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, 1996 OR [ ]TRANSITION REPORT PURSUANT TO SECION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 0-19277 ITT HARTFORD 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) Registrant's telephone number, including area code: (860) 547-5000 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, 1996, there were outstanding 117,286,616 shares of Common Stock, $.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, 1996 and 1995 3 Consolidated Balance Sheets - June 30, 1996 and December 31, 1995 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1996 and 1995 5 Notes to Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7 PART II. OTHER INFORMATION Item 1. Legal Proceedings 15 Item 4. Submission of Matters to a Vote of Security Holders 15 Item 6. Exhibits and Reports on Form 8-K 15 Signature 16
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> ITT HARTFORD GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF INCOME Second Quarter Ended Six Months Ended June 30, June 30, (In millions, except for per share data) 1996 1995 1996 1995 ------------------------------------------------------------------------------------------------------------------------ (Unaudited) (Unaudited) <S> <C> <C> <C> <C> REVENUES Earned premiums $2,403 $2,264 $5,059 $4,688 Net investment income 601 622 1,204 1,183 Net realized capital gains 22 28 41 48 ------------------------------------------------------------------------------------------------------------------------ TOTAL REVENUES 3,026 2,914 6,304 5,919 -------------------------------------------------------------------------------------------------------------------- BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 2,042 2,017 4,083 3,850 Amortization of deferred policy acquisition costs 450 399 861 813 Other expenses 355 372 1,067 933 ------------------------------------------------------------------------------------------------------------------------ TOTAL BENEFITS, CLAIMS AND EXPENSES 2,847 2,788 6,011 5,596 ------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 179 126 293 323 Income tax expense 36 20 54 76 Dividends on subsidiary preferred stock -- (1) -- (2) ------------------------------------------------------------------------------------------------------------------------ NET INCOME $143 $105 $239 $245 ------------------------------------------------------------------------------------------------------------------- EARNINGS PER SHARE $1.22 $0.90 $2.04 $2.09 CASH DIVIDENDS DECLARED PER SHARE $0.40 -- $0.80 -- WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (1) 117.2 117.1 117.2 117.1 ------------------------------------------------------------------------------------------------------------------------ <FN> (1) 1995 average common shares outstanding of 117.1 reflects a retroactive presentation of the actual number of shares outstanding at December 31, 1995. </FN> </TABLE> THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THE ABOVE STATEMENTS.
<TABLE> <CAPTION> ITT HARTFORD GROUP, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS June 30, December 31, (In millions, except for shares data) 1996 1995 - ---------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> ASSETS Investments Fixed maturities, available for sale, at fair value (amortized cost of $30,820 and $30,892) $30,302 $31,168 Equity securities, at fair value (cost $1,308 and $1,192) 1,528 1,342 Policy loans, at cost 3,753 3,380 Other investments, at cost 538 785 - ---------------------------------------------------------------------------------------------------------------------------- Total investments 36,121 36,675 Cash 156 95 Premiums receivable and agents' balances 1,950 1,890 Reinsurance recoverables 11,694 11,801 Deferred policy acquisition costs 3,247 2,945 Deferred income tax 1,466 1,150 Other assets 2,364 2,451 Separate account assets 43,216 36,848 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL ASSETS $100,214 $93,855 ----------------------------------------------------------------------------------------------------------------------- LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $17,507 $17,536 Life 4,089 3,894 Other policy claims and benefits payable 22,702 22,770 Unearned premiums 2,846 2,766 Short-term debt 500 886 Long-term debt 1,021 1,022 Company obligated manditorily redeemable preferred securities of subsidiary trust holding solely parent junior subordinated debentures 485 -- Other liabilities 3,462 3,431 Separate account liabilities 43,216 36,848 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES 95,828 89,153 ----------------------------------------------------------------------------------------------------------------------- STOCKHOLDERS' EQUITY Common stock - authorized 200,000,000, issued 118,916,662 and 118,762,331, outstanding 117,278,662 and 117,124,331 shares, par value $.01 1 1 Common stock of parent company held by a subsidiary - 1,408,170 shares (30) (30) Treasury stock - 229,830 shares -- -- Capital surplus 1,642 1,636 Cumulative translation adjustments 16 48 Unrealized gain (loss) on securities, net of tax (189) 245 Retained earnings 2,946 2,802 - ---------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY 4,386 4,702 ----------------------------------------------------------------------------------------------------------------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $100,214 $93,855 ----------------------------------------------------------------------------------------------------------------- </TABLE> THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THE ABOVE STATEMENTS.
<TABLE> <CAPTION> ITT HARTFORD GROUP, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, (In millions) 1996 1995 - ----------------------------------------------------------------------------------------------------------------------------- (Unaudited) <S> <C> <C> OPERATING ACTIVITIES Net income $239 $245 ADJUSTMENTS TO NET INCOME Depreciation and amortization 39 38 Gain on sale of securities (41) (48) Change in receivables, payables and accruals (217) (167) Accrued and deferred taxes (163) (177) Increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 216 462 Increase in deferred policy acquisition costs (311) (245) Decrease in reinsurance recoverables and other related assets 310 253 Other, net 283 32 - ----------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY OPERATING ACTIVITIES 355 393 ----------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of investments (9,173) (6,372) Sale and maturity of investments 8,977 4,957 Additions to plant, property and equipment (28) (38) - ----------------------------------------------------------------------------------------------------------------------------- CASH USED FOR INVESTING ACTIVITIES (224) (1,453) ----------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Short-term debt, net (386) 12 Net proceeds from issuance of company obligated manditorily redeemable preferred securities of subsidiary trust holding solely parent junior subordinated debentures 484 -- Dividends paid (47) -- Investments and advances from affiliated parties -- 145 Net receipts from (disbursements for) investment and universal life-type contracts credited to (charged from) policyholder accounts (128) 971 Other, net 5 (1) - ----------------------------------------------------------------------------------------------------------------------------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES (72) 1,127 - ----------------------------------------------------------------------------------------------------------------------------- ---------------- ----------------- Exchange rate effect on cash 2 (10) - ----------------------------------------------------------------------------------------------------------------------------- Increase in cash 61 57 Cash - beginning of period 95 55 - ----------------------------------------------------------------------------------------------------------------------------- ----------------------------------------------------------------------------------------------------------------------- CASH - END OF PERIOD $156 $112 ----------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: NET CASH PAID DURING THE PERIOD FOR: Income taxes $163 $150 Interest $70 $48 NONCASH FINANCING ACTIVITIES: Capital contribution -- $180 </TABLE> THE ACCOMPANYING NOTES TO CONSOLIDATED FINANCIAL STATEMENTS ARE AN INTEGRAL PART OF THE ABOVE STATEMENTS.
