================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended September 30, 1999 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 0-19277 THE HARTFORD FINANCIAL SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) Delaware 13-3317783 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) Hartford Plaza, Hartford, Connecticut 06115-1900 (Address of principal executive offices) (860) 547-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] As of October 31, 1999, there were outstanding 221,620,486 shares of Common Stock, $0.01 par value per share, of the registrant. ================================================================================
INDEX PART I. FINANCIAL INFORMATION - ------------------------------ Item 1. Financial Statements Page ---- Consolidated Statements of Income - Third Quarter and Nine Months Ended September 30, 1999 and 1998 3 Consolidated Balance Sheets - September 30, 1999 and December 31, 1998 4 Consolidated Statements of Changes in Stockholders' Equity - Nine Months Ended September 30, 1999 and 1998 5 Consolidated Statements of Cash Flows - Nine Months Ended September 30, 1999 and 1998 6 Notes to Consolidated Financial Statements 7 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 10 Item 3. Quantitative and Qualitative Disclosures About Market Risk 21 PART II. OTHER INFORMATION - --------------------------- Item 1. Legal Proceedings 22 Item 6. Exhibits and Reports on Form 8-K 22 Signature 23 - 2 -
PART I. FINANCIAL INFORMATION Item 1. Financial Statements <TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Income Third Quarter Ended Nine Months Ended September 30, September 30, --------------------------- -------------------------- (In millions, except for per share data) 1999 1998 1999 1998 ------------------------------------------------------------------- ------------- ------------- ------------ ------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> REVENUES Earned premiums and other considerations $ 2,812 $ 2,934 $ 8,105 $ 8,612 Net investment income 640 691 1,957 2,060 Net realized capital gains (losses) (8) 15 30 189 ------------------------------------------------------------------- ------------- ------------- ------------ ------------- TOTAL REVENUES 3,444 3,640 10,092 10,861 ------------------------------------------------------------ ------------- ------------- ------------ ------------- BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 2,025 2,125 5,939 6,271 Amortization of deferred policy acquisition costs 516 537 1,464 1,591 Other expenses 650 665 1,785 1,960 ------------------------------------------------------------------- ------------- ------------- ------------ ------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 3,191 3,327 9,188 9,822 ------------------------------------------------------------ ------------- ------------- ------------ ------------- OPERATING INCOME 253 313 904 1,039 Income tax expense 45 80 202 273 ------------------------------------------------------------------- ------------- ------------- ------------ ------------- INCOME BEFORE MINORITY INTEREST 208 233 702 766 Minority interest in consolidated subsidiary (22) (19) (63) (52) ------------------------------------------------------------------- ------------- ------------- ------------ ------------- NET INCOME $ 186 $ 214 $ 639 $ 714 ------------------------------------------------------------ ------------- ------------- ------------ ------------- Basic earnings per share $ 0.83 $ 0.92 $ 2.82 $ 3.04 Diluted earnings per share $ 0.82 $ 0.91 $ 2.79 $ 3.00 ------------------------------------------------------------------- ------------- ------------- ------------ ------------- Weighted average common shares outstanding 225.3 232.2 226.4 234.5 Weighted average common shares outstanding and dilutive potential common shares 227.8 235.6 229.3 238.0 ------------------------------------------------------------------- ------------- ------------- ------------ ------------- Cash dividends declared per share $ 0.23 $ 0.21 $ 0.68 $ 0.63 =================================================================== ============= ============= ============ ============= </TABLE> See Notes to Consolidated Financial Statements. - 3 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Balance Sheets September 30, December 31, (In millions, except for share data) 1999 1998 - ------------------------------------------------------------------------------------------- ----------------- ----------------- <S> <C> <C> ASSETS (UNAUDITED) Investments ----------- Fixed maturities, available for sale, at fair value (amortized cost of $33,672 and $34,191) $ 33,282 $ 35,331 Equity securities, available for sale, at fair value (cost of $917 and $846) 1,156 1,066 Policy loans, at outstanding balance 4,283 6,687 Other investments 696 612 - ------------------------------------------------------------------------------------------- ----------------- ----------------- Total investments 39,417 43,696 Cash 135 123 Premiums receivable and agents' balances 2,131 1,833 Reinsurance recoverables 4,359 4,978 Deferred policy acquisition costs 4,922 4,579 Deferred income tax 1,380 1,085 Other assets 2,869 2,759 Separate account assets 98,340 91,579 - ------------------------------------------------------------------------------------------- ----------------- ----------------- TOTAL ASSETS $ 153,553 $ 150,632 =================================================================================== ================= ================= LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 16,013 $ 16,449 Life 6,325 6,088 Other policy claims and benefits payable 16,685 19,774 Unearned premiums 2,715 2,478 Short-term debt 31 31 Long-term debt 1,548 1,548 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,250 1,250 Other liabilities 4,440 4,547 Separate account liabilities 98,340 91,579 - ------------------------------------------------------------------------------------------- ----------------- ----------------- 147,347 143,744 COMMITMENTS AND CONTINGENCIES, NOTE 3 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 433 465 STOCKHOLDERS' EQUITY Common stock - authorized 400,000,000, issued 238,645,675 and 238,705,675 shares, par value $0.01 2 2 Additional paid-in capital 1,557 1,591 Retained earnings 4,957 4,474 Treasury stock, at cost - 15,070,593 and 11,310,598 shares (655) (455) Accumulated other comprehensive income (loss) (88) 811 - ------------------------------------------------------------------------------------------- ----------------- ----------------- TOTAL STOCKHOLDERS' EQUITY 5,773 6,423 ----------------------------------------------------------------------------------- ----------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 153,553 $ 150,632 =================================================================================== ================= ================= </TABLE> See Notes to Consolidated Financial Statements. - 4 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Changes in Stockholders' Equity Nine Months Ended September 30, 1999 Accumulated Other Comprehensive Income (Loss) ----------------------------- Unrealized Common Stock/ Treasury Gain (Loss) on Cumulative Outstanding Additional Retained Stock, Securities, Translation Shares (Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands) - ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> <C> Balance, beginning of period $1,593 $4,474 $(455) $811 $-- $6,423 227,395 Comprehensive income Net income 639 639 Other comprehensive income (loss), net of tax (1) Unrealized gain (loss) on securities (2) (862) (862) Cumulative translation adjustments (37) (37) ---------- Total other comprehensive income (loss) (899) ---------- Total comprehensive income (loss) (260) ---------- Issuance of shares under incentive and stock purchase plans (46) 97 51 1,908 Tax benefit on employee stock options and awards 15 15 Treasury stock acquired (3) (297) (300) (5,728) Dividends declared on common stock (156) (156) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of period $1,559 $4,957 $(655) $(51) $(37) $5,773 223,575 - ------------------------------------------------------------------------------------------------------------------------------------ Nine Months Ended September 30, 1998 Accumulated Other Comprehensive Income (Loss) ----------------------------- Unrealized Common Stock/ Treasury Gain (Loss) on Cumulative Outstanding Additional Retained Stock, Securities, Translation Shares (Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands) - ----------------------------------------------------------------------------------------------------------------------------------- Balance, beginning of period as previously reported $1,660 $3,658 $(65) $853 $(21) $6,085 117,976 Two-for-one stock split (3) (17) 17 117,976 - ------------------------------------------------------------------------------------------------------------------------------------ Balance, beginning of period as adjusted $1,643 $3,658 $(48) $853 $(21) $6,085 235,952 Comprehensive income Net income 714 714 Other comprehensive income, net of tax (1) Unrealized gain on securities (2) 69 69 Cumulative translation adjustments 25 25 ----------- Total other comprehensive income 94 ----------- Total comprehensive income 808 ----------- Issuance of shares under incentive and stock purchase plans 12 40 52 1,606 Tax benefit on employee stock options and awards 15 15 Treasury stock acquired (95) (330) (425) (8,236) Dividends declared on common stock (148) (148) - ------------------------------------------------------------------------------------------------------------------------------------ Balance, end of period $1,575 $4,224 $(338) $922 $4 $6,387 229,322 ==================================================================================================================================== <FN> (1) Unrealized gain (loss) on securities is net of tax expense (benefit) of $(464) and $38 for the nine months ended September 30, 1999 and 1998, respectively. There is no tax effect on cumulative translation adjustments. (2) Net of reclassification adjustment for gains realized in net income of $23 and $123 for the nine months ended September 30, 1999 and 1998, respectively. (3) On May 21, 1998, the Board of Directors authorized a two-for-one stock split effected in the form of a 100% stock dividend distributed on July 15, 1998 to shareholders of record as of June 24, 1998. </FN> </TABLE> See Notes to Consolidated Financial Statements. - 5 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. Consolidated Statements of Cash Flows Nine Months Ended September 30, ---------------------------------- (In millions) 1999 1998 - ------------------------------------------------------------------------------------------- ---------------------------------- (Unaudited) <S> <C> <C> OPERATING