-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, UQPszsYXwJwS9NajdhlQvcW4stQWhhjmds/ehpWi5Kw6DO5D5jCPrfjgyWJXHkHx WPym0iDOLMOIoNcgWhBffw== 0000948572-98-000021.txt : 19990902 0000948572-98-000021.hdr.sgml : 19990902 ACCESSION NUMBER: 0000948572-98-000021 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 2 CONFORMED PERIOD OF REPORT: 19980331 FILED AS OF DATE: 19980515 DATE AS OF CHANGE: 19990901 FILER: COMPANY DATA: COMPANY CONFORMED NAME: HARTFORD FINANCIAL SERVICES GROUP INC/DE CENTRAL INDEX KEY: 0000874766 STANDARD INDUSTRIAL CLASSIFICATION: 6411 IRS NUMBER: 133317783 STATE OF INCORPORATION: DE FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 001-13958 FILM NUMBER: 98623248 BUSINESS ADDRESS: STREET 1: HARTFORD PLZ CITY: HARTFORD STATE: CT ZIP: 06115 BUSINESS PHONE: 8605475000 MAIL ADDRESS: STREET 1: HARTFORD PLAZA T-15 CITY: HARTFORD STATE: CT ZIP: 06115 FORMER COMPANY: FORMER CONFORMED NAME: ITT HARTFORD GROUP INC /DE DATE OF NAME CHANGE: 19930328 10-Q 1 THE HARTFORD FINANCIAL SERVICES GROUP, INC. ================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended March 31, 1998 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 0-19277 THE HARTFORD FINANCIAL SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3317783 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900 (Address of principal executive offices) (860) 547-5000 (Registrant's telephone number, including area code) 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 April 30, 1998, there were outstanding 117,839,232 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 - First Quarter Ended March 31, 1998 and 1997 3 Consolidated Balance Sheets - March 31, 1998 and December 31, 1997 4 Consolidated Statements of Changes in Stockholders' Equity - First Quarter Ended March 31, 1998 and 1997 5 Consolidated Statements of Cash Flows - First Quarter Ended March 31, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 8 PART II. OTHER INFORMATION - - --------------------------- ITEM 1. LEGAL PROCEEDINGS 18 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 18 Signature 19 - 2 - PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS
THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME First Quarter Ended March 31, -------------------------- (In millions, except for per share data) 1998 1997 - - ------------------------------------------------------------------------------------ (Unaudited) REVENUES Earned premiums and other considerations $ 2,948 $ 2,470 Net investment income 684 629 Net realized capital gains 96 37 - - ------------------------------------------------------------------------------------ TOTAL REVENUES 3,728 3,136 =============================================================================== BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 2,111 1,958 Amortization of deferred policy acquisition costs 487 454 Other expenses 744 450 - - ------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 3,342 2,862 =============================================================================== OPERATING INCOME 386 274 Income tax expense 106 70 - - ------------------------------------------------------------------------------------ INCOME BEFORE MINORITY INTEREST 280 204 Minority interest in consolidated subsidiary (16) -- - - ------------------------------------------------------------------------------------ NET INCOME $ 264 $ 204 =============================================================================== Basic earnings per share $ 2.24 $ 1.73 Diluted earnings per share $ 2.21 $ 1.71 - - ------------------------------------------------------------------------------------ Weighted average common shares outstanding 117.9 117.7 Weighted average common shares outstanding and dilutive potential common shares 119.6 119.1 - - ------------------------------------------------------------------------------------ Cash dividends declared per share $ 0.42 $ 0.40 ==================================================================================== SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED BALANCE SHEETS March 31, December 31, (In millions, except for share data) 1998 1997 - - ------------------------------------------------------------------------------------------------------------------ ASSETS (Unaudited) Investments Fixed maturities, available for sale, at fair value (amortized cost of $34,919 and $ 34,061) $ 35,891 $ 35,053 Equity securities, available for sale, at fair value (cost of $1,315 and $1,509) 1,795 1,922 Policy loans, at outstanding balance 3,764 3,759 Other investments, at cost 590 388 - - ------------------------------------------------------------------------------------------------------------------ Total investments 42,040 41,122 Cash 76 140 Premiums receivable and agents' balances 2,167 1,873 Reinsurance recoverables 10,340 10,839 Deferred policy acquisition costs 4,358 4,181 Deferred income tax 1,069 955 Other assets 2,736 2,502 Separate account assets 78,625 70,131 - - ------------------------------------------------------------------------------------------------------------------ TOTAL ASSETS $ 141,411 $ 131,743 ============================================================================================================ LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 18,273 $ 18,376 Life 5,419 5,271 Other policy claims and benefits payable 21,100 21,143 Unearned premiums 3,117 2,895 Short-term debt 281 291 Long-term debt 1,482 1,482 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely parent junior subordinated debentures 1,000 1,000 Other liabilities 5,362 4,672 Separate account liabilities 78,625 70,131 - - ------------------------------------------------------------------------------------------------------------------ 134,659 125,261 COMMITMENTS AND CONTINGENCIES, NOTE 3 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 411 397 STOCKHOLDERS' EQUITY Common stock - authorized 200,000,000, issued 119,989,999 shares, par value $ 0.01 1 1 Additional paid-in capital 1,687 1,659 Retained earnings 3,873 3,658 Treasury stock, at cost - 2,181,349 and 2,013,779 shares (89) (65) Accumulated other comprehensive income 869 832 - - ------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY 6,341 6,085 ============================================================================================================ TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 141,411 $ 131,743 ============================================================================================================ SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY FIRST QUARTER ENDED MARCH 31, 1998 Accumulated Other Comprehensive Income -------------------------------- Common Stock/ Treasury Unrealized Gain Cumulative Outstanding Additional Retained Stock, on Securities, Translation Shares (Dollars in millions) (Unaudited) Paid-in Capital Earnings at cost net of tax Adjustments Total (In thousands) - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD $1,660 $3,658 $(65) $853 $(21) $6,085 117,976 Comprehensive income Net income 264 264 Other comprehensive income, net of tax (1) Unrealized gain on securities 40 40 (2) Cumulative translation adjustments (3) (3) ---------- Total other comprehensive income 37 ---------- Total comprehensive income 301 ---------- Issuance of shares under incentive and stock purchase plans 13 22 35 306 Tax benefit on employee stock options and awards 15 15 Dividends declared on common stock (49) (49) Treasury stock acquired (46) (46) (473) - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $1,688 $3,873 $(89) $893 $(24) $6,341 117,809 - - ------------------------------------------------------------------------------------------------------------------------------------