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES 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 ITT Hartford Group, Inc. ("ITT Hartford") have been prepared in accordance with generally accepted accounting principles for interim periods. 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 for the fiscal year ended December 31, 1995 included in ITT Hartford's 1995 Form 10-K Annual Report. (B) EMPLOYEE BENEFIT PLANS In October 1995, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 123, "Accounting for Stock-Based Compensation", which is effective in 1996 for calendar year end companies. As permitted by SFAS No. 123, ITT Hartford continues to measure compensation costs of employee stock option plans using the intrinsic value method prescribed by Accounting Principles Board Opinion No. 25 and plans to disclose in the 1996 Form 10-K Annual Report pro forma disclosures of net income and earnings per share as if the fair value method prescribed by SFAS No. 123 had been applied. NOTE 2. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES On February 28, 1996, Hartford Capital I, a special purpose Delaware trust formed by ITT Hartford, issued 20,000,000 Series A, 7.7% Cumulative Quarterly Income Preferred Securities ("Series A Preferred Securities"). The proceeds from the sale of the Series A Preferred Securities were used to acquire $500 of Junior Subordinated Deferrable Interest Debentures, Series A ("Junior Subordinated Debentures"), issued by ITT Hartford. ITT Hartford used the proceeds from the sale of such debentures for the partial repayment of outstanding commercial paper and short-term bank indebtedness. Series A Preferred Securities represent undivided beneficial interests in the assets of Hartford Capital I. ITT Hartford owns all of the beneficial interests represented by Series A Common Securities of Hartford Capital I. Holders of Series A Preferred Securities are entitled to receive preferential cumulative cash distributions accruing from February 28, 1996 and payable quarterly in arrears commencing March 31, 1996 at the annual rate of 7.7% of the liquidation amount of $25.00 per Series A Preferred Security. The Series A Preferred Securities are subject to mandatory redemption upon repayment of the Junior Subordinated Debentures at maturity or their earlier redemption. Holders of Series A Preferred Securities have limited voting rights. The Junior Subordinated Debentures bear interest at the annual rate of 7.7% of the principal amount, payable quarterly in arrears commencing March 31, 1996, and mature on February 28, 2016. The Junior Subordinated Debentures are unsecured and rank junior and subordinate in right of payment to all senior debt of ITT Hartford and are effectively subordinated to all existing and future liabilities of its subsidiaries. ITT Hartford has the right to defer payments of interest on the Junior Subordinated Debentures by extending the interest payment period for up to 20 consecutive quarters for each deferral period, up to the maturity date. During any such period, interest will continue to accrue and ITT Hartford may not declare or pay any cash dividends or distributions on ITT Hartford's common stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. In the event of failure to pay interest for 30 consecutive days (subject to the deferral of any due date in the case of an extension period), the Junior Subordinated Debentures will become due and payable. ITT Hartford has guaranteed, on a subordinated basis, all of the Hartford Capital I obligations under the Series A Preferred Securities, including, to pay the redemption price and any accumulated and unpaid distributions to the extent of available funds and upon dissolution, winding up or liquidation, but only to the extent that Hartford Capital I has funds to make such payments. NOTE 3. CONTINGENCIES (A) LITIGATION ITT 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 position, results of operations or cash flow of ITT 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 Discussions and Analysis of Financial Condition and Results of Operations ("MD&A").
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (DOLLAR AMOUNTS IN MILLIONS EXCEPT PER SHARE UNLESS OTHERWISE STATED) MD&A addresses the financial condition of ITT Hartford as of June 30, 1996, compared with December 31, 1995, and its results of operations for the second quarter and six months ended June 30, 1996 compared with the equivalent 1995 periods. This discussion should be read in conjunction with the MD&A included in ITT Hartford's 1995 Form 10-K Annual Report and in ITT Hartford's report on Form 10-Q for the first quarter of 1996. Interim results are not necessarily indicative of the results which may be expected for any other interim period or for the full year. During December 1995, ITT Corporation ("ITT"), after transferring ownership of First State Insurance Company ("First State") and Fencourt Reinsurance Company ("Fencourt") to ITT Hartford, distributed the outstanding shares of ITT Hartford common stock to the shareholders of ITT in what is described herein as the "Distribution". The second quarter and six months ended June 30, 1995 financial information included herein reflects the results of ITT Hartford on a post-Distribution basis, including the operating results of Fencourt and First State. (For additional information see "Distribution" under MD&A in the 1995 Form 10-K Annual Report.) - -------------------------------------------------------------------------------- INDEX - -------------------------------------------------------------------------------- Consolidated Results of Operations: Operating Summary 7 North American Property & Casualty 8 Life 9 International 9 Runoff 10 Environmental and Asbestos Claims 10 Investments 11 Capital Resources and Liquidity 14 - -------------------------------------------------------------------------------- CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> TOTAL REVENUES $3,026 $2,914 $6,304 $5,919 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- NET INCOME $ 143 $ 105 $ 239 $ 245 Less: Net realized capital gains, after-tax 16 18 28 31 Allocated Distribution items -- 13 -- 13 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- CORE EARNINGS $ 127 $ 74 $ 211 $ 201 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- CORE EARNINGS PER SHARE [1] $ 1.08 $ 0.63 $ 1.80 $ 1.72 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- <FN> [1] Second quarter and six months ended June 30, 1995 per share data reflect a retroactive presentation of the actual number of shares outstanding at December 31, 1995 of 117.1 million. </FN> </TABLE> Revenues for the second quarter and six months ended June 30, 1996 increased $112 or 4% from the second quarter of 1995, and $385 or 7% from the six months ended June 30, 1995, primarily the result of growth in the Life segment. Net income, excluding the impact of net realized capital gains, after-tax, and allocated Distribution items, was $127 and $211 for the second quarter and six months of 1996, respectively, compared with $74 and $201 for the comparable prior year periods. ITT Hartford defines as "core earnings", after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes and allocated Distribution items. The increase in core earnings of $53, or $.45 per share, for the second quarter of 1996 over the second quarter of the prior year, was partially due to increased property & casualty net investment income and growth in earnings on Life annuities. Additionally, a $26, or $.22 per share, after-tax loss relating to the settlement of claims against Dow Corning Corporation occurred in the second quarter of 1995. The increase in core earnings of $10 or 5% for the six months ended June 30, 1996 compared to the same period in 1995 was adversely affected by the unusually high catastrophe and severe winter storm losses totaling $107 after-tax in 1996, compared to $53 after-tax in 1995. Excluding the impact of these losses, core earnings for the six months of 1996 increased $64, or 25%, to $318 over the comparable period in 1995. The effective tax rates for the second quarter and six months ended June 30, 1996 were 20% and 18%, respectively, compared to 16% and 24% for the comparable periods in 1995. Tax-exempt interest earned on invested assets were the principal cause of an effective tax rate lower than the 35% U.S. statutory rate. The increase in the tax rate for the second quarter of 1996 over 1995 was due to improved operating results in the North American Property & Casualty segment. The decrease for the six month period was largely due to tax benefits generated at the 34% Federal tax rate resulting from increased underwriting losses for the six months ended June 30, 1996 compared to the same period in 1995.
