10-Q 1 0001.txt 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 June 30, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 0-19277 THE HARTFORD FINANCIAL SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3317783 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900 (Address of principal executive offices) (860) 547-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] As of July 31, 2000, there were outstanding 224,306,990 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 - Second Quarter and Six Months Ended June 30, 2000 and 1999 3 Consolidated Balance Sheets - June 30, 2000 and December 31, 1999 4 Consolidated Statements of Changes in Stockholders' Equity - Six Months Ended June 30, 2000 and 1999 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 2000 and 1999 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 12 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 23 PART II. OTHER INFORMATION --------------------------- ITEM 1. LEGAL PROCEEDINGS 24 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 24 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 24 Signature 25 - 2 - PART I. FINANCIAL INFORMATION Item 1. Financial Statements
THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Income Second Quarter Ended Six Months Ended June 30, June 30, --------------------------- -------------------------- (In millions, except for per share data) 2000 1999 2000 1999 -------------------------------------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) REVENUES Earned premiums, fee income and other $ 2,917 $ 2,688 $ 5,745 $ 5,293 Net investment income 643 652 1,297 1,317 Net realized capital gains (losses) (46) 9 (29) 38 -------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 3,514 3,349 7,013 6,648 =================================================================================================================== BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 2,088 2,005 4,078 3,914 Amortization of deferred policy acquisition costs and present value of future profits 540 490 1,084 948 Other expenses 628 547 1,249 1,135 -------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 3,256 3,042 6,411 5,997 =================================================================================================================== OPERATING INCOME 258 307 602 651 Income tax expense 19 71 97 157 -------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST 239 236 505 494 Minority interest in consolidated subsidiary (26) (21) (54) (41) -------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 213 $ 215 $ 451 $ 453 =================================================================================================================== Basic earnings per share $ 0.98 $ 0.95 $ 2.09 $ 2.00 Diluted earnings per share $ 0.97 $ 0.93 $ 2.07 $ 1.97 -------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 216.5 226.8 216.2 226.9 Weighted average common shares outstanding and dilutive potential common shares 219.9 230.0 218.4 230.0 -------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share $ 0.24 $ 0.23 $ 0.48 $ 0.45 ==========================================================================================================================
See Notes to Consolidated Financial Statements. - 3 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Balance Sheets June 30, December 31, (In millions, except for share data) 2000 1999 ------------------------------------------------------------------------------------------------------------------------------- ASSETS (Unaudited) Investments ----------- Fixed maturities, available for sale, at fair value (amortized cost of $33,341 and $33,653) $ 32,856 $ 32,875 Equity securities, available for sale, at fair value (cost of $997 and $937) 1,264 1,286 Policy loans, at outstanding balance 3,581 4,222 Other investments 1,316 758 ------------------------------------------------------------------------------------------------------------------------------- Total investments 39,017 39,141 Cash 212 182 Premiums receivable and agents' balances 2,171 2,071 Reinsurance recoverables 4,419 4,473 Deferred policy acquisition costs and present value of future profits 5,239 5,038 Deferred income tax 1,314 1,404 Other assets 3,857 3,075 Separate account assets 115,676 111,667 ------------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $ 171,905 $ 167,051 ======================================================================================================================= LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 15,878 $ 16,014 Life 6,833 6,564 Other policy funds and benefits payable 15,560 16,884 Unearned premiums 2,973 2,777 Short-term debt 431 31 Long-term debt 2,061 1,548 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,243 1,250 Other liabilities 4,962 4,421 Separate account liabilities 115,676 111,667 ------------------------------------------------------------------------------------------------------------------------------- 165,617 161,156 COMMITMENTS AND CONTINGENCIES, NOTE 6 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY -- 429 STOCKHOLDERS' EQUITY Common stock - authorized 400,000,000, issued 238,645,675 and 238,645,675 shares, par value $0.01 2 2 Additional paid-in capital 1,686 1,551 Retained earnings 5,475 5,127 Treasury stock, at cost - 15,463,042 and 21,419,460 shares (627) (942) Accumulated other comprehensive loss (248) (272) ------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 6,288 5,466 ======================================================================================================================= TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 171,905 $ 167,051 =======================================================================================================================
See Notes to Consolidated Financial Statements. - 4 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Changes in Stockholders' Equity SIX MONTHS ENDED JUNE 30, 2000 Accumulated Other Comprehensive (Loss) --------------------------------------- Common Unrealized Minimum Stock/ Gain (Loss) Pension Outstanding Additional Treasury on Cumulative Liability Shares Paid-in Retained Stock, Securities, Translation Adjustment, (In (Dollars in millions) (Unaudited) Capital Earnings at Cost net of tax Adjustments net of tax Total thousands) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD $1,553 $5,127 $(942) $(198) $(63) $(11) $5,466 217,226 Comprehensive income Net income 451 451 Other comprehensive income, net of tax [1] Unrealized gain on securities [2] 78 78 Cumulative translation adjustments (54) (54) ---------- Total other comprehensive income 24 ---------- Total comprehensive income 475 ---------- Issuance of shares under incentive and stock purchase plans (8) 73 65 1,467 Issuance of common stock from treasury 56 342 398 7,250 Conversion of HLI employee options and restricted shares 86 86 72 Tax benefit on employee stock options and awards 1 1 Treasury stock acquired (100) (100) (2,832) Dividends declared on common stock (103) (103) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $1,688 $5,475 $(627) $(120) $(117) $(11) $6,288 223,183 ====================================================================================================================================
SIX MONTHS ENDED JUNE 30, 1999 Accumulated Other Comprehensive Income --------------------------------------- Common Unrealized Stock/ Gain Outstanding Additional Treasury on Cumulative Shares Paid-in Retained Stock, Securities, Translation (In (Dollars in millions) (Unaudited) Capital Earnings at Cost net of tax Adjustments Total thousands) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD $1,593 $4,474 $(455) $811 $-- $6,423 227,395 Comprehensive income Net income 453 453 Other comprehensive income (loss), net of tax [1] Unrealized gain (loss) on securities (639) (639) [2] Cumulative translation adjustments (39) (39) ---------- Total other comprehensive income (loss) (678) ---------- Total comprehensive income (loss) (225) ---------- Issuance of shares under incentive and stock purchase plans (47) 85 38 1,667 Tax benefit on employee stock options and awards 15 15 Treasury stock acquired (3) (148) (151) (2,675) Dividends declared on common stock (103) (103) ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $1,558 $4,824 $(518) $172 $(39) $5,997 226,387 ==================================================================================================================================== [1] Unrealized gain (loss) on securities is net of tax expense (benefit) of $42 and $(344) for the six months ended June 30, 2000 and 1999, respectively. There is no tax effect on cumulative translation adjustments. [2] Net of reclassification adjustment for gains (losses) realized in net income of $(14) and $24 for the six months ended June 30, 2000 and 1999, respectively.