FIRST QUARTER ENDED MARCH 31, 1997 Accumulated Other Comprehensive Income -------------------------------- Common Stock/ Treasury Unrealized Gain Cumulative Outstanding Additional Retained Stock, on Securities, Translation Shares (Dollars in millions) (Unaudited) Paid-in Capital Earnings at cost net of tax Adjustments Total (In thousands) - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD $1,643 $2,515 $(30) $352 $40 $4,520 117,556 Comprehensive income Net income 204 204 Other comprehensive income, net of tax (1) Unrealized loss on securities (256) (256) (2) Cumulative translation adjustments (52) (52) ---------- Total other comprehensive income (308) ---------- Total comprehensive income (104) ---------- Issuance of shares under incentive and stock purchase plans 12 12 402 Dividends declared on common stock (47) (47) - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $1,655 $2,672 $(30) $96 $(12) $4,381 117,958 - - ------------------------------------------------------------------------------------------------------------------------------------ (1) Unrealized gain (loss) on securities is net of tax of $22 and $(141) for the first quarter ended March 31, 1998 and 1997, respectively. There is no tax effect on cumulative translation adjustments. (2) Net of reclassification adjustment for gains realized in net income of $63 and $25 for the first quarter ended March 31, 1998 and 1997, respectively. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS First Quarter Ended March 31, ---------------------------------- (In millions) 1998 1997 - - ----------------------------------------------------------------------------------------------------------------------------- (Unaudited) OPERATING ACTIVITIES Net income $ 264 $ 204 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Increase in receivables, payables and accruals (310) (212) (Increase) decrease in reinsurance recoverables and other related assets 232 (268) Increase in deferred policy acquisition costs (157) (182) Accrued and deferred income taxes (23) 89 Increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 146 454 Minority interest in consolidated subsidiary 16 -- Net realized capital gains (96) (37) Depreciation and amortization 36 21 Other, net 68 277 - - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 176 346 ============================================================================================================================= INVESTING ACTIVITIES Purchase of investments (10,550) (9,683) Sale of investments 3,225 2,957 Maturity of investments 7,088 6,144 Purchase of affiliate (189) -- Additions to plant, property and equipment (38) (13) - - ----------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR INVESTING ACTIVITIES (464) (595) ============================================================================================================================= FINANCING ACTIVITIES Short-term debt, net (10) 637 Net receipts from (disbursements for) investment and universal life-type contracts credited to (charged from) policyholder accounts 312 (316) Dividends paid (47) (48) Acquisition of treasury stock (46) -- Proceeds from issuances under incentive and stock purchase plans 13 12 - - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 222 285 ============================================================================================================================= Foreign exchange rate effect on cash 2 (2) - - ----------------------------------------------------------------------------------------------------------------------------- Net increase (decrease) in cash (64) 34 Cash - beginning of period 140 112 - - ----------------------------------------------------------------------------------------------------------------------------- CASH - END OF PERIOD $ 76 $ 146 ============================================================================================================================= SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - - ------------------------------------------------ NET CASH PAID (REFUNDS RECEIVED) DURING THE PERIOD FOR: Income taxes $ 93 $ (70) Interest $ 24 $ 40 SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
- 6 - THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in millions except for share data unless otherwise stated) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of The Hartford Financial Services Group, Inc. ("The Hartford" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim periods. Less than majority-owned entities in which The Hartford has at least a 20% interest are reported on an equity basis. In the opinion of management, these statements include all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented. For a description of accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in The Hartford's 1997 Form 10-K Annual Report. Certain reclassifications have been made to prior year financial information to conform to the current year classification of transactions and accounts. (B) CHANGES IN ACCOUNTING PRINCIPLES In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". This SOP provides guidance on accounting for costs of internal use software and in determining whether software is for internal use. The SOP defines internal use software as software that is acquired, internally developed, or modified solely to meet internal needs and identifies stages of software development and accounting for the related costs incurred during the stages. This statement is effective for fiscal years beginning after December 15, 1998 and is not expected to have a material impact on the Company's financial condition or results of operations. Effective January 1, 1998, The Hartford adopted Statement of Financial Accounting Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The objective of this statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Comprehensive income is the total of net income and all other nonowner changes in equity. Accordingly, the Company has reported comprehensive income in the Consolidated Statements of Changes in Stockholders' Equity. NOTE 2. EARNINGS PER SHARE The Company adopted SFAS No. 128, "Earnings per Share", effective December 15, 1997, and as a result, the Company's reported earnings per share for March 31, 1997 were restated to reflect the effect of reporting diluted earnings per share. The following tables present a reconciliation of income and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share.