SEGMENT RESULTS ITT Hartford's reporting segments, which reflect the management structure of the company, consist of North American Property & Casualty, Life, International and Runoff. Certain reclassifications have been made to conform historical information to the June 30, 1996 presentation. Below is a summary of core earnings by segment. <TABLE> <CAPTION> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> North American Property & Casualty $ 65 $18 $ 91 $ 95 Life 59 51 113 97 International 17 15 35 30 Runoff (14) (10) (28) (21) - ----------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $127 $74 $211 $201 - ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> The sections that follow analyze each segments' results. Specific topics such as environmental reserves and investment results are discussed separately following the segment overviews. - -------------------------------------------------------------------------------- NORTH AMERICAN PROPERTY & CASUALTY - -------------------------------------------------------------------------------- <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> TOTAL REVENUES $1,609 $1,591 $3,162 $3,157 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- NET INCOME $ 68 $ 30 $ 94 $ 117 Less: Net realized capital gains, after-tax 3 12 3 22 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- CORE EARNINGS $ 65 $ 18 $ 91 $ 95 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- CORE EARNINGS PER SHARE $0.55 $ 0.15 $ 0.78 $ 0.81 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- </TABLE> Core earnings for the North American Property & Casualty segment were $65 for the second quarter ended June 30, 1996, an increase of $47, or $.40 per share, from the comparable period in 1995. This increase was largely due to the Dow Corning Corporation $26 after-tax, non-recurring charge that occurred in last year's second quarter. Absent this charge, core earnings for the second quarter 1996 rose 48%, primarily due to an increase of 17% in after-tax, net investment income and a 17% improvement in catastrophe experience. The decrease in core earnings for the first six months of 1996 compared to 1995 of $4, or $.03 per share, reflects adverse first quarter weather-related underwriting results, partially offset by higher investment income. (For an analysis of investment income and net realized capital gains, see the Investments section.) UNDERWRITING RESULTS Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses. The following table displays written premiums, underwriting results and combined ratios for ITT Hartford's North American Property & Casualty segment. <TABLE> <CAPTION> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Written premiums $1,435 $1,392 $2,892 $2,822 Underwriting results, before-tax $ (80) $ (133) $ (220) $ (165) Combined ratio [1] 104.6 109.7 106.8 105.6 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- <FN> [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 expenses to premiums earned and the ratio of underwriting expenses incurred to premiums written. </FN> </TABLE> North American Property & Casualty segment written premiums for the second quarter and six months ended June 30, 1996 increased $43 or 3%, and $70 or 2%, respectively, over the equivalent prior year periods. Premiums increased in the Reinsurance and Personal lines but were offset by lower Commercial line results. Growth in the Reinsurance line was primarily due to an increased level of renewals and new product development in specialty lines. The continued expansion into the over-50 market as facilitated by ITT Hartford's exclusive arrangement with the American Association of Retired Persons ("AARP"), is reflected in the premium volume increase in the Personal line, while intensely competitive market conditions have adversely affected Commercial product sales.
Underwriting results, before-tax, for the second quarter ended June 30, 1996 for the North American Property & Casualty segment were $53 above the prior year's second quarter, resulting in a 5.1 point decrease in the combined ratio. The underwriting results for the second quarter of 1995 includes a $40 before-tax charge relating to the settlement of claims against Dow Corning Corporation alleging product defects arising from breast implants. Excluding the impact of this loss, second quarter combined ratio improved by 2.3 points due to better claim management and lower operating costs. For the six months ended June 30, 1996, underwriting results, before-tax, were $55 below the prior year's second quarter, resulting in a 1.2 point increase in the combined ratio. The results for the six months of 1996 reflect $165 before-tax of catastrophe and severe winter storm losses, an $83 increase over equivalent losses for the six months ended June 30, 1995. Excluding these losses, underwriting results were $28 or 1.7 point favorable to prior year, reflecting the improved underwriting performance previously discussed. LIFE <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 -------------- ------------- ------------- ------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> TOTAL REVENUES $ 932 $ 804 $2,173 $1,768 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- NET INCOME $ 58 $ 52 $ 112 $ 100 Less: Net realized capital gains, after-tax (1) 1 (1) 3 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- CORE EARNINGS $ 59 $ 51 $ 113 $ 97 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- CORE EARNINGS PER SHARE $0.50 $0.44 $ 0.96 $ 0.83 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- </TABLE> Life segment revenues for the second quarter and six months ended June 30, 1996 increased $128 or 16%, and $405 or 23%, over the comparable 1995 periods. This growth was largely due to revenue from increased cost of insurance charges on existing corporate owned life insurance ("COLI") contracts and fees generated from a growing block of individual annuity and life business. Furthermore, the Life segment sold $5 billion of individual annuity contracts during the first half of 1996. Core earnings for the Life segment increased $8 or 16% for the second quarter and $16 or 16% for the first six months of 1996 over the