ACTIVITIES Net income $ 639 $ 714 Adjustments to reconcile net income to net cash provided by operating activities Change in receivables, payables and accruals (43) (242) Decrease in reinsurance recoverables and other related assets 338 289 Increase in deferred policy acquisition costs (356) (460) Change in accrued and deferred income taxes 29 (98) (Decrease) increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums (16) 588 Minority interest in consolidated subsidiary 63 52 Net realized capital gains (30) (189) Depreciation and amortization 48 78 Other, net (237) 26 - ------------------------------------------------------------------------------------------- ---------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 435 758 - ------------------------------------------------------------------------------------------- ---------------------------------- INVESTING ACTIVITIES Purchase of investments (10,785) (11,443) Sale of investments 11,930 9,769 Maturity of investments 1,536 1,727 Sale (purchase) of affiliate 21 (359) Additions to plant, property and equipment (79) (88) - ------------------------------------------------------------------------------------------- ---------------------------------- NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 2,623 (394) - ------------------------------------------------------------------------------------------- ---------------------------------- FINANCING ACTIVITIES Short-term debt, net -- (60) Proceeds from issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures -- 250 Net disbursements for investment and universal life-type contracts charged against policyholder accounts (2,649) (52) Dividends paid (156) (146) Acquisition of treasury stock (287) (400) Proceeds from issuances under incentive and stock purchase plans 50 37 - ------------------------------------------------------------------------------------------- ---------------------------------- NET CASH USED FOR FINANCING ACTIVITIES (3,042) (371) - ------------------------------------------------------------------------------------------- ---------------------------------- Foreign exchange rate effect on cash (4) 2 - ------------------------------------------------------------------------------------------- ---------------------------------- Net increase in cash 12 (5) Cash - beginning of period 123 140 - ------------------------------------------------------------------------------------------- ---------------------------------- CASH - END OF PERIOD $ 135 $ 135 - ------------------------------------------------------------------------------------------- ---------------------------------- Supplemental Disclosure of Cash Flow Information: - ------------------------------------------------ Net Cash Paid During the Period For: Income taxes $ 110 $ 308 Interest $ 145 $ 147 </TABLE> See Notes to Consolidated Financial Statements. - 6 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Amounts in millions except per share data unless otherwise stated)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (a) Basis of Presentation The accompanying unaudited consolidated financial statements of The Hartford Financial Services Group, Inc. ("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 1998 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 June 1999, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards ("SFAS") No. 137, "Accounting for Derivative Instruments and Hedging Activities - Deferral of the Effective Date of FASB Statement No. 133". This statement amends SFAS No. 133 to defer its effective date for one year, to fiscal years beginning after June 15, 2000. Initial application for The Hartford will begin for the first quarter of the year 2001. Effective January 1, 1999, The Hartford adopted 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. Adoption of this SOP did not have a material impact on the Company's financial condition or results of operations. Effective January 1, 1999, The Hartford adopted SOP No. 97-3, "Accounting by Insurance and Other Enterprises for Insurance-Related Assessments". This SOP addresses accounting by insurance and other enterprises for assessments related to insurance activities including recognition, measurement and disclosure of guaranty fund or other assessments. Adoption of this SOP did not have a material impact on the Company's financial condition or results of operations. In November 1998, the Emerging Issues Task Force ("EITF") reached consensus on issue 98-15, "Structured Notes Acquired for a Specific Investment Strategy". This pronouncement requires companies to account for structured notes acquired for a specific investment strategy, as a unit. Affected companies that entered into these notes prior to September 25, 1998 are required to either restate prior period financial statements to conform with the prescribed unit accounting model, or disclose the related impact on earnings for all periods presented and cumulatively over the life of the instruments had the registrant accounted for the structure as a unit. Net income for the quarter and nine months ended September 30, 1999 would have been approximately $1 and $2 lower, respectively, and cumulatively over the life of the instrument would have been $24 higher had the Company accounted for its structured note transaction as a unit, based upon the consensus reached in EITF 98-15. NOTE 2. 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. <TABLE> <CAPTION> Third Quarter Ended Nine Months Ended ------------------------------------- ------------------------------------- Per Share Per Share September 30, 1999 Income Shares Amount Income Shares Amount ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic Earnings per Share Income available to common shareholders $ 186 225.3 $ 0.83 $ 639 226.4 $ 2.82 ------------- ------------ Diluted Earnings per Share Options and contingently issuable shares -- 2.5 -- 2.9 ------------------------ ------------------------- Income available to common shareholders plus assumed conversions $ 186 227.8 $ 0.82 $ 639 229.3 $ 2.79 ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> - 7 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 2. EARNINGS PER SHARE (continued) <TABLE> <CAPTION> Third Quarter Ended Nine Months Ended ------------------------------------- ------------------------------------- Per Share Per Share September 30, 1998 Income Shares Amount Income Shares Amount ----------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Basic Earnings per Share Income available to common shareholders $ 214 232.2 $ 0.92 $ 714 234.5 $ 3.04 ------------- ------------ Diluted Earnings per Share Options and contingently issuable shares -- 3.4 -- 3.5 ------------------------ ------------------------- Income available to common shareholders plus assumed conversions $ 214 235.6 $ 0.91 $ 714 238.0 $ 3.00 ----------------------------------------------------------------------------------------------------------------------------------- </TABLE> Basic earnings per share are computed based on the weighted average number of shares outstanding during the period. Diluted earnings per share include the dilutive effect of outstanding options, using the treasury stock method, and contingently issuable shares. Under the treasury stock method, exercise of options is assumed with the proceeds used to purchase common stock at the average market price for the period. The difference between the number of shares assumed issued and number of shares purchased represents the dilutive shares. Contingently issuable shares are included upon satisfaction of certain conditions related to the contingency. NOTE 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, after consideration of provisions made for potential losses and costs of defense, is not expected to be material to the consolidated financial condition, results of operations or cash flows of The Hartford. (b) Environmental and Asbestos Claims Information regarding environmental and asbestos claims may be found in the Environmental and Asbestos Claims section of Management's Discussion and Analysis of Financial Condition and Results of Operations. (c) Investments In October 1998, the Company became aware of allegations of improper activities at Commercial Financial Services Inc. ("CFS") a securitizer and servicer of asset backed securities, and in December 1998, CFS filed for protection under Chapter 11 of the Bankruptcy Code. As a result, the Company recognized a $36, after-tax, writedown related to the asset backed securities during the fourth quarter of 1998. In June 1999, CFS ceased operations at which time the Company recognized an additional $42, after-tax, writedown. In August 1999, the Company sold all of its CFS holdings at a nominal gain, recovering its June 30, 1999 amortized cost of $34. (d) Tax Matters The Hartford's federal income tax returns are routinely audited by the Internal Revenue Service. Management believes that adequate provision has been made in the financial statements for items that may result from tax examinations and other tax related matters. NOTE 4. SEGMENT INFORMATION The Hartford's reporting segments consist of Commercial, Personal, Reinsurance, Life, International and Other Operations. While the measure of profit or loss used by The Hartford's management in evaluating performance is core earnings for the Life, International and Other Operations segments, the Commercial, Personal and Reinsurance segments are evaluated by The Hartford's management primarily based upon underwriting results. The Hartford defines "core earnings" as after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes, allocated Distribution items (for additional information, see Note 16 of Notes to Consolidated Financial Statements included in The Hartford's 1998 Form 10-K Annual Report) and certain other items. Core earnings is an internal performance measure used by the Company in the management of its operations. While not considered a segment, the Company also reports and evaluates core earnings results for North American Property & Casualty, which includes the combined underwriting results of the Commercial, Personal and Reinsurance segments, along with income and expense items not directly allocable to these segments such as net investment income. Included in core earnings for Other Operations is the effect of an approximate 19% minority interest in Hartford Life, Inc.'s operating results. - 8 -
