quarter increased by $1, or 13%, and were flat for the nine months ended September 30, 1998, compared to the equivalent 1997 periods. For both the quarter and nine month periods, core earnings increases of $1 at London & Edinburgh were offset by decreases at Zwolsche Algemeene - 13 - and ITT Ercos of $2 and $1, respectively. The decreases were primarily due to deterioration in property and casualty underwriting results, slightly offset by improved life results at Zwolsche Algemeene. Underwriting results for London & Edinburgh, for the nine month period ended September 30, 1998, remained flat over prior year results due to January storms, the effect of April floods and reserve deterioration in motor and professional indemnity, offset in part by improved underwriting results in other lines including creditor and property lines. There was a negligible foreign exchange impact on total revenues and core earnings for the third quarter. For the nine months ended September 30, 1998, there was an overall negative foreign exchange impact on total revenues and core earnings of $7 and $1, respectively. The negative core earnings impact was due primarily to weakness in the Dutch guilder and Spanish peseta. OTHER OPERATIONS Operating Summary
Third Quarter Ended Nine Months Ended September 30, September 30, ----------------------------- ------------------------- 1998 1997 1998 1997 -------------- -------------- -------------- ---------- Total revenues $ 40 $ 41 $ 124 $ 119 - - ----------------------------------------------------------------------------------------------------------------------------------- Net income (loss) $ (16) $ (17) $ (47) $ 345 Less: Net realized capital gains (losses), after-tax 1 -- 2 -- Equity gain on HLI initial public offering -- -- -- 368 - - ----------------------------------------------------------------------------------------------------------------------------------- Core earnings $ (17) $ (17) $ (49) $ (23) - - -----------------------------------------------------------------------------------------------------------------------------------
Other Operations consist of property and casualty operations of The Hartford which have discontinued writing new business, as well as the effect of an approximately 19% minority interest in HLI's operating results. For the third quarter and nine months ended September 30, 1998, core earnings included $(19) and $(52) minority interest in HLI's operating results, respectively, while 1997 included $(16) and $(21), respectively, for the comparable prior year periods. (For additional information regarding HLI's results, see the Life section.) Excluding minority interest, core earnings increased $3 and $5 over the third quarter and nine months ended September 30, 1997, respectively. The equity gain consisted of a $368 non-taxable gain related to the increased value of The Hartford's equity ownership in HLI, as discussed in The Hartford's 1997 Form 10-K Annual Report in the Life section of the MD&A. ENVIRONMENTAL AND ASBESTOS CLAIMS The Hartford continues to receive claims asserting damages from environmental exposures and for injuries from asbestos and asbestos-related products, both of which affect the North American Property & Casualty, International and Other Operations segments. Environmental claims relate primarily to pollution and related clean-up costs. With regard to these claims, uncertainty exists which impacts the ability of insurers and reinsurers to estimate the ultimate reserves for unpaid losses and related settlement expenses. The Hartford finds that conventional reserving techniques cannot estimate the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. For the majority of environmental claims and many types of asbestos claims, unlike any other type of contractual claim, there is almost no agreement or consistent precedent to determine what, if any, coverage exists or which, if any, policy years and insurers or reinsurers may be liable. Further uncertainty arises with environmental claims since claims are often made under policies, the existence of which may be in dispute, the terms of which may have changed over many years, which may or may not provide for legal defense costs, and which may or may not contain environmental exclusion clauses that may be absolute or allow for fortuitous events. Courts in different jurisdictions have reached disparate conclusions on similar issues and in certain situations have broadened the interpretation of policy coverage and liability issues. In light of the extensive claim settlement process for environmental and asbestos claims, involving comprehensive fact gathering, subject matter expertise and intensive litigation, The Hartford established an environmental claims facility in 1992 to defend itself aggressively against unwarranted claims and to minimize costs. Within the property and casualty insurance industry, progress has been made in developing sophisticated, alternative methodologies utilizing company experience and supplemental databases to assess environmental and asbestos liabilities. Consistent with The Hartford's practice of using the best techniques to estimate the Company's environmental and asbestos exposures, a study was conducted in 1996 utilizing internal staff supplemented by outside legal and actuarial consultants. Use of these new methodologies resulted in The Hartford adjusting its environmental and asbestos liabilities in the third quarter of 1996. (For additional information, see The Hartford's 1997 Form 10-K Annual Report.) Reserve activity for both reported and unreported environmental and asbestos claims, including reserves for legal defense costs, for the nine months ended September 30, 1998 and the year ended December 31, 1997, was as follows (net of reinsurance): - 14 -
Environmental and Asbestos Claims Claims and Claim Adjustment Expenses Nine Months Ended Year Ended September 30, 1998 December 31, 1997 ------------------------------------------------------------------------------- Environmental Asbestos Total Environmental Asbestos Total ------------------------------------------------------------------------------- Beginning liability $ 1,312 $ 688 $ 2,000 $ 1,439 $ 717 $ 2,156 Claims and claim adjustment expenses incurred 4 4 8 -- 2 2 Claims and claim adjustment expenses paid (117) (33) (150) (113) (45) (158) Other [1] -- -- -- (14) 14 -- ---------------------------------------------------------------------------------------------------------------------------------- Ending liability [2] $ 1,199 $ 659 $ 1,858 $ 1,312 $ 688 $ 2,000 ---------------------------------------------------------------------------------------------------------------------------------- [1] Other represents reclassifications of beginning reserves between environmental and asbestos for December 31, 1997. [2] The ending liabilities are net of reinsurance on reported and unreported claims of $1,678 and $1,853 for September 30, 1998 and December 31, 1997, respectively. Gross of reinsurance, as of September 30, 1998 and December 31, 1997 reserves for environmental and asbestos were $1,919 and $1,617 and $2,165 and $1,688, respectively.
