================================================================================ SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 ---------------------- FORM 10-Q (Mark One) [X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For The Quarterly Period Ended June 30, 1997 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) ITT HARTFORD GROUP, INC. (Former name) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] As of July 31, 1997, there were outstanding 118,245,642 shares of Common Stock, $0.01 par value per share, of the registrant. ================================================================================
INDEX PART I. FINANCIAL INFORMATION - - ----------------------------- ITEM 1. FINANCIAL STATEMENTS PAGE ---- Consolidated Statements of Income - Second Quarter and Six Months Ended June 30, 1997 and 1996 3 Consolidated Balance Sheets - June 30, 1997 and December 31, 1996 4 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1997 and 1996 5 Notes to Consolidated Financial Statements 6 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 7 PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS 16 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 16 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17 Signature 18 - 2 -
PART I. FINANCIAL INFORMATION <TABLE> <CAPTION> ITEM 1. FINANCIAL STATEMENTS THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF INCOME Second Quarter Ended Six Months Ended June 30, June 30, --------------------------- -------------------------- (In millions, except for per share data) 1997 1996 1997 1996 - - ----------------------------------------------------------------- ------------- ------------- ------------ ------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> REVENUES Earned premiums $ 2,468 $ 2,403 $ 4,920 $ 5,059 Net investment income 638 601 1,267 1,204 Net realized capital gains 36 22 73 41 - - ---- ------------------------------------------------------------ ------------- ------------- ------------ ------------- TOTAL REVENUES 3,142 3,026 6,260 6,304 ------------------------------------------------------------ ------------- ------------- ------------ ------------- BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 1,928 2,042 3,886 4,083 Amortization of deferred policy acquisition costs 477 450 931 861 Other expenses 462 355 894 1,067 - - ---- ------------------------------------------------------------ ------------- ------------- ------------ ------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 2,867 2,847 5,711 6,011 ------------------------------------------------------------ ------------- ------------- ------------ ------------- OPERATING INCOME 275 179 549 293 Equity gain on HLI initial public offering 368 -- 368 -- - - ----------------------------------------------------------------- ------------- ------------- ------------ ------------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 643 179 917 293 Income tax expense 64 36 134 54 - - ----------------------------------------------------------------- ------------- ------------- ------------ ------------- INCOME BEFORE MINORITY INTEREST 579 143 783 239 Minority interest in consolidated subsidiary (5) -- (5) -- - - ----------------------------------------------------------------- ------------- ------------- ------------ ------------- NET INCOME $ 574 $ 143 $ 778 $ 239 ------------------------------------------------------------ ------------- ------------- ------------ ------------- EARNINGS PER SHARE $ 4.86 $ 1.22 $ 6.60 $ 2.04 CASH DIVIDENDS DECLARED PER SHARE $ 0.40 $ 0.40 $ 0.80 $ 0.80 WEIGHTED AVERAGE COMMON SHARES OUTSTANDING 118.0 117.2 117.8 117.2 - - ----------------------------------------------------------------- ------------- ------------- ------------ ------------- <FN> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. </FN> </TABLE> - 3 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED BALANCE SHEETS June 30, December 31, (In millions, except for share data) 1997 1996 - - ------------------------------------------------------------------------------------------ ---------------- ----------------- (Unaudited) <S> <C> <C> ASSETS Investments Fixed maturities, available for sale, at fair value (amortized cost of $33,339 and $31,178) $ 33,658 $ 31,449 Equity securities, available for sale, at fair value (cost of $1,591 and $1,581) 2,072 1,865 Policy loans, at outstanding balance 3,757 3,839 Other investments, at cost 466 486 - - ------------------------------------------------------------------------------------------ ---------------- ----------------- Total investments 39,953 37,639 Cash 135 112 Premiums receivable and agents' balances 2,009 1,797 Reinsurance recoverables 11,249 11,229 Deferred policy acquisition costs 3,816 3,535 Deferred income tax 1,392 1,480 Other assets 2,688 2,596 Separate account assets 59,875 50,452 - - ------------------------------------------------------------------------------------------ ---------------- ----------------- TOTAL ASSETS $ 121,117 $ 108,840 ------------------------------------------------------------------------------------ -- ------------- --- ------------- LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 18,552 $ 18,303 Life 4,678 4,371 Other policy claims and benefits payable 21,377 22,220 Unearned premiums 2,959 2,797 Short-term debt 88 500 Long-term debt 1,682 1,032 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely parent junior subordinated