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued) NOTE 4. SEGMENT INFORMATION (continued) The following tables present revenues and core earnings. Revenues are presented by segment and for total North American Property & Casualty. Underwriting results are presented for the Commercial, Personal and Reinsurance segments, while core earnings are presented for North American Property & Casualty and the segments of Life, International and Other Operations. <TABLE> <CAPTION> Revenues Third Quarter Ended Nine Months Ended September 30, September 30, --------------------------------------------------------- 1999 1998 1999 1998 --------------------------------------------------------- <S> <C> <C> <C> <C> Earned premiums and other considerations Commercial $ 852 $ 851 $ 2,456 $ 2,569 Personal 634 572 1,859 1,667 Reinsurance 179 215 516 527 - ------------------------------------------------------------------------------------------------------------------------------------ North American Property & Casualty earned premiums and other considerations 1,665 1,638 4,831 4,763 Net investment income 209 210 636 618 Net realized capital gains -- -- 22 121 - ------------------------------------------------------------------------------------------------------------------------------------ North American Property & Casualty 1,874 1,848 5,489 5,502 Life 1,420 1,287 4,112 3,846 International 114 465 382 1,389 Other Operations 36 40 109 124 - ------------------------------------------------------------------------------------------------------------------------------------ Total revenues $ 3,444 $ 3,640 $ 10,092 $ 10,861 ==================================================================================================================================== </TABLE> <TABLE> <CAPTION> Core Earnings Third Quarter Ended Nine Months Ended September 30, September 30, --------------------------------------------------------- 1999 1998 1999 1998 --------------------------------------------------------- <S> <C> <C> <C> <C> Underwriting results Commercial $ (32) $ (51) $ (127) $ (207) Personal (14) 32 31 78 Reinsurance (35) (18) (44) (30) - ------------------------------------------------------------------------------------------------------------------------------------ North American Property & Casualty underwriting results (81) (37) (140) (159) Net investment income 209 210 636 618 Income taxes and other expenses (42) (61) (175) (132) - ------------------------------------------------------------------------------------------------------------------------------------ North American Property & Casualty 86 112 321 327 Life 119 100 339 278 International 4 9 16 35 Other Operations (22) (17) (60) (49) - ------------------------------------------------------------------------------------------------------------------------------------ Total core earnings 187 204 616 591 Net realized capital gains (losses), after-tax (1) 10 23 123 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 186 $ 214 $ 639 $ 714 ==================================================================================================================================== </TABLE> - 9 -
Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS (Dollar amounts in millions except per share data unless otherwise stated) Management's Discussion and Analysis of Financial Condition and Results of Operations ("MD&A") addresses the financial condition of The Hartford as of September 30, 1999, compared with December 31, 1998, and its results of operations for the third quarter and nine months ended September 30, 1999 compared with the equivalent 1998 periods. This discussion should be read in conjunction with the MD&A included in The Hartford's 1998 Form 10-K Annual Report. Certain of the statements contained herein (other than statements of historical fact) are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty which are, in many instances, beyond the Company's control and have been made based upon management's expectations and beliefs concerning future developments and their potential effect upon The Hartford. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on The Hartford will be those anticipated by management. Actual results could differ materially from those expected by The Hartford, depending on the outcome of certain factors, including those described with the forward-looking statements herein. Certain reclassifications have been made to prior year financial information to conform to the current year presentation. INDEX Consolidated Results of Operations: Operating Summary 10 North American Property & Casualty 12 Commercial 12 Personal 12 Reinsurance 13 Life 13 International 14 Other Operations 14 Environmental and Asbestos Claims 15 Investments 16 Capital Markets Risk Management 18 Capital Resources and Liquidity 19 Regulatory Initiatives and Contingencies 20 Accounting Standards 21 CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY <TABLE> <CAPTION> Operating Summary Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> Total revenues $ 3,444 $ 3,640 $ 10,092 $ 10,861 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 186 $ 214 $ 639 $ 714 Less: Net realized capital gains (losses), after-tax (1) 10 23 123 - ------------------------------------------------------------------------------------------------------------------------------------ Core earnings $ 187 $ 204 $ 616 $ 591 ==================================================================================================================================== </TABLE> The Hartford defines "core earnings" as after-tax operational results excluding, as applicable, net realized capital gains or losses, the cumulative effect of accounting changes, allocated Distribution items (for additional information, see Note 16 of Notes to Consolidated Financial Statements included in The Hartford's 1998 Form 10-K Annual Report) and certain other items. Core earnings is an internal performance measure used by the Company in the management of its operations. Management believes that this performance measure delineates the results of operations of the Company's ongoing businesses in a manner that allows for a better understanding of the underlying trends in the Company's current business. However, core earnings should only be analyzed in conjunction with, and not in lieu of, net income and may not be comparable to other performance measures used by the Company's competitors. Revenues for the third quarter and nine months ended September 30, 1999 decreased $196, or 5%, and $769, or 7%, respectively, over the comparable prior year periods, primarily as a result of the November 1998 sale of United Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh"), which was The Hartford's largest international subsidiary, and lower net realized capital gains (losses), partially offset by premium growth in North American Property & Casualty and Life. (For an analysis of net realized capital gains (losses), see the Investments section.) Core earnings decreased $17, or 8%, for the third quarter and increased $25, or 4%, for the nine months ended September 30, 1999, compared with the same prior year periods. The decrease for the quarter was due primarily to increased underwriting losses, primarily the result of higher catastrophe losses in North American Property & Casualty, partially offset by higher fee income in the Investment Products operation of the Life segment as a result of increasing account values. The increase for the nine month period was the result of higher fee income in the Investment Products operation and lower catastrophe losses, - 10 -
partially offset by a decrease in International earnings as a result of the sale of London & Edinburgh. The effective tax rates for the third quarter and nine months ended September 30, 1999 were 18% and 22%, respectively, compared to 26% for both comparable periods in 1998. The decrease in the effective tax rates for the 1999 periods was primarily due to an increase in the proportionate share of tax-exempt net investment income to total pre-tax income for the third quarter and nine months ended September 30, 1999 compared with the same prior year periods. Tax-exempt interest earned on invested assets was the principal cause of effective tax rates lower than the 35% U.S. statutory rate. Segment Results The Hartford's reporting segments consist of Commercial, Personal, Reinsurance, Life, International and Other Operations. While the measure of profit or loss used by The Hartford's management in evaluating performance is core earnings for the Life, International and Other Operations segments, the Commercial, Personal and Reinsurance segments are evaluated by The Hartford's management primarily based upon underwriting results. While not considered a segment, the Company also reports and evaluates core earnings results for North American Property & Casualty, which include the combined underwriting results of the Commercial, Personal and Reinsurance segments, along with income and expense items not directly allocable to these segments such as net investment income. Other Operations include operations which have ceased writing new business. Also included in Other Operations is the effect of an approximate 19% minority interest in Hartford Life, Inc.'s ("HLI") operating results. The following is a summary of underwriting results by segment within North American Property & Casualty. Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses. <TABLE> <CAPTION> Underwriting Results Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> Commercial $ (32) $ (51) $ (127) $ (207) Personal (14) 32 31 78 Reinsurance (35) (18) (44) (30) - ------------------------------------------------------------------------------------------------------------------------------------ Total $ (81) $ (37) $ (140) $ (159) ==================================================================================================================================== </TABLE> The following is a summary of core earnings and net income. <TABLE> <CAPTION> Core earnings Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> North American Property & Casualty $ 86 $ 112 $ 321 $ 327 Life 119 100 339 278 International 4 9 16 35 Other Operations (22) (17) (60) (49) - ------------------------------------------------------------------------------------------------------------------------------------ Core earnings $ 187 $ 204 $ 616 $ 591 ==================================================================================================================================== </TABLE> <TABLE> <CAPTION> Net income Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> North American Property & Casualty $ 86 $ 112 $ 335 $ 405 Life 119 100 339 278 International 3 18 26 78 Other Operations (22) (16) (61) (47) - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 186 $ 214 $ 639 $ 714 ==================================================================================================================================== </TABLE> An analysis of the operating results summarized above, is included on the following pages. Environmental and Asbestos Claims and Investments are discussed in separate sections. - 11 -