The Hartford believes that the environmental and asbestos reserves recorded at September 30, 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. - 15 - INVESTMENTS An important element of the financial results of The Hartford is return on invested assets. The Hartford's investment activities are divided between the reportable segments of North American Property & Casualty, Life, International and Other Operations. The investment portfolios for these segments are managed based on the underlying characteristics and nature of their respective liabilities. For a further discussion on The Hartford's approach to managing risks, see the Capital Markets Risk Management section. Please refer to The Hartford's 1997 Form 10-K Annual Report for a description of the Company's investment objectives and policies. NORTH AMERICAN PROPERTY & CASUALTY Total invested assets were $ 14.9 billion at September 30, 1998 and were comprised of fixed maturities of $13.6 billion and other investments of $1.3 billion, primarily equity securities. Fixed Maturities by Type - - ----------------------------------------------------------------- September 30, 1998 December 31, 1997 - - ----------------------------------------------------------------- Fair Fair Type Value Percent Value Percent - - ----------------------------------------------------------------- Municipal - tax-exempt $ 8,030 58.9% $ 7,873 58.5% Corporate 2,104 15.4% 2,257 16.8% Commercial MBS 668 4.9% 687 5.1% Gov't/Gov't agencies - For. 492 3.6% 459 3.4% ABS 477 3.5% 559 4.2% CMO 457 3.4% 483 3.6% MBS - agency 361 2.6% 540 4.0% Gov't/Gov't agencies - U.S. 54 0.4% 32 0.2% Municipal - taxable 25 0.2% 31 0.2% Short-term 895 6.6% 479 3.6% Redeemable pref'd stock 66 0.5% 56 0.4% - - ----------------------------------------------------------------- Total fixed maturities $ 13,629 100.0% $ 13,456 100.0% - - ----------------------------------------------------------------- The taxable equivalent duration of the September 30, 1998 fixed maturity portfolio was 4.5 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 the North American Property & Casualty segment's results. Third Quarter Nine Months Ended Ended September 30, September 30, ---------------------------------------- 1998 1997 1998 1997 - - ------------------------------------------------------------------ Net investment income, before-tax $ 210 $ 198 $ 618 $ 568 Net investment income, after-tax [1] $ 166 $ 157 $ 492 $ 454 Yield on average invested assets, before-tax [2] 5.9% 5.6% 5.8% 5.7% Yield on average invested assets, after-tax [1] [2] 4.7% 4.5% 4.6% 4.5% Net realized capital gains, before-tax $ -- $ 162 $ 121 $ 179 - - ------------------------------------------------------------------ [1] Due to the significant holdings in tax-exempt investments, after-tax net investment income and after-tax yield are also included. [2] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). For the third quarter ended September 30, 1998, before-tax net investment income was $210 compared to $198 in 1997, an increase of 6%, while after-tax net investment income also increased 6% to $166. Before-tax yields on average invested assets for the third quarter increased to 5.9% from 5.6% in 1997. For the nine months ended September 30, 1998, before-tax net investment income was $618 compared to $568 in 1997, an increase of 9%, while after-tax net investment income increased 8% to $492. Before-tax yields for the nine month period increased to 5.8% from 5.7% in 1997. The increase in net investment income for both periods was the result of higher invested assets. The increase in yields on average invested assets was due primarily to the reallocation from equities to higher yielding fixed maturities. There were no net realized capital gains for the third quarter ended September 30, 1998, compared to $162 for the same period in 1997, and year to date gains decreased to $121 from $179 in 1997. During the quarter, write downs related to certain below investment grade bonds were offset by gains from the sale of fixed maturity and equity securities. LIFE Invested assets, excluding separate accounts, totaled $21.4 billion at September 30, 1998 and were comprised of $17.1 billion of fixed maturities, $3.7 billion of policy loans, and other investments of $575. Policy loans, which had a weighted-average interest rate of 11.0% as of September 30, 1998, are secured by the cash value of the life policy. These loans do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. Fixed Maturities by Type - - ------------------------------------------------------------------ September 30, 1998 December 31, 1997 - - ----------------------------------------------------------------- Fair Fair Type Value Percent Value Percent - - ----------------------------------------------------------------- Corporate $ 7,942 46.4% $ 7,970 47.3% ABS 2,890 16.9% 3,199 19.0% Commercial MBS 2,097 12.2% 1,606 9.5% CMO 935 5.5% 978 5.8% Municipal - tax-exempt 838 4.9% 171 1.0% Gov't/Gov't agencies - For. 576 3.4% 502 3.0% MBS - agency 494 2.9% 514 3.1% Municipal - taxable 234 1.4% 267 1.6% Gov't/Gov't agencies - U.S. 105 0.6% 241 1.4% Short-term 996 5.8% 1,395 8.3% Redeemable preferred stock 5 -- 5 -- - - ----------------------------------------------------------------- Total fixed maturities $ 17,112 100.0% $ 16,848 100.0% - - ----------------------------------------------------------------- INVESTMENT RESULTS The table below summarizes the Life segment's results. Third Quarter Nine Months Ended Ended September 30, September 30, ---------------------------------------- (before-tax) 1998 1997 1998 1997 - - ------------------------------------------------------------------ Net investment income $ 393 $ 360 $ 1,185 $ 1,097 Yield on average invested assets [1] 7.5% 7.1% 7.6% 7.3% Net realized capital $ -- $ 1 $ -- $ -- gains - - ------------------------------------------------------------------ [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). - 16 - For the third quarter ended September 30, 1998, before-tax net investment income was $393 compared to $360 in 1997, an increase of 9% as a result of higher average invested assets and increased yields on average invested assets. Before-tax yields on average invested assets for the third quarter increased to 7.5% from 7.1% in 1997. For the nine months ended September 30, 1998, before-tax net investment income was $1,185 compared to $1,097 in 1997, an increase of $88, or 8%. Before-tax yields for the nine month period increased to 7.6% from 7.3% in 1997. The increase in yields on average invested assets for both periods was due, in part, to an increase in the allocation to assets rated BBB (see Capital Markets Risk Management section below) when compared to the prior year periods. The Life segment also continued its objective of increasing the allocation to municipal tax-exempt securities in order to increase after-tax yields. There were no net realized capital gains for the quarter and nine months ended September 30, 1998. During the quarter, write downs related to certain below investment grade bonds were offset by gains from the sale of fixed maturity and equity securities. INTERNATIONAL Invested assets, excluding separate accounts, were $2.9 billion at September 30, 1998 and were comprised of fixed maturities of $2.5 billion and other investments of $371, primarily equity securities. Fixed Maturities by Type - - ------------------------------------------------------------------ September 30, 1998 December 31, 1997 - - ----------------------------------------------------------------- Fair Fair Type Value Percent Value percent - - ----------------------------------------------------------------- Gov't/Gov't agencies - For. $ 967 38.4% $ 829 36.5% Corporate 522 20.8% 414 18.3% Gov't/Gov't agencies - U.S. 11 0.4% 19 0.8% Short-term 1,015 40.4% 1,007 44.4% - - ----------------------------------------------------------------- Total fixed maturities $ 2,515 100.0% $ 2,269 100.0% - - ----------------------------------------------------------------- INVESTMENT RESULTS The table below summarizes the International segment's results. Third Quarter Nine Months Ended Ended September 30, September 30, ---------------------------------------- (before-tax) 1998 1997 1998 1997 - - ------------------------------------------------------------------ Net investment income $ 48 $ 44 $ 137 $ 128 Yield on average invested assets [1] 7.0% 6.9% 6.8% 6.8% Net realized capital $ 14 $ 16 $ 65 $ 73 gains - - ------------------------------------------------------------------ [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). For the third quarter ended September 30, 1998, before-tax net investment income was $48 compared to $44 in 1997, an increase of 9%. Before-tax yields on average invested assets for the third quarter increased to 7.0% from 6.9% in 1997. For the nine months ended September 30, 1998, before-tax net investment income was $137 compared to $128 in 1997, an increase of 7%. Before-tax yields for the nine month period remained unchanged from 1997 at 6.8%. The increase in yields on average invested assets for the quarter was primarily due to an increase in short-term interest rates in the United Kingdom. The increase in net investment income for the quarter and nine months was primarily the result of a higher invested asset base. Net realized capital gains for the third quarter ended September 30, 1998 decreased to $14 compared to $16 for the same period in 1997, and year to date gains decreased to $65 from $73 in 1997. OTHER OPERATIONS