See Notes to Consolidated Financial Statements. - 5 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Cash Flows Six Months Ended June 30, ---------------------------------- (In millions) 2000 1999 ------------------------------------------------------------------------------------------------------------------------------ (Unaudited) OPERATING ACTIVITIES Net income $ 451 $ 453 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Change in receivables, payables and accruals (78) (118) Decrease in reinsurance recoverables and other related assets 81 193 Increase in deferred policy acquisition costs and present value of future profits (209) (267) Change in accrued and deferred income taxes 178 (12) Increase (decrease) in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 307 (132) Minority interest in consolidated subsidiary 54 41 Net realized capital gains/losses 29 (38) Depreciation and amortization 27 36 Other, net 57 (50) ------------------------------------------------------------------------------------------------------------------------------ NET CASH PROVIDED BY OPERATING ACTIVITIES 897 106 ------------------------------------------------------------------------------------------------------------------------------ INVESTING ACTIVITIES Purchase of investments (7,271) (7,756) Sale of investments 6,667 9,212 Maturity of investments 976 1,103 Purchase of affiliate (1,108) -- Additions to plant, property and equipment (56) (46) ------------------------------------------------------------------------------------------------------------------------------ NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (792) 2,513 ------------------------------------------------------------------------------------------------------------------------------ FINANCING ACTIVITIES Short-term debt, net 400 -- Issuance of long-term debt 516 -- Issuance of common stock from treasury 398 -- Net disbursements for investment and universal life-type contracts charged against policyholder accounts (1,215) (2,316) Dividends paid (105) (104) Acquisition of treasury stock (100) (151) Proceeds from issuances under incentive and stock purchase plans 36 34 ------------------------------------------------------------------------------------------------------------------------------ NET CASH USED FOR FINANCING ACTIVITIES (70) (2,537) ============================================================================================================================== Foreign exchange rate effect on cash (5) (4) ------------------------------------------------------------------------------------------------------------------------------ Net increase in cash 30 78 Cash - beginning of period 182 123 ------------------------------------------------------------------------------------------------------------------------------ CASH - END OF PERIOD $ 212 $ 201 ============================================================================================================================== SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: ------------------------------------------------ NET CASH (RECEIVED) PAID DURING THE PERIOD FOR: Income taxes $ (69) $ 110 Interest $ 107 $ 107
See Notes to Consolidated Financial Statements. - 6 - THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in millions except per 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. and its consolidated subsidiaries (The Hartford or the Company), have been prepared in accordance with generally accepted accounting principles for interim periods. Less than majority-owned entities in which The Hartford has at least a 20% interest are reported on an equity basis. In the opinion of management, these statements include all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented. For a description of accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in The Hartford's 1999 Form 10-K Annual Report. On June 27, 2000, The Hartford acquired all of the outstanding shares of Hartford Life, Inc. (HLI) that it did not already own (The HLI Repurchase). The accompanying unaudited consolidated financial statements reflect the minority interest in HLI of approximately 19% prior to the acquisition date. For a further discussion on The HLI Repurchase, see Note 2. Certain reclassifications have been made to prior year financial information to conform to the current year classification of transactions and accounts. (B) NEW ACCOUNTING STANDARDS In June 2000, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities", which amends SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities". Specifically, it amends SFAS No. 133 so that in interest rate hedges, a company may designate as the hedged risk, the risk of changes only in a benchmark interest rate. Also, credit risk is newly defined as the company-specific spread over the benchmark interest rate and may be hedged separately from or in combination with the benchmark interest rate. For companies that have not adopted SFAS No. 133 before June 15, 2000, SFAS No. 138 must be adopted concurrently with the company's adoption of SFAS No. 133. Initial application of both SFAS No. 133 and SFAS No. 138 for The Hartford will begin January 1, 2001. The Company has reviewed its derivative holdings and is in the process of quantifying the impact of SFAS No. 133, as amended by SFAS No. 138. The Company is also assessing what actions, if any, need to be taken to minimize potential volatility, while at the same time maintaining the economic protection needed to support the goals of its business. Effective January 1, 2000, The Hartford adopted Statement of Position (SOP) No. 98-7, "Accounting for Insurance and Reinsurance Contracts That Do Not Transfer Insurance Risk". This SOP provides guidance on the method of accounting for insurance and reinsurance contracts that do not transfer insurance risk, defined in the SOP as the deposit method. Adoption of this SOP did not have a material impact on the Company's financial condition or results of operations. In November 1998, the Emerging Issues Task Force (EITF) reached consensus on Issue 98-15, "Structured Notes Acquired for a Specific Investment Strategy". This pronouncement requires companies to account for structured notes acquired for a specific investment strategy as a unit. Affected companies that entered into these notes prior to September 25, 1998 are required to either restate prior period financial statements to conform with the prescribed unit accounting model, or disclose the related impact on earnings for all periods presented and cumulatively over the life of the instruments had the registrant accounted for the structure as a unit. Net income for both the second quarter and six months ended June 30, 1999 would have been $1 lower, while net income for the second quarter and six months ended June 30, 2000, would have been $7 and $8 lower, respectively, and cumulatively over the life of the instrument would have been $14 higher, had the Company accounted for its structured note transaction as a unit, based upon the consensus reached in EITF 98-15. NOTE 2. THE HLI REPURCHASE On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI that it did not already own (The HLI Repurchase). The HLI Repurchase has been recorded as a purchase transaction. Consideration totaled $1.4 billion and resulted in recognition of goodwill (excess of the purchase price over the fair values of the net assets acquired) of $862, which is being amortized on a straight-line basis over a 25 year period. Of the total purchase price, $226 was outstanding and payable as of June 30, 2000, related to non-tendered shares, the majority of which was subsequently paid in July 2000. Purchase accounting for this transaction resulted in adjustments to the cost basis of certain assets and liabilities acquired based on preliminary assessments of fair value, including the recognition of the present value of future gross profits to be earned (PVP) and a reduction of deferred policy acquisition costs. Goodwill amortization and other purchase price adjustments did not have a material impact on second quarter results of operations. Purchase consideration for the transaction was as follows: Issuance of: ----------- Common stock from treasury (7.25 million shares @ $54.90 per share) $398 Long-term notes: $250 7.75% notes due June 15, 2005 244 $275 7.90% notes due June 15, 2010 272 Commercial paper 400 ----------------------------------------------------------------- Consideration raised 1,314 Other including conversion of HLI employee options and restricted shares 102 ----------------------------------------------------------------- Total consideration $1,416 ----------------------------------------------------------------- - 7 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 3. DEBT (A) SHORT-TERM DEBT On June 23, 2000, The Hartford borrowed $400 under its existing commercial paper program, the proceeds of which were used to partially fund The HLI Repurchase. (B) LONG-TERM DEBT On June 16, 2000, The Hartford issued and sold $525 of unsecured redeemable long-term debt under its existing shelf registration (for a description of the shelf registration, see Note 6 of Notes to Consolidated Financial Statements included in The Hartford's 1999 Form 10-K Annual Report). The long-term debt was issued in the form of $250 7.75% five-year notes due June 15, 2005, and $275 7.90% ten-year notes due June 15, 2010. Interest on the notes is payable semi-annually on June 15 and December 15, commencing on December 15, 2000. The Hartford used the net proceeds from the issuance of the notes to partially fund The HLI Repurchase. After the long-term debt issuance and the issuance of common stock (described below in Note 4, Stockholders Equity), The Hartford had $127 remaining on its shelf registration at June 30, 2000. NOTE 4. STOCKHOLDERS' EQUITY On June 8, 2000, The Hartford issued 7.25 million shares of common stock, under its existing shelf registration, to Goldman, Sachs & Co. for $398. The shares, which were issued out of treasury, were re-offered by Goldman, Sachs & Co. to investors. The Hartford used the net proceeds from the issuance of the shares to partially fund The HLI Repurchase. NOTE 5. 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.
Second Quarter Ended Six Months Ended ------------------------------------- ------------------------------------ Per Share Per Share June 30, 2000 Income Shares Amount Income Shares Amount ----------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common shareholders $ 213 216.5 $ 0.98 $ 451 216.2 $ 2.09 ------------ ------------- DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 3.4 -- 2.2 ------------------------- ------------------------ Income available to common shareholders plus assumed conversions $ 213 219.9 $ 0.97 $ 451 218.4 $ 2.07 ------------------------------------------------------------------------------------------------------------------------------------
Second Quarter Ended Six Months Ended ------------------------------------- ------------------------------------- Per Share Per Share June 30, 1999 Income Shares Amount Income Shares Amount ----------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common shareholders $ 215 226.8 $ 0.95 $ 453 226.9 $ 2.00 ------------- ------------ DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 3.2 -- 3.1 ------------------------ ------------------------- Income available to common shareholders plus assumed conversions $ 215 230.0 $ 0.93 $ 453 230.0 $ 1.97 -----------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share are computed based on the weighted average number of shares outstanding during the period. Diluted earnings per share include the dilutive effect of outstanding options, using the treasury stock method, and contingently issuable shares. Under the treasury stock method, exercise of options is assumed with the proceeds used to purchase common stock at the average market price for the period. The difference between the number of shares assumed issued and number of shares purchased represents the dilutive shares. Contingently issuable shares are included upon satisfaction of certain conditions related to the contingency. NOTE 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, final outcome of these matters after consideration of provisions made for potential losses and costs of defense, is not expected to be material to the consolidated financial condition, results of operations or cash flows of The Hartford. In May 2000, an agreement in principle was reached providing for a settlement of the Delaware Chancery Court (the Court) actions reported in the Company's March 31, 2000 Form 10-Q concerning The HLI Repurchase. On May 17, 2000, a Memorandum of - 8 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 6. COMMITMENTS AND CONTINGENCIES (CONTINUED) (A) LITIGATION (CONTINUED) Understanding was executed by all parties taking into account the final price paid for the public shares and providing for a full release by all class members and named plaintiffs of all claims that were or could have been brought concerning The HLI Repurchase. The settlement is subject to the execution of a definitive stipulation of settlement after confirmatory discovery and approval by the Court after notice to the members of the proposed settlement class. The Memorandum of Understanding also provides that upon final approval of the settlement, the Company will pay plaintiffs' attorneys' fees and costs of up to $2. As of July 31, 2000, the discovery contemplated by the Memorandum of Understanding was completed, but the stipulation of settlement had not been finalized and executed. (B) ENVIRONMENTAL AND ASBESTOS CLAIMS Information regarding environmental and asbestos claims may be found in the Environmental and Asbestos Claims section of Management's Discussion and Analysis of Financial Condition and Results of Operations. (C) TAX MATTERS The Hartford's federal income tax returns are routinely audited by the Internal Revenue Service. Management believes that adequate provision has been made in the financial statements for items that may result from tax examinations and other tax related matters. During the second quarter of 2000, the Company reached a settlement with the Internal Revenue Service with respect to certain tax matters for the 1993-1995 tax years. The settlement resulted in a $24 tax benefit being recorded in the Company's second quarter results of operations. NOTE 7. SEGMENT INFORMATION During the second quarter of 2000, The Hartford's reportable segments changed in connection with the establishment of two major operating entities: Worldwide Life and Worldwide Property & Casualty. Within these entities, The Hartford conducts business principally in eight operating segments. The Company also includes in Corporate all activities related to The HLI Repurchase (see Note 2), along with the minority interest for pre-acquisition periods. Worldwide Life is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits (formerly Employee Benefits) and Corporate Owned Life Insurance (COLI). Investment Products offers individual fixed and variable annuities, mutual funds, retirement plan services and other investment products. Individual Life sells a variety of life insurance products, including variable life, universal life, interest sensitive whole life and term life insurance. Group Benefits sells group insurance products, including group life and group disability insurance as well as other products, including stop loss and supplementary medical coverage to employers and employer sponsored plans, accidental death and dismemberment, travel accident, long-term care insurance and other special risk coverages to employers and associations. COLI primarily offers variable products used by employers to fund non-qualified benefits or other postemployment benefit obligations as well as leveraged COLI. Worldwide Life also includes in "Other" its international operations as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. Worldwide Property & Casualty is organized into four reportable operating segments: the underwriting segments of Commercial, Personal and Reinsurance, and an International and Other Operations segment. Also reported within Worldwide Property & Casualty is North American, which includes the combined underwriting results of Commercial, Personal and Reinsurance along with income and expense items not directly allocable to these segments, such as net investment income. The Commercial segment provides workers' compensation, property, automobile, liability, marine, agricultural and bond coverages to commercial accounts throughout the United States and Canada. Excess and surplus lines business not normally written by standard lines insurers is also provided. The Personal segment provides automobile, homeowners, home-based business and fire coverages to individuals throughout the United States. The Reinsurance segment assumes reinsurance worldwide through its thirteen HartRe offices located in the United States, Canada, the United Kingdom, France, Italy, Germany, Spain, Hong Kong and Taiwan. HartRe primarily writes treaty reinsurance through professional reinsurance brokers covering various property, casualty, specialty and marine classes of business. International consists of European companies offering a variety of insurance products (primarily property and casualty products) designed to meet the needs of local customers, and Other Operations consists of operations which have ceased writing new business. While the measure of profit or loss used by The Hartford's management in evaluating performance is core earnings for its non-underwriting segments, the Commercial, Personal and Reinsurance segments are evaluated by The Hartford's management primarily based upon underwriting results. The Hartford defines "core earnings" as after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes, allocated Distribution items (for additional information, see Note 16 of Notes to Consolidated Financial Statements included in The Hartford's 1999 Form 10-K Annual Report) and certain other items. Core earnings is an internal performance measure used by the Company in the management of its operations. While not considered segments, the Company also reports and evaluates core earnings results for Worldwide Life and Worldwide Property & Casualty, including North American. Worldwide Property & Casualty includes core earnings for North American and the International and Other Operations segment. - 9 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 7. SEGMENT INFORMATION (CONTINUED) Certain transactions between segments occur during the year that primarily relate to tax settlements, insurance coverage, expense reimbursements, services provided and capital contributions. Certain reinsurance stop loss agreements exist between the segments which specify that one segment will reimburse another for losses incurred in excess of a predetermined limit. Also, one segment may purchase group annuity contracts from another to fund pension costs and claim annuities to settle casualty claims. The following tables present revenues and core earnings. Underwriting results are presented for the Commercial, Personal and Reinsurance segments while core earnings are presented for the non-underwriting segments, along with Worldwide Life and Worldwide Property & Casualty, including North American.