MARCH 31, 1998 Income Shares Per Share Amount - - ----------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common shareholders $ 264 117.9 $ 2.24 -------------------- DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 1.7 ------------------------------ Income available to common shareholders plus assumed conversions $ 264 119.6 $ 2.21 - - -----------------------------------------------------------------------------------------------------------------------------------
MARCH 31, 1997 Income Shares Per Share Amount - - ----------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common shareholders $ 204 117.7 $ 1.73 -------------------- DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 1.4 ------------------------------ Income available to common shareholders plus assumed conversions $ 204 119.1 $ 1.71 - - -----------------------------------------------------------------------------------------------------------------------------------
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 also contingently issuable shares. Under the treasury stock method, exercise of options is assumed with the proceeds used to purchase common stock at the average market price for the period. The difference between the number of shares assumed issued and number of shares purchased represents the dilutive shares. Contingently issuable shares are included upon satisfaction of certain conditions related to the contingency. NOTE 3. COMMITMENTS AND CONTINGENCIES (A) LITIGATION The Hartford is involved in various legal actions, some of which involve claims for substantial amounts. In the opinion of management, the ultimate liability with respect to such lawsuits is not expected to be material to the consolidated financial condition, results of operations or cash flows of The Hartford. (B) ENVIRONMENTAL AND ASBESTOS CLAIMS Information regarding environmental and asbestos claims may be found in the Environmental and Asbestos Claims section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. - 7 - ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in millions except per share data unless otherwise stated) Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") addresses the financial condition of The Hartford as of March 31, 1998, compared with December 31, 1997, and its results of operations for the first quarter ended March 31, 1998 compared with the equivalent 1997 period. This discussion should be read in conjunction with the MD&A included in The Hartford's 1997 Form 10-K Annual Report. Certain of the statements contained herein (other than statements of historical fact) are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty which are, in many instances, beyond the Company's control and have been made based upon management's expectations and beliefs concerning future developments and their potential effect upon The Hartford. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on The Hartford will be those anticipated by management. Actual results could differ materially from those expected by The Hartford, depending on the outcome of certain factors, including those described with the forward-looking statements herein. Certain reclassifications have been made to prior year financial information to conform to the current year presentation. INDEX Consolidated Results of Operations: Operating Summary 8 North American Property & Casualty 9 Life 10 International 10 Other Operations 11 Environmental and Asbestos Claims 11 Investments 13 Capital Markets Risk Management 15 Capital Resources and Liquidity 16 Regulatory Initiatives and Contingencies 17 Accounting Standards 17
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, --------------------------- 1998 1997 ------------- ------------- TOTAL REVENUES $ 3,728 $ 3,136 - - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 264 $ 204 Less: Net realized capital gains, after-tax 63 25 - - ----------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ 201 $ 179 - - -----------------------------------------------------------------------------------------------------------------------------------
The Hartford defines "core earnings" as after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes, allocated Distribution items and certain other items. Core earnings is an internal performance measure used by the Company in the management of its operations. Management believes that this performance measure delineates the results of operations of the Company's ongoing lines of business in a manner that allows for a better understanding of the underlying trends in the Company's current business. However, core earnings should only be analyzed in conjunction with, and not in lieu of, net income and may not be comparable to other performance measures used by the Company's competitors. Revenues for the first quarter ended March 31, 1998 increased $592, or 19%, from the first quarter of 1997, primarily due to an increase in the aggregate fees earned on separate account assets, an increase in fees associated with new variable corporate owned life insurance ("COLI") sales, higher sales and renewals of group life and disability insurance, proceeds from the sale of renewal rights and other considerations related to the Industrial Risk Insurance pool ("IRI transaction") and an increase in service fee revenue. Higher net investment income and net realized capital gains also contributed to the increase. (For an analysis of net investment income and net realized capital gains, see the Investments section.) Core earnings increased $22, or 12%, for the first quarter ended March 31, 1998 from the comparable prior year period due primarily to increasing account values and continued operating efficiencies in the Annuity division, strong sales and renewal activity as well as favorable morbidity experience in the group disability block of business, an increase in net investment income and proceeds from the IRI transaction, partially offset by increased underwriting losses, including additional reserves associated with the IRI transaction. The effective tax rate for the first quarter ended March 31, 1998 was 27% compared to 26% for the comparable period in 1997. - 8 - Tax-exempt interest earned on invested assets was a principal cause of effective tax rates lower than the 35% U.S. statutory rate. SEGMENT RESULTS The Hartford's reporting segments consist of North American Property & Casualty, Life, International and Other Operations. Included in Other Operations in 1998 is the effect of an 18.6% minority interest in Hartford Life, Inc.'s ("HLI") operating results. On May 22, 1997, HLI, the holding company parent of The Hartford's significant life insurance subsidiaries, completed the initial public offering of 18.6% of it's Class A common stock. (For additional information, please refer to The Hartford's 1997 Form 10-K Annual Report.) Below is a summary of net income and core earnings by segment for the first quarter ended March 31, 1998 and 1997, respectively.
NET INCOME CORE EARNINGS --------------------------- --------------------------- 1998 1997 1998 1997 ------------- ------------- ------------- ------------- North American Property & Casualty $ 166 $ 104 $ 115 $ 104 Life 84 63 84 62 International 28 36 17 14 Other Operations (14) 1 (15) (1) - - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL $ 264 $ 204 $ 201 $ 179 - - -----------------------------------------------------------------------------------------------------------------------------------
The sections that follow analyze each segment's results. Specific topics such as environmental and asbestos reserves and investment results are discussed separately following the segment overviews.
NORTH AMERICAN PROPERTY & CASUALTY OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, --------------------------- 1998 1997 ------------- ------------- TOTAL REVENUES $ 1,837 $ 1,623 - - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 166 $ 104 Less: Net realized capital gains, after-tax 51 -- - - ----------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ 115 $ 104 - - -----------------------------------------------------------------------------------------------------------------------------------
Revenues for the North American Property & Casualty segment increased $214, or 13%, for the first quarter ended March 31, 1998 compared with the first quarter of 1997. This increase was primarily due to $79 of pre-tax net realized capital gains which resulted essentially from favorable stock market conditions, $55 of proceeds from the IRI transaction and an increase of $25 in net investment income. In addition, the Hartford Customer Services Group, which provides customer and telemarketing services for The American Association of Retired Persons ("AARP") Health Care Options program as of January 1, 1998, generated $59 of the revenue increase. Partially offsetting these increases was a slight decrease in earned premiums. Core earnings increased $11, or 11%, for the first quarter of 1998 compared to the same period in 1997. This increase was primarily due to increased after-tax net investment income and after-tax proceeds from the IRI transaction, partially offset by other expenses, primarily employee benefits, and increased underwriting losses, including additional reserves associated with the IRI transaction, as discussed below. UNDERWRITING RESULTS Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses. The following table summarizes written premiums, underwriting results and combined ratios for The Hartford's North American Property & Casualty segment. FIRST QUARTER ENDED MARCH 31, ------------------------------ 1998 1997 ----------------------------- Written premiums $ 1,462 $ 1,488 Underwriting results, before-tax $ (63) $ (20) Combined ratio [1] [2] 104.3 100.7 - - ------------------------------------------------------------------- [1] "Combined ratio" is a common industry measurement of property and casualty underwriting profitability. This ratio is the sum of the ratio of incurred claims and claim adjustment expenses to premiums earned and the ratio of underwriting expenses incurred to premiums written. [2] Combined ratio, excluding reserve additions associated with the IRI transaction, was 101.8. The North American Property & Casualty segment's written premiums decreased 2% for the first quarter ended March 31, 1998 compared to the first quarter of 1997, as decreases in Commercial and Reinsurance operations were partially offset by an increase in Personal operations. Commercial written premiums decreased $57, or 6%, contributing 4% to the decline in the North American Property and Casualty segment. Growth in Select Customers of 9%, Commercial Affinity of 5% and Bond of 10% was more than offset by decreases in Major/National Accounts of 30% and Other Specialty of 35%. These decreases were primarily due to increased conversion of workers' compensation to high deductible policies and lower premium audits and retrospectively - 9 - rated policy premium adjustments, and the elimination of Industrial Risk Insurance premiums in 1998 as a result of the IRI transaction. Personal written premiums increased $47, or 11%, in the first quarter contributing 3% of growth to the North American Property & Casualty segment. All three customer divisions within Personal (AARP, Agency and Affinity) produced positive premium growth in the quarter. In addition, the acquisition of Omni Insurance Group, Inc., completed on February 12, 1998, contributed $22 of this increase. Reinsurance written premiums declined $16, or 10%, in the first quarter contributing 1% of the decrease in the North American Property and Casualty segment. This decrease was primarily due to timing of premium bookings in North America and reductions in international premiums resulting from rate decreases, increased customer retentions and unfavorable foreign exchange rates. Underwriting results, before-tax, for the first quarter ended March 31, 1998 deteriorated $43, or 3.6 combined ratio points, over the comparable prior year period. In connection with the IRI transaction, a review of existing claims and outstanding reinsurance assets of the Industrial Risk Insurance pool was performed by The Hartford and additional reserves were established. Additionally, increased property catastrophe losses contributed to the decrease. Excluding the impact of these two items, underwriting results improved $13, or 0.3 combined ratio points, for the first quarter of 1998 over the first quarter of 1997. Strong underwriting performance in Personal, Reinsurance and Commercial operation's Select Customers and Key Accounts was partially offset by a deterioration in Other Specialty within Commercial, primarily due to reduced premium revenues.