comparable prior year periods. Strong sales and asset growth in the Individual Annuity division along with earnings increases in excess of 10% in the Individual Life and Employee Benefits divisions accounted for the growth. In August of 1996 Congress passed COLI legislation which provides for a three year phase out of the interest deduction on loans taken against COLI policies. It is anticipated that the President will sign this bill. Although there were no new deposits of leveraged COLI in the first half of 1996, new products, including variable COLI and other non-qualified deferred compensation vehicles, are being developed. INTERNATIONAL <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> TOTAL REVENUES $399 $385 $789 $730 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- NET INCOME $ 31 $ 21 $ 61 $ 37 Less: Net realized capital gains, after-tax 14 6 26 7 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- CORE EARNINGS $ 17 $ 15 $ 35 $ 30 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- CORE EARNINGS PER SHARE $0.15 $0.13 $0.30 $0.26 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- </TABLE> International segment revenues for the second quarter and six months ended June 30, 1996 increased $14 or 4%, and $59 or 8%, respectively, over the comparable periods in 1995. The increase in the second quarter was due primarily to improved investment performance. Also, for the first six months of 1996, net written premiums at Zwolsche Algemeene of $204 increased $22 or 12% over the same period in 1995, reflecting increased sales of health, motor and life insurance. The transition from a national health system to private insurance partly contributed to the growth in health premiums. Motor growth increased due to both pricing and production, while the growth in the life business was due to higher unit-linked (main class and mortgage) sales. Additionally, with the acquisition of ITT Ercos in May 1995, revenues for the second quarter and six months of 1996 included $20 and $39, respectively, related to this new subsidiary. Core earnings in the International segment increased $2 or 13% for the second quarter and $5 or 17% for the six months ended June 30, 1996 over the same periods in 1995. An increase in core earnings at ITT London & Edinburgh of $1 or 11% for the second quarter and $4 or 24% for the six months of 1996 over the prior year periods was due primarily to improved investment income.
RUNOFF <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, 1996 1995 1996 1995 ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> TOTAL REVENUES $ 86 $134 $180 $264 - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- NET LOSS $(14) $(11) $(28) $(22) Less: Net realized capital loss, after-tax -- (1) -- (1) - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- CORE EARNINGS $(14) $(10) $(28) $(21) - --------------------------------------------------------------------------- ------------- ------------- ------------- ------------- </TABLE> Runoff segment revenues for the second quarter and six months ended June 30, 1996 decreased $48 or 36%, and $84 or 32%, over the comparable 1995 periods. This decrease was due primarily to the closed book of guaranteed rate contract business ("Closed Book GRC"). Closed Book GRC includes Life products with fixed or indexed rates that are guaranteed for a specific period. Revenues for Closed Book GRC decreased $37 or 40% for the second quarter and $76 or 39% for the first six months of 1996 over the comparable prior year periods, the result of lower investment earnings on mortgage-backed securities reflecting prepayments experienced in excess of assumed levels. This book of business has also been affected by the interest rate rise in 1994 when the duration of assets lengthened relative to that of the liabilities. The Company is considering portfolio management strategies which may accelerate the recognition of the Closed Book GRC loss. This loss was disclosed in the Company's 1995 Form 10-K Annual Report. - -------------------------------------------------------------------------------- Runoff segment core earnings decreased $4 or 40% for the second quarter and $7 or 33% for the six months of 1996 over the comparable prior year periods. These results reflect the net losses of Closed Book GRC of $(15) and $(13) for the second quarters and $(30) and $(26) for the six months ended June 30, 1996 and 1995, respectively, which were driven by the same factors affecting revenues. ENVIRONMENTAL AND ASBESTOS CLAIMS ITT Hartford continues to receive claims asserting damages from environmental and related clean-up costs, and injuries from asbestos and asbestos-related products which affect the North American Property & Casualty, International and Runoff segments. Environmental claims relate primarily to pollution and related clean-up costs. With regard to these claims, deviations from past experience significantly impact the ability of insurers and reinsurers to estimate the ultimate reserves for unpaid losses and related settlement expenses. ITT 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. Future social, economic, legal or legislative developments may continue to expand the original intent of policies and the scope of coverage. These developments may occur such that the need for additional reserves may arise, adversely affecting future operating results. Due to the uncertainties described above, we have been unable to meaningfully quantify a range of such reserve increases. Within the property and casualty insurance industry, recent progress has been made in developing sophisticated, alternative methodologies utilizing supplemental databases to assess environmental and asbestos-related liabilities. ITT Hartford, utilizing both outside consultants and internal staff, has initiated the development of its own database for potential use in supplementing its current analysis of these exposures. In light of the extensive claim settlement process with environmental and asbestos claims, involving comprehensive fact gathering, subject matter expertise and intensive litigation, ITT Hartford established an environmental claims facility in 1992 to defend itself aggressively