Invested assets were $2.5 billion at September 30, 1998 and were substantially comprised of fixed maturities. Fixed Maturities by Type - - ------------------------------------------------------------------ September 30, 1998 December 31, 1997 - - ----------------------------------------------------------------- Fair Fair Type Value Percent Value Percent - - ----------------------------------------------------------------- Corporate $ 1,656 66.8% $ 1,530 61.7% Commercial MBS 147 5.9% 149 6.0% ABS 228 9.2% 142 5.7% Gov't/Gov't agencies - U.S. 82 3.3% 88 3.5% Gov't/Gov't agencies - For. 55 2.2% 83 3.3% MBS - agency 46 1.9% 56 2.3% Municipal - taxable 41 1.7% 39 1.6% CMO 17 0.7% 27 1.1% Short-term 197 7.9% 357 14.4% Redeemable preferred stock 9 0.4% 9 0.4% - - ----------------------------------------------------------------- Total fixed maturities $ 2,478 100.0% $ 2,480 100.0% - - ----------------------------------------------------------------- INVESTMENT RESULTS The table below summarizes the Other Operations segment's results. Third Quarter Nine Months Ended Ended September 30, September 30, ---------------------------------------- (before-tax) 1998 1997 1998 1997 - - ------------------------------------------------------------------ Net investment income $ 40 $ 40 $ 120 $ 116 Yield on average invested assets [1] 6.7% 7.0% 6.6% 6.8% Net realized capital $ 1 $ -- $ 3 $ -- gains - - ------------------------------------------------------------------ [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). For the third quarter ended September 30, 1998, before-tax net investment income remained unchanged from 1997 at $40. Before-tax yields on average invested assets for the third quarter decreased to 6.7% from 7.0% in 1997. For the nine months ended September 30, 1998, before-tax net investment income was $120 compared to $116 in 1997, an increase of 3%. Before-tax yields for the nine month period decreased to 6.6% from 6.8% in 1997. - 17 - CAPITAL MARKETS RISK MANAGEMENT The Hartford has a disciplined approach to managing risks associated with its capital markets and asset/liability management activities. Investment portfolio management is organized to focus investment management expertise on specific classes of investments while asset/liability management is the responsibility of separate and distinct risk management units supporting the property and casualty and life operations. Derivative instruments are utilized in accordance with established Company policy and are monitored internally and reviewed by senior management. The Company is exposed to two primary sources of investment and asset/liability management risk: credit risk, relating to the uncertainty associated with the ability of an obligor or counterparty to make timely payments of principal and/or interest, and market risk, relating to the market price and/or cash flow variability associated with changes in interest rates, securities prices, market indices, yield curves or currency exchange rates. The Company does not hold any financial instruments entered into for trading purposes. Please refer to The Hartford's 1997 Form 10-K Annual Report for a description of the Company's objectives, policies and strategies. CREDIT RISK The Company invests primarily in investment grade securities and has established exposure limits, diversification standards and review procedures for all credit risks whether borrower, issuer or counterparty. Creditworthiness of specific obligors is determined by an internal credit evaluation supplemented by consideration of external determinants of creditworthiness, typically ratings assigned by nationally recognized ratings agencies. Obligor, geographic, asset sector and industry concentrations are subject to established limits and monitored on a regular interval. The Hartford is not exposed to any significant credit concentration risk of a single issuer. For a discussion of investment contingencies, see Note 6 (c) of Notes to Consolidated Financial Statements. 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 September 30, 1998, over 96% of the fixed maturity portfolio was invested in investment-grade securities. Fixed Maturities by Credit Quality - - ----------------------------------------------------------------- September 30, 1998 December 31, 1997 - - ----------------------------------------------------------------- Fair Fair Credit Quality Value Percent Value Percent - - ----------------------------------------------------------------- U.S. Gov't/Gov't agencies $ 871 4.8% $ 1,083 6.1% AAA 6,566 36.1% 6,337 35.4% AA 3,204 17.6% 3,426 19.1% A 3,326 18.3% 3,096 17.3% BBB 1,521 8.3% 1,352 7.6% BB & below 643 3.5% 767 4.3% Short-term 2,079 11.4% 1,832 10.2% - - ----------------------------------------------------------------- Total fixed maturities $ 18,210 100.0% $ 17,893 100.0% - - ----------------------------------------------------------------- LIFE OPERATIONS As of September 30, 1998, over 98% of the fixed maturity portfolio was invested in investment-grade securities. Fixed Maturities by Credit Quality - - ----------------------------------------------------------------- September 30, 1998 December 31, 1997 - - ----------------------------------------------------------------- Fair Fair Credit Quality Value Percent Value Percent - - ----------------------------------------------------------------- U.S. Gov't/Gov't agencies $ 2,624 9.5% $ 2,907 10.6% AAA 4,238 15.4% 4,252 15.4% AA 2,901 10.6% 2,990 10.9% A 9,043 32.9% 9,351 33.9% BBB 7,146 26.0% 5,966 21.7% BB & below 401 1.5% 205 0.7% Short-term 1,122 4.1% 1,880 6.8% - - ----------------------------------------------------------------- Total fixed maturities $ 27,475 100.0% $ 27,551 100.0% - - ----------------------------------------------------------------- MARKET RISK The Hartford has material exposure to both interest rate and equity market risk. The Company employs 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. As of September 30, 1998, The Hartford had reduced its holdings in equity securities by 9%, on a cost basis, from December 31, 1997, reallocating from equities to higher yielding fixed maturities. There have been no other material changes in market risk exposures since December 31, 1997. 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. - 18 - The Company uses derivative instruments in its management of market risk consistent with four risk management strategies: hedging anticipated transactions, hedging liability instruments, hedging invested assets and hedging portfolios of assets and/or liabilities. Derivative activities are monitored by an internal compliance unit, reviewed frequently by senior management and reported to the Company's Finance Committee. The notional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. Notional amounts pertaining to derivative instruments for both general and guaranteed separate accounts totaled $11.6 billion and $11.1 billion at September 30, 1998 and December 31, 1997, respectively. For a further discussion of market risk exposure including derivative instruments, please refer to The Hartford's 1997 Form 10-K Annual Report. CAPITAL RESOURCES AND LIQUIDITY Capital resources and liquidity represent the overall financial strength of The Hartford and its ability to generate strong cash flows from each of the business segments and borrow funds at competitive rates to meet operating and growth needs. The capital structure of The Hartford consists of debt, minority interest and equity, summarized as follows:
September 30, 1998 December 31, 1997 - - ----------------------------------------------------------------------------------------------------------------------------------- Short-term debt $ 231 $ 291 Long-term debt 1,482 1,482 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures (QUIPS and TruPS) 1,250 1,000 - - ----------------------------------------------------------------------------------------------------------------------------------- Total debt $ 2,963 $ 2,773 ---------------------------------------------------------------------------------------------------------------------------- Minority interest in consolidated subsidiary [1] $ 396 $ 351 ---------------------------------------------------------------------------------------------------------------------------- Equity excluding unrealized gain on securities, net of tax $ 5,465 $ 5,232 Unrealized gain on securities, net of tax 922 853 - - ----------------------------------------------------------------------------------------------------------------------------------- Total stockholders' equity $ 6,387 $ 6,085 ---------------------------------------------------------------------------------------------------------------------------- Total capitalization [2] $ 8,824 $ 8,356 ---------------------------------------------------------------------------------------------------------------------------- Debt to equity [2] [3] 54% 53% Debt to capitalization [2] [3] 34% 33% - - ----------------------------------------------------------------------------------------------------------------------------------- [1] Excludes unrealized gain on securities, net of tax, of $72 and $46 as of September 30, 1998 and December 31, 1997, respectively. [2] Excludes unrealized gain on securities, net of tax. [3] Excluding QUIPS and TruPS, the debt to equity ratios were 31% and 34% as of September 30, 1998 and December 31, 1997, respectively, and the debt to capital ratios were 19% and 21% as of September 30, 1998 and December 31, 1997, respectively.