LIFE OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, -------------------------- 1998 1997 ------------- ------------ TOTAL REVENUES $ 1,404 $ 1,055 - - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 84 $ 63 Less: Net realized capital gains, after-tax -- 1 - - ----------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ 84 $ 62 - - -----------------------------------------------------------------------------------------------------------------------------------
Revenues increased $349, or 33%, for the first quarter ended March 31, 1998, over the comparable prior year period. This was partially due to COLI revenues which increased $161 over the same period last year as a result of fees associated with new variable COLI sales. Excluding COLI, revenues increased $188, or 21%, over the first quarter of 1997. This increase was principally driven by the Annuity division which experienced a substantial increase in the aggregate fees earned on its growing block of separate account assets. Average annuity separate account assets increased $17.4 billion resulting in fees increasing $89, or 49%, over the first three months of 1997. In addition, higher sales and renewals of group life and disability insurance resulted in increased revenues of $90, or 23%, over the first quarter of 1997. Core earnings increased $22, or 35%, over the first quarter of 1997 primarily due to growth in the Annuity and Employee Benefits divisions. Annuity earnings increased $18, or 42%, as a result of increasing account values and continued operating efficiencies, which resulted in a further reduction in operating expenses as a percentage of account value, particularly in Individual Annuity. The increase in account values was driven primarily by sales of individual variable annuities of approximately $2.4 billion and significant market appreciation. Group Insurance operation earnings, within the Employee Benefits division, increased $4, or 36%, as a result of strong sales and renewal activity, as well as favorable morbidity experience in the group disability block of business. Partially offsetting this increase was a $2 operating loss from the division's international operation, while earnings on COLI remained consistent with the prior year. The Guaranteed Investment Contracts division had no net income in the first quarter of 1998 or 1997, consistent with management's expectations.
INTERNATIONAL OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, --------------------------- 1998 1997 ------------- ------------- TOTAL REVENUES $ 446 $ 417 - - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 28 $ 36 Less: Net realized capital gains, after-tax 11 22 - - ----------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ 17 $ 14 - - -----------------------------------------------------------------------------------------------------------------------------------
International segment revenues for the first quarter ended March 31, 1998 increased $29, or 7%, over the comparable period in 1997 due to earned premium growth of $44, or 13%, primarily at ITT London & Edinburgh, offset by a decrease in net realized - 10 - capital gains of $17, or 52%. Also, net investment income increased $2, or 5%, as compared to the first quarter of 1997. (For an analysis of net realized capital gains and net investment income, see the Investments section.) Due to continued strengthening of the U.S. dollar against the Netherlands guilder, there was a negative foreign exchange impact on total revenues of $10 for the first quarter ended March 31, 1998 compared to a negligible impact for the first quarter of 1997. Core earnings in the International segment for the first quarter ended March 31, 1998 increased $3, or 21%, compared to the same period in 1997, due to a $3, or 50%, improvement at ITT London & Edinburgh. This improvement in core earnings was achieved as a result of a 16% improvement in after-tax underwriting results compared with the first quarter of 1997 due in part to strong pricing and underwriting actions taken in the motor line of business at ITT London & Edinburgh in 1997. The strength of the U.S. dollar against the Netherlands guilder gave rise to a negative foreign exchange impact on core earnings of $1 for the three months ended March 31, 1998 compared to a negligible impact for the first quarter of 1997.