REVENUES SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------------------------------- 2000 1999 2000 1999 --------------------------------------------------------- Worldwide Life Investment Products $ 587 $ 499 $ 1,172 $ 982 Individual Life 154 140 311 273 Group Benefits 557 489 1,077 964 COLI 170 215 335 439 Other (27) 14 (8) 34 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Life 1,441 1,357 2,887 2,692 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Property & Casualty North American Earned premiums, service fees and other from underwriting segments Commercial 848 808 1,677 1,603 Personal 674 617 1,325 1,226 Reinsurance 200 186 383 337 ------------------------------------------------------------------------------------------------------------------------------------ Total underwriting segments earned premiums, service fees and other 1,722 1,611 3,385 3,166 Net investment income 207 216 428 427 Net realized capital gains (losses) (8) 6 (1) 22 ------------------------------------------------------------------------------------------------------------------------------------ Total North American 1,921 1,833 3,812 3,615 ------------------------------------------------------------------------------------------------------------------------------------ International and Other Operations 153 159 315 341 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Property & Casualty 2,074 1,992 4,127 3,956 ------------------------------------------------------------------------------------------------------------------------------------ Corporate (1) -- (1) -- ------------------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES $ 3,514 $ 3,349 $ 7,013 $ 6,648 ====================================================================================================================================
- 10 - NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 7. SEGMENT INFORMATION (CONTINUED)
CORE EARNINGS SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------------------------------- 2000 1999 2000 1999 --------------------------------------------------------- Worldwide Life Investment Products $ 110 $ 81 $ 212 $ 159 Individual Life 20 17 38 32 Group Benefits 21 19 40 36 COLI 8 8 16 14 Other 15 (11) 18 (21) ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Life 174 114 324 220 ------------------------------------------------------------------------------------------------------------------------------------ Worldwide Property & Casualty North American Underwriting results Commercial (34) (43) (95) (95) Personal (19) 2 (15) 45 Reinsurance (11) (6) (24) (9) ------------------------------------------------------------------------------------------------------------------------------------ Total underwriting results (64) (47) (134) (59) Net service fee and other income [1] -- 5 2 7 Net investment income 207 216 428 427 Other expenses (53) (55) (102) (111) Income tax (expense) benefit 2 (9) (2) (29) ------------------------------------------------------------------------------------------------------------------------------------ Total North American 92 110 192 235 International and Other Operations 5 8 9 15 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Property & Casualty 97 118 201 250 ------------------------------------------------------------------------------------------------------------------------------------ Corporate (32) (21) (60) (41) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CORE EARNINGS 239 211 465 429 Net realized capital gains (losses), after-tax (26) 4 (14) 24 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 213 $ 215 $ 451 $ 453 ==================================================================================================================================== [1] Net of expenses related to service business.
NOTE 8. STOCK COMPENSATION PLANS On May 18, 2000, the shareholders of The Hartford approved The Hartford 2000 Incentive Stock Plan (the 2000 Stock Plan) which replaced The Hartford 1995 Incentive Stock Plan (the 1995 Stock Plan). For further discussion of the 1995 Stock Plan, see Note 10 of Notes to Consolidated Financial Statements included in The Hartford's 1999 Form 10-K Annual Report. The terms of the 2000 Stock Plan are substantially similar to the terms of the 1995 Stock Plan, except that the maximum limit applicable to all share awards for the ten year duration of the 2000 Stock Plan has been reduced to 8% of the outstanding shares as of the date the 2000 Stock Plan was approved by shareholders (approximately 17 million shares). Also, under the 2000 Stock Plan, there is no applicable annual limit, while the 1995 Stock Plan had an annual limit of 1.65% of the prior year end's outstanding shares. - 11 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in millions except share data unless otherwise stated) Management's Discussion and Analysis of Financial Condition and Results of Operations (MD&A) addresses the financial condition of The Hartford Financial Services Group, Inc. and its consolidated subsidiaries (The Hartford or the Company) as of June 30, 2000, compared with December 31, 1999, and its results of operations for the second quarter and six months ended June 30, 2000 compared with the equivalent 1999 periods. This discussion should be read in conjunction with the MD&A included in The Hartford's 1999 Form 10-K Annual Report. Certain of the statements contained herein (other than statements of historical fact) are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty which are, in many instances, beyond the Company's control and have been made based upon management's expectations and beliefs concerning future developments and their potential effect upon The Hartford. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on The Hartford will be those anticipated by management. Actual results could differ materially from those expected by The Hartford, depending on the outcome of certain factors, including the possibility of general economic and business conditions that are less favorable than anticipated, changes in interest rates or the stock markets, stronger than anticipated competitive activity, more frequent or severe natural catastrophes than anticipated and those described in the forward-looking statements herein. Certain reclassifications have been made to prior year financial information to conform to the current year presentation. -------------------------------------------------------------------------------- INDEX -------------------------------------------------------------------------------- Consolidated Results of Operations: Operating Summary 12 Worldwide Life 14 Investment Products 15 Individual Life 15 Group Benefits 16 Corporate Owned Life Insurance (COLI) 16 Worldwide Property & Casualty 17 Commercial 17 Personal 17 Reinsurance 18 International and Other Operations 18 Environmental and Asbestos Claims 19 Investments 20 Capital Markets Risk Management 21 Capital Resources and Liquidity 22 Regulatory Matters and Contingencies 23 Accounting Standards 23 -------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- ----------- 2000 1999 2000 1999 -------------- -------------- -------------- ----------- TOTAL REVENUES $ 3,514 $ 3,349 $ 7,013 $ 6,648 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 213 $ 215 $ 451 $ 453 Less: Net realized capital gains (losses), after-tax (26) 4 (14) 24 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 239 $ 211 $ 465 $ 429 ====================================================================================================================================
The Hartford defines "core earnings" as after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes, allocated Distribution items (for additional information, see Note 16 of Notes to Consolidated Financial Statements included in The Hartford's 1999 Form 10-K Annual Report) and certain other items. Core earnings is an internal performance measure used by the Company in the management of its operations. Management believes that this performance measure delineates the results of operations of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current business. However, core earnings should only be analyzed in conjunction with, and not in lieu of, net income and may not be comparable to other performance measures used by the Company's competitors. Revenues for the second quarter and six months ended June 30, 2000 increased $165, or 5%, and $365, or 5%, respectively, over the comparable prior year periods, primarily as a result of continued growth in fee income in Worldwide Life and growth in personal lines and small commercial within Worldwide Property & Casualty operations. Core earnings increased $28, or 13%, and $36, or 8%, for the second quarter and six months ended June 30, 2000, respectively, from the comparable prior year periods as continued strong performance in Worldwide Life operations, primarily due to higher fee income, was partially offset by a decline in Worldwide Property & Casualty results, primarily due to personal lines automobile loss costs. The effective tax rates for the second quarter and six months ended June 30, 2000 were 7% and 16%, respectively, compared to 23% and 24%, respectively, for the comparable periods in 1999. During the second quarter of 2000, the Company reached a settlement with the Internal Revenue Service with respect to - 12 - certain tax matters for the 1993-1995 tax years. The settlement resulted in a $24 tax benefit being recorded in the Company's second quarter results of operations. This benefit, along with tax-exempt interest earned on invested assets, were the principal causes of the effective tax rates being lower than the 35% U.S. statutory rate. SEGMENT RESULTS During the second quarter of 2000, The Hartford's reportable segments changed in connection with the establishment of two major operating entities: Worldwide Life and Worldwide Property & Casualty. Within these entities, The Hartford conducts business principally in eight operating segments. The Company also includes in Corporate all activities related to The HLI Repurchase (see Note 2 of Notes to Consolidated Financial Statements and the Capital Resources and Liquidity section under The HLI Repurchase), along with the minority interest for pre-acquisition periods. Worldwide Life is organized into four reportable operating segments: Investment Products, Individual Life, Group Benefits (formerly Employee Benefits) and Corporate Owned Life Insurance (COLI). Worldwide Life also includes in "Other" its international operations as well as corporate items not directly allocable to any of its reportable operating segments, principally interest expense. Worldwide Property & Casualty is organized into four reportable operating segments: the underwriting segments of Commercial, Personal and Reinsurance, and an International and Other Operations segment. Also reported within Worldwide Property & Casualty is North American, which includes the combined underwriting results of Commercial, Personal and Reinsurance along with income and expense items not directly allocable to these segments, such as net investment income. While the measure of profit or loss used by The Hartford's management in evaluating performance is core earnings for its non-underwriting segments, the Commercial, Personal and Reinsurance segments are evaluated by The Hartford's management primarily based upon underwriting results. While not considered segments, the Company also reports and evaluates core earnings results for Worldwide Life and Worldwide Property & Casualty, including North American. Worldwide Property & Casualty includes core earnings for North American and the International and Other Operations segment. Certain transactions between segments occur during the year that primarily relate to tax settlements, insurance coverage, expense reimbursements, services provided and capital contributions. Certain reinsurance stop loss agreements exist between the segments which specify that one segment will reimburse another for losses incurred in excess of a predetermined limit. Also, one segment may purchase group annuity contracts from another to fund pension costs and claim annuities to settle casualty claims. The following is a summary of North American underwriting results by underwriting segment within Worldwide Property & Casualty. Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses.