NORTH AMERICAN PROPERTY & CASUALTY <TABLE> <CAPTION> Operating Summary Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> Total revenues $ 1,874 $ 1,848 $ 5,489 $ 5,502 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 86 $ 112 $ 335 $ 405 Less: Net realized capital gains, after-tax -- -- 14 78 - ------------------------------------------------------------------------------------------------------------------------------------ Core earnings $ 86 $ 112 $ 321 $ 327 ==================================================================================================================================== </TABLE> Revenues for North American Property & Casualty increased $26 for the third quarter and decreased $13 for the nine months ended September 30, 1999 compared with the same prior year periods. The increase for the third quarter was primarily due to a $27 increase in earned premiums and other considerations. For the nine month period, the decrease was due to a $99 decline in pre-tax net realized capital gains, $55 of proceeds in the first quarter of 1998 from the sale of renewal rights and other considerations related to the Industrial Risk Insurance pool ("IRI transaction"), partially offset by a $123 increase in earned premiums and other considerations and higher net investment income of $18. Core earnings decreased $26, or 23%, for the third quarter and $6, or 2%, for the nine months ended September 30, 1999 compared with the same periods in 1998. The decrease for the quarter was primarily due to adverse catastrophe losses totaling $61, after-tax, for the quarter ended September 30, 1999 compared to $40, after-tax, for the same period in 1998. For the nine month period, the decrease was primarily the result of proceeds received in 1998 related to the IRI transaction and an increase in non-underwriting expenses, partially offset by higher net investment income and changes in underwriting results as discussed below. COMMERCIAL <TABLE> <CAPTION> Operating Summary Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 - --------------------------------------------------------------------------- -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> Written premiums $ 808 $ 795 $ 2,369 $ 2,421 Underwriting results $ (32) $ (51) $ (127) $ (207) Combined ratio 104.7 106.6 105.5 108.1 ==================================================================================================================================== </TABLE> Commercial written premiums increased $13, or 2%, for the third quarter and decreased $52, or 2%, for the nine months ended September 30, 1999 compared with the same periods in 1998. The increase for the third quarter was primarily due to continued solid growth in the small commercial businesses, with Select Customer up 15% and Commercial Affinity up 22%. Partially offsetting this growth were decreases in mid-market standard commercial business (Key Accounts) of 11% and Major/National Accounts of 2%. For the nine month period, increases in Select Customer of 13% and Commercial Affinity of 22% were more than offset by decreases in Key Accounts of 11%, Major/National Accounts of 15% and Other of 7%. Enhanced product offerings, targeted geographic strategies and partnerships with other entities continued to be the primary drivers of the growth businesses. The declines in middle and large commercial markets continued to be attributable to the highly competitive marketplace and reaction to price increases by The Hartford. Underwriting results improved $19, or 1.9 combined ratio points, for the third quarter and $80, or 2.6 combined ratio points, for the nine months ended September 30, 1999 compared with the same prior year periods. The improvement in underwriting results for both periods was primarily the result of favorable loss and loss expense due to continued underwriting discipline across the Commercial segment. Partially offsetting the improvement for the quarter were increased catastrophe related losses of $22, or 2.6 combined ratio points. For the nine month period, loss reserves established in the first quarter of 1998 as part of the sale of IRI also contributed to the increase. PERSONAL <TABLE> <CAPTION> Operating Summary Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 - --------------------------------------------------------------------------- -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> Written premiums $ 651 $ 578 $ 1,846 $ 1,658 Underwriting results $ (14) $ 32 $ 31 $ 78 Combined ratio 102.5 94.4 99.9 95.3 ==================================================================================================================================== </TABLE> Personal written premiums increased $73, or 13%, for the third quarter and $188, or 11%, for the nine months ended September 30, 1999 over the comparable prior year periods. Written premiums for Agency, including Omni and Affinity, increased $57 for the quarter and $139 for the nine month period, contributing 10% and 8%, respectively, to the segment's growth. - 12 -
In the third quarter of 1999, non-standard automobile coverage through Omni was introduced in three additional states and is now available in 27 states, up from 13 at the time of Omni's acquisition in 1998. Also, AARP written premiums increased $16, or 5%, for the quarter and $49, or 5%, for the nine month period contributing 3% to the segments growth in both periods. Underwriting results decreased $46, or 144%, for the third quarter and $47, or 60%, for the nine months ended September 30, 1999 with a corresponding 8.1 point increase in the combined ratio for the quarter and a 4.6 point increase for the nine month period compared with 1998. The decrease in underwriting results and related increase in the combined ratio was principally driven by expenses, up 4.2 points for the quarter and 2.9 points for the nine months ended September 30, 1999 compared to 1998 and catastrophe experience which contributed 3.0 points to the increase in combined ratio for the quarter and 0.1 points to the increase for the nine month period compared to 1998. Underwriting expenses increased due to investments in alternative distribution channels and growth initiatives, in addition to increased commission expense related to the premium growth from independent agents. Loss adjustment expense increased due to investments in claim initiatives to lower overall loss costs. REINSURANCE <TABLE> <CAPTION> Operating Summary Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 - --------------------------------------------------------------------------- -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> Written premiums $ 169 $ 212 $ 561 $ 537 Underwriting results $ (35) $ (18) $ (44) $ (30) Combined ratio 119.8 108.3 108.1 106.6 ==================================================================================================================================== </TABLE> Reinsurance written premiums decreased $43, or 20%, for the third quarter and increased $24, or 4%, for the nine months ended September 30, 1999 compared with the same prior year periods. The decrease was primarily due to a single finite-risk account in excess of $70 written in the third quarter of 1998. Excluding this transaction, premiums increased $27, or 19%, for the third quarter and $94, or 20%, for the nine months ended September 30, 1999 compared with the same periods in 1998. This increase was primarily due to the first quarter 1999 acquisition of renewal rights to the ongoing reinsurance business of Vesta Fire Insurance Corp., a subsidiary of Vesta Insurance Group Inc. Underwriting results decreased $17, or 94%, for the third quarter and $14, or 47%, for the nine months ended September 30, 1999 with a corresponding 11.5 point increase in the combined ratio for the quarter and a 1.5 point increase for the nine month period compared with 1998. The decrease in underwriting results for both periods was due primarily to unfavorable development in prior underwriting year losses concentrated in a few classes of business. The increase in the combined ratio for both periods reflected the unfavorable development in addition to an increase in commissions due to a shift to pro rata business as a result of the Vesta acquisition. LIFE <TABLE> <CAPTION> Operating Summary [1] Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> Total revenues $ 1,420 $ 1,287 $ 4,112 $ 3,846 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 119 $ 100 $ 339 $ 278 Less: Net realized capital gains, after-tax -- -- -- -- - ------------------------------------------------------------------------------------------------------------------------------------ Core earnings $ 119 $ 100 $ 339 $ 278 ==================================================================================================================================== <FN> [1] Life results are presented before the effect of the approximately 19% minority interest in HLI, which is reflected in Other Operations. </FN> </TABLE> Revenues in the Life segment increased $133, or 10%, and $266, or 7%, for the third quarter and nine months ended September 30, 1999, as compared to the third quarter and nine months ended September 30, 1998, respectively. This increase was primarily attributable to the Investment Products operation where revenues increased $70, or 16%, and $162, or 12%, respectively, over the comparable 1998 periods due to a substantial increase in the aggregate fees earned as a result of increased assets under management. Investment Products' average assets under management increased $18.5 billion, or 25%, to $92.7 billion as of September 30, 1999 from $74.2 billion as of September 30, 1998 due to strong net cash flow (new sales less surrenders) related primarily to the individual variable annuity and mutual fund operations, as well as equity market appreciation. In addition, revenues in the Employee Benefits operation, excluding buyouts, increased $52, or 12%, and $122, or 9%, for the third quarter and nine months ended September 30, 1999, as compared to the third quarter and nine months ended September 30, 1998, respectively, as a result of strong sales and persistency. However, Corporate Owned Life Insurance ("COLI") revenues for the nine months ended September 30, 1999 compared to the equivalent 1998 period decreased $32, or 5%, primarily due to revenues associated with significant sales in the first quarter of 1998. The increase in core earnings of $19, or 19%, and $61, or 22%, for the third quarter and nine months ended September 30, 1999, - 13 -