against unwarranted claims. Reserve activity for both reported and unreported pollution and asbestos claims, including reserves for legal defense costs, were as follows: <TABLE> <CAPTION> POLLUTION AND ASBESTOS CLAIMS LOSS AND LOSS ADJUSTMENT EXPENSES JUNE 30, DEC. 31, 1996 1995 ----------- ----------- (Unaudited) <S> <C> <C> Beginning liability $1,336 $ 1,334 Loss and loss expenses incurred 105 163 Loss and loss expenses paid (83) (161) - ------------------------------------- ----------- ----------- Ending liability [1] $1,358 $ 1,336 - ------------------------------------- ----------- ----------- <FN> [1] The June 30, 1996 and December 31, 1995 ending reserves include $927 and $926 for pollution, respectively, and $431 and $410, respectively, for asbestos. Gross of reinsurance, the ending June 30, 1996 and December 31, 1995 reserves for pollution and asbestos were $1,721 and $1,619 and $1,707 and $1,568, respectively. </FN> </TABLE>
- -------------------------------------------------------------------------------- INVESTMENTS - -------------------------------------------------------------------------------- An important element of the financial results of ITT Hartford is return on invested assets. ITT Hartford's investment activities are divided between the reportable segments of North American Property & Casualty, Life, International, and Runoff. The investment portfolios for these operations are managed based on the underlying characteristics and nature of their respective policy liabilities. Please refer to ITT Hartford's 1995 Form 10-K Annual Report for a description of the company's investment objectives and policies. NORTH AMERICAN PROPERTY & CASUALTY Invested assets were $11.8 billion at June 30, 1996, and were comprised of fixed maturities of $10.5 billion and other investments of $1.3 billion, primarily equity securities. The table below summarizes fixed maturity holdings by type. FIXED MATURITIES BY TYPE - --------------------------------------------------------- (Unaudited) JUNE 30, DECEMBER 31, 1996 1995 - -------------- --------------------- -------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - -------------- ----------- -------- ------------ -------- Corporate $1,815 17.2% $2,427 22.8% CMO 806 7.7% 1,462 13.7% Municipals- tax exempt 6,543 62.2% 5,171 48.5% Gov't/Gov't agencies-US 65 0.6% 249 2.3% ABS 121 1.2% 239 2.2% Gov't/Gov't 220 2.1% 255 2.4% agencies-For. MBS - Agency 218 2.1% 244 2.3% Commercial MBS 24 0.2% 14 0.1% Municipals- taxable 69 0.6% 75 0.7% Redeemable Pref'd 29 0.3% -- -- stock Short-terms 607 5.8% 531 5.0% - -------------- ----------- -------- ------------ -------- TOTAL FIXED MATURITIES $10,517 100.0% $10,667 100.0% - -------------- ----------- -------- ------------ -------- This segment maintains a high quality fixed maturity portfolio. At June 30, 1996, less than 5% of the fixed maturity portfolio was invested in below investment-grade securities. The table below summarizes fixed maturity holdings by credit quality. FIXED MATURITIES BY CREDIT QUALITY --------------------------------------------------------- (Unaudited) JUNE 30, DECEMBER 31, 1996 1995 - ------------- --------------------- -------------------- CREDIT FAIR VALUE PERCENT FAIR VALUE PERCENT QUALITY - ------------- ----------- --------- ----------- -------- AAA $4,558 43.2% $4,570 42.8% AA 2,356 22.4% 2,137 20.0% A 1,607 15.3% 1,862 17.5% BBB 536 5.1% 649 6.1% Gov't 220 2.1% 252 2.4% BB & below 469 4.5% 459 4.3% Not rated 164 1.6% 207 1.9% Short-term 607 5.8% 531 5.0% - ------------- ----------- --------- ----------- -------- TOTAL FIXED MATURITIES $10,517 100.0% $10,667 100.0% - ------------- ----------- --------- ----------- -------- The North American Property & Casualty segment uses a minimal amount of derivatives in managing its investments and, as of June 30, 1996, had no open derivatives positions. As of December 31, 1995, this segment had open derivatives with a notional amount of $14. INVESTMENT RESULTS The table below summarizes the North American Property & Casualty segment's results. SECOND SIX MONTHS QUARTER ENDED ENDED JUNE 30, JUNE 30, - -------------------------- --------------- --------------- (Unaudited) 1996 1995 1996 1995 - -------------------------- ------- ------- ------- ------- Net Investment Income $166 $155 $327 $313 Yield on Average Invested 5.7% 5.6% 5.6% 5.7% Assets Before-tax (1) Yield on Average Invested 4.6% 4.1% 4.5% 4.2% Assets After-tax (2) Net Realized Capital $4 $17 $4 $33 Gains - ---------------------------------------------------------- (1) Represents annualized net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost). (2) Due to the significant holdings in tax-exempt investments an after-tax yield is also included. - ---------------------------------------------------------- For the second quarter ended June 30, 1996, net investment income was $166 compared to $155 in 1995, an increase of 7%. For the six months ended June 30, 1996, net investment income was $327 compared to $313 in 1995, an increase of 4%. For the six months ended June 30, 1996, before-tax yields on average invested assets decreased to 5.6% from 5.7% in 1995, while the after-tax yields increased to 4.5%. The increases in net investment income and after-tax yields were primarily due to the transition from lower yielding real estate and corporate bonds to tax-exempt municipal bonds. NET REALIZED CAPITAL GAINS There were net realized capital gains of $4 for the second quarter ended June 30, 1996 down from $17 in 1995; and, for the six months ended June 30, 1996, there were net realized capital gains of $4 down from $33 in 1995. The reduction was primarily the result of the sale of lower yielding taxable bonds at realized losses, of which the proceeds were allocated to the higher yielding after-tax municipal market. Net realized capital gains, generated in the equity portfolios, were used to help offset the losses incurred. LIFE Invested assets, excluding separate accounts, totaled $15.4 billion at June 30, 1996 and were comprised of $11.4 billion of fixed maturities, $3.8 billion of policy loans, and other investments of $238. The table below summarizes fixed maturity holdings by type.