UNDERWRITING RESULTS SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, --------------------------------------------------------- North American 2000 1999 2000 1999 --------------------------------------------------------- Commercial $ (34) $ (43) $ (95) $ (95) Personal (19) 2 (15) 45 Reinsurance (11) (6) (24) (9) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NORTH AMERICAN UNDERWRITING RESULTS $ (64) $ (47) $ (134) $ (59) ------------------------------------------------------------------------------------------------------------------------------------
The following is a summary of core earnings and net income (loss).
CORE EARNINGS SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- ----------- 2000 1999 2000 1999 -------------- -------------- -------------- ----------- Worldwide Life Investment Products $ 110 $ 81 $ 212 $ 159 Individual Life 20 17 38 32 Group Benefits 21 19 40 36 COLI 8 8 16 14 Other 15 (11) 18 (21) ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Life 174 114 324 220 Worldwide Property & Casualty North American 92 110 192 235 International and Other Operations 5 8 9 15 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Property & Casualty 97 118 201 250 Corporate (32) (21) (60) (41) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL CORE EARNINGS $ 239 $ 211 $ 465 $ 429 ====================================================================================================================================
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NET INCOME (LOSS) SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- ----------- 2000 1999 2000 1999 -------------- -------------- -------------- ----------- Worldwide Life Investment Products $ 110 $ 81 $ 212 $ 159 Individual Life 20 17 38 32 Group Benefits 21 19 40 36 COLI 8 8 16 14 Other (13) (11) (10) (21) ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Life 146 114 296 220 Worldwide Property & Casualty North American 86 113 191 249 International and Other Operations 9 9 20 25 ------------------------------------------------------------------------------------------------------------------------------------ Total Worldwide Property & Casualty 95 122 211 274 Corporate (28) (21) (56) (41) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL NET INCOME $ 213 $ 215 $ 451 $ 453 ====================================================================================================================================
An analysis of the operating results summarized above is included on the following pages. Environmental and Asbestos Claims and Investments are discussed in separate sections. -------------------------------------------------------------------------------- WORLDWIDE LIFE --------------------------------------------------------------------------------
OPERATING SUMMARY [1] SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- ----------- 2000 1999 2000 1999 -------------- -------------- -------------- ----------- Revenues $ 1,441 $ 1,357 $ 2,887 $ 2,692 Expenses 1,295 1,243 2,591 2,472 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 146 $ 114 $ 296 $ 220 Less: Net realized capital losses, after-tax (28) -- (28) -- ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 174 $ 114 $ 324 $ 220 ==================================================================================================================================== [1] Worldwide Life results are presented before the effect of the approximately 19% minority interest in HLI prior to The HLI Repurchase on June 27, 2000, which is reflected in Corporate.
Revenues increased $84, or 6%, and $195, or 7%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent 1999 periods. Excluding net realized capital losses and the COLI segment, where revenues decreased primarily due to the declining block of leveraged COLI business, revenues increased $172, or 15%, and $342, or 15%, for the respective second quarter and six month periods. The increase in revenues was attributable to growth across each of Worldwide Life's other operating segments, particularly the Investment Products segment, where related assets under management, which include mutual funds, grew 18% to $116.5 billion from a year ago. The revenue growth in the Investment Products segment was primarily due to higher fee income related to the individual annuity and mutual fund operations resulting from the aforementioned increase in assets under management. In addition, Group Benefits and Individual Life contributed to the increased revenues as a result of strong sales and favorable persistency. Expenses increased $52, or 4%, and $119, or 5%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent 1999 periods. Excluding tax benefits (described below) and the COLI segment, where expenses decreased primarily due to the declining block of leveraged COLI business, expenses increased $121, or 12%, and $257, or 13%, for the respective second quarter and six month periods. The increase in expenses was lower than the growth in revenues as Worldwide Life continues to create operating leverage by expanding its distribution platform to accelerate sales volume while utilizing technology and prudent expense management to increase productivity. Core earnings increased $60, or 53%, and $104, or 47%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent 1999 periods. This increase was led by the Investment Products segment where core earnings increased $29, or 36%, and $53, or 33%, for the respective second quarter and six month periods. Additionally, the remaining three operating segments each reported a double digit percentage increase for the six months ended June 30, 2000 as compared to the respective prior year period. Worldwide Life also reported a benefit related to the settlement of a federal tax matter of $24 for the second quarter of 2000 (see Note 6 (c) of Notes to Consolidated Financial Statements). This benefit, along with an $8 benefit related to state income taxes in the first quarter of 2000, resulted in $32 of tax benefits for the six months ended June 30, 2000. Excluding the tax items, core earnings were up $36, or 32%, and $72, or 33%, for the respective second quarter and six month periods. - 14 - -------------------------------------------------------------------------------- INVESTMENT PRODUCTS --------------------------------------------------------------------------------
SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Revenues $ 587 $ 499 $ 1,172 $ 982 Expenses 477 418 960 823 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 110 $ 81 $ 212 $ 159 ------------------------------------------------------------------------------------------------------------------------------------ Individual variable annuity account values $ 82,264 $ 70,741 Other individual annuity account values 8,624 8,371 Other investment products account values 16,862 15,206 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ACCOUNT VALUES 107,750 94,318 Retail mutual fund assets under management 8,729 4,119 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 116,479 $ 98,437 ====================================================================================================================================
Revenues in the Investment Products segment increased $88, or 18%, and $190, or 19%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent 1999 periods, primarily due to higher fee income in the individual annuity and retail mutual fund operations. Fee income generated by individual annuities increased $60, or 22%, and $136, or 26%, for the respective second quarter and six month periods, as related account values grew $11.8 billion, or 15%, from June 30, 1999. The growth in individual annuity account values was mostly due to strong individual annuity sales (including $5.8 billion for the first six months of 2000) and equity market appreciation. In addition, fee income from other investment products increased $25, or 60%, and $49, or 57%, for the respective second quarter and six month periods of 2000, primarily driven by the Company's retail mutual fund operation, where assets under management increased $4.6 billion, or 112%, from June 30, 1999. This substantial growth was mostly due to strong sales (including $2.6 billion for the first six months of 2000) and equity market appreciation. Due to the continued growth in this segment, particularly the individual annuity and mutual fund operations, expenses increased $59, or 14%, and $137, or 17%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent 1999 periods. These increases were primarily driven by amortization of deferred policy acquisition costs, which grew $17, or 16%, and $44, or 21%, for the respective second quarter and six month periods and other expenses which increased $41, or 41%, and $66, or 33%, over the respective prior year levels. The segment's operating expenses as a percentage of average assets under management were relatively consistent for the second quarter and six month periods versus the equivalent prior year periods. Core earnings increased $29, or 36%, and $53, or 33%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the comparable 1999 periods, primarily due to the growth in revenues associated with the increase in assets under management across the entire segment. Additionally, the Investment Products segment continued to maintain its profit margins related to its primary businesses thus contributing to the segment's earnings growth. -------------------------------------------------------------------------------- INDIVIDUAL LIFE --------------------------------------------------------------------------------
SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Revenues $ 154 $ 140 $ 311 $ 273 Expenses 134 123 273 241 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 20 $ 17 $ 38 $ 32 ------------------------------------------------------------------------------------------------------------------------------------ Variable life account values $ 2,848 $ 2,021 Total account values $ 5,695 $ 4,834 ------------------------------------------------------------------------------------------------------------------------------------ Variable life insurance in force $ 28,503 $ 19,410 Total life insurance in force $ 70,613 $ 63,297 ====================================================================================================================================