respectively, compared to the equivalent prior year periods was primarily related to growth in Investment Products, as well as increased earnings in Individual Life, Employee Benefits and COLI. Investment Products' core earnings increased $16, or 24%, and $48, or 25%, for the third quarter and nine months ended September 30, 1999, respectively, compared to the equivalent prior year periods, as a result of higher fee income earned on increased assets under management due to strong net cash flow and equity market appreciation. Individual Life's core earnings increased $2, or 12%, and $6, or 13%, respectively, compared to the prior year periods, primarily due to continued growth in variable life account values. Employee Benefits' core earnings increased $2, or 11%, and $6, or 12%, respectively, compared to the prior year periods as a result of increased premium revenues, excluding buyouts, and increased after-tax net investment income. Core earnings for COLI increased $2, or 33%, for the third quarter and $4, or 22%, for the nine months ended September 30, 1999 over the comparable prior year periods due to increased fee income associated with growth in variable COLI account values and earnings associated with MBL business. (For a discussion of the MBL Recapture, see "Acquisitions" under the Capital Resources and Liquidity section in The Hartford's 1998 Form 10-K Annual Report.) INTERNATIONAL <TABLE> <CAPTION> Operating Summary Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> Total revenues $ 114 $ 465 $ 382 $ 1,389 - ------------------------------------------------------------------------------------------------------------------------------------ Net income $ 3 $ 18 $ 26 $ 78 Less: Net realized capital gains (losses), after-tax (1) 9 10 43 - ------------------------------------------------------------------------------------------------------------------------------------ Core earnings $ 4 $ 9 $ 16 $ 35 ==================================================================================================================================== </TABLE> International segment operating results for 1998 included operating activity from London & Edinburgh, which was sold on November 16, 1998. Excluding London & Edinburgh, International revenues decreased $9, or 7%, for the third quarter and $16, or 4%, for the nine months ended September 30, 1999 over the comparable periods in 1998. The decrease was primarily due to a decline in net realized capital gains of $11, or 137%, for the third quarter and $38, or 73%, for the nine months ended September 30, 1999 compared with the prior year periods. (For an analysis of net realized capital gains (losses), see the Investments section.) Also contributing to the decrease for the third quarter was a negative foreign exchange impact on revenues of $6, primarily due to weakness in the Dutch guilder and Spanish peseta versus the prior year. Partially offsetting the decrease in both periods was an increase in earned premiums of $5, or 5%, for the third quarter and $24, or 8%, for the nine months ended September 30, 1999 due to continued growth in automobile business at Hartford Seguros (formerly Ercos) in Spain and, for the nine month period, growth in health and life business at Zwolsche in the Netherlands. Foreign exchange impacts on total revenues were not material for the nine months ended September 30, 1999 compared to the same period in 1998. Excluding London & Edinburgh, core earnings for the third quarter ended September 30, 1999 decreased $3, or 43%, compared to the same period of 1998, primarily due to a higher loss ratio in Spain, higher non-underwriting expenses and costs associated with implementing the Euro currency requirements in the Netherlands. For the nine month period ended September 30, 1999, core earnings, excluding London & Edinburgh, decreased $5, or 24%, over the comparable 1998 period. The decrease was due to higher loss ratios in automobile in each operating location and lower net investment income in the European operations as a result of a decrease in interest rates. Foreign exchange impacts on core earnings for the third quarter and nine months ended September 30, 1999 were not material when compared to the same periods in 1998. OTHER OPERATIONS <TABLE> <CAPTION> Operating Summary Third Quarter Ended Nine Months Ended September 30, September 30, -------------- -------------- -------------- ----------- 1999 1998 1999 1998 -------------- -------------- -------------- ----------- <S> <C> <C> <C> <C> Total revenues $ 36 $ 40 $ 109 $ 124 - ------------------------------------------------------------------------------------------------------------------------------------ Net income (loss) $ (22) $ (16) $ (61) $ (47) Less: Net realized capital gains (losses), after-tax -- 1 (1) 2 - ------------------------------------------------------------------------------------------------------------------------------------ Core earnings $ (22) $ (17) $ (60) $ (49) ==================================================================================================================================== </TABLE> Other Operations consist of property and casualty operations of The Hartford which have discontinued writing new business as well as the effect of an approximate 19% minority interest in HLI's operating results. Revenues decreased $4, or 10%, for the third quarter and $15, or 12%, for the nine months ended September 30, 1999 compared to the same prior year periods. The decrease in revenues is consistent with the runoff nature of these operations. Excluding minority interest, year to date core earnings were flat compared to earnings from the prior year. - 14 -
ENVIRONMENTAL AND ASBESTOS CLAIMS The Hartford continues to receive claims asserting damages from environmental exposures and for injuries from asbestos and asbestos-related products, both of which affect North American Property & Casualty along with the International and Other Operations segments. Environmental claims relate primarily to pollution and related clean-up costs. With regard to these claims, uncertainty exists which impacts the ability of insurers and reinsurers to estimate the ultimate reserves for unpaid losses and related settlement expenses. The Hartford finds that conventional reserving techniques cannot estimate the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. For the majority of environmental claims and many types of asbestos claims, unlike any other type of contractual claim, there is almost no agreement or consistent precedent to determine what, if any, coverage exists or which, if any, policy years and insurers or reinsurers may be liable. Further uncertainty arises with environmental claims since claims are often made under policies, the existence of which may be in dispute, the terms of which may have changed over many years, which may or may not provide for legal defense costs, and which may or may not contain environmental exclusion clauses that may be absolute or allow for fortuitous events. Courts in different jurisdictions have reached disparate conclusions on similar issues and in certain situations have broadened the interpretation of policy coverage and liability issues. In light of the extensive claim settlement process for environmental and asbestos claims, involving comprehensive fact gathering, subject matter expertise and intensive litigation, The Hartford established an environmental claims facility in 1992 to defend itself aggressively against unwarranted claims and to minimize costs. Within the property and casualty insurance industry, progress has been made in developing sophisticated, alternative methodologies utilizing company experience and supplemental 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 1998 Form 10-K Annual Report.) Reserve activity for both reported and unreported environmental and asbestos claims, including reserves for legal defense costs, for the nine months ended September 30, 1999 and the year ended December 31, 1998, was as follows (net of reinsurance): <TABLE> <CAPTION> Environmental and Asbestos Claims Claims and Claim Adjustment Expenses Nine Months Ended Year Ended September 30, 1999 December 31, 1998 ---------------------------------------- --------------------------------------- Environmental Asbestos Total Environmental Asbestos Total ---------------- ----------- ----------- ---------------- ----------- ---------- <S> <C> <C> <C> <C> <C> <C> Beginning liability $ 1,144 $ 648 $ 1,792 $ 1,312 $ 688 $ 2,000 Claims and claim adjustment expenses incurred 9 4 13 -- 6 6 Claims and claim adjustment expenses paid (142) (37) (179) (150) (64) (214) Other [1] -- -- -- (18) 18 -- -------------------------------------------------- -- -------------- - -------- -- -------- -- -------------- -- ------- -- ------- Ending liability [2] $ 1,011 $ 615 $ 1,626 $ 1,144 $ 648 $ 1,792 ================================================== == ============== = ======== == ======== == ============== == ======= == ======= <FN> [1] Other represents reclassifications of beginning reserves between environmental and asbestos for December 31, 1998. [2] The ending liabilities are net of reinsurance on reported and unreported claims of $1,519 and $1,711 for September 30, 1999 and December 31, 1998, respectively. Gross of reinsurance as of September 30, 1999 and December 31, 1998, reserves for environmental and asbestos were $1,635 and $1,510 and $1,850 and $1,653, respectively. </FN> </TABLE> The Hartford believes that the environmental and asbestos reserves recorded at September 30, 1999 are a reasonable estimate of the ultimate remaining liability for these claims based upon known facts, current assumptions and The Hartford's methodologies. Future social, economic, legal or legislative developments may alter the original intent of policies and the scope of coverage. The Hartford will continue to evaluate new developments and methodologies as they become available for use in supplementing the Company's ongoing analysis and review of its environmental and asbestos exposures. These future reviews may result in a change in reserves, impacting The Hartford's results of operations in the period in which the reserve estimates are changed. While the effects of future changes in facts, legal and other issues could have a material effect on future results of operations, The Hartford does not expect such changes would have a material effect on its liquidity or financial condition. - 15 -