FIXED MATURITIES BY TYPE --------------------------------------------------------- JUNE 30, DECEMBER 31, (Unaudited) 1996 1995 - ------------ --------------------- -------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - ------------ ------------ -------- ----------- -------- Corporate $5,627 49.4% $5,146 45.0% CMO 1,748 15.4% 2,071 18.1% Gov't/Gov't 160 1.4% 260 2.3% agencies-US ABS 1,840 16.2% 1,782 15.6% Gov't/Gov't 262 2.3% 223 1.9% agencies-For. MBS - 749 6.6% 673 5.9% Agency Commercial MBS 622 5.5% 348 3.0% Municipals- taxable 123 1.1% 130 1.1% Short-terms 242 2.1% 817 7.1% - ------------ ------------ -------- ----------- -------- TOTAL FIXED $11,373 100.0% $11,450 100.0% MATURITIES - ------------ ------------ -------- ----------- -------- The Life segment continued to maintain a high quality fixed maturity portfolio. As of June 30, 1996, less than .5% of the fixed maturity portfolio was invested in below investment-grade securities. The table below summarizes fixed maturity holdings by credit quality. FIXED MATURITIES BY CREDIT QUALITY - -------------------------------------------------------- - ------------- -------------------- --------------------- (Unaudited) JUNE 30, DECEMBER 31, 1996 1995 - ------------- -------------------- --------------------- CREDIT FAIR VALUE PERCENT FAIR VALUE PERCENT QUALITY - ------------ ----------- --------- ----------- -------- AAA $2,978 26.2% $3,688 32.2% AA 1,650 14.5% 1,502 13.1% A 3,987 35.0% 3,651 31.9% BBB 1,716 15.1% 1,276 11.1% Gov't 452 4.0% 523 4.6% BB & below 21 0.2% 29 0.3% Not rated -- -- 54 0.5% Short-term 569 5.0% 727 6.3% - ------------ ----------- --------- ----------- -------- TOTAL FIXED $11,373 100.0% $11,450 100.0% MATURITIES - ------------ ----------- --------- ----------- -------- The average duration of the June 30, 1996 fixed maturity portfolio was 4.1 years. 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 Life segment's results. SECOND SIX MONTHS QUARTER ENDED ENDED JUNE 30, JUNE 30, - ---------------------- --------------- --------------- (Unaudited) 1996 1995 1996 1995 - ---------------------- ------- ------- ------- ------- Net Investment Income $300 $292 $601 $527 Yield on Average Invested 7.6% 8.2% 7.9% 7.9% Assets Before-tax (1) Net Realized Capital Gains(Losses) $(1) $1 $(1) $4 - ------------------------------------------------------ (1) Represents annualized net investment income (excluding net realized capital gains(losses)) divided by average invested assets at cost (fixed maturities at amortized cost). - ------------------------------------------------------ For the second quarter ended June 30, 1996, net investment income totaled $300 compared to $292 in 1995, an increase of 3%. For the six months ended June 30, 1996, net investment income was $601 compared to $527 in 1995, an increase of 14%. The increase in net investment income was primarily due to an increase in policy loans, new business cash flow invested in fixed maturities and asset mix. NET REALIZED CAPITAL GAINS/LOSSES Net realized capital losses were $(1) for the second quarter ended June 30, 1996 down from net realized capital gains of $1 in 1995. ASSET AND LIABILITY MANAGEMENT STRATEGIES The Life segment employs several risk management tools to quantify and manage interest rate risk arising from its investments and interest sensitive liabilities. Management monitors the changes in present value between assets and liabilities resulting from various interest rate scenarios using integrated asset/liability measurement systems and a proprietary system that simulates the impacts of parallel and non-parallel yield curve shifts. Based on this current and prospective information, management implements risk reducing techniques to improve the match between assets and liabilities. The Life segment's asset/liability policy is to maintain individual portfolios of assets with durations that fall within target ranges of specific liabilities. To complement invested assets, derivatives are used, those traded both over-the-counter and on national exchanges, to hedge interest rate, price and foreign exchange rate risk; to manage liquidity risk; and to control transaction costs. Derivative instruments include interest rate swaps, foreign currency and coupon swaps, futures contracts and options, including caps and floors. Derivatives are used for non-speculative purposes and are related to, and correlated with, specific instruments. Life management endorses the use of derivatives and recognizes their contribution to improving the segment's interest rate risk management, product development, portfolio management and liability management efforts. Derivatives transactions are quantified based on notional amounts. Notional amounts are not reflective of credit risk, but establish the basis upon which to calculate amounts to be paid or received. As of June 30, 1996 and December 31, 1995, the Life segment had derivatives with an aggregate notional amount of $4 billion for asset/liability management purposes. INTERNATIONAL Invested assets, excluding separate accounts, were $2.9 billion at June 30, 1996 and were comprised of fixed maturities of $2.4 billion and other investments of $478. Minimal use is made of derivatives which, if purchased, are used for hedging market and foreign exchange risk. The table below summarizes fixed maturity holdings by type.
FIXED MATURITIES BY TYPE --------------------------------------------------------- (Unaudited) JUNE 30, DECEMBER 31, 1996 1995 - -------------- ----------- --------- ----------- -------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - -------------- ----------- --------- ----------- -------- Corporate $347 14.3% $261 10.8% Gov't/Gov't agencies-US 104 4.3% 57 2.4% Gov't/Gov't 1,363 56.1% 1,203 49.8% agencies-For. Short-terms 613 25.3% 893 37.0% - -------------- ----------- --------- ----------- -------- TOTAL FIXED MATURITIES $2,427 100.0% $2,414 100.0% - -------------- ----------- --------- ----------- -------- As of June 30, 1996, the fixed maturity portfolio consisted of 100% investment grade securities with no security rated lower than A. The table below summarizes fixed maturity holdings by credit quality. FIXED MATURITIES BY CREDIT QUALITY - --------------------------------------------------------- (Unaudited) JUNE 30, DECEMBER 31, 1996 1995 - ------------- ------------ -------- ----------- -------- CREDIT FAIR VALUE PERCENT FAIR VALUE PERCENT QUALITY - ------------- ------------ -------- ----------- -------- AAA $1,693 69.7% $1,428 59.2% AA 117 4.8% 89 3.8% A 4 0.2% 4 -- Short-dated 613 25.3% 893 37.0% - ------------- ------------ -------- ----------- -------- TOTAL FIXED MATURITIES $2,427 100.0% $2,414 100.0% - ------------- ------------ -------- ----------- -------- INVESTMENT RESULTS The table below summarizes the International segment's results. SECOND SIX MONTHS QUARTER ENDED ENDED JUNE 30, JUNE 30, - ---------------------- --------------- --------------- (Unaudited) 1996 1995 1996 1995 - ---------------------- ------- ------- ------- ------- Net Investment Income $49 $43 $97 $81 Yield on Average Invested 7.0% 6.6% 7.0% 6.4% Assets Before-tax (1) Net Realized Capital $20 $9 $39 $11 Gains - ------------------------------------------------------ (1) Represents annualized net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost). - ------------------------------------------------------ For the second quarter ended June 30, 1996, net investment income totaled $49 compared to $43 in 1995, an increase of 14%. For the six months ended June 30, 1996, net investment income totaled $97 compared to $81 in 1995, an increase of 20% while yields on average invested assets increased to 7.0% from 6.4%. The increase in net investment income was primarily due to increased operating cash flow which was invested in international bonds, a shift in asset allocation to long-term bonds from short-term bonds, and the acquisition of ITT Ercos. NET REALIZED CAPITAL GAINS For the second quarter ended June 30, 1996, net realized capital