Revenues in the Individual Life segment increased $14, or 10%, and $38, or 14%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent 1999 periods, resulting primarily from higher fee income associated with the growing block of variable life insurance. Fee income increased $14, or 15%, and $41, or 23%, for the respective second quarter and six month periods, as variable life account values increased $827, or 41%, and variable life insurance in force increased $9.1 billion, or 47%, from June 30, 1999. Expenses increased $11, or 9%, and $32, or 13%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent 1999 periods. The increase in expenses for the second quarter was principally due to an $8 increase in benefits, claims and claim adjustment expenses related - 15 - to the growing block of business. The increase in expenses for the six month period was primarily due to a $21, or 40%, increase in amortization of deferred policy acquisition costs which was also associated with the growth in this segment's variable business. Core earnings increased $3, or 18%, and $6, or 19%, primarily due to the higher fee income described above, and favorable mortality experience as death benefits through six months remained level with 1999, while life insurance in force increased 12%. -------------------------------------------------------------------------------- GROUP BENEFITS --------------------------------------------------------------------------------
SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Revenues $ 557 $ 489 $ 1,077 $ 964 Expenses 536 470 1,037 928 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 21 $ 19 $ 40 $ 36 ====================================================================================================================================
Revenues in the Group Benefits segment increased $68, or 14%, and $113, or 12%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent prior year periods. The increase was primarily driven by growth in fully insured premiums, excluding buyouts, which increased $54, or 13%, and $104, or 12%, for the respective second quarter and six month periods, due primarily to favorable persistency of the in force block of business. Expenses increased $66, or 14%, and $109, or 12%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent prior year periods. The increase was primarily due to higher benefits, claims and claim adjustment expenses which, excluding buyouts, increased $45, or 13%, and $91, or 13% for the respective second quarter and six month periods. However, the loss ratio (defined as benefits, claims and claim adjustment expenses as a percentage of premiums and other considerations excluding buyouts) of 82.4% for the second quarter and 83.2% for the six months ended June 30, 2000, remained relatively consistent with the comparable prior year periods. The revenue growth described above, coupled with the segment's stable loss ratio, resulted in an increase in core earnings of $2, or 11% and $4, or 11% for the respective second quarter and six month periods. -------------------------------------------------------------------------------- CORPORATE OWNED LIFE INSURANCE (COLI) --------------------------------------------------------------------------------
SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Revenues $ 170 $ 215 $ 335 $ 439 Expenses 162 207 319 425 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 8 $ 8 $ 16 $ 14 ------------------------------------------------------------------------------------------------------------------------------------ Variable COLI account values $ 12,925 $ 11,833 Leveraged COLI account values 4,975 6,197 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL ACCOUNT VALUES $ 17,900 $ 18,030 ====================================================================================================================================
COLI revenues decreased $45, or 21%, and $104, or 24%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent prior year periods. Net investment income decreased $19, or 18%, and $53, or 23%, for the respective second quarter and six month periods primarily due to the leveraged COLI block of business, as related account values decreased $1.2 billion, or 20%, as a result of the downsizing caused by the Health Insurance Portability and Accountability Act of 1996. Revenues also decreased due to lower sales in 2000 as compared to 1999. Expenses decreased $45, or 22%, and $106, or 25%, for the second quarter and six months ended June 30, 2000, respectively, as compared to the equivalent prior year periods due to the factors described above. Core earnings was consistent for the second quarters ended June 30, 2000 and 1999, however, core earnings for the six months ended June 30, 2000 as compared to the equivalent period of 1999 increased $2, or 14%. The increase for the six month period was primarily attributable to the variable COLI business where account values increased $1.1 billion, or 9%, as well as increased earnings associated with a block of leveraged COLI business recaptured in 1998. - 16 - -------------------------------------------------------------------------------- WORLDWIDE PROPERTY & CASUALTY --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2000 1999 2000 1999 -------------- -------------- -------------- ----------- TOTAL REVENUES $ 2,074 $ 1,992 $ 4,127 $ 3,956 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 95 $ 122 $ 211 $ 274 Less: Net realized capital gains (losses), after-tax (2) 4 10 24 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 97 $ 118 $ 201 $ 250 ====================================================================================================================================
Revenues for Worldwide Property & Casualty increased $82, or 4%, for the second quarter and increased $171, or 4%, for the six months ended June 30, 2000, compared with the same prior year periods. The increase for the second quarter was due to a $105 increase in earned premiums primarily in Personal, small commercial and Reinsurance, partially offset by decreases of $12 in net investment income and $11 in pre-tax net realized capital gains. For the six month period, the increase in earned premiums of $198 was partially offset by a decrease of $4 in net investment income and $23 in pre-tax net realized capital gains. Core earnings decreased $21, or 18%, for the second quarter and $49, or 20%, for the six months ended June 30, 2000 compared to the same periods in 1999. These decreases for the quarter were primarily due to increases in Personal automobile loss costs partially offset by favorable impacts of Commercial pricing increases and lower other underwriting expense (OUE) ratios. In addition, International and Other Operations decreased as a result of adverse loss reserve development in International's automobile business. For the six month period, the decreases were due to an increase in Personal automobile loss costs, higher catastrophe losses and expenses related to the Commercial field office reorganization. International and Other Operations' decrease was due to continued adverse prior year reserve development on International's automobile business. -------------------------------------------------------------------------------- COMMERCIAL --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Written premiums $ 858 $ 794 $ 1,688 $ 1,561 Underwriting results $ (34) $ (43) $ (95) $ (95) Combined ratio 101.9 105.1 103.9 106.0 ------------------------------------------------------------------------------------------------------------------------------------
Commercial written premiums increased $64, or 8%, for the second quarter and $127, or 8%, for the six months ended June 30, 2000 compared with the same periods in 1999. Continued solid growth in the small commercial businesses, with Select Customer up 18% and 20%, respectively, and the small commercial portion of Affinity up 26% and 30%, respectively, for the second quarter and six months ended June 30, 2000, respectively, was slightly offset by decreases in mid-market standard commercial business, Key Accounts, of 5% and 9%, respectively. Enhanced product offerings, targeted geographic strategies and partnerships with other entities continued to be the primary drivers of the growth businesses. The decline in mid-market continues to be attributable to a highly competitive, but firming, marketplace, aggressive underwriting actions and reaction to price increases by The Hartford. Underwriting results improved $9, or 3.2 combined ratio points, for the second quarter, but were flat for the six months ended June 30, 2000 compared with the same prior year periods. The combined ratio improved by 2.1 points for the six month period. The improvement for the second quarter was primarily the result of improvements in the loss ratio due to the continued effective execution of pricing actions and a decrease in the OUE ratio. For the six month period, the improvement noted in the second quarter was offset by first quarter reorganization costs and catastrophe results adverse to the prior year. -------------------------------------------------------------------------------- PERSONAL --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Written premiums $ 692 $ 635 $ 1,305 $ 1,195 Underwriting results $ (19) $ 2 $ (15) $ 45 Combined ratio 102.5 101.8 101.1 98.6 ------------------------------------------------------------------------------------------------------------------------------------
Personal written premiums increased $57, or 9%, for the second quarter and $110, or 9%, for the six months ended June 30, 2000 over the comparable prior year periods. Written premiums increased $24, or 6%, in the AARP program for the quarter, and $43, or 6%, for the six month period. Standard agency written premiums increased $20, or 12% for the quarter and $43, or 14%, for the six months ended June 30, 2000. Affinity growth of $14, or 53%, for the quarter, and $35, or 71%, for the six month - 17 - period included the Ford Motor Company and Ford Motor Credit Company account as well as financial institutions. In June 2000, the company announced another affinity marketing arrangement with Sears that will begin July 1, 2000. Non-standard automobile written premiums through Omni were essentially flat for the quarter compared to prior year, but declined $12, or 9%, for the six month period compared to prior year due to decreased business as a result of rate increases not matched by competitors. Underwriting results decreased $21 for the second quarter and $60 for the six months ended June 30, 2000 with a corresponding 0.7 point increase in the combined ratio for the quarter and a 2.5 point increase for the six month period compared with 1999. The decrease in underwriting results and related increase in the combined ratio were driven principally by loss and loss adjustment expense, up 1.5 points for the quarter and 3.6 points for the six months ended June 30, 2000 compared to 1999. The frequency and severity of automobile losses are running at increased levels from 1999. The 2000 OUE ratio was below 1999 for both the quarter and six months, reflecting the continuing trend of productivity gains from prior investments, and fixed cost growth lower than written premiums growth. -------------------------------------------------------------------------------- REINSURANCE --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------------------------------------------------------------------------ Written premiums $ 188 $ 174 $ 455 $ 392 Underwriting results $ (11) $ (6) $ (24) $ (9) Combined ratio 108.1 102.7 104.9 102.4 ------------------------------------------------------------------------------------------------------------------------------------