CAPITALIZATION The Hartford's total capitalization, excluding unrealized gain on securities, net of tax, increased $468 as of September 30, 1998 compared to December 31, 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, under incentive and stock purchase plans. DEBT For a discussion of Debt, see Note 2 of Notes to Consolidated Financial Statements. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES For a discussion of Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures issued in 1998, see Note 3 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 4 of Notes to Consolidated Financial Statements. Dividends - On February 19, 1998, The Hartford's Board of Directors approved a 5% increase in the quarterly dividend to $0.21 per share (post-split basis). On July 16, 1998, The Hartford declared a dividend on its common stock of $0.21 per share payable October 1, 1998 to shareholders of record as of September 1, 1998. On October 15, 1998, The Hartford's Board of Directors approved an additional 5% increase in the quarterly dividend to $0.22 per share, payable January 4, 1999 to shareholders of record as of December 1, 1998. The Hartford expects to continue to pay quarterly dividends on its common stock of $0.22 per share throughout 1999. Treasury Stock - During the nine months of 1998, The Hartford repurchased 8,235,500 shares of its common stock in the open market at a total cost of $425 under the Company's $1.0 billion repurchase program announced in December 1997. Certain of these repurchased shares were reissued pursuant to certain stock-based benefit plans. - 19 - RATINGS As of October 1998, the financial ratings for Hartford Life Capital I's trust preferred securities from the major independent rating organizations were A from Duff & Phelps, a2 from Moody's and Afrom Standard & Poor's. CASH FLOWS Nine Months Ended September 30, -------------------------- 1998 1997 - - ------------------------------------------------------------------ Cash provided by operating activities $ 783 $ 1,289 Cash used for investing activities $ (394) $ (1,698) Cash provided by (used for) financing activities $ (396) $ 479 Cash - end of period $ 135 $ 178 - - ------------------------------------------------------------------ The change in cash provided by operating activities was primarily the result of an increase in income taxes paid. The decrease in cash provided by financing activities was primarily the result of proceeds from the HLI offering in May 1997 and 1998 treasury stock purchases in accordance with the Company's share repurchase program, partially offset by increases in investment type contracts written in the Life segment. The change in cash used for investing activities primarily reflects the investment of cash from operating and financing activities. Operating cash flows in both periods have been 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. SUBSEQUENT EVENT For a discussion of The Hartford's sale of its London & Edinburgh Insurance Group, Ltd. subsidiary on November 16, 1998, see the International section. REGULATORY INITIATIVES AND CONTINGENCIES NAIC PROPOSALS The National Association of Insurance Commissioners ("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. 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 has thousands of individual and business customers that have insurance policies, annuities, mutual funds and other financial products of The Hartford. Nearly all of these policies and products contain date sensitive data, such as policy expiration dates, birth dates, premium payment dates, and the like. In addition, 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 - 20 - 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 and certifying IT and non-IT systems as Year 2000 ready; (4) deploying such remediated and tested systems back into their respective production environments and (5) conducting internal and external integrated testing of such systems. The Hartford currently anticipates that initiatives (1) through (4) of its internal Year 2000 efforts will be substantially complete by the end of 1998, and that initiative (5) testing will begin in early 1999 and continue through the end 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 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 and the significance of the business relationship, conducting additional activities with third parties as determined to be necessary in each case, which activities may include integrated IT systems testing. The Hartford has completed the first third party initiative and is in the process of evaluating third party responses received. The Hartford currently anticipates that it will substantially complete the response evaluation in early 1999 and that it will conduct the additional activities described in initiative (3) beginning in early 1999 and continue through the end of 1999 as necessary. 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 have been incurred through the year ended December 31, 1997 have not been material to The Hartford's financial condition or results of operations. Management estimates that after-tax costs related to the Year 2000 program to be incurred in 1998 and 1999 will be from $40 to $50 in total, of which approximately $20 has been incurred as of September 30, 1998. These costs are being expensed as incurred and have not had, and are not currently expected to have, a material impact on The Hartford's financial condition or results of operations. 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. Given the uncertain nature of Year 2000 problems that may arise, especially those related to the readiness of third parties discussed above, The Hartford 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 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 In addition, as an insurer, The Hartford may receive claims from insureds who may incur losses as a result of Year 2000 problems. Accordingly, The Hartford may incur losses and loss adjustment expenses, including attorneys' fees and other legal expenses. To the extent claims are ultimately 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 losses and related loss adjustment expenses would have a material impact upon The Hartford's financial condition or results of operations. - 21 - ACCOUNTING STANDARDS For a discussion of accounting standards, see Note 1 of Notes to Consolidated Financial Statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the Capital Markets Risk Management section of the Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Hartford is a defendant in various lawsuits arising out of its business. In the opinion of management, final outcome of these matters will not materially affect the consolidated financial condition, results of operations or cash flows of The Hartford. The Hartford is involved in claims litigation arising in the ordinary course of business and accounts for such activity through the establishment of policy reserves. As further discussed in the MD&A under the Environmental and Asbestos Claims section, The Hartford continues to receive environmental and asbestos claims which involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels, reserving methodologies and reinsurance coverages. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibits Index. (b) Reports on Form 8-K - None - 22 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Hartford Financial Services Group, Inc. (Registrant) /s/ James J. Westervelt ------------------------------------------- James J. Westervelt Senior Vice President and Group Controller (Chief Accounting Officer) November 13, 1998 - 23 - THE HARTFORD FINANCIAL SERVICES GROUP, INC. FORM 10-Q EXHBITS INDEX Exhibit # 10.1 The Hartford 1995 Incentive Stock Plan, as amended, is filed as exhibit 10.1 herewith. 10.2 The 1997 Hartford Life, Inc. Incentive Stock Plan, as amended, was filed as exhibit 10.1 to the Hartford Life, Inc. Form 10-Q filed for the quarter ended September 30, 1998, and is incorporated herein by reference. 27 Financial Data Schedule is filed herewith. - 24 - THE HARTFORD 1995 1NCENTIVE STOCK PLAN 1. Purpose The purpose of the The Hartford 1995 Incentive Stock Plan is to motivate and reward superior performance on the part of employees of The Hartford Financial Services Group, Inc. and its subsidiaries ("The Hartford") and to thereby attract and retain employees of superior ability. In addition, the Plan is intended to further opportunities for stock ownership by such employees and Directors (as defined below) in order to increase their proprietary interest in The Hartford and, as a result, their interest in the success of the Company. Awards will be made, in the discretion of the Committee, to Key Employees (including officers and directors who are also employees) whose responsibilities and decisions directly affect the performance of any Participating Company and its subsidiaries, and also to Directors. Such incentive awards may consist of stock options and stock appreciation rights payable in stock or cash for Key Employees or Directors, and performance shares, restricted stock or any combination of the foregoing for Key Employees, as the Committee may determine. 