gains increased to $20 from $9 in 1995 and for the six months ended June 30, 1996, to $39 from $11 in 1995, primarily the result of an increase in both fixed maturity and equity gains. RUNOFF Invested assets were $6.1 billion at June 30, 1996, and were comprised of fixed maturities of $6.0 billion and other investments of $81. The runoff segment uses derivatives related to the Closed Book GRC. As of June 30, 1996 and December 31, 1995, Runoff had derivatives with an aggregate notional amount of $5.3 billion and $5.6 billion, respectively, for asset/liability management purposes. (For additional information, see "Asset and Liability Management Strategies" under the Life section of Investments.) The table below summarizes fixed maturity holdings by type. FIXED MATURITIES BY TYPE --------------------------------------------------------- (Unaudited) JUNE 30, DECEMBER 31, 1996 1995 - -------------- ----------- -------- ------------ -------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - -------------- ----------- -------- ------------ -------- Corporate $2,600 43.4% $2,587 39.0% CMO 1,504 25.1% 1,691 25.5% Gov't/Gov't agencies-US 316 5.3% 362 5.4% ABS 578 9.7% 649 9.8% Gov't/Gov't 151 2.5% 145 2.2% agencies-For. MBS - Agency 169 2.8% 218 3.3% Commercial MBS 64 1.1% 77 1.1% Municipals- taxable 81 1.4% 87 1.3% Short-terms 522 8.7% 821 12.4% - -------------- ----------- -------- ------------ -------- TOTAL FIXED MATURITIES $5,985 100.0% $6,637 100.0% - -------------- ----------- -------- ------------ -------- The Runoff segment maintains a greater than 99% investment grade fixed maturity portfolio. The table below summarizes fixed maturity holdings by credit quality. FIXED MATURITIES BY CREDIT QUALITY - --------------------------------------------------------- (Unaudited) JUNE 30, DECEMBER 31, 1996 1995 - ------------- ------------ -------- ----------- -------- CREDIT FAIR VALUE PERCENT FAIR VALUE PERCENT QUALITY - ------------- ------------ -------- ----------- -------- AAA $3,076 51.4% $2,804 42.2% AA 580 9.7% 691 10.4% A 1,537 25.7% 1,525 23.0% BBB 242 4.0% 357 5.4% Gov't 266 4.4% 272 4.1% BB & below 12 0.2% 12 0.2% Not rated 59 1.0% 65 1.0% Short-term 213 3.6% 911 13.7% - ------------- ----------- -------- ------------ -------- TOTAL FIXED MATURITIES $5,985 100.0% $6,637 100.0% - ------------- ----------- -------- ------------ -------- INVESTMENT RESULTS The table below summarizes the Runoff segment's results. SECOND SIX MONTHS QUARTER ENDED ENDED JUNE 30, JUNE 30, - ---------------------- --------------- --------------- (Unaudited) 1996 1995 1996 1995 - ---------------------- ------- ------- ------- ------- Net Investment Income $86 $132 $179 $262 Yield on Average Invested 4.3% 6.1% 4.8% 6.0% Assets Before-tax (1) Net Realized Capital Gains (Losses) $(1) $1 $(1) -- - ------------------------------------------------------ (1) Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). - ------------------------------------------------------
For the second quarter ended June 30, 1996, net investment income totaled $86 compared to $132 in 1995, a decrease of 35%. For the six months ended June 30, 1996, net investment income totaled $179 compared to $262 in 1995, a decrease of 32% while yields on average invested assets decreased to 4.8% from 6.0%. Net investment income decreased primarily due to asset runoff in the Closed Book GRC. The decrease in yield was primarily the result of sales and maturities of higher yielding securities in Closed Book GRC. (For additional information, see "Asset Management Services" in the Life section of the MD&A in the 1995 Form 10-K Annual Report.) NET REALIZED CAPITAL GAINS/LOSSES Net realized capital gains/losses for the six months ended June 30, 1996 were $(1) from no gain/loss in 1995, primarily due to losses taken in First State. CAPITAL RESOURCES AND LIQUIDITY Capital resources and liquidity represent the overall financial strength of ITT 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 ITT Hartford consists of debt and equity, summarized as follows: <TABLE> <CAPTION> JUNE 30, DECEMBER 31, 1996 1995 ----------------- ----------------- (Unaudited) <S> <C> <C> Short-term debt $ 500 $ 886 Long-term debt 1,021 1,022 - --------------------------------------------------------------------------------------------- ----------------- ----------------- SUB-TOTAL 1,521 1,908 Cumulative quarterly income preferred securities [1] 485 -- - --------------------------------------------------------------------------------------------- ----------------- ----------------- TOTAL DEBT [2] $2,006 $1,908 - ------------------------------------------------------------------------------------------ ----------------- ----------------- Equity excluding unrealized gain (loss), net of tax $4,575 $4,457 Unrealized gain (loss), net of tax (189) 245 - --------------------------------------------------------------------------------------------- ----------------- ----------------- TOTAL STOCKHOLDERS' EQUITY $4,386 $4,702 ------------------------------------------------------------------------------------------ ----------------- ----------------- TOTAL CAPITALIZATION EXCLUDING UNREALIZED GAIN (LOSS), NET OF TAX $6,581 $6,365 ------------------------------------------------------------------------------------------ ----------------- ----------------- Debt to equity excluding unrealized gain (loss), net of tax [2] 43.8% 42.8% Debt to capitalization excluding unrealized gain (loss), net of tax [2] 30.5% 30.0% - --------------------------------------------------------------------------------------------- ----------------- ----------------- <FN> [1] Represents Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Parent Junior Subordinated Debentures. [2] Debt at June 30, 1996 includes cumulative quarterly income preferred securities. </FN> </TABLE> CAPITALIZATION ITT Hartford's total capitalization, excluding unrealized gain (loss), net of tax, increased by $216 as of June 30, 1996 over December 31, 1995. This change primarily was the result of earnings of $239 and additional net borrowings totaling $96, partially offset by dividends declared of $94 on ITT Hartford common stock. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUST HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES On February 28, 1996, Hartford Capital I, a trust formed by ITT Hartford, issued 20,000,000 Series A, 7.7% Cumulative Quarterly Income Preferred Securities. The proceeds from the sale of these securities were used to acquire $500 of Junior Subordinated Deferrable Interest Debentures from ITT Hartford. ITT Hartford used the proceeds from the sale of such debentures for the partial repayment of outstanding commercial paper and short-term bank indebtedness. For additional information, see Note 2 of Notes to Consolidated Financial Statements. DIVIDENDS On May 16, 1996, ITT Hartford declared a dividend on its common stock of $.40 per share payable on July 1, 1996 to all shareholders of record as of May 31, 1996. Also, on July 18, 1996 a dividend was declared on ITT Hartford common stock of $0.40 per share payable on October 1, 1996 to all shareholders of record on August 30, 1996. CASH FLOW SIX MONTHS ENDED JUNE 30, 1996 1995 ------------------------ (Unaudited) Cash provided by operating activities $ 355 $ 393 Cash used for investing activities $ (224) $ (1,453) Cash provided by (used for) financing activities $ (72) $ 1,127 Cash -- end of period $ 156 $ 112 - ------------------------------------------------------------------ The changes in cash from both investing and financing activities between years were due to investment-type contracts written in the Life segment offset by increases in investment-type contract maturities resulting in $(128) for the six months ended June 30, 1996 compared with $971 in the prior year's six months. These funds, along with cash reserves, were invested in securities held by ITT Hartford. Operating cash flows have been more than adequate to meet the liquidity requirements of ITT Hartford.