Reinsurance written premiums increased $14, or 8%, for the second quarter and $63, or 16%, for the six months ended June 30, 2000, compared with the same prior year periods. These increases were primarily due to continued execution of new business development strategies in the Alternative Risk Transfer line and in Europe, along with successful pricing increases in North America. Underwriting results decreased $5 for the second quarter and $15 for the six months ended June 30, 2000 with corresponding 5.4 point and 2.5 point increases in the combined ratio for the second quarter and six month periods compared with 1999. The decrease in underwriting results and increase in combined ratios for both periods was primarily due to continued adverse prior underwriting year loss development concentrated in a few classes of business along with increased commissions. In addition, 2.2 of the 5.4 point increase in the second quarter combined ratio was due to the commuting of a significant treaty written in the first quarter. -------------------------------------------------------------------------------- INTERNATIONAL AND OTHER OPERATIONS --------------------------------------------------------------------------------
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, ----------------------------- -------------------------- 2000 1999 2000 1999 ----------------------------- -------------------------- TOTAL REVENUES $ 153 $ 159 $ 315 $ 341 ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 9 $ 9 $ 20 $ 25 Less: Net realized capital gains, after-tax 4 1 11 10 ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 5 $ 8 $ 9 $ 15 ------------------------------------------------------------------------------------------------------------------------------------
International International revenues decreased $8, or 7%, for the second quarter and $26, or 10%, for the six months ended June 30, 2000 over the comparable periods in 1999. The decreases were mainly due to a continued negative foreign exchange impact as the Euro deteriorated against the U.S. dollar during the second quarter and for the six months ended June 30, 2000. Excluding the effect of foreign exchange, total revenues increased $10 for the second quarter and $9 for the six months ended June 30, 2000 primarily due to an increase in automobile earned premiums. Core earnings for the second quarter ended June 30, 2000, decreased $3, or 50%, compared to the same period in 1999, primarily due to adverse automobile loss reserve development and unfavorable foreign exchange impacts. For the six month period, core earnings decreased $6, or 50%, over the comparable 1999 period due mainly to a higher calendar year loss ratio in automobile business and unfavorable foreign exchange impacts. Overall, there was a negative foreign exchange impact of $1 for the second quarter and $2 for the six months ended June 30, 2000. Other Operations Other Operations revenues increased $2, or 6%, for the second quarter and were flat for the six months ended June 30, 2000 compared to the same prior year periods. Core earnings were flat for the second quarter and the six months ended June 30, 2000, compared to prior year. - 18 - -------------------------------------------------------------------------------- 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 Worldwide Property & Casualty. Environmental claims relate primarily to pollution and related clean-up costs. With regard to these claims, uncertainty exists which impacts the ability of insurers and reinsurers to estimate the ultimate reserves for unpaid losses and related settlement expenses. The Hartford finds that conventional reserving techniques cannot estimate the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. For the majority of environmental claims and many types of asbestos claims, unlike any other type of contractual claim, there is almost no agreement or consistent precedent to determine what, if any, coverage exists or which, if any, policy years and insurers or reinsurers may be liable. Further uncertainty arises with environmental claims since claims are often made under policies, the existence of which may be in dispute, the terms of which may have changed over many years, which may or may not provide for legal defense costs, and which may or may not contain environmental exclusion clauses that may be absolute or allow for fortuitous events. Courts in different jurisdictions have reached disparate conclusions on similar issues and in certain situations have broadened the interpretation of policy coverage and liability issues. In light of the extensive claim settlement process for environmental and asbestos claims, involving comprehensive fact gathering, subject matter expertise and intensive litigation, The Hartford established an environmental claims facility in 1992 to defend itself aggressively against unwarranted claims and to minimize costs. Within the property and casualty insurance industry in the mid-1990's, progress was made in developing sophisticated, alternative methodologies utilizing company experience and supplemental databases to assess environmental and asbestos liabilities. Consistent with The Hartford's practice of using the best techniques to estimate the Company's environmental and asbestos exposures, a study was initiated in April 1996 utilizing internal staff supplemented by outside legal and actuarial consultants. Use of these new methodologies resulted in The Hartford adjusting its environmental and asbestos liabilities in the third quarter of 1996. For additional information, see The Hartford's 1999 Form 10-K Annual Report. Reserve activity for both reported and unreported environmental and asbestos claims, including reserves for legal defense costs, for the six months ended June 30, 2000 and the year ended December 31, 1999, was as follows (net of reinsurance):
ENVIRONMENTAL AND ASBESTOS CLAIMS AND CLAIM ADJUSTMENT EXPENSES SIX MONTHS ENDED YEAR ENDED JUNE 30, 2000 DECEMBER 31, 1999 -------------------------------------------------------------------------------- Environmental Asbestos Total Environmental Asbestos Total -------------------------------------------------------------------------------- Beginning liability $ 995 $ 607 $ 1,602 $ 1,144 $ 648 $ 1,792 Claims and claim adjustment expenses incurred 4 3 7 7 4 11 Claims and claim adjustment expenses paid (47) (24) (71) (156) (45) (201) ----------------------------------------------------------------------------------------------------------------------------------- ENDING LIABILITY [1] $ 952 $ 586 $ 1,538 $ 995 $ 607 $ 1,602 =================================================================================================================================== [1] The ending liabilities are net of reinsurance on reported and unreported claims of $1,399 and $1,506 for June 30, 2000 and December 31, 1999, respectively. Gross of reinsurance as of June 30, 2000 and December 31, 1999, reserves for environmental and asbestos were $1,555 and $1,382 and $1,609 and $1,499, respectively.
The Hartford believes that the environmental and asbestos reserves recorded at June 30, 2000 are a reasonable estimate of the ultimate remaining liability for these claims based upon known facts, current assumptions and The Hartford's methodologies. Future social, economic, legal or legislative developments may alter the original intent of policies and the scope of coverage. The Hartford will continue to evaluate new developments and methodologies as they become available for use in supplementing the Company's ongoing analysis and review of its environmental and asbestos exposures. These future reviews may result in a change in reserves, impacting The Hartford's results of operations in the period in which the reserve estimates are changed. While the effects of future changes in facts, legal and other issues could have a material effect on future results of operations, The Hartford does not expect such changes would have a material effect on its liquidity or financial condition. - 19 - -------------------------------------------------------------------------------- INVESTMENTS -------------------------------------------------------------------------------- An important element of the financial results of The Hartford is return on invested assets. The Hartford's investment portfolios are divided between Worldwide Life and Worldwide Property & Casualty. The investment portfolios are managed based on the underlying characteristics and nature of each operation's respective liabilities and managed within established risk parameters. (For a further discussion on The Hartford's approach to managing risks, see the Capital Markets Risk Management section.) Please refer to The Hartford's 1999 Form 10-K Annual Report for a description of the Company's investment objectives and policies. WORLDWIDE LIFE Invested assets, excluding separate accounts, totaled $21.5 billion at June 30, 2000 and were comprised of $17.0 billion of fixed maturities, $3.6 billion of policy loans, and other investments of $877. Invested assets, excluding separate accounts, totaled $21.8 billion at December 31, 1999 and were comprised of $17.0 billion of fixed maturities, $4.2 billion of policy loans, and other investments of $529. Policy loans are secured by the cash value of the life policy and do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. FIXED MATURITIES BY TYPE ------------------------------------------------------------------ JUNE 30, 2000 DECEMBER 31, 1999 ----------------------------------------------------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT ----------------------------------------------------------------- Corporate $ 7,333 43.1% $ 7,737 45.4% ABS 2,818 16.6% 2,508 14.7% Commercial MBS 2,393 14.1% 2,112 12.4% Municipal - tax-exempt 1,320 7.8% 1,108 6.5% MBS - agency 909 5.3% 853 5.0% CMO 676 4.0% 592 3.5% Gov't/Gov't agencies - For. 314 1.8% 339 2.0% Gov't/Gov't agencies - U.S. 122 0.7% 229 1.3% Municipal - taxable 69 0.4% 165 1.0% Short-term 967 5.7% 1,346 7.9% Redeemable preferred stock 78 0.5% 46 0.3% ----------------------------------------------------------------- TOTAL FIXED MATURITIES $ 16,999 100.0% $ 17,035 100.0% ----------------------------------------------------------------- Short-term securities declined primarily as a result of the funding of scheduled liability maturities and reallocation into other asset sectors. INVESTMENT RESULTS The table below summarizes Worldwide Life's results. SECOND QUARTER SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------------------------------- (before-tax) 2000 1999 2000 1999 ------------------------- --------- ---------- --------- --------- Net investment income - excluding policy loans $ 312 $ 284 $ 620 $ 574 Policy loan income 72 97 146 208 --------------------------------------- Net invest. income - total $ 384 $ 381 $ 766 $ 782 Yield on average invested assets [1] 7.0% 6.9% 6.9% 6.7% Net realized capital losses $ (43) $ -- $ (43) $ -- ------------------------------------------------------------------ [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). Net investment income, excluding policy loans, for the second quarter and six months ended June 30, 2000 increased approximately 10% and 8% compared to the respective prior periods. The increases were primarily due to higher yields earned on new investments. Policy loan income decreased approximately 26% and 30% over the same periods due to the decrease in leveraged COLI business. Net realized capital losses for the second quarter and six months ended June 30, 2000 increased by $43 compared to the respective prior year periods, primarily as a result of portfolio rebalancing. WORLDWIDE PROPERTY & CASUALTY Total invested assets were $17.6 billion at June 30, 2000 and were comprised of fixed maturities of $15.9 billion and other investments of $1.7 billion, primarily equity securities and limited partnerships. Total invested assets were $17.4 billion at December 31, 1999 and were comprised of fixed maturities of $15.8 billion and other investments of $1.6 billion, primarily equity securities and limited partnerships. FIXED MATURITIES BY TYPE ---------------------------------------------------------------- JUNE 30, 2000 DECEMBER 31, 1999 ----------------------------------------------------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT ----------------------------------------------------------------- Municipal - tax-exempt $ 8,379 52.8% $ 8,160 51.5% Corporate 3,121 19.7% 3,104 19.6% Gov't/Gov't agencies - For. 1,050 6.6% 1,140 7.2% Commercial MBS 987 6.2% 881 5.6% ABS 631 4.0% 596 3.8% MBS - agency 405 2.6% 445 2.8% CMO 181 1.1% 240 1.5% Gov't/Gov't agencies - U.S. 67 0.4% 101 0.6% Municipal - taxable 43 0.3% 54 0.4% Short-term 826 5.2% 1,003 6.3% Redeemable preferred stock 167 1.1% 116 0.7% ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 15,857 100.0% $ 15,840 100.0% ================================================================ INVESTMENT RESULTS The table below summarizes Worldwide Property & Casualty's results. SECOND QUARTER SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------------------------------- 2000 1999 2000 1999 ------------------------------------------------------------------ Net investment income, before-tax $ 259 $ 271 $ 531 $ 535 Net investment income, after-tax [1] $ 204 $ 209 $ 414 $ 415 Yield on average invested assets, 6.0% 6.1% 6.1% 6.0% before-tax [2] Yield on average invested assets, 4.7% 4.7% 4.8% 4.7% after-tax [1] [2] Net realized capital gains and losses, $ (2) $ 9 $ 15 $ 38 before-tax ================================================================== [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 second quarter ended June 30, 2000, before- and after-tax net investment income decreased by 4% and 2%, respectively. The decreases were primarily due to a decrease in partnership income. For the six months ended June 30, 2000, both before- and after-tax net investment income decreased slightly. The slight decreases were primarily due to a decline in invested assets which was - 20 - partially offset by increases in both dividend and partnership income. Net realized capital gains for the second quarter and six months ended June 30, 2000 decreased from the respective prior year periods as increased equity gains were more than offset by increased fixed maturity losses. -------------------------------------------------------------------------------- CAPITAL MARKETS RISK MANAGEMENT -------------------------------------------------------------------------------- The Hartford has a disciplined approach to managing risks associated with its capital markets and asset/liability management activities. Investment portfolio management is organized to focus investment management expertise on specific classes of investments while asset/liability management is the responsibility of separate and distinct risk management units supporting the property and casualty and life operations. Derivative instruments are utilized in accordance with established Company policy and are monitored internally and reviewed by senior management. The Company is exposed to two primary sources of investment and asset/liability management risk: credit risk, relating to the uncertainty associated with the ability of an obligor or counterparty to make timely payments of principal and/or interest, and market risk, relating to the market price and/or cash flow variability associated with changes in interest rates, securities prices, market indices, yield curves or currency exchange rates. The Company does not hold any financial instruments purchased for trading purposes. Please refer to The Hartford's 1999 Form 10-K Annual Report for a description of the Company's objectives, policies and strategies. CREDIT RISK The Company invests primarily in securities rated investment grade and has established exposure limits, diversification standards and review procedures for all credit risks including borrower, issuer or counterparty. Creditworthiness of specific obligors is determined by an internal credit assessment and ratings assigned by nationally recognized ratings agencies. Obligor, asset sector and industry concentrations are subject to established limits and are monitored on a regular interval. The Hartford is not exposed to any significant credit concentration risk of a single issuer. The following tables identify fixed maturity securities for Worldwide Life, including guaranteed separate accounts, and Worldwide Property & Casualty, 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. WORLDWIDE LIFE As of June 30, 2000 and December 31, 1999, over 97% of the fixed maturity portfolio was invested in securities rated investment grade. FIXED MATURITIES BY CREDIT QUALITY ----------------------------------------------------------------- JUNE 30, 2000 DECEMBER 31, 1999 ------------------------------------------------------------------ CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT ----------------------------------------------------------------- U.S. Gov't/Gov't agencies $ 2,164 8.2% $ 2,404 9.3% AAA 4,278 16.3% 3,535 13.6% AA 3,412 13.0% 3,199 12.3% A 8,614 32.8% 8,731 33.6% BBB 5,642 21.5% 5,816 22.4% BB & below 650 2.5% 559 2.2% Short-term 1,499 5.7% 1,728 6.6% ----------------------------------------------------------------- TOTAL FIXED MATURITIES $ 26,259 100.0% $ 25,972 100.0% ================================================================= WORLDWIDE PROPERTY AND CASUALTY As of June 30, 2000 and December 31, 1999 over 95% of the fixed maturity portfolio was invested in securities rated investment grade. Fixed Maturities by Credit Quality ----------------------------------------------------------------- JUNE 30, 2000 DECEMBER 31, 1999 ------------------------------------------------------------------ CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT ----------------------------------------------------------------- U.S. Gov't/Gov't agencies $ 545 3.4% $ 650 4.1% AAA 6,651 42.0% 6,378 40.3% AA 3,329 21.0% 3,298 20.8% A 2,514 15.9% 2,613 16.5% BBB 1,352 8.5% 1,240 7.8% BB & below 640 4.0% 658 4.2% Short-term 826 5.2% 1,003 6.3% ----------------------------------------------------------------- TOTAL FIXED MATURITIES $ 15,857 100.0% $ 15,840 100.0% ================================================================= MARKET RISK The Hartford has material exposure to both interest rate and equity market risk. The Company analyzes interest rate risk using various models including multi-scenario cash flow projection models that forecast cash flows of the liabilities and their supporting investments, including derivative instruments. There have been no material changes in market risk exposures from December 31, 1999. DERIVATIVE INSTRUMENTS The Hartford utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options, in accordance with Company policy and in order to achieve one of three Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transaction costs. The Company does not make a market or trade derivatives for the express purpose of earning trading profits. The Company uses derivative instruments in its management of market risk consistent with four risk management strategies: hedging anticipated transactions, hedging liability instruments, hedging invested assets and hedging portfolios of assets and/or liabilities. Derivative activities are monitored by an internal compliance unit, reviewed frequently by senior management and reported to the - 21 - Company's Finance Committee. The notional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. Notional amounts pertaining to derivative instruments for both general and guaranteed separate accounts totaled $9.7 billion and $9.8 billion at June 30, 2000 and December 31, 1999, respectively. For a further discussion of market risk exposure, including derivative instruments, please refer to The Hartford's 1999 Form 10-K Annual Report. -------------------------------------------------------------------------------- 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. As of June 30, 2000, the capital structure of The Hartford consisted of debt and equity, and as of December 31, 1999 also consisted of minority interest, summarized as follows:
JUNE 30, 2000 DECEMBER 31, 1999 ------------------------------------------------------------------------------------------------------------------------------------ Short-term debt $ 431 $ 31 Long-term debt 2,061 1,548 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures (QUIPS and TruPS) 1,243 1,250 ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEBT $ 3,735 $ 2,829 ----------------------------------------------------------------------------------------------------------------------------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ -- $ 491 ----------------------------------------------------------------------------------------------------------------------------- Equity excluding unrealized loss on securities, net of tax $ 6,408 $ 5,664 Unrealized loss on securities, net of tax (120) (198) ------------------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 6,288 $ 5,466 ----------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION [2] $ 10,143 $ 8,984 ----------------------------------------------------------------------------------------------------------------------------- Debt to equity [2] [3] 58% 50% Debt to capitalization [2] [3] 37% 31% ==================================================================================================================================== [1] Excludes unrealized loss on securities, net of tax, of $(62) as of December 31, 1999. [2] Excludes unrealized loss on securities, net of tax. [3] Excluding QUIPS and TruPS, the debt to equity ratio was 39% and 28% and the debt to capitalization ratio was 25% and 18% as of June 30, 2000 and December 31, 1999, respectively.