OTHER OPERATIONS OPERATING SUMMARY FIRST QUARTER ENDED MARCH 31, --------------------------- 1998 1997 ------------- ------------- TOTAL REVENUES $ 41 $ 41 - - ----------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ (14) $ 1 Less: Net realized capital gains, after-tax 1 2 - - ----------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ (15) $ (1) - - -----------------------------------------------------------------------------------------------------------------------------------
Other Operations consist of property and casualty operations of The Hartford which have discontinued writing new and renewal business as well as the effect of an 18.6% minority interest in HLI's operating results. For the first quarter of 1998, core earnings included $(16) minority interest in HLI's operating results. (For additional information regarding HLI's results, see the Life section.) Excluding minority interest, core earnings increased $2 over the prior year first quarter. ENVIRONMENTAL AND ASBESTOS CLAIMS The Hartford continues to receive claims asserting damages from environmental exposures and for injuries from asbestos and asbestos-related products, both of which affect the North American Property & Casualty, International and Other Operations segments. Environmental claims relate primarily to pollution and related clean-up costs. With regard to these claims, uncertainty exists which impacts the ability of insurers and reinsurers to estimate the ultimate reserves for unpaid losses and related settlement expenses. The Hartford finds that conventional reserving techniques cannot estimate the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. For the majority of environmental claims and many types of asbestos claims, unlike any other type of contractual claim, there is almost no agreement or consistent precedent to determine what, if any, coverage exists or which, if any, policy years and insurers or reinsurers may be liable. Further uncertainty arises with environmental claims since claims are often made under policies, the existence of which may be in dispute, the terms of which may have changed over many years, which may or may not provide for legal defense costs, and which may or may not contain environmental exclusion clauses that may be absolute or allow for fortuitous events. Courts in different jurisdictions have reached disparate conclusions on similar issues and in certain situations have broadened the interpretation of policy coverage and liability issues. In light of the extensive claim settlement process for environmental and asbestos claims, involving comprehensive fact gathering, subject matter expertise and intensive litigation, The Hartford established an environmental claims facility in 1992 to defend itself aggressively against unwarranted claims and to minimize costs. Within the property and casualty insurance industry, progress has been made in developing sophisticated, alternative methodologies utilizing company experience and supplemental databases to assess environmental and asbestos liabilities. Consistent with The Hartford's practice of using the best techniques to estimate the Company's environmental and asbestos exposures, a study was conducted in 1996 utilizing internal staff supplemented by outside legal and actuarial consultants. Use of these new methodologies resulted in The Hartford adjusting its environmental and asbestos liabilities in the third quarter of 1996. (For additional information, see The Hartford's 1997 Form 10-K Annual Report.) - 11 - Reserve activity for both reported and unreported environmental and asbestos claims, including reserves for legal defense costs, for the first quarter ended March 31, 1998 and the year ended December 31, 1997, was as follows (net of reinsurance):
ENVIRONMENTAL AND ASBESTOS CLAIMS CLAIMS AND CLAIM ADJUSTMENT EXPENSES FIRST QUARTER ENDED YEAR ENDED MARCH 31, 1998 DECEMBER 31, 1997 ---------------------------------------- ---------------------------------------- Environmental Asbestos Total Environmental Asbestos Total ---------------- ----------- ----------- ---------------- ----------- ----------- Beginning liability $ 1,312 $ 688 $ 2,000 $ 1,439 $ 717 $ 2,156 Claims and claim adjustment expenses incurred 3 2 5 -- 2 2 Claims and claim adjustment expenses paid (44) (8) (52) (113) (45) (158) Other [1] -- -- -- (14) 14 -- - - ------------------------------------------------ -- -------------- - -------- -- -------- -- -------------- -- ------- -- -------- ENDING LIABILITY [2] $ 1,271 $ 682 $ 1,953 $ 1,312 $ 688 $ 2,000 - - ------------------------------------------------ -- -------------- - -------- -- -------- -- -------------- -- ------- -- -------- [1] Other represents reclassifications of beginning reserves between environmental and asbestos for December 31, 1997. [2] The ending liabilities are net of reinsurance on reported and unreported claims of $1,815 and $1,853 for March 31, 1998 and December 31, 1997, respectively. Gross of reinsurance, as of March 31, 1998 and December 31, 1997 reserves for environmental and asbestos were $2,101 and $1,667 and $2,165 and $1,688, respectively.
The Hartford believes that the environmental and asbestos reserves recorded at March 31, 1998 are a reasonable estimate of the ultimate remaining liability for these claims based upon known facts, current assumptions and The Hartford's methodologies. Future social, economic, legal or legislative developments may alter the original intent of policies and the scope of coverage. The Hartford will continue to evaluate new developments and methodologies as they become available for use in supplementing the Company's ongoing analysis and review of its environmental and asbestos exposures. These future reviews may result in a change in reserves, impacting The Hartford's results of operations in the period in which the reserve estimates are changed. While the effects of future changes in facts, legal and other issues could have a material effect on future results of operations, The Hartford does not expect such changes would have a material effect on its liquidity or financial condition. - 12 - INVESTMENTS An important element of the financial results of The Hartford is return on invested assets. The Hartford's investment activities are divided between the reportable segments of North American Property & Casualty, Life, International and Other Operations. The investment portfolios for these segments are managed based on the underlying characteristics and nature of their respective liabilities. For a further discussion on The Hartford's approach to managing risks, see the Capital Markets Risk Management section. Please refer to The Hartford's 1997 Form 10-K Annual Report for a description of the Company's investment objectives and policies. NORTH AMERICAN PROPERTY & CASUALTY Total invested assets were $15.1 billion at March 31, 1998 and were comprised of fixed maturities of $13.7 billion and other investments of $1.4 billion, primarily equity securities. FIXED MATURITIES BY TYPE - - ---------------------------------------------------------------- MARCH 31, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- Municipal - tax-exempt $ 7,989 58.2% $ 7,873 58.5% Corporate 2,123 15.5% 2,257 16.8% Commercial MBS 740 5.4% 687 5.1% CMO 643 4.7% 483 3.6% ABS 623 4.5% 559 4.2% Gov't/Gov't agencies - For. 611 4.4% 459 3.4% MBS - agency 369 2.7% 540 4.0% Gov't/Gov't agencies - U.S. 60 0.4% 32 0.2% Municipal - taxable 24 0.2% 31 0.2% Short-term 501 3.6% 479 3.6% Redeemable pref'd stock 