2. Definitions When used herein, the following terms shall have the following meanings: "Change of Control" means the occurrence of an event defined in Section 9 of the Plan. "Act" means the Securities Exchange Act of 1934. "Annual Limit" means the maximum number of shares of Stock for which Awards may be granted under the Plan in each Plan Year as provided in Section 3 of the Plan. "Award" means an award granted to any Key Employee or Director in accordance with the provisions of the Plan in the form of Options, Rights, Performance Shares or Restricted Stock, or any combination of the foregoing, as applicable. "Award Agreement" means the written agreement evidencing each Award granted under the Plan. "Beneficial Owner" means any Person who, directly or indirectly, has the right to vote or dispose of or has "beneficial ownership" (within the meaning of Rule 13d-3 - 1 - under the Act) of any securities of a company, including any such right pursuant to any agreement, arrangement or understanding (whether or not in writing), provided that: (i) a Person shall not be deemed the Beneficial Owner of any security as a result of an agreement, arrangement or understanding to vote such security (A) arising solely from a revocable proxy or consent given in response to a public proxy or consent solicitation made pursuant to, and in accordance with, the Act and the applicable rules and regulations thereunder, or (B) made in connection with, or to otherwise participate in, a proxy or consent solicitation made, or to be made, pursuant to, and in accordance with, the applicable provisions of the Act and the applicable rules and regulations thereunder, in either case described in clause (A) or (B) above, whether or not such agreement, arrangement or understanding is also then reportable by such Person on Schedule 13D under the Act (or any comparable or successor report); and (ii) a Person engaged in business as an underwriter of securities shall not be deemed to be the Beneficial Owner of any security acquired through such Person's participation in good faith in a firm commitment underwriting until the expiration of forty days after the date of such acquisition. "Beneficiary" means the beneficiary or beneficiaries designated pursuant to Section 10 to receive the amount, if any, payable under the Plan upon the death of an Award Recipient. "Board" means the Board of Directors of the Company. "Code" means the Internal Revenue Code of 1986, as now in effect or as hereafter amended. (All citations to sections of the Code are to such sections as they may from time to time be amended or renumbered.) "Committee" means the Compensation and Personnel Committee of the Board or such other committee as may be designated by the Board to administer the Plan. "Company" means The Hartford and its successors and assigns. "Director" means a member of the Board of The Hartford Financial Services Group, Inc. who is not an employee of any Participating Company. "Fair Market Value", unless otherwise indicated in the provisions of this Plan, means, as of any date, the composite closing price for one share of Stock on the New York Stock Exchange or, if no sales of Stock have taken place on such date, the composite closing price on the most recent date on which selling prices were quoted, the determination to be made in the discretion of the Committee. "Incentive Stock Option" means a stock option qualified under Section 422 of the Code. "Key Employee" means an employee (including any officer or director who is - 2 - also an employee) of any Participating Company whose responsibilities and decisions, in the judgment of the Committee, directly affect the performance of the Company and its subsidiaries. "Limited Stock Appreciation Right" means a stock appreciation right which shall become exercisable automatically upon the occurrence of a Change of Control as described in Section 9 of the Plan. "Option" means an option awarded under Section 5 of the Plan to purchase Stock of the Company, which option may be an Incentive Stock Option or a non-qualified stock option. "Participating Company" means the Company or any subsidiary or other affiliate of the Company; provided, however, for Incentive Stock Options only, "Participating Company" means the Company or any corporation which at the time such Option is granted qualifies as a "subsidiary" of the Company under Section 424(f) of the Code. "Performance Share" means a performance share awarded under Section 6 of the Plan. "Person" has the meaning ascribed to such term in Section 3(a)(9) of the Act, as supplemented by Section 13(d)(3) of the Act; provided, however, that Person shall not include (i) the Company, any subsidiary of the Company or any other Person controlled by the Company, (ii) any trustee or other fiduciary holding securities under any employee benefit plan of the Company or of any subsidiary of the Company, or (iii) a corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of securities of the Company. "Plan" means The Hartford 1995 Incentive Stock Plan, as the same may be amended, administered or interpreted from time to time. "Plan Year" means the calendar year. "Retirement" means eligibility to receive immediate retirement benefits under a Participating Company pension plan. "Restricted Stock" means Stock awarded under Section 7 of the Plan subject to such restrictions as the Committee deems appropriate or desirable. "Right" means a stock appreciation right awarded in connection with an Option under Section 5 of the Plan. "Stock" means the common stock ($.01 par value) of the Company. - 3 - "Total Disability" means the complete and permanent inability of a Key Employee to perform all of his or her duties under the terms of his or her employment with any Participating Company, as determined by the Committee upon the basis of such evidence, including independent medical reports and data, as the Committee deems appropriate or necessary. "Transferee" means any person or entity to whom or to which a non-qualified stock option has been transferred and assigned in accordance with Section 5(h) of the Plan. 3. Shares Subject to the Plan The aggregate number of shares of Stock which may be awarded under the Plan shall be subject to a maximum limit applicable to all Awards for the duration of the Plan (the "Maximum Limit"), and an annual limit applicable to all Awards for any Plan Year (the "Annual Limit"). The Maximum Limit shall be fifteen percent (15%) of the total of the issued and outstanding shares of Stock and treasury Stock as reported in the Annual Report on Form 10-K of the Company for the fiscal year ended December 31, 1997, such issued and outstanding shares being adjusted for the two-for-one stock split on the Stock that occurred effective July 15, 1998. The Annual Limit shall be 1.65 percent (1.65%) of the total of the issued and outstanding shares of the Stock and treasury Stock as reported in the Annual Report on Form 10-K of the Company for the fiscal year ending immediately prior to any Plan Year (the "Reported Shares"). Any unused portion of the Annual Limit for any Plan Year shall be carried forward and be made available for awards in succeeding Plan Years. In addition to the foregoing, in no event shall more than ten million (10,000,000) shares of Stock be cumulatively available for Awards of Incentive Stock Options under the Plan, and provided further, that no more than twenty percent (20%) of the total number of shares on a cumulative basis shall be available for Restricted Stock and Performance Share Awards. For any Plan Year, no individual employee may receive an Award of Options for more than the lesser of (i) ten percent (10%) of one and a half percent (1.5%) (i.e., .15%) of the Reported Shares and (ii) 1,000,000 shares; except that, for the Plan Year that follows the Distribution Date, each individual employee may receive in addition to the foregoing limit that number of stock options equal to the lesser of (x) 1,050,000 and (y) the number of substitute stock options required to replace ITT Corporation stock options surrendered by such employee in connection with the spin-off by ITT Corporation of the shares of The Hartford to ITT Corporation shareholders. Subject to the above limitations, shares of Stock to be issued under the Plan may be made available from the authorized but unissued shares, or shares held by the Company in treasury or from shares purchased in the open market. - 4 - For the purpose of computing the total number of shares of Stock available for Awards under the Plan, there shall be counted against the foregoing limitations the number of shares of Stock subject to issuance upon exercise or settlement of Awards and the number of shares of Stock which equal the value of performance share Awards, in each case determined as at the dates on which such Awards are granted. If any Awards under the Plan are forfeited, terminated, expire unexercised, are settled in cash in lieu of Stock or are exchanged for other Awards, the shares of Stock which were theretofore subject to such Awards shall again be available for Awards under the Plan to the extent of such forfeiture, termination, expiration cash settlement or exchange of such Awards. Further, any shares that are exchanged (either actually or constructively) by optionees as full or partial payment to the Company of the purchase price of shares being acquired through the exercise of a stock option granted under the Plan may be available for subsequent Awards. 4. Grant of Awards and Award Agreements (a) Subject to the provisions of the Plan, the Committee shall (i) determine and designate from time to time those Key Employees or groups of Key Employees to whom Awards are to be granted, and those Directors to whom Options and Rights may be granted; (ii) determine the form or forms of Award to be granted to any Key Employee and any Director; (iii) determine the amount or number of shares of Stock subject to each Award; and (iv) determine the terms and conditions of each Award. (b) Each Award granted under the Plan shall be evidenced by a written Award Agreement. Such agreement shall be subject to and incorporate the express terms and conditions, if any, required under the Plan or required by the Committee. 5. Stock Options and Rights (a) With respect to Options and Rights, the Committee shall (i) authorize the granting of Incentive Stock Options, non-qualified stock options, or a combination of Incentive Stock Options and non-qualified stock options; (ii) authorize the granting of Rights which may be granted in connection with all or part of any Option granted under this Plan, either concurrently with the grant of the Option or at any time thereafter during the term of the Option; (iii) determine the number of shares of Stock subject to each Option or the number of shares of Stock that shall be used to determine the value of a Right; and (iv) determine the time or times when and the manner in which each Option or Right shall be exercisable and the duration of the exercise period. (b) Any option issued hereunder which is intended to qualify as an Incentive Stock Option shall be subject to such limitations or requirements as may be necessary for the purposes of Section 422 of the Code or any regulations and rulings thereunder to the extent and in such form as determined by the Committee in its discretion. (c) The exercise period for a non-qualified stock option and any related Right - 5 - shall not exceed ten years and two days from the date of grant, and the exercise period for an Incentive Stock Option and any related Right shall not exceed ten years from the date of grant. (d) The Option price per share shall be determined by the Committee at the time any Option is granted and shall be not less than the Fair Market Value of one share of Stock on the date the Option is granted. (e) No part of any Option or Right may be exercised until the Key Employee who has been granted the Award shall have remained in the employ of a Participating Company for such period after the date of grant as the Committee may specify, if any, and the Committee may further require exercisability in installments. (f) The purchase price of the shares as to which an Option shall be exercised shall be paid to the Company at the time of exercise either in cash or Stock already owned by the optionee having a total Fair Market Value equal to the