INVESTMENTS An important element of the financial results of The Hartford is return on invested assets. The Hartford's investment activities are divided between North American Property & Casualty, Life, International and Other Operations. The investment portfolios are managed based on the underlying characteristics and nature of each operation's respective liabilities and managed within established risk parameters. (For a further discussion on The Hartford's approach to managing risks, see the Capital Markets Risk Management section.) Please refer to The Hartford's 1998 Form 10-K Annual Report for a description of the Company's investment objectives and policies. NORTH AMERICAN PROPERTY & CASUALTY Total invested assets were $14.6 billion at September 30, 1999 and were comprised of fixed maturities of $13.6 billion and other investments of $963, primarily equity securities. Fixed Maturities by Type - ----------------------------------------------------------------- September 30, 1999 December 31, 1998 - ----------------------------------------------------------------- Type Fair Value Percent Fair Value Percent - ----------------------------------------------------------------- Municipal - tax-exempt $ 8,249 60.6% $ 8,804 61.5% Corporate 2,043 15.0% 2,119 14.8% Commercial MBS 857 6.3% 834 5.8% Gov't/Gov't agencies - For. 596 4.4% 501 3.5% MBS - agency 493 3.6% 348 2.4% ABS 445 3.3% 500 3.5% CMO 279 2.0% 415 2.9% Gov't/Gov't agencies - U.S. 37 0.3% 46 0.3% Municipal - taxable 18 0.1% 24 0.2% Short-term 495 3.6% 663 4.6% Redeemable preferred stock 104 0.8% 65 0.5% - ----------------------------------------------------------------- Total fixed maturities $ 13,616 100.0% $ 14,319 100.0% - ----------------------------------------------------------------- The taxable equivalent duration of the September 30, 1999 fixed maturity portfolio was 5.2 years compared to 4.8 years at December 31, 1998. The change in taxable equivalent duration was primarily due to the purchase of longer duration securities and an increase in interest rates. Duration is defined as the market price sensitivity of the portfolio to parallel shifts in the yield curve. Investment Results The table below summarizes North American Property & Casualty's results. Third Quarter Nine Months Ended Ended September 30, September 30, ------------------- ------------------- 1999 1998 1999 1998 - ------------------------- --------- ---------- --------- --------- Net investment income, before-tax $ 209 $ 210 $ 636 $ 618 Net investment income, after-tax [1] $ 169 $ 166 $ 512 $ 492 Yield on average invested assets, 5.8% 5.9% 5.9% 5.8% before-tax [2] Yield on average invested assets, 4.7% 4.7% 4.7% 4.6% after-tax [1] [2] Net realized capital gains, before-tax $ -- $ -- $ 22 $ 121 - ------------------------------------------------------------------ [1] Due to the significant holdings in tax-exempt investments, after-tax net investment income and after-tax yield are also included. [2] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). For the third quarter ended September 30, 1999, before-tax income was relatively flat compared to the same period in 1998, while after-tax net investment income increased 2% to $169. For the nine months ended September 30, 1999, before-tax income increased 3% to $636 while after-tax income increased 4% to $512. These increases were primarily due to an increase in income from limited partnership investments, as well as the reallocation of assets in the fourth quarter of 1998 from equities to fixed maturities, which also positively impacted both before and after-tax yields. After-tax net investment income for the quarter and nine months was also favorably impacted by the fourth quarter 1998 reallocation of assets from taxable bonds to tax-exempt bonds. For the nine months ended September 30, 1999, net realized capital gains included a $9, after-tax, impairment of asset backed securities securitized and serviced by Commercial Financial Services Inc. ("CFS"). The CFS securities were sold in August of 1999 at a nominal gain. (For additional information on CFS, see Note 3 of Notes to Consolidated Financial Statements under "Investments".) Net realized capital gains for the nine month period decreased from the respective prior year period, primarily as a result of opportunities taken in 1998 as a result of a strong equity market. LIFE Invested assets, excluding separate accounts, totaled $21.6 billion at September 30, 1999 and were comprised of $16.8 billion of fixed maturities, $4.3 billion of policy loans, and other investments of $542. Policy loans are secured by the cash value of the life policy and do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. Policy loans decreased by $2.4 billion from December 31, 1998, as a result of the declining block of leveraged COLI business. Fixed Maturities by Type - ----------------------------------------------------------------- September 30, 1999 December 31, 1998 - ----------------------------------------------------------------- Type Fair Value Percent Fair Value Percent - ----------------------------------------------------------------- Corporate $ 8,000 47.6% $ 7,898 44.6% ABS 2,514 15.0% 2,465 13.9% Commercial MBS 2,048 12.2% 2,036 11.5% Municipal - tax-exempt 1,027 6.1% 916 5.2% MBS - agency 876 5.2% 503 2.9% CMO 645 3.8% 831 4.7% Gov't/Gov't agencies - For. 401 2.4% 530 3.0% Gov't/Gov't agencies - U.S. 241 1.4% 166 0.9% Municipal - taxable 166 1.0% 223 1.3% Short-term 837 5.0% 2,119 12.0% Redeemable preferred stock 47 0.3% 5 -- - ----------------------------------------------------------------- Total fixed maturities $ 16,802 100.0% $ 17,692 100.0% - ----------------------------------------------------------------- Short-term securities declined primarily as a result of the funding of scheduled liability maturities and reallocation into other asset sectors. INVESTMENT RESULTS The table below summarizes the Life segment's results. - 16 -
Third Quarter Nine Months Ended Ended September 30, September 30, ------------------- ------------------- (before-tax) 1999 1998 1999 1998 - ------------------------- --------- ---------- --------- --------- Net investment income - Excluding policy loans $ 291 $ 294 $ 865 $ 876 Policy loan income 90 99 298 309 --------------------------------------- Net investment income - total 381 393 1,163 1,185 Yield on average invested assets [1] 6.9% 7.5% 6.7% 7.6% Net realized capital $ (5) $ -- $ (5) $ -- (losses) - ------------------------------------------------------------------ [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). Net investment income for the third quarter and nine months ended September 30, 1999 decreased 3% and 2%, respectively, compared to the equivalent prior year periods. Yield on average invested assets declined 0.6% and 0.9% for the third quarter and nine months ended September 30, 1999, respectively. This decline was the result of a decrease in policy loan weighted-average interest rates, which declined to 7.9% as of September 30, 1999 from 11.0% as of September 30, 1998, combined with an increase in average policy loan balances. For the nine months ended September 30, 1999, net realized capital gains on the sale of equity securities and fixed maturities partially offset a $32, after-tax, impairment of asset-backed securities securitized and serviced by CFS. The CFS securities were sold in August of 1999 at a nominal gain. (For additional information on CFS, see Note 3 of Notes to the Consolidated Financial Statements under "Investments".) INTERNATIONAL Invested assets, excluding separate accounts, were $1.1 billion at September 30, 1999 and were comprised of fixed maturities of $738 and other investments of $345, primarily equity securities. Fixed Maturities by Type - ------------------------------------------------------------------ September 30, 1999 December 31, 1998 - ----------------------------------------------------------------- Type Fair Value Percent Fair Value Percent - ----------------------------------------------------------------- Gov't/Gov't agencies - For. $ 503 68.1% $ 611 72.4% Corporate 146 19.8% 109 12.9% Short-term 89 12.1% 124 14.7% - ----------------------------------------------------------------- Total fixed maturities $ 738 100.0% $ 844 100.0% - ----------------------------------------------------------------- INVESTMENT RESULTS The table below summarizes the International segment's results. Third Quarter Nine Months Ended Ended September 30, September 30, ------------------- ------------------- (before-tax) 1999 1998 1999 1998 - ------------------------- --------- ---------- --------- --------- Net investment income $ 15 $ 48 $ 49 $ 137 Yield on average invested assets [1] 5.9% 7.0% 6.1% 6.8% Net realized capital gains (losses) $ (3) $ 14 $ 14 $ 65 - ------------------------------------------------------------------ [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). For the third quarter and nine months ended September 30, 1999, before-tax net investment income decreased from the respective prior year periods, primarily due to the effects of the London & Edinburgh sale in November 1998. Excluding the London & Edinburgh results, investment income remained relatively flat to the prior year periods. Yield on average invested assets for the third quarter and nine months ended September 30, 1999, decreased 1.1% and 0.7%, respectively, primarily due to lower short-term interest rates in certain international markets. Net realized capital gains (losses) for the third quarter and nine months ended September 30, 1999 decreased from the respective prior year periods, primarily due to opportunities taken in 1998 as a result of a favorable equity market in the Netherlands. OTHER OPERATIONS Invested assets were $2.1 billion at September 30, 1999 and were substantially comprised of fixed maturities. Fixed Maturities by Type - ------------------------------------------------------------------ September 30, 1999 December 31, 1998 - ----------------------------------------------------------------- Type Fair Value Percent Fair Value Percent - ----------------------------------------------------------------- Corporate $ 1,379 64.9% $ 1,603 64.7% Commercial MBS 190 8.9% 145 5.9% ABS 158 7.4% 224 9.0% Gov't/Gov't agencies - U.S. 68 3.2% 82 3.3% Gov't/Gov't agencies - For. 63 3.0% 50 2.0% Municipal - taxable 38 1.8% 40 1.6% MBS - agency 33 1.5% 41 1.7% CMO 12 0.6% 20 0.8% Short-term 177 8.3% 262 10.6% Redeemable preferred stock 8 0.4% 9 0.4% - ----------------------------------------------------------------- Total fixed maturities $ 2,126 100.0% $ 2,476 100.0% - ----------------------------------------------------------------- INVESTMENT RESULTS The table below summarizes the Other Operations segment's results. Third Quarter Nine Months Ended Ended September 30, September 30, ------------------- ------------------- (before-tax) 1999 1998 1999 1998 - ------------------------- --------- ---------- --------- --------- Net investment income $ 35 $ 40 $ 109 $ 120 Yield on average invested assets [1] 6.4% 6.7% 6.4% 6.6% Net realized capital gains (losses) $ -- $ 1 $ (1) $ 3 - ------------------------------------------------------------------ [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). Net investment income for the quarter ended September 30, 1999 decreased 12% to $35. For the nine months ended September 30, 1999, net investment income decreased 9% to $109. The decreases in net investment income in both the third quarter and nine month periods were primarily due to the reduction in invested assets as a result of the funding of runoff liabilities. In addition, yields for the third quarter and nine months ended September 30, 1999 decreased 0.3% and 0.2%, respectively, compared to the equivalent prior year periods. - 17 -