THE HLI REPURCHASE On June 27, 2000, The Hartford acquired all of the outstanding shares of HLI that it did not already own (The HLI Repurchase). The HLI Repurchase has been recorded as a purchase transaction. Consideration totaled $1.4 billion and resulted in recognition of goodwill (excess of the purchase price over the fair values of the net assets acquired) of $862, which will be amortized straight-line over a 25 year period. Of the total purchase price, $226 was outstanding and payable as of June 30, 2000, related to non-tendered shares, the majority of which was subsequently paid in July 2000. Purchase accounting for the transaction resulted in adjustments to the cost basis of certain assets and liabilities acquired based on preliminary assessments of fair value, including the recognition of the present value of future gross profits to be earned (PVP) and a reduction of deferred policy acquisition costs. Goodwill amortization and other purchase price adjustments did not have a material impact on second quarter results of operations. Purchase consideration for the transaction was as follows: Issuance of: ----------- Common stock from treasury (7.25 million shares @ $54.90 per share) $398 Long-term notes: $250 7.75% notes due June 15, 2005 244 $275 7.90% notes due June 15, 2010 272 Commercial paper 400 ------------------------------------------------------------------ Consideration raised 1,314 Other including conversion of HLI employee options and restricted shares 102 ------------------------------------------------------------------ Total consideration $1,416 ------------------------------------------------------------------ CAPITALIZATION The Hartford's total capitalization, excluding unrealized loss on securities, net of tax, increased by $1.2 billion as of June 30, 2000 compared to December 31, 1999. This change was primarily the result of earnings and financing activities related to The HLI Repurchase, partially offset by dividends declared. DEBT On June 16, 2000, The Hartford issued and sold $525 of unsecured redeemable long-term debt. On June 23, 2000, The Hartford issued $400 of commercial paper. Proceeds on the debt issuances were used to partially fund The HLI Repurchase. For a further discussion of the debt, see Note 3 of Notes to Consolidated Financial Statements. - 22 - STOCKHOLDERS' EQUITY Issuance of common stock from treasury - On June 8, 2000, The Hartford issued 7.25 million shares of common stock under its existing shelf registration to Goldman, Sachs & Co. for $398. The shares, which were issued out of treasury, were re-offered by Goldman, Sachs & Co. to investors. The Hartford used the net proceeds from the issuance of the shares to partially fund The HLI Repurchase. Dividends - On May 18, 2000, The Hartford declared a dividend on its common stock of $0.24 per share payable on July 3, 2000 to shareholders of record as of June 1, 2000. Treasury stock - During the six months ended June 30, 2000, The Hartford repurchased 2.8 million shares of its common stock in the open market at a total cost of $100 under the Company's $1.0 billion repurchase program authorized in October 1999. Since the inception of the repurchase program, The Hartford has repurchased 5.9 million shares at a total cost of $243. Certain of these repurchased shares have been reissued pursuant to certain stock-based benefit plans and in the issuance of common stock described above. As a result of The HLI Repurchase, management has elected to temporarily discontinue all repurchase activity indefinitely. CASH FLOWS SIX MONTHS ENDED June 30, -------------------------- 2000 1999 ------------------------------------------------------------------ Cash provided by operating activities $ 897 $ 106 Cash (used for) provided by investing activities $ (792) $ 2,513 Cash used for financing activities $ (70) $ (2,537) Cash - end of period $ 212 $ 201 ================================================================== The increase in operating cash flow was primarily the result of a decrease in income taxes paid along with growth in Worldwide Life business. The decrease in cash used for financing activities was attributable to financing for The HLI Repurchase as well as a lower level of disbursements for investment type contracts related to the leveraged block of COLI business. The financing activities, along with the increase in cash provided by operating activities, accounted for the change in cash from investing activities. -------------------------------------------------------------------------------- REGULATORY MATTERS AND CONTINGENCIES -------------------------------------------------------------------------------- NAIC CODIFICATION The NAIC adopted the Codification of Statutory Accounting Principles (SAP) in March 1998. The effective date for the statutory accounting guidance is January 1, 2001. It is expected that each of The Hartford's domiciliary states will adopt the SAP and the Company will make the necessary changes required for implementation. The Company is in the process of determining the impact, if any, that the SAP will have on the statutory financial statements of The Hartford's insurance subsidiaries. DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS The Company distributes its annuity, life and certain property and casualty insurance products through a variety of distribution channels, including broker-dealers, banks, wholesalers, its own internal sales force and other third party organizations. The Company periodically negotiates provisions and renewals of these relationships and there can be no assurance that such terms will remain acceptable to the Company or such third parties. An interruption in the Company's continuing relationship with certain of these third parties could materially affect the Company's ability to market its products. YEAR 2000 Status and Contingency Plans As of June 30, 2000, The Hartford had not experienced any Year 2000-related business interruptions arising either from its own systems or those of third parties. Nonetheless, The Hartford has developed certain contingency plans in order to avoid or minimize any Year 2000-related problems should they occur in the future. Each business segment has identified certain business disruption scenarios that, if they were to occur, could create significant problems in its respective critical functions. Each segment has developed a corresponding contingency plan to respond to such problems. The Hartford will continue to assess Year 2000 issues, if any, on its business functions and will review and revise its contingency plans related thereto as circumstances warrant. Year 2000 Costs The Hartford did not incur any significant costs related to its Year 2000 efforts during the six months ended June 30, 2000. Insurance Claims As an insurer, The Hartford has received and expects to receive claims from insureds who have incurred or may incur losses as a result of Year 2000 issues. Insurance coverage, if any, will depend upon the provisions of the policies and the facts and circumstances of each claim. The Hartford does not currently believe that the claim and claim adjustment expenses related to such claims will have a material impact upon The Hartford's financial condition or results of operations. For further information on Year 2000, please refer to The Hartford's 1999 Form 10-K Annual Report. -------------------------------------------------------------------------------- ACCOUNTING STANDARDS -------------------------------------------------------------------------------- For a discussion of accounting standards, see Note 1 of Notes to Consolidated Financial Statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the Capital Markets Risk Management section of Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference. - 23 - PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Hartford is involved in various legal actions, some of which involve claims for substantial amounts. In the opinion of management, final outcome of these matters after consideration of provisions made for potential losses and costs of defense, is not expected to be material to the consolidated financial condition, results of operations or cash flows of The Hartford. In May 2000, an agreement in principle was reached providing for a settlement of the Delaware Chancery Court (the Court) actions reported in the Company's March 31, 2000, Form 10-Q concerning The HLI Repurchase. On May 17, 2000, a Memorandum of Understanding was executed by all parties taking into account the final price paid for the public shares and providing for a full release by all class members and named plaintiffs of all claims that were or could have been brought concerning The HLI Repurchase. The settlement is subject to the execution of a definitive stipulation of settlement after confirmatory discovery and approval by the Court after notice to the members of the proposed settlement class. The Memorandum of Understanding also provides that upon final approval of the settlement, the Company will pay plaintiffs' attorneys' fees and costs of up to $2. As of July 31, 2000, the discovery contemplated by the Memorandum of Understanding was completed, but the stipulation of settlement had not been finalized and executed. 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 18, 2000, The Hartford held its annual meeting of shareholders. The following matters were considered and voted upon: (1) the election of directors to serve for a one year term, (2) the ratification of the appointment of Arthur Andersen LLP as independent auditors of the Company for the fiscal year ending December 31, 2000, (3) the approval of certain material terms of The Hartford's annual executive bonus program, (4) the approval of The Hartford's 2000 Incentive Stock Plan and (5) a shareholder proposal regarding The Hartford's investment in tobacco equities. Set forth below is the vote tabulation relating to the five items presented to the shareholders at the annual meeting: (1) The shareholders elected each of the eleven nominees to the Board of Directors for a one-year term: NAME OF DIRECTOR NOMINEES SHARES FOR SHARES WITHHELD -------------------------------------------------------------- Bette B. Anderson 174,488,242 2,542,455 Rand V. Araskog 173,561,180 3,469,517 Ramani Ayer 174,507,268 2,523,429 Dina Dublon 174,572,181 2,458,516 Donald R. Frahm 173,225,780 3,804,917 Paul G. Kirk, Jr. 174,558,662 2,472,035 Robert W. Selander 174,646,496 2,384,201 Lowndes A. Smith 174,650,103 2,380,594 H. Patrick Swygert 174,531,320 2,499,377 Gordon I. Ulmer 174,520,300 2,510,397 David K. Zwiener 174,256,605 2,414,924 ============================================================== (2) The shareholders ratified the appointment of Arthur Andersen LLP as independent auditors of The Hartford: Shares For 176,132,656 Shares Against 986,060 Shares Abstained 911,981 (3) The shareholders approved certain material terms of The Hartford's annual executive bonus program: For 163,798,196 Against 10,776,350 Abstain 2,456,151 (4) The shareholders approved the adoption of The Hartford 2000 Incentive Stock Plan: For 131,402,185 Against 25,366,352 Abstain 1,842,948 Broker Non-Vote 18,419,212 (5) The shareholders defeated a shareholder proposal regarding The Hartford's investment in tobacco equities: For 10,642,297 Against 140,924,427 Abstain 7,044,761 Broker Non-Vote 18,419,212 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibits Index. (b) Reports on Form 8-K The Company filed a Form 8-K Current Report dated May 18, 2000 to report that Hartford Fire Insurance Company, a wholly owned subsidiary of the Company, intended to make a cash tender - 24 - offer for all of the publicly-held shares of Hartford Life, Inc.'s Class A Common Stock. Any shares of Hartford Life, Inc.'s Class A Common Stock not purchased in the tender offer would be acquired by the Company in a subsequent merger transaction. No financial statements were required to be or were filed with this Form 8-K. The Company filed a Form 8-K Current Report on June 23, 2000 to incorporate by reference into Registration Statement No. 333-12617 on Form S-3 the Underwriting Agreement dated June 5, 2000 between the Company and Goldman, Sachs & Co., and the Underwriting Agreement dated June 13, 2000 among the Company and Credit Suisse First Boston Corporation and Goldman, Sachs & Co. as Representatives of the Several Underwriters named in Schedule 1 to the Applicable Pricing Agreement. No financial statements were required to be or were filed with this Form 8-K. The Company filed a Form 8-K on June 27, 2000 to report that the merger of HLI Acquisition, Inc., a wholly owned subsidiary of the Company, with and into Hartford Life, Inc. had been completed. No financial statements were required to be or were filed with this Form 8-K. SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Hartford Financial Services Group, Inc. (Registrant) /s/ John N. Giamalis ------------------------------------------- John N. Giamalis Senior Vice President and Controller August 11, 2000 - 25 - THE HARTFORD FINANCIAL SERVICES GROUP, INC. FORM 10-Q EXHBITS INDEX Exhibit # --------- 10.1 The Hartford 2000 Incentive Stock Plan dated as of May 18, 2000 is filed herewith. 27 Financial Data Schedule is filed herewith. - 26 -