purchase price, or a combination of cash and Stock having a total fair market value, as so determined, equal to the purchase price. The Committee shall determine acceptable methods for tendering Stock as payment upon exercise of an Option and may impose such limitations and prohibitions on the use of Stock to exercise an Option as it deems appropriate. (g) In case of a Key Employee's termination of employment, the following provisions shall apply: (A) If a Key Employee who has been granted an Option shall die before such Option has expired, his or her Option may be exercised in full by (i) the person or persons to whom the Key Employee's rights under the Option pass by will, or if no such person has such right, by his or her executors or administrators; (ii) his or her Transferee(s) (with respect to non-qualified stock options); or (iii) his or her Beneficiary designated pursuant to Section 10, at any time, or from time to time, within five years after the date of the Key Employee's death or within such other period, and subject to such terms and conditions as the Committee may specify, but not later than the expiration date specified in Section 5(c) above. (B) If the Key Employee's employment by any Participating Company terminates because of his or her Retirement or Total Disability, he or she may exercise his or her Options in full at any time, or from time to time, within five years after the date of the termination of his or her employment, or within such other period, and subject to such terms and conditions as the Committee may specify, but not later than the expiration date specified in Section 5(c) above. Any such Options not fully exercisable immediately prior to such optionee's retirement shall become fully exercisable upon such retirement unless the Committee, in its sole discretion, shall otherwise determine. - 6 - (C) Except as provided in Section 9, if the Key Employee shall voluntarily resign before eligibility for Retirement or he or she is terminated for cause as determined by the Committee, the Options or Rights shall be canceled coincident with the effective date of the termination of employment. (D) If a Key Employee's employment terminates for any other reason, he or she may exercise his or her Options, to the extent that he or she shall have been entitled to do so at the date of the termination of his or her employment at any time, or from time to time, within three months after the date of the termination of his or her employment, or within such other period, and subject to such terms and conditions as the Committee may specify, but not later than the expiration date specified in Section 5(c) above. (h) Except as provided in this Section 5(h), no Option or Right granted under the Plan shall be transferable other than by will or by the laws of descent and distribution. During the lifetime of the optionee, an Option or Right shall be exercisable only by the Key Employee or Director, to whom the Option or Right is granted (or his or her estate or designated Beneficiary). Notwithstanding the foregoing, all or a portion of a non-qualified stock option may be transferred and assigned by such persons designated by the Committee, to such persons designated by the Committee, and upon such terms and conditions as the Committee may from time to time authorize and determine in its sole discretion. (i) If a Director's service on the Board terminates for any reason, including without limitation, termination due to death, disability or retirement, such Director may exercise any Option or Right granted to him or her only to the extent determined by the Committee as set forth in such Director's Award Agreement and/or any administrative rules or other terms and conditions adopted by the Committee from time to time applicable to such Option or Right granted to such Director. (j) With respect to an Incentive Stock Option, the Committee shall specify such terms and provisions as the Committee may determine to be necessary or desirable in order to qualify such Option as an "incentive stock option" within the meaning of Section 422 of the Code. (k) With respect to the exercisability and settlement of Rights: (i) Upon exercise of a Right, a Key Employee or Director shall be entitled, subject to such terms and conditions the Committee may specify, to receive upon exercise thereof all or a portion of the excess of (A) the Fair Market Value of a specified number of shares of Stock at the time of exercise, as determined by the Committee, over (B) a specified amount which shall not, subject to Section 5(d), be less than the Fair Market Value of such specified number of shares of Stock at the time the Right is granted. Upon exercise of a Right, payment of such excess shall be made as the Committee shall specify in cash, the issuance or transfer to the Key Employee or Director - 7 - of whole shares of Stock with a Fair Market Value at such time equal to any excess, or a combination of cash and shares of Stock with a combined Fair Market Value at such time equal to any such excess, all as determined by the Committee. The Company will not issue a fractional share of Stock and, if a fractional share would otherwise be issuable, the Company shall pay cash equal to the Fair Market Value of the fractional share of Stock at such time. (ii) In the event of the exercise of such Right, the Company's obligation in respect of any related Option or such portion thereof will be discharged by payment of the Right so exercised. 6. Performance Shares (a) Subject to the provisions of the Plan, the Committee shall (i) determine and designate from time to time those Key Employees or groups of Key Employees to whom Awards of Performance Shares are to be made, (ii) determine the Performance Period (the "Performance Period") and Performance Objectives (the "Performance Objectives") applicable to such Awards, (iii) determine the form of settlement of a Performance Share and (iv) generally determine the terms and conditions of each such Award. At any date, each Performance Share shall have a value equal to the Fair Market Value of a share of Stock at such date; provided that the Committee may limit the aggregate amount payable upon the settlement of any Award. The maximum award for any individual employee in any given year shall be 200,000 Performance Shares. (b) The Committee shall determine a Performance Period of not less than two nor more than five years. Performance Periods may overlap and Key Employees may participate simultaneously with respect to Performance Shares for which different Performance Periods are prescribed. (c) The Committee shall determine the Performance Objectives of Awards of Performance Shares. Performance Objectives may vary from Key Employee to Key Employee and between groups of Key Employees and shall be based upon one or more of the following objective criteria, as the Committee deems appropriate, which may be (i) determined solely by reference to the performance of the Company, any subsidiary or affiliate of the Company or any division or unit of any of the foregoing, or (ii) based on comparative performance of any one or more of the following relative to other entities: (A) earnings per share, (B) return on equity, (C) cash flow, (D) return on total capital, (E) return on assets, (F) economic value added, (G) increase in surplus, (H) reductions in operating expenses, (I) increases in operating margins (J) earnings before income taxes and depreciation, (K) total shareholder return (L) return on invested capital, (M) cost reductions and savings, (N) earnings before interest, taxes, depreciation and amortization ("EDITDA"), (O) pre-tax operating income, (P) productivity improvements, or (Q) a Key Employee's attainment of personal objectives with respect to any of the foregoing criteria or other criteria such as growth and profitability, customer satisfaction, leadership effectiveness, business development, negotiating transactions and sales or developing - 8 - long term business goals. If during the course of a Performance Period there shall occur significant events which the Committee expects to have a substantial effect on the applicable Performance Objectives during such period, the Committee may revise such Performance Objectives. (d) At the beginning of a Performance Period, the Committee shall determine for each Key Employee or group of Key Employees the number of Performance Shares or the percentage of Performance Shares which shall be paid to the Key Employee or member of the group of Key Employees if the applicable Performance Objectives are met in whole or in part. (e) If a Key Employee terminates service with all Participating Companies during a Performance Period because of death, Total Disability, Retirement, or under other circumstances where the Committee in its sole discretion finds that a waiver would be in the best interests of the Company, that Key Employee may, as determined by the Committee, be entitled to payment in settlement of such Performance Shares at the end of the Performance Period based upon the extent to which the Performance Objectives were satisfied at the end of such period and prorated for the portion of the Performance Period during which the Key Employee was employed by any Participating Company; provided, however, the Committee may provide for an earlier payment in settlement of such Performance Shares in such amount and under such terms and conditions as the Committee deems appropriate or desirable. If a Key Employee terminates service with all Participating Companies during a Performance Period for any other reason, then such Key Employee shall not be entitled to any Award with respect to that Performance Period unless the Committee shall otherwise determine. (f) Each Award of a Performance Share shall be paid in whole shares of Stock, or cash, or a combination of Stock and cash either as a lump sum payment or in annual installments, all as the Committee shall determine, with payment to commence as soon as practicable after the end of the relevant Performance Period. 