CAPITAL MARKETS Risk Management The Hartford has a disciplined approach to managing risks associated with its capital markets and asset/liability management activities. Investment portfolio management is organized to focus investment management expertise on specific classes of investments while asset/liability management is the responsibility of separate and distinct risk management units supporting the property and casualty and life operations. Derivative instruments are utilized in accordance with established Company policy and are monitored internally and reviewed by senior management. The Company is exposed to two primary sources of investment and asset/liability management risk: credit risk, relating to the uncertainty associated with the ability of an obligor or counterparty to make timely payments of principal and/or interest, and market risk, relating to the market price and/or cash flow variability associated with changes in interest rates, securities prices, market indices, yield curves or currency exchange rates. The Company does not hold any financial instruments purchased for trading purposes. Please refer to The Hartford's 1998 Form 10-K Annual Report for a description of the Company's objectives, policies and strategies. CREDIT RISK The Company invests primarily in securities rated investment grade and has established exposure limits, diversification standards and review procedures for all credit risks including borrower, issuer or counterparty. Creditworthiness of specific obligors is determined by an internal credit assessment and ratings assigned by nationally recognized ratings agencies. Obligor, asset sector and industry concentrations are subject to established limits and 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 September 30, 1999, over 95% of the fixed maturity portfolio was invested in securities rated investment grade. Fixed Maturities by Credit Quality - ----------------------------------------------------------------- September 30, 1999 December 31, 1998 - ----------------------------------------------------------------- Credit Quality Fair Value Percent Fair Value Percent - ----------------------------------------------------------------- U.S. Gov't/Gov't agencies $ 761 4.7% $ 805 4.7% AAA 6,258 38.9% 6,570 38.2% AA 3,456 21.5% 3,209 18.7% A 2,791 17.4% 3,409 19.8% BBB 1,423 8.8% 1,508 8.8% BB & below 674 4.2% 682 3.9% Short-term 716 4.5% 1,016 5.9% - ----------------------------------------------------------------- Total fixed maturities $ 16,079 100.0% $ 17,199 100.0% - ----------------------------------------------------------------- LIFE OPERATIONS As of September 30, 1999, over 97% of the fixed maturity portfolio was invested in securities rated investment grade. Fixed Maturities by Credit Quality - ----------------------------------------------------------------- September 30, 1999 December 31, 1998 - ------------------------------------------------------------------ Credit Quality Fair Value Percent Fair Value Percent - ----------------------------------------------------------------- U.S. Gov't/Gov't agencies $ 2,595 9.9% $ 2,596 9.3% AAA 3,943 15.0% 3,907 14.0% AA 3,313 12.6% 2,716 9.7% A 8,546 32.5% 8,878 31.8% BBB 6,118 23.3% 7,019 25.2% BB & below 579 2.2% 492 1.8% Short-term 1,180 4.5% 2,298 8.2% - ----------------------------------------------------------------- Total fixed maturities $ 26,274 100.0% $ 27,906 100.0% - ----------------------------------------------------------------- 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, 1998. 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 $10.0 billion and $11.3 billion at September 30, 1999 and December 31, 1998, respectively. For a further discussion of market risk exposure, including derivative instruments, please refer to The Hartford's 1998 Form 10-K Annual Report. - 18 -
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: <TABLE> <CAPTION> September 30, 1999 December 31, 1998 - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Short-term debt $ 31 $ 31 Long-term debt 1,548 1,548 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures (QUIPS and TruPS) 1,250 1,250 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEBT $ 2,829 $ 2,829 ----------------------------------------------------------------------------------------------------------------------------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ 470 $ 414 ----------------------------------------------------------------------------------------------------------------------------- Equity excluding unrealized gain (loss) on securities, net of tax $ 5,824 $ 5,612 Unrealized gain (loss) on securities, net of tax (51) 811 - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 5,773 $ 6,423 ----------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION [2] $ 9,123 $ 8,855 ----------------------------------------------------------------------------------------------------------------------------- Debt to equity [2] [3] 49% 50% Debt to capitalization [2] [3] 31% 32% ==================================================================================================================================== <FN> [1] Excludes unrealized gain (loss) on securities, net of tax, of $(37) and $51 for September 30, 1999 and December 31, 1998, respectively. [2] Excludes unrealized gain (loss) on securities, net of tax. [3] Excluding QUIPS and TruPS, the debt to equity ratios were 27% and 28% as of September 30, 1999 and December 31, 1998, respectively, and the debt to capitalization ratios were 17% and 18%, respectively. </FN> </TABLE> CAPITALIZATION The Hartford's total capitalization, excluding unrealized gain (loss) on securities, net of tax, increased by $268 as of September 30, 1999 compared to December 31, 1998. This change primarily was the result of earnings, partially offset by dividends declared on The Hartford's common stock and the net effect of treasury stock acquired. STOCKHOLDERS' EQUITY Dividends - On May 20, 1999, The Hartford's Board of Directors approved a 5% increase in the quarterly dividend to $0.23 per share, payable on July 1, 1999 to shareholders of record as of June 1, 1999. On July 15, 1999, The Hartford declared a dividend on its common stock of $0.23 per share, payable October 1, 1999 to shareholders of record as of September 1, 1999. An additional 4% increase in the quarterly dividend to $0.24 per share, payable on January 3, 2000 to shareholders of record as of December 1, 1999, was approved by The Hartford's Board of Directors on October 21, 1999. Treasury Stock - During the nine months ended September 30, 1999, The Hartford repurchased 5.7 million shares of its common stock in the open market at a total cost of $300 under the Company's $1.0 billion repurchase program authorized in December 1997. Since the inception of the repurchase program, The Hartford has repurchased 16.5 million shares at a total cost of $847. Some of these repurchased shares have been reissued pursuant to certain stock-based benefit plans. In October 1999, The Hartford's Board of Directors authorized the repurchase of up to $1 billion of the Company's outstanding common stock. This repurchase authorization will be initiated when the prior repurchase authorization granted in December 1997 is complete, and will cover a three-year period. Unrealized Gain (Loss) - Unrealized gain (loss) on securities, net of tax, decreased by $862 as of September 30, 1999 compared to December 31, 1998. The change resulted primarily from the impact of increased interest rates on the fixed maturity portfolio. RATINGS On February 8, 1999, A.M. Best assigned first time ratings of a+ ("strong") to The Hartford Financial Services Group, Inc.'s senior debt, Hartford Capital I and II quarterly income preferred securities, HLI's senior debt and HLI's Capital I trust preferred securities. CASH FLOWS Nine Months Ended September 30, -------------------------- 1999 1998 - ------------------------------------------------------------------ Cash provided by operating activities $ 435 $ 758 Cash provided by (used for) investing activities $ 2,623 $ (394) Cash used for financing activities $ (3,042) $ (371) Cash - end of period $ 135 $ 135 - ------------------------------------------------------------------ The decrease in cash provided by operating activities was primarily the result of higher claim payments, partially offset by a decrease in income taxes paid. The change in both investing and financing cash flow was primarily the result of an increase in disbursements for investment type contracts related to the leveraged COLI block of business. Operating cash flows in both periods have been more than adequate to meet liquidity requirements. - 19 -
REGULATORY INITIATIVES AND CONTINGENCIES NAIC Proposals The NAIC developed several model laws and regulations, including a Model Investment Law and amendments to the Model Holding Company System Regulatory Act (the "Holding Act Amendments"). The Model Investment Law defines the investments, which are permissible for property and casualty and life insurers to hold, and the Holding Act Amendments address the types of activities in which subsidiaries and affiliates may engage. The NAIC adopted these models in 1997 and 1996, but the laws have not been enacted for insurance companies domiciled in the State of Connecticut, such as Hartford Fire Insurance Company. Even if enacted in Connecticut or other states in which The Hartford's subsidiaries are domiciled, it is expected that these laws will neither significantly change The Hartford's investment strategies nor have any material adverse effect on The Hartford's liquidity or financial position. The NAIC adopted the Codification of Statutory Accounting Principles ("Codification") in September 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 Codification and the Company will make the necessary changes required for implementation. The Company has not yet determined the impact that Codification will have on the statutory financial statements of The Hartford. DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS The Company distributes its annuity, life and certain property and casualty insurance products through a variety of distribution channels, including broker-dealers, banks, wholesalers, its own internal sales force and other third party marketing organizations. The Company periodically negotiates provisions and renewals of