debentures 1,000 1,000 Other liabilities 5,225 3,645 Separate account liabilities 59,875 50,452 - - ------------------------------------------------------------------------------------------ ---------------- ----------------- TOTAL LIABILITIES 115,436 104,320 ------------------------------------------------------------------------------------ ---------------- ----------------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 324 -- STOCKHOLDERS' EQUITY Common stock - authorized 200,000,000, issued 119,865,713 and 119,194,412 shares, par value $0.01 1 1 Capital surplus 1,664 1,642 Retained earnings 3,199 2,515 Treasury stock - 1,638,000 shares (30) (30) Cumulative translation adjustments (4) 40 Unrealized gain on securities, net of tax 527 352 - - ----- ------------------------------------------------------------------------------------ ---------------- ----------------- TOTAL STOCKHOLDERS' EQUITY 5,357 4,520 ------------------------------------------------------------------------------------ ---------------- ----------------- TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 121,117 $ 108,840 ------------------------------------------------------------------------------ -- ------------- --- ------------- <FN> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. </FN> </TABLE> - 4 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, ---------------------------------- (In millions) 1997 1996 - - ------------------------------------------------------------------------------------------ ---------------- ----------------- (Unaudited) OPERATING ACTIVITIES <S> <C> <C> Net income $ 778 $ 239 ADJUSTMENTS TO NET INCOME Depreciation and amortization 38 39 Net realized capital gains (73) (41) Equity gain on HLI initial public offering (368) -- Change in receivables, payables and accruals (176) (217) Accrued and deferred taxes 146 (163) Increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 635 216 Increase in deferred policy acquisition costs (294) (311) (Increase) decrease in reinsurance recoverables and other related assets (179) 310 Minority interest in consolidated subsidiary 5 -- Other, net 330 283 - - ------------------------------------------------------------------------------------------ ---------------- ----------------- CASH PROVIDED BY OPERATING ACTIVITIES 842 355 - - ------------------------------------------------------------------------------------------ ---------------- ----------------- INVESTING ACTIVITIES Purchase of investments (23,539) (19,641) Sale of investments 7,568 8,977 Maturity of investments 14,597 10,468 Additions to plant, property and equipment (28) (28) - - ------------------------------------------------------------------------------------------ ---------------- ----------------- CASH USED FOR INVESTING ACTIVITIES (1,402) (224) - - ------------------------------------------------------------------------------------------ ---------------- ----------------- FINANCING ACTIVITIES Short-term debt, net (412) (386) Long-term debt, net 650 -- Net proceeds from issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely parent junior subordinated debentures -- 484 Dividends paid (95) (47) Net disbursements for investment and universal life-type contracts charged from policyholder accounts (265) (128) Net proceeds from sale of minority interest in subsidiary 687 -- Other, net 22 5 - - ------------------------------------------------------------------------------------------ ---------------- ----------------- CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 587 (72) - - ------------------------------------------------------------------------------------------ ---------------- ----------------- Foreign exchange rate effect on cash (4) 2 - - ------------------------------------------------------------------------------------------ ---------------- ----------------- Increase in cash 23 61 Cash - beginning of period 112 95 ========================================================================================== ================ ================= CASH - END OF PERIOD $ 135 $ 156 - - ------------------------------------------------------------------------------------------ -- ------------- -- -------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - - ------------------------------------------------ NET CASH PAID (REFUNDS RECEIVED) DURING THE PERIOD FOR: Income taxes $ (57) $ 163 Interest $ 116 $ 70 <FN> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. </FN> </TABLE> - 5 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLAR AMOUNTS IN MILLIONS EXCEPT FOR SHARE DATA UNLESS OTHERWISE STATED) (UNAUDITED) - - -------------------------------------------------------------------------------- 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", formerly ITT Hartford Group, Inc.) 