7. Restricted Stock (a) Restricted Stock shall be subject to a restriction period (after which restrictions will lapse) which shall mean a period commencing on the date the Award is granted and ending on such date as the Committee shall determine (the "Restriction Period"). The Committee may provide for the lapse of restrictions in installments where deemed appropriate and it may also require the achievement of predetermined performance objectives in order for such shares to vest. (b) Except when the Committee determines otherwise pursuant to Section 7(d), if a Key Employee terminates employment with all Participating Companies for any reason before the expiration of the Restriction Period, all shares of Restricted Stock still subject to restriction shall be forfeited by the Key Employee and shall be reacquired by the Company. - 9 - (c) Except as otherwise provided in this Section 7, no shares of Restricted Stock received by a Key Employee shall be sold, exchanged, transferred, pledged, hypothecated or otherwise disposed of during the Restriction Period. (d) In cases of death, Total Disability or Retirement or in cases of special circumstances, the Committee may, in its sole discretion when it finds that a waiver would be in the best interests of the Company, elect to waive any or all remaining restrictions with respect to such Key Employee's Restricted Stock. (e) The Committee may require, under such terms and conditions as it deems appropriate or desirable, that the certificates for Stock delivered under the Plan may be held in custody by a bank or other institution, or that the Company may itself hold such shares in custody until the Restriction Period expires or until restrictions thereon otherwise lapse, and may require, as a condition of any Award of Restricted Stock that the Key Employee shall have delivered a stock power endorsed in blank relating to the Restricted Stock. (f) Nothing in this Section 7 shall preclude a Key Employee from exchanging any shares of Restricted Stock subject to the restrictions contained herein for any other shares of Stock that are similarly restricted. (g) Subject to Section 7(e) and Section 8, each Key Employee entitled to receive Restricted Stock under the Plan shall be issued a certificate for the shares of Stock. Such certificate shall be registered in the name of the Key Employee, and shall bear an appropriate legend reciting the terms, conditions and restrictions, if any, applicable to such Award and shall be subject to appropriate stop-transfer orders. 8. Certificates for Awards of Stock (a) The Company shall not be required to issue or deliver any certificates for shares of Stock prior to (i) the listing of such shares on any stock exchange on which the Stock may then be listed and (ii) the completion of any registration or qualification of such shares under any federal or state law, or any ruling or regulation of any government body which the Company shall, in its sole discretion, determine to be necessary or advisable. (b) All certificates for shares of Stock delivered under the Plan shall also be subject to such stop-transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of the Securities and Exchange Commission, any stock exchange upon which the Stock is then listed and any applicable federal or state securities laws, and the Committee may cause a legend or legends to be placed on any such certificates to make appropriate reference to such restrictions. In making such determination, the Committee may rely upon an opinion of counsel for the Company. - 10 - (c) Except for the restrictions on Restricted Stock under Section 7, each Key Employee who receives Stock in settlement of an Award of Stock, shall have all of the rights of a shareholder with respect to such shares, including the right to vote the shares and receive dividends and other distributions. No Key Employee awarded an Option, a Right or Performance Share, and no Director awarded an Option or Right, shall have any right as a shareholder with respect to any shares covered by his or her Option, Right or Performance Share prior to the date of issuance to him or her of a certificate or certificates for such shares. 9. Change of Control (a) For purposes of this Plan, a Change of Control shall occur if: (i) a report on Schedule 13D shall be filed with the Securities and Exchange Commission pursuant to Section 13(d) of the Act disclosing that any Person, other than the Company or a subsidiary of the Company or any employee benefit plan sponsored by the Company or a subsidiary of the Company is the Beneficial Owner of twenty percent or more of the outstanding stock of the Company entitled to vote in the election of directors of the Company; (ii) any Person other than the Company or a subsidiary of the Company or any employee benefit plan sponsored by the Company or a subsidiary of the Company shall purchase shares pursuant to a tender offer or exchange offer to acquire any stock of the Company (or securities convertible into stock) for cash, securities or any other consideration, provided that after consummation of the offer, the Person in question is the Beneficial Owner of fifteen percent or more of the outstanding stock of the Company entitled to vote in the election of directors of the Company (calculated as provided in paragraph (d) of Rule 13d-3 under the Act in the case of rights to acquire stock); (iii) the stockholders of the Company shall approve (A) any consolidation or merger in which the Company is not the continuing or surviving corporation or pursuant to which shares of stock of the Company entitled to vote in the election of directors of the Company would be converted into cash, securities or other property, other than a merger of the Company in which holders of such stock of the Company immediately prior to the merger have the same proportionate ownership of common stock entitled to vote in the election of directors of the surviving corporation immediately after the merger as immediately before, or (B) any sale, lease, exchange or other transfer (in one transaction or a series of related transactions) of all or substantially all the assets of the Company; or (iv) within any 12 month period, the persons who were directors of the Company immediately before the beginning of such period (the "Incumbent - 11 - Directors") shall cease (for any reason other than death) to constitute at least a majority of the Board or the board of directors of any successor to the Company, provided that any director who was not a director at the beginning of such period shall be deemed to be an Incumbent Director if such director (A) was elected to the Board by, or on the recommendation of or with the approval of, at least two-thirds of the directors who then qualified as Incumbent Directors either actually or by prior operation of this clause (iv), and (B) was not designated by a Person who has entered into an agreement with the Company to effect a transaction described in the immediately preceding paragraph (iii). (b) Notwithstanding any provisions in this Plan to the contrary: (i) Each outstanding Option granted under the Plan shall become immediately exercisable in full for the aggregate number of shares covered thereby and all related Rights shall also become exercisable upon the occurrence of a Change of Control described in this Section 9 and shall continue to be exercisable in full for cash for a period of 60 calendar days beginning on the date that such Change of Control occurs and ending on the 60th calendar day following that date; provided, however, that no Option or Right shall be exercisable beyond the expiration date of its original term. (ii) Options and Rights shall not terminate and shall continue to be fully exercisable for a period of seven months following the occurrence of a Change of Control in the case of an employee who is terminated other than for just cause or who voluntarily terminates his employment because he in good faith believes that as a result of such Change of Control he is unable effectively to discharge his present duties or the duties of the position he occupied just prior to the occurrence of such Change of Control. For purposes of Section 9 only, termination shall be for "just cause" only if such termination is based on fraud, misappropriation or embezzlement on the part of the employee which results in a final conviction of a felony. Under no circumstances, however, shall any Option or Right be exercised beyond the expiration date of its original term. (iii) Any Right or portion thereof may be exercised for cash within the 60 calendar day period following the occurrence of a Change of Control with settlement, except in the case of a Right related to an Incentive Stock Option, based on the "Formula Price" which shall be the highest of (A) the highest composite daily closing price of the Stock during the period beginning on the 60th calendar day prior to the Change of Control and ending on the date of such Change of Control, (B) the highest gross price paid for the Stock during the same period of time, as reported in a report on Schedule 13D filed with the Securities and Exchange Commission or (C) the highest gross price paid or to be paid for a share of Stock (whether by way of exchange, conversion, distribution upon merger, liquidation or otherwise) in any of the transactions set forth in this Section 9 as constituting a Change of Control. (iv) Upon the occurrence of a Change of Control, Limited Stock - 12 - Appreciation Rights shall automatically be granted as to any Option with respect to which Rights are not then outstanding; provided, however, that Limited Stock Appreciation Rights shall be provided at the time of grant of any Incentive Stock Option subject to exercisability upon the occurrence of a Change of Control. Limited Stock Appreciation Rights shall entitle the holder thereof, upon exercise of such rights and surrender of the related Option or any portion thereof, to receive, without payment to the Company (except for applicable withholding taxes), an amount in cash equal to the excess, if any, of the Formula Price as that term is defined in Section 9 over the option price of the Stock as provided in such Option; provided that in the case of the exercise of any such Limited Stock Appreciation Right or portion thereof related to an Incentive Stock Option, the Fair Market Value of the Stock at the time of such exercise shall be substituted for the Formula Price. Each such Limited Stock Appreciation Right shall be exercisable only during the period beginning on the first business day following the occurrence of such Change of Control and ending on the 60th day following such date and only to the same extent the related Option is exercisable. Upon exercise of a Limited Stock Appreciation Right and surrender of the related Option, or portion thereof, such Option, to the extent surrendered, shall not thereafter be exercisable. (v) The restrictions applicable to shares of Restricted Stock held by Key Employees pursuant to Section 7 shall lapse upon the occurrence of a Change of Control, and such Key Employees shall be entitled to elect, at any time during the 60 calendar days following such Change of Control, to receive immediately after the date the Key Employee makes such election either of the following: (A) unrestricted certificates for all of such shares, or (B) a lump sum cash amount equal to the number of such shares multiplied by the Formula Price. If a Key Employee does not make any election during the foregoing 