56 0.4% 56 0.4% - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 13,739 100.0% $ 13,456 100.0% ================================================================ The North American Property & Casualty segment continued its strategy to increase its ownership of taxable bonds, specifically, asset backed securities ("ABS") and commercial mortgage backed securities ("CMBS"). In addition, the segment's percentage ownership of equity securities to total invested assets decreased primarily as a result of opportunities taken in a favorable equity market. The taxable equivalent duration of the March 31, 1998 fixed maturity portfolio was 4.6 years compared to 4.7 years at December 31, 1997. Duration is defined as the market price sensitivity of the portfolio to parallel shifts in the yield curve. INVESTMENT RESULTS The table below summarizes the North American Property & Casualty segment's results. FIRST QUARTER ENDED MARCH 31, ------------------- 1998 1997 - - ----------------------------------------------------------------- Net investment income, before-tax $202 $177 Net investment income, after-tax [1] $162 $143 Yield on average invested assets, before-tax [2] 5.7% 5.5% Yield on average invested assets, after-tax [1] [2] 4.6% 4.5% Net realized capital gains, before-tax $79 -- - - ----------------------------------------------------------------- [1] Due to the significant holdings in tax-exempt investments an after-tax net investment income and after-tax yield are also included. [2] Represents annualized three months net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost). For the first quarter ended March 31, 1998, before-tax net investment income was $202 compared to $177 in 1997, an increase of 14%, while after-tax net investment income increased 13% to $162. The increase in both before- and after-tax net investment income was primarily due to an increase in invested assets as a result of increased operating cash flow and the impact of the 1997 repayment of allocated advances by HLI. The increase in before-tax and after-tax yields was due to an increased allocation to fixed maturities, specifically higher yielding ABS and commercial MBS, along with an increase in below investment grade securities. Net realized capital gains increased to $79 in March 31, 1998 resulting primarily from opportunities in a strong equity market. LIFE Invested assets, excluding separate accounts, totaled $21.7 billion at March 31, 1998 and were comprised of $17.4 billion of fixed maturities, $3.8 billion of policy loans, and other investments of $562. Policy loans, which had a weighted-average interest rate of 11.1% as of March 31, 1998, are secured by the cash value of the life policy. These loans do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. FIXED MATURITIES BY TYPE - - ---------------------------------------------------------------- MARCH 31, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- Corporate $ 7,927 45.6% $ 7,970 47.3% ABS 3,224 18.6% 3,199 19.0% Commercial MBS 1,776 10.2% 1,606 9.5% CMO 937 5.4% 978 5.8% Gov't/Gov't agencies - For. 619 3.6% 502 3.0% MBS - agency 484 2.8% 514 3.1% Municipal - tax-exempt 400 2.3% 171 1.0% Municipal - taxable 263 1.5% 267 1.6% Gov't/Gov't agencies - U.S. 142 0.8% 241 1.4% Short-term 1,607 9.2% 1,395 8.3% Redeemable preferred stock 5 -- 5 -- - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 17,384 100.0% $ 16,848 100.0% - - ---------------------------------------------------------------- The Life segment continued its objective of managing exposure to securities that "underperform" in a falling interest rate environment. The segment reduced exposure to the collateralized - 13 - mortgage obligations ("CMO") asset sector, and allocated funds into various other sectors. At March 31, 1998, holdings in CMO securities were $937, or 5%, of total invested assets excluding policy loans compared to $978, or 6%, at December 31, 1997 and $2.2 billion, or 13%, at December 31, 1996. INVESTMENT RESULTS The table below summarizes the Life segment's results. FIRST QUARTER ENDED MARCH 31, ------------------- (before-tax) 1998 1997 - - ------------------------------------------------------- --------- Net investment income $400 $375 Yield on average invested assets [1] 7.6% 7.6% Net realized capital gains -- $1 - - ----------------------------------------------------------------- [1] Represents annualized three months net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost). For the quarter ended March 31, 1998, before-tax net investment income totaled $400, compared to $375 in 1997, an increase of 7% as a result of higher average invested assets. Before-tax yields on average invested assets remained at 7.6%. There were no net realized capital gains for the quarter ended March 31, 1998. INTERNATIONAL Invested assets, excluding separate accounts, were $2.7 billion at March 31, 1998 and were comprised of fixed maturities of $2.3 billion and other investments of $434, primarily equity securities. FIXED MATURITIES BY TYPE - - ---------------------------------------------------------------- MARCH 31, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- Gov't/Gov't agencies - For. $ 858 37.7% $ 829 36.5% Corporate 391 17.2% 414 18.3% Gov't/Gov't agencies - U.S. 11 0.5% 19 0.8% Short-term 1,013 44.6% 1,007 44.4% - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 2,273 100.0% $ 2,269 100.0% - - ---------------------------------------------------------------- INVESTMENT RESULTS The table below summarizes the International segment's results. FIRST QUARTER ENDED MARCH 31, ------------------- (before-tax) 1998 1997 - - ----------------------------------------------------------------- Net investment income $43 $41 Yield on average invested assets [1] 6.7% 6.4% Net realized capital gains $16 $33 - - ----------------------------------------------------------------- [1] Represents annualized three months net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost). For the first quarter ended March 31, 1998, before-tax net investment income increased $2, or 5%, as compared to the same period in 1997. Yields on average invested assets increased to 6.7% as of March 31, 1998 from 6.4% in 1997. Due to continued strengthening in the U.S. dollar against the Netherlands guilder, there was a negative foreign exchange impact on net investment income of $1 for the quarter ended March 31, 1998 compared to a negligible impact for the first quarter of 1997. Net realized capital gains decreased to $16 in 1998 compared to $33 in 1997, the result of higher equity gains taken in 1997. OTHER OPERATIONS Invested assets were $2.5 billion at March 31, 1998 and were substantially comprised of fixed maturities. FIXED MATURITIES BY TYPE - - ----------------------------------------------------------------- MARCH 31, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- Corporate $ 1,556 62.4% $ 1,530 61.7% Commercial MBS 150 6.0% 149 6.0% ABS 122 4.9% 142 5.7% Gov't/Gov't agencies - U.S. 102 4.1% 88 3.5% Gov't/Gov't agencies - For. 63 2.5% 83 3.3% MBS - agency 53 2.1% 56 2.3% Municipal - taxable 39 1.6% 39 1.6% CMO 24 1.0% 27 1.1% Short-term 377 15.1% 357 14.4% Redeemable preferred stock 9 0.3% 9 0.4% - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 2,495 100.0% $ 2,480 100.0% - - ---------------------------------------------------------------- INVESTMENT RESULTS The table below summarizes the Other Operations segment's results. FIRST QUARTER ENDED MARCH 31, ------------------- (before-tax) 1998 1997 - - ----------------------------------------------------------------- Net investment income $39 $36 Yield on average invested assets [1] 6.4% 6.4% Net realized capital gains $1 $3 - - ----------------------------------------------------------------- [1] Represents annualized three months net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost). For the quarter ended March 31, 1998, before-tax net investment income totaled $39 compared to $36 in 1997, an increase of 8%, while before-tax yields remained unchanged at 6.4%. Net realized capital gains were $1 in 1998 compared to $3 in 1997. - 14 - CAPITAL MARKETS RISK MANAGEMENT The Hartford has a disciplined approach to managing risks associated with its capital markets and asset/liability management activities. Investment portfolio management is organized to focus investment management expertise on specific classes of investments while asset/liability management is the responsibility of separate and distinct risk management units supporting the property and casualty and life operations. Derivative instruments are utilized in accordance with established Company policy and are monitored internally and reviewed by senior management. The Company is exposed to two primary sources of investment and asset/liability management risk: credit risk, relating to the uncertainty associated with the ability of an obligor or counterparty to make timely payments of principal and/or interest, and market risk, relating to the market price and/or cash flow variability associated with changes in interest rates, securities prices, market indices, yield curves or currency exchange rates. The Company does not hold any financial instruments entered into for trading purposes. Please refer to The Hartford's 1997 Form 10-K Annual Report for a description of the Company's objectives, policies and strategies. CREDIT RISK The Company invests primarily in investment grade securities and has established exposure limits, diversification standards and review procedures for all credit risks whether borrower, issuer or counterparty. Creditworthiness of specific obligors is determined by an internal credit evaluation supplemented by consideration of external determinants of creditworthiness, typically ratings assigned by nationally recognized ratings agencies. Obligor, geographic, asset sector and industry concentrations are subject to established limits and monitored on a regular interval. The Hartford is not exposed to any significant credit concentration risk of a single issuer. The following tables identify fixed maturity securities for the property and casualty operations, including international and other operations, and the life operations, including international operations and guaranteed separate accounts, by credit quality. The ratings referenced in the tables are based on the ratings of a nationally recognized rating organization or, if not rated, assigned based on the Company's internal analysis of such securities. PROPERTY AND CASUALTY OPERATIONS As of March 31, 1998, over 95% of the fixed maturity portfolio was invested in investment-grade securities. FIXED MATURITIES BY CREDIT QUALITY - - ---------------------------------------------------------------- MARCH 31, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- U.S. Gov't/Gov't agencies$ 1,060 5.8% $ 1,083 6.1% AAA 6,473 35.6% 6,337 35.4% AA 3,298 18.2% 3,426 19.1% A 3,078 16.9% 3,096 17.3% BBB 1,590 8.8% 1,352 7.6% BB & below 796 4.4% 767 4.3% Short-term 1,878 10.3% 1,832 10.2% - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 18,173 100.0% $ 17,893 100.0% - - ---------------------------------------------------------------- LIFE OPERATIONS As of March 31, 1998, over 98% of the fixed maturity portfolio was invested in investment-grade securities. FIXED MATURITIES BY CREDIT QUALITY - - --------------------------------------------------------------- MARCH 31, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- U.S. Gov't/Gov't agencies $ 2,838 10.1% $ 2,907 10.6% AAA 4,158 14.8% 4,252 15.4% AA 2,621 9.4% 2,990 10.9% A 8,875 31.7% 9,351 33.9% BBB 7,069 25.2% 5,966 21.7% BB & below 346 1.2% 205 0.7% Short-term 2,118 7.6% 1,880 6.8% - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 28,025 100.0% $ 27,551 100.0% - - ---------------------------------------------------------------- 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, 1997. DERIVATIVE INSTRUMENTS The Hartford utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options, in accordance with Company policy and in order to achieve one of three Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transaction costs. The Company does not make a market or trade derivatives for the express purpose of earning trading profits. The Company uses derivative instruments in its management of market risk consistent with four risk management strategies: hedging anticipated transactions, hedging liability instruments, hedging invested assets and hedging portfolios of assets and/or liabilities. Derivative activities are monitored by an internal compliance unit, reviewed frequently by senior management and reported to the Company's Finance Committee. The notional amounts of derivative contracts represent the basis upon which pay or receive amounts are calculated and are not reflective of credit risk. Notional amounts pertaining to derivative instruments for both general and guaranteed separate accounts totaled $9.7 billion and $11.1 billion at March 31, 1998 and December 31, 1997, respectively. For a further discussion of market risk exposure including derivative instruments please refer to the Hartford's 1997 Form 10-K Annual Report. - 15 - CAPITAL RESOURCES AND LIQUIDITY Capital resources and liquidity represent the overall financial strength of The Hartford and its ability to generate strong cash flows from each of the business segments and borrow funds at competitive rates to meet operating and growth needs. The capital structure of The Hartford consists of debt, minority interest and equity, summarized as follows:
MARCH 31, 1998 DECEMBER 31, 1997 - - ----------------------------------------------------------------------------------------------------------------------------------- Short-term debt $ 281 $ 291 Long-term debt 1,482 1,482 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely parent junior subordinated debentures (QUIPS) 1,000 1,000 - - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL DEBT $ 2,763 $ 2,773 ---------------------------------------------------------------------------------------------------------------------------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ 365 $ 351 ---------------------------------------------------------------------------------------------------------------------------- Equity excluding unrealized gain on securities, net of tax $ 5,448 $ 5,232 Unrealized gain on securities, net of tax 893 853 - - ----------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 6,341 $ 6,085 ---------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION [2] $ 8,576 $ 8,356 ---------------------------------------------------------------------------------------------------------------------------- Debt to equity [2] 51% 53% Debt to capitalization [2] 32% 33% - - ----------------------------------------------------------------------------------------------------------------------------------- [1] Excludes unrealized gain on securities, net of tax, of $46 for both March 31, 1998 and December 31, 1997. [2] Excludes unrealized gain on securities, net of tax.