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 for the fiscal year ended December 31, 1996 included in The Hartford's 1996 Form 10-K Annual Report. Certain reclassifications have been made to prior year financial information to conform to current year presentation. (B) CHANGES IN ACCOUNTING PRINCIPLES In February 1997, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 128, "Earnings per Share". This statement establishes standards for computing and presenting earnings per share ("EPS") and applies to entities with publicly held common stock or potential common stock. This statement simplifies the standards for computing earnings per share previously found in Accounting Principles Board Opinion No. 15, "Earnings per Share", and makes them comparable to international EPS standards. It replaces the presentation of primary EPS with the presentation of basic EPS. It also requires dual presentation of basic and diluted EPS on the face of the income statement for all entities with complex capital structures and requires a reconciliation of the numerator and denominator of the basic EPS computation to the numerator and denominator of the diluted EPS computation. This statement is effective for financial statements for both interim and annual periods ending after December 15, 1997. Adoption of SFAS No. 128 is not expected to have a material effect on the Company's earnings per share calculation. NOTE 2. THE OFFERING On February 10, 1997, Hartford Life, Inc. ("HLI"), the holding company parent of The Hartford's significant life insurance subsidiaries, filed a registration statement with the Securities and Exchange Commission, as amended, relating to the initial public offering of HLI class A common stock (the "Offering"). Pursuant to the Offering on May 22, 1997, HLI sold to the public 26 million shares at $28.25 per share and received proceeds, net of offering expenses, of $687. The 26 million shares sold in the Offering represent approximately 18.6% of the equity ownership in HLI and approximately 4.4% of the combined voting power of HLI's class A and class B common stock. The Hartford owns all of the 114 million outstanding shares of class B common stock of HLI, representing approximately 81.4% of the equity ownership in HLI and approximately 95.6% of the combined voting power of HLI's class A and class B common stock. Holders of class A common stock generally have identical rights to the holders of class B common stock except that the holders of class A common stock are entitled to one vote per share while holders of class B common stock are entitled to five votes per share on all matters submitted to a vote of HLI's stockholders. In connection with the Offering, The Hartford reported a $368 gain related to the increased value of its equity ownership in HLI. Management used or will use the proceeds from the Offering to reduce certain debt outstanding, to fund growth initiatives, and for other general corporate purposes. The Hartford's current intent is to continue to beneficially own at least 80% of HLI, but it is under no contractual obligation to do so. NOTE 3. DEBT On February 14, 1997, HLI filed a shelf registration statement for the issuance and sale of up to $1.0 billion in the aggregate of senior debt securities, subordinated debt securities and preferred stock of HLI. On June 17, 1997, HLI issued and sold $650 of unsecured redeemable long-term debt in the form of notes and debentures. Of this amount, $200 was in the form of 6.90% notes due June 15, 2004, $200 of 7.10% notes due June 15, 2007, and $250 of 7.65% debentures due June 15, 2027. Interest on each of the notes and debentures is payable semi-annually on June 15 and December 15, of each year, commencing December 15, 1997. HLI also issued $50 of short-term debt in the form of commercial paper. HLI used the proceeds from these issuances for the repayment of short-term debt and for other general corporate purposes. In the first quarter of 1997, HLI borrowed $1.1 billion against a $1.3 billion unsecured short-term credit facility with four banks. During the second quarter of 1997, HLI retired the borrowing with proceeds from the Offering and the new debt issuances (discussed above), and subsequently reduced the capacity of its unsecured short-term credit facility from $1.3 billion to $250. NOTE 4. CONTINGENCIES (A) LITIGATION The Hartford is involved in various legal actions, some of which involve claims for substantial amounts. In the opinion of management, the ultimate liability with respect to such lawsuits is not expected to be material to the consolidated financial position, results of operations or cash flows of The Hartford. (B) ENVIRONMENTAL AND ASBESTOS CLAIMS Information regarding environmental and asbestos claims may be found in the Environmental and Asbestos Claims section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. - 6 -
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 June 30, 1997, compared with December 31, 1996, and its results of operations for the second quarter and six months ended June 30, 1997 compared with the equivalent 1996 periods. This discussion should be read in conjunction with the MD&A included in The Hartford's 1996 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. The forward-looking statements are 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 7 North American Property & Casualty 8 Life 9 International 10 Other Operations and Minority Interest 10 Environmental and Asbestos Claims 10 Investments 12 Capital Resources and Liquidity 15 ================================================================================ CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY ================================================================================ <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- -------------- 1997 1996 1997 1996 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> TOTAL REVENUES $ 3,142 $ 3,026 $ 6,260 $ 6,304 - - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 574 $ 143 $ 778 $ 239 Less: Net realized capital gains, after-tax 24 16 49 