these relationships and there can be no assurance that such terms will remain acceptable to the Company or such service providers. An interruption in the Company's continuing relationship with certain of these third parties could materially affect the Company's ability to market its products. During the first quarter of 1999, the Company modified its existing, exclusive contract with one such third party, Putnam Mutual Funds Corp. ("Putnam") to eliminate the exclusivity provision which will allow both parties to pursue new market opportunities. Putnam is contractually obligated to support and service the related annuity in force block of business and to market, support and service new business. However, there can be no assurance that this contract modification will not adversely impact the Company's ability to market Putnam related products. YEAR 2000 In General The Year 2000 issue relates to the ability or inability of computer hardware, software and other information technology ("IT") systems, as well as non-IT systems, such as equipment and machinery with imbedded chips and microprocessors, to properly process information and data containing or related to dates beginning with the year 2000 and beyond. The Year 2000 issue exists because, historically, many IT and non-IT systems that are in use today were developed years ago when a year was identified using a two-digit date field rather than a four-digit date field. As information and data containing or related to the century date are introduced to date sensitive systems, these systems may recognize the year 2000 as "1900", or not at all, which may result in systems processing information incorrectly. This, in turn, may significantly and adversely affect the integrity and reliability of information databases of IT systems, may cause the malfunctioning of certain non-IT systems, and may result in a wide variety of adverse consequences to a company. In addition, Year 2000 problems that occur with third parties with which a company does business, such as suppliers, computer vendors, distributors and others, may also adversely affect any given company. The integrity and reliability of The Hartford's IT systems, as well as the reliability of its non-IT systems, are integral aspects of The Hartford's business. The Hartford issues insurance policies, annuities, mutual funds and other financial products to individual and business customers, nearly all of which contain date sensitive data, such as policy expiration dates, birth dates and premium payment dates. In addition, various IT systems support communications and other systems that integrate The Hartford's various business segments and field offices, including The Hartford's foreign operations. The Hartford also has business relationships with numerous third parties that affect virtually all aspects of The Hartford's business, including, without limitation, suppliers, computer hardware and software vendors, insurance agents and brokers, third party administrators, securities broker-dealers, banks, and other distributors and servicers of financial products, many of which provide date sensitive data to The Hartford, and whose operations are important to The Hartford's business. Internal Year 2000 Efforts and Timetable Beginning in 1990, The Hartford began working on making its IT systems Year 2000 ready, either through installing new programs or replacing systems. Since January 1998, The Hartford's Year 2000 efforts have focused on the remaining Year 2000 issues related to IT and non-IT systems in all of The Hartford's business segments. These Year 2000 efforts include the following five main initiatives: (1) identifying and assessing Year 2000 issues; (2) taking actions to remediate IT and non-IT systems so that they are Year 2000 ready; (3) testing IT and non-IT systems for Year 2000 readiness; (4) deploying such remediated and tested systems back into their respective production environments; and (5) conducting internal and external integrated testing of such systems. As of December 31, 1998, The Hartford substantially completed initiatives (1) through (4) of its internal Year 2000 efforts. The Hartford has completed internal integrated testing related to initiative (5) and will continue external integrated testing into the fourth quarter of 1999. Third Party Year 2000 Efforts and Timetable The Hartford's Year 2000 efforts include assessing the potential impact on The Hartford of third parties' Year 2000 readiness. The - 20 -
Hartford's third party Year 2000 efforts include the following three main initiatives: (1) identifying third parties which have significant business relationships with The Hartford, including, without limitation, suppliers, computer hardware and software vendors, insurance agents and brokers, third party administrators, securities broker-dealers, banks, and other distributors and servicers of financial products, and inquiring of such third parties regarding their Year 2000 readiness; (2) evaluating such third parties' responses to The Hartford's inquiries; and (3) based on the evaluation of third party responses (or a third party's failure to respond) and the significance of the business relationship, conducting additional activities with respect to third parties as determined to be necessary in each case. These activities may include conducting additional inquiries, more in-depth evaluations of Year 2000 readiness and plans, and integrated IT systems testing. The Hartford has substantially completed third party initiatives (1) and (2). The Hartford is currently conducting the additional activities described in initiative (3) and management currently anticipates that it will continue to do so through the end of 1999. However, notwithstanding these third party Year 2000 efforts, The Hartford does not have control over these third parties and, as a result, The Hartford cannot currently determine to what extent future operating results may be adversely affected by the failure of these third parties to adequately address their Year 2000 issues. Year 2000 Costs The after-tax costs of The Hartford's Year 2000 efforts that were incurred prior to the year ended December 31, 1998, were not material to The Hartford's financial condition or results of operations. For the year ended December 31,1998, the after-tax costs were approximately $23. Management currently estimates that after-tax costs related to the Year 2000 program to be incurred in 1999 will be approximately $18 to $20, of which approximately $13 were incurred for the nine months ended September 30, 1999. These costs are being expensed as incurred. Risks and Contingency Plans If significant Year 2000 problems arise, including problems arising with third parties, failures of IT and non-IT systems could occur, which in turn could result in substantial interruptions in The Hartford's business. In addition, The Hartford's investing activities are an important aspect of its business and The Hartford may be exposed to the risk that issuers of investments held by it will be adversely impacted by Year 2000 issues. Given the uncertain nature of Year 2000 problems that may arise, especially those related to the readiness of third parties discussed above, management cannot determine at this time whether the consequences of Year 2000 related problems that could arise will have a material impact on The Hartford's financial condition or results of operations. The Hartford has substantially completed the development of certain contingency plans so that if, despite its Year 2000 efforts, Year 2000 problems ultimately arise, the impact of such problems may be avoided or minimized. The contingency planning process involved identifying reasonably likely business disruption scenarios that, if they were to occur, could create significant problems in the critical functions of each business segment. Each business segment has developed plans to respond to such problems so that critical business functions may continue to operate with minimal disruption. Contingency planning also included assessing the dependency of The Hartford's critical business functions on critical third parties and their Year 2000 readiness. These plans were reviewed and simulated on an integrated basis, where appropriate, and will continue to be evaluated for the remainder of the year. Furthermore, in many contexts, Year 2000 issues are dynamic, and ongoing assessments of business functions, vulnerabilities and risks must be made. As such, new contingency plans may be needed in the future and/or existing plans may need to be modified as circumstances warrant. Rollover and Event Management A Corporate Event Management Team has been established to monitor the corporate-wide rollover from 1999 to 2000. In addition, each business unit has developed detailed rollover plans that will be managed and coordinated by its individual Business Unit Event Management Centers. Insurance Claims As an insurer, The Hartford expects to incur claim and claim adjustment expenses, including attorneys' fees and other legal expenses, resulting from claims from insureds who may incur losses as a result of Year 2000 problems. 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 will 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 claim and claim adjustment expenses will 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. Item 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK The information contained in the Capital Markets Risk Management section of Management's Discussion and Analysis of Financial Condition and Results of Operations is incorporated herein by reference. - 21 -
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, after consideration of provisions made for potential losses and costs of defense, will not materially affect the consolidated financial condition, results of operations or cash flows of The Hartford. The Hartford is involved in claims litigation arising in the ordinary course of business and accounts for such activity through the establishment of policy reserves. As further discussed in the MD&A under the Environmental and Asbestos Claims section, The Hartford continues to receive environmental and asbestos claims which involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels, reserving methodologies and reinsurance coverages. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibits Index. (b) Reports on Form 8-K - None. - 22 -
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Hartford Financial Services Group, Inc. (Registrant) /s/ John N. Giamalis ------------------------------------ John N. Giamalis Senior Vice President and Controller November 12, 1999 - 23 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. FORM 10-Q EXHBITS INDEX Exhibit # --------- 27 Financial Data Schedule is filed herewith. - 24 -