60 day period, such Key Employee shall be deemed to have made the election described in Section 9(b)(v)(A) as of the 60th day of such period, and unrestricted certificates shall be issued to such Key Employee immediately following such day as described in Section 9(b)(v)(A) hereof. (vi) If a Change of Control occurs during the course of a Performance Period applicable to an Award of Performance Shares pursuant to Section 6, then a Key Employee shall be deemed to have satisfied the Performance Objectives effective on the date of such occurrence. Such Key Employee shall be paid, immediately following the occurrence of such Change of Control, a lump sum cash amount equal to the number of outstanding Performance Shares awarded to such Key Employee multiplied by the Formula Price. (c) In the event of a Change of Control, no amendment, suspension or termination of the Plan thereafter shall impair or reduce the rights of any person with respect to any award made under the Plan. - 13 - 10. Beneficiary (a) Each Key Employee, Director and/or his or her Transferee may file with the Company a written designation of one or more persons as the Beneficiary who shall be entitled to receive the Award, if any, payable under the Plan upon his or her death. A Key Employee, Director or Transferee may from time to time revoke or change his or her Beneficiary designation without the consent of any prior Beneficiary by filing a new designation with the Company. The last such designation received by the Company shall be controlling; provided, however, that no designation, or change or revocation thereof, shall be effective unless received by the Company prior to the Key Employee's, Director's or Transferee's death, as the case may be, and in no event shall it be effective as of a date prior to such receipt. (b) If no such Beneficiary designation is in effect at the time of a Key Employee's, Director's or Transferee's death, as the case may be, or if no designated Beneficiary survives the Key Employee, Director or Transferee or if such designation conflicts with law, the Key Employee's, Director's or Transferee's estate, as the case may be, shall be entitled to receive the Award, if any, payable under the Plan upon his or her death. If the Committee is in doubt as to the right of any person to receive such Award, the Company may retain such Award, without liability for any interest thereon, until the Committee determines the rights thereto, or the Company may pay such Award into any court of appropriate jurisdiction and such payment shall be a complete discharge of the liability of the Company therefor. 11. Administration of the Plan (a) Each member of the Committee shall be both a member of the Board and both a "non-employee director" within the meaning of Rule 16b-3 under the Act or successor rule or regulation and an "outside director" for purposes of Section 162(m) of the Internal Revenue Code. (b) All decisions, determinations or actions of the Committee made or taken pursuant to grants of authority under the Plan shall be made or taken in the sole discretion of the Committee and shall be final, conclusive and binding on all persons for all purposes. (c) The Committee shall have full power, discretion and authority to interpret, construe and administer the Plan and any part thereof, and its interpretations and constructions thereof and actions taken thereunder shall be, except as otherwise determined by the Board, final, conclusive and binding on all persons for all purposes. (d) The Committee's decisions and determinations under the Plan need not be uniform and may be made selectively among Key Employees, whether or not such Key Employees are similarly situated. - 14 - (e) The Committee may, in its sole discretion, delegate such of its powers as it deems appropriate to the chief executive officer or other members of senior management, except that Awards to executive officers shall be made solely by the Committee or the Board of Directors. (f) If a Change of Control has not occurred and if the Committee determines that a Key Employee has taken action inimical to the best interests of any Participating Company, the Committee may, in its sole discretion, terminate in whole or in part such portion of any Option (including any related Right) as has not yet become exercisable at the time of termination, terminate any Performance Share Award for which the Performance Period has not been completed or terminate any Award of Restricted Stock for which the Restriction Period has not lapsed. 12. Amendment, Extension or Termination The Board may, at any time, amend or terminate the Plan and, specifically, may make such modifications to the Plan as it deems necessary to avoid the application of Section 162(m) of the Code and the Treasury regulations issued thereunder. However, no amendment applicable to Incentive Stock Options shall, without approval by a majority of the Company's stockholders, (a) alter the group of persons eligible to participate in the Plan, or (b) except as provided in Section 13 increase the maximum number of shares of Stock which are available for Awards under the Plan. If a Change of Control has occurred, no amendment or termination shall impair the rights of any person with respect to a prior Award. 13. Adjustments in Event of Change in Common Stock In the event of any reorganization, merger, recapitalization, consolidation, liquidation, stock dividend, stock split, reclassification, combination of shares, rights offering, split-up or extraordinary dividend (including a spin-off) or divestiture, or any other change in the corporate structure or shares, the Committee may make such adjustment in the Stock subject to Awards, including Stock subject to purchase by an Option, or the terms, conditions or restrictions on Stock or Awards, including the price payable upon the exercise of such Option and the number of shares subject to restricted stock awards, as the Committee deems equitable. - 15 - 14. Substitute Awards The Committee shall be authorized to issue substitute The Hartford stock options and related rights to those key employees of Participating Companies who surrender options to acquire stock in ITT Corporation. The Committee may make a determination as to the exercise price and number of such substitute options as it may determine in order to preserve the economic value of the surrendered ITT options and related rights in the aggregate amount not to exceed 16,000,000 shares. Subject to this limitation, shares of The Hartford Common Stock to be issued upon the exercise of substitute stock options may be made available from authorized but unissued shares or from treasury or shares held by The Hartford in shares purchased in the open market. The maximum number of substitute The Hartford stock options and related rights that may be granted to an individual employee is 1,050,000 or such lower number as may be necessary to preserve the economic value of the surrendered ITT options and related rights by any such individual employee. The terms and conditions of each substitute stock award, including, without limitation, the expiration date of the option, the time or times when, and the manner in which, each substitute option shall be exercisable, the duration of the exercise period, the method of exercise, settlement and payment, and the rules in the event of termination, shall be the same as those of the surrendered ITT award. The Committee shall also be authorized to issue substitute grants of The Hartford Restricted Stock to replace shares of ITT restricted stock surrendered by employees of Participating Companies. Such substitute shares shall be subject to the same terms and conditions as the surrendered shares of ITT restricted stock, including, without limitation, the restriction period of such ITT shares. 15. Miscellaneous (a) Except as provided in Section 9, nothing in this Plan or any Award granted hereunder shall confer upon any employee any right to continue in the employ of any Participating Company or interfere in any way with the right of any Participating Company to terminate his or her employment at any time. No Award payable under the Plan shall be deemed salary or compensation for the purpose of computing benefits under any employee benefit plan or other arrangement of any Participating Company for the benefit of its employees unless the Company shall determine otherwise. No Key Employee shall have any claim to an Award until it is actually granted under the Plan. To the extent that any person acquires a right to receive payments from the Company under this Plan, such right shall be no greater than the right of an unsecured general creditor of the Company. All payments to be made hereunder shall be paid from the general funds of the Company and no special or separate fund shall be established and no segregation of assets shall be made to assure payment of such amounts except as provided in Section 7(e) with respect to Restricted Stock. - 16 - (b) The Committee may cause to be made, as a condition precedent to the payment of any Award, or otherwise, appropriate arrangements with the Key Employee or his or her Beneficiary, for the withholding of any federal, state, local or foreign taxes. (c) The Plan and the grant of Awards shall be subject to all applicable federal and state laws, rules, and regulations and to such approvals by any government or regulatory agency as may be required. (d) The terms of the Plan shall be binding upon the Company and its successors and assigns. (e) Captions preceding the sections hereof are inserted solely as a matter of convenience and in no way define or limit the scope or intent of any provision hereof. 16. Effective Date, Term of Plan and Shareholder Approval The effective date of the Plan shall be December 19, 1995. No Award shall be granted under this Plan after the Plan's termination date. The Plan's termination date shall be the earlier of: (a) December 31, 2005, or (b) the date on which the Maximum Limit is reached; provided, however, that the Plan will continue in effect for existing Awards as long as any such Award is outstanding. - 17 - EX-27 2 ARTICLE 7 FDS FOR THE HARTFORD 3RD QUARTER 10-Q WARNING: THE EDGAR SYSTEM ENCOUNTERED ERROR(S) WHILE PROCESSING THIS SCHEDULE.
7 1,000,000 0 9-MOS DEC-31-1998 SEP-30-1998 35,734 0 0 1,522 224 23 41,690 135 10,266 4,658 141,064 24,041 3,243 20,819 77,985 1,713 1 1,250 0 6,386 141,064 8,612 2,060 189 0 6,271 1,591 1,720 1,039 264 714 0 0 0 714 3.04 3.00 0 0 0 0 0 0 0 REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES. AMOUNTS FOR SECURITIES ACT INDUSTRY GUIDE 6 AND EXCHANGE ACT INDUSTRY GUIDE 4 DISCLOSURES ARE REQUIRED FOR ANNUAL FILINGS ONLY. ACCORDINGLY, NO AMOUNTS WILL BE REPORTED FOR INTERIM FILINGS.
-----END PRIVACY-ENHANCED MESSAGE-----