- -------------------------------------------------------------------------------- PART II. OTHER INFORMATION - -------------------------------------------------------------------------------- ITEM 1. LEGAL PROCEEDINGS ITT 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 position of ITT Hartford. ITT Hartford is involved in claim 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, ITT Hartford continues to receive environmental and asbestos claims which involve significant uncertainty regarding policy coverage issues. Regarding these claims, ITT 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 16, 1996, ITT Hartford held its annual meeting of shareholders. The only matters considered and voted upon were the election of directors for a one year term and the ratification of Arthur Andersen LLP as independent auditors of ITT Hartford for the fiscal year ending December 31, 1996 Each of the nominees for the election as a director was elected to the Board of Directors. The following is the vote tabulation for each nominee: <TABLE> <CAPTION> Name of Director Nominee Shares Voted For Shares Withheld* - ----------------------------------- ------------------------------ ----------------------------------- <S> <C> <C> Bette B. Anderson 101,807,037 470,461 Rand V. Araskog 101,710,236 567,262 Ramani Ayer 101,896,729 380,769 Robert A. Burnett 101,799,449 478,049 Donald R. Frahm 101,751,540 525,958 Arthur A. Hartman 101,722,096 555,402 Paul G. Kirk, Jr. 100,930,583 1,346,915 Lon A. Smith 101,905,553 371,945 H. Patrick Swygert 100,765,933 1,511,565 DeRoy C. Thomas 101,830,251 447,247 Gordon I. Ulmer 101,800,017 477,481 - ----------------------------------- ------------------------------ ----------------------------------- <FN> * Shares withheld include broker non-votes and abstentions. </FN> </TABLE> In addition, the appointment of Arthur Andersen LLP as independent auditors for the fiscal year ending December 31, 1996 was ratified by 101,339,146 shares of Common Stock voting for the proposal, 551,429 voting against, and 386,923 shares abstaining. There were 117,182,164 shares issued and outstanding and entitled to vote at the annual meeting as of the record date for the meeting. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibits Index. (b) Reports on Form 8-K - None.
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. ITT Hartford Group, Inc. (Registrant) /s/ James J. Westervelt ------------------------------------------ James J. Westervelt Senior Vice President and Group Controller (Chief Accounting Officer) AUGUST 13, 1996
ITT HARTFORD GROUP, INC. AND SUBSIDIARIES FORM 10-Q EXHBITS INDEX EXHIBIT # 11.01 Computation of Earnings Per Share is filed herewith. 12.01 Computation of Ratios of Earnings to Combined Fixed Charges and Earnings to Combined Fixed Charges and Preferred Stock Dividends is filed herewith. 27 Financial Data Schedule is filed herewith.
<TABLE> <CAPTION> ITT HARTFORD GROUP, INC. AND SUBSIDIARIES COMPUTATION OF EARNINGS PER SHARE (In millions, except per share data) Second Quarter Ended Six Months Ended June 30, June 30, 1996 1995 1996 1995 - --------------------------------------------------------------- ------------- ------------- ------------- ------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Net income $143 $105 $239 $245 Weighted average common shares outstanding (1) 117.2 117.1 117.2 117.1 Earnings Per Share $1.22 $0.90 $2.04 $2.09 - --------------------------------------------------------------- ------------- ------------- ------------- ------------- <FN> (1) June 30, 1995 average common shares outstanding of 117.1 reflects a retroactive presentation of the actual number of shares outstanding at December 31, 1995. </FN> </TABLE>
<TABLE> <CAPTION> ITT HARTFORD GROUP, INC. AND SUBSIDIARIES COMPUTATION OF RATIOS OF EARNINGS TO COMBINED FIXED CHARGES AND EARNINGS TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS ($ in millions) Six Months Ended June 30, 1996 1995 ---------------------------------------------------------------------- ---------------- --------------- (Unaudited) EARNINGS <S> <C> <C> OPERATING INCOME $293 $323 ADD: FIXED CHARGES Interest expense 71 47 Interest factor attributable to rentals (1) 18 23 ---------------------------------------------------------------------- ---------------- --------------- TOTAL FIXED CHARGES 89 70 ----------------------------------------------------------------- ---------------- --------------- EARNINGS, AS DEFINED $382 $393 ---------------------------------------------------------------------- ---------------- --------------- FIXED CHARGES Fixed charges above $89 $70 Dividends on subsidiary preferred stock -- 3 ---------------------------------------------------------------------- ---------------- --------------- TOTAL FIXED CHARGES AND PREFERRED DIVIDEND REQUIREMENTS $89 $73 ---------------------------------------------------------------------- ---------------- --------------- RATIOS Earnings, as defined, to combined fixed charges 4.3 5.6 ---------------------------------------------------------------------- ---------------- --------------- Earnings, as defined, to combined fixed charges and preferred stock dividend requirements 4.3 5.3 ---------------------------------------------------------------------- ---------------- --------------- <FN> (1) The interest factor attributable to rentals was computed by calculating the estimated present value of all long-term rental commitments and applying the approximate weighted average interest rate inherent in the lease obligations and adding thereto the interest element assumed in short-term cancelable and contingent rentals excluded from the commitment data but included in rental expense. </FN> </TABLE>