CAPITALIZATION The Hartford's total capitalization, excluding unrealized gain on securities, net of tax, increased by $220 as of March 31, 1998 compared to December 31, 1997. This change primarily was the result of earnings, partially offset by dividends declared on The Hartford's common stock. The Company's debt to equity and debt to capitalization ratios (both excluding unrealized gain on securities, net of tax) improved at March 31, 1998 as compared to December 31, 1997 primarily as a result of earnings. DEBT On February 9, 1998, HLI converted its short-term credit facility to a five year facility with five banks. DIVIDENDS On February 19, 1998, The Hartford's Board of Directors approved a 5% increase in its quarterly dividend to $0.42 per share. The dividend was paid on April 1, 1998 to shareholders of record as of March 2, 1998. The Hartford expects to continue paying quarterly dividends on its common stock of $0.42 per share throughout 1998. TREASURY STOCK During the first quarter of 1998, The Hartford repurchased 473,000 shares of its common stock in the open market at a total cost of $46 under the Company's $1.0 billion repurchase program announced in December 1997. Certain of these repurchased shares were reissued pursuant to certain stock-based benefit plans. CASH FLOWS FIRST QUARTER ENDED MARCH 31, -------------------------- 1998 1997 - - ------------------------------------------------------------------ Cash provided by operating activities $ 173 $ 346 Cash used for investing activities $ (464) $ (595) Cash provided by financing activities $ 225 $ 285 Cash - end of period $ 76 $ 146 - - ------------------------------------------------------------------ The change in cash provided by financing activities was primarily due to a decrease in borrowing activity offset by declines in reinsurance recoverables related to investment-type contracts written in the Life segment. The change in cash used for investing activities primarily reflects the investment of cash from operating and financing activities. Operating cash flows in both periods have been more than adequate to meet liquidity requirements. OMNI On February 12, 1998, The Hartford completed the purchase of all outstanding shares of Omni Insurance Group, Inc. ("Omni"), a holding company of two non-standard auto insurance subsidiaries licensed in 25 states and the District of Columbia. The Hartford paid cash of $31.75 per share, plus transaction costs, for a total of $189. The acquisition has been reported as a purchase transaction and accordingly, the results of Omni's operations have been included in The Hartford's consolidated financial statements from the closing date of the transaction. - 16 - REGULATORY INITIATIVES AND CONTINGENCIES NAIC PROPOSALS The National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles ("SAP") in March, 1998. The proposed effective date for the statutory accounting guidance is January 1, 2001. It is expected that each of The Hartford's domiciliary states will adopt SAP and the Company will make the necessary changes required for implementation. These changes are not anticipated to have a material impact on the statutory financial statements of The Hartford. YEAR 2000 The Year 2000 issue relates to the ability or inability of computer systems to properly process information and data containing or related to dates beginning with the year 2000 and beyond. The Year 2000 issue exists because, historically, many computer systems that are in use today were developed years ago when a year was identified using a two-digit field rather than a four-digit field. As information and data containing or related to the century date are introduced to computer hardware, software and other systems, date sensitive systems may recognize the year 2000 as "1900", or not at all, which may result in computer systems processing information incorrectly. This, in turn, may significantly and adversely affect the integrity and reliability of information databases and may result in a wide variety of adverse consequences to a company. In addition, Year 2000 problems that occur with third parties with which a company does business, such as suppliers, computer vendors, distributors and others, may also adversely affect any given company. As an insurance and financial services company, The Hartford has thousands of individual and business customers that have insurance policies, annuities, mutual funds and other financial products of The Hartford. Nearly all of these policies and products contain date sensitive data, such as policy expiration dates, birth dates, premium payment dates, and the like. In addition, The Hartford has business relationships with numerous third parties that affect virtually all aspects of The Hartford's business, including, without limitation, suppliers, computer hardware and software vendors, insurance agents and brokers, securities broker-dealers and other distributors of financial products. Beginning in 1990, The Hartford began working on making its computer systems Year 2000 ready, either through installing new programs or replacing systems. In January 1998, The Hartford commenced a company-wide program to further identify, assess and remediate the impact of Year 2000 problems in The Hartford's business segments. The Hartford currently anticipates that this internal program will be substantially completed by the end of 1998, and testing of computer systems will continue through 1999. The costs of addressing the Year 2000 issue that have been incurred by The Hartford through the year ended December 31, 1997 have not been material to The Hartford's financial condition or results of operations. The Hartford will continue to incur costs related to its Year 2000 efforts and is in the process of attempting to determine the approximate total costs to be incurred in the future, which costs are not currently anticipated to be material to the Company's financial condition or results of operations. As part of its Year 2000 program, The Hartford is identifying third parties with which it has significant business relations in order to attempt to assess the potential impact on The Hartford of their Year 2000 issues and remediation plans. The Hartford currently anticipates that it will substantially complete this evaluation by the end of 1998, and will conduct systems testing with certain third parties through 1999. The Hartford does not have control over these third parties and, as a result, The Hartford cannot currently determine to what extent future operating results may be adversely affected by the failure of these third parties to successfully address their Year 2000 issues. However, The Hartford expects to develop plans to attempt to minimize identified third party exposures In addition, as an insurer, The Hartford may incur losses and loss adjustment expenses (including attorneys' fees and other legal expenses) arising from property and casualty insurance claims by its insureds, who may incur losses as a result of Year 2000 problems. To the extent claims are ultimately made, insurance coverage, if any, will depend upon the provisions of the policies and the facts and circumstances of each claim. It is not possible to determine in advance whether and to what extent insureds would incur losses, the amount of the losses, or whether any such losses would be covered under The Hartford's insurance policies. Because of this uncertainty, it is also not possible to determine in advance whether such losses and related loss adjustment expenses would have a material impact upon The Hartford's financial condition or results of operations. ACCOUNTING STANDARDS For a discussion of accounting standards, see Note 1 of Notes to Consolidated Financial Statements. - 17 - PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Hartford is a defendant in various lawsuits arising out of its business. In the opinion of management, final outcome of these matters will not materially affect the consolidated financial condition, results of operations or cash flows of The Hartford. The Hartford is involved in claims litigation arising in the ordinary course of business and accounts for such activity through the establishment of policy reserves. As further discussed in the MD&A under the Environmental and Asbestos Claims section, The Hartford continues to receive environmental and asbestos claims which involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels, reserving methodologies and reinsurance coverages. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibits Index. (b) Reports on Form 8-K - None. - 18 - SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Hartford Financial Services Group, Inc. (Registrant) /s/ James J. Westervelt --------------------------------------------- James J. Westervelt Senior Vice President and Group Controller (Chief Accounting Officer) MAY 14, 1998 - 19 - THE HARTFORD FINANCIAL SERVICES GROUP, INC. FORM 10-Q EXHBITS INDEX EXHIBIT # - - --------- 10.01 Amended and restated Credit Agreement dated as of February 9, 1998 among Hartford Life, Inc., the lenders named therein and Citibank, N.A. as administrative agent, was filed as Exhibit 10.01 to Hartford Life, Inc.'s Form 10-Q filed for the quarterly period ended March 31, 1998 and is incorporated herein by reference. 27 Financial Data Schedule is filed herewith. - 20 - EX-27 2 ARTICLE 7 FDS FOR THE HARTFORD 1ST QUARTER 10-Q
7 1,000,000 3-MOS DEC-31-1998 MAR-31-1998 35,891 0 0 1,795 204 26 42,040 76 10,340 4,358 141,411 23,692 3,117 21,100 78,625 1,763 1,000 0 1 6,340 141,411 2,948 684 96 0 2,111 487 660 386 106 264 0 0 0 264 2.24 2.21 0 0 0 0 0 0 0 REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES.
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