28 Equity gain on HLI initial public offering 368 -- 368 -- - - -------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ 182 $ 127 $ 361 $ 211 - - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> Revenues for the second quarter ended June 30, 1997 increased $116, or 4%, from the second quarter of 1996 and decreased $44, or 1%, for the first six months of 1997 compared to the same prior year period. Excluding corporate-owned life insurance ("COLI") premiums, which decreased as a result of the Health Insurance Portability and Accountability Act of 1996 ("HIPA Act of 1996"), which phases out the deductibility of interest on policy loans under leveraged COLI by 1998, revenues increased $182, or 6%, and $387, or 7%, respectively, for the second quarter and six months ended June 30, 1997. The increase for both periods was due primarily to higher fees earned due to growth in individual variable annuity account values, an increase in premiums and other considerations resulting from strong group disability sales, growth in Reinsurance operations and AARP (American Association of Retired Persons) personal lines as well as new business attributable to a recent agreement with Nationwide Building Society in the United Kingdom. Higher net investment income and net realized capital gains also contributed to the increase. 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 (as defined in The Hartford's 1996 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 lines of business in a manner that allows for a better understanding of the underlying trends in the Company's current business. However, core earnings should only be analyzed in conjunction with, and not in lieu of, net income and may not be comparable to other performance measures used by the Company's competitors. Net income, excluding the impact of net realized capital gains, after-tax, and a $368 equity gain resulting from the the Offering of 18.6% of HLI (for additional information, see Capital Resources and Liquidity section under "The Offering") was $182 and $361 for the second quarter and six months of 1997, respectively, compared with $127 and $211 for the comparable prior year periods. The increase in core earnings of $55, or 43%, for the second quarter and $150, or 71%, for the first six months of 1997 was partially due to significantly lower catastrophe and severe winter storm losses totaling $3 and $19, after-tax, for the second quarter and six months ended June 30, 1997, respectively, compared to $30 and $107, after-tax, for the same periods in 1996. Excluding the impact of these losses, core earnings for the second quarter increased $28, or 18%, to $185 and for the first six months - 7 -
of 1997 increased $62, or 19%, to $380 over the comparable prior year periods. This improvement was driven by premium growth in AARP and Reinsurance operations, increased investment income, growth in earnings on Life annuities, the reduction of incurred environmental and asbestos losses and the reduction of losses in the Guaranteed Investment Contract division. The effective tax rates for the second quarter and six months ended June 30, 1997, excluding the equity gain in HLI, were 23% and 24%, respectively, compared to 20% and 18% for the comparable periods in 1996. Tax-exempt interest earned on invested assets was a principal cause of effective tax rates lower than the 35% U.S. statutory rate. SEGMENT RESULTS The Hartford's reporting segments, which reflect the management structure of the Company, consist of North American Property & Casualty, Life, International and Other Operations and Minority Interest. Below is a summary of core earnings by segment. <TABLE> <CAPTION> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- -------------- 1997 1996 1997 1996 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> North American Property & Casualty $ 100 $ 65 $ 204 $ 91 Life 74 44 136 83 International 13 20 27 41 Other Operations and Minority Interest (5) (2) (6) (4) - - -------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ 182 $ 127 $ 361 $ 211 - - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> The sections that follow analyze each segment's results. Specific topics such as environmental and asbestos reserves and investment results are discussed separately following the segment overviews. <TABLE> <CAPTION> ================================================================================ NORTH AMERICAN PROPERTY & CASUALTY ================================================================================ OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- -------------- 1997 1996 1997 1996 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> TOTAL REVENUES $ 1,656 $ 1,609 $ 3,261 $ 3,162 - - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 111 $ 68 $ 215 $ 94 Less: Net realized capital gains, after-tax 11 3 11 3 - - -------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ 100 $ 65 $ 204 $ 91 - - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> Core earnings for the North American Property & Casualty segment were $100 for the second quarter ended June 30, 1997, an increase of $35, or 54%, from the comparable period in 1996. This improvement was primarily due to a $27 decrease in after-tax underwriting loss. Core earnings increased 124% to $204 for the first six months of 1997 as compared to 1996. Of this $113 increase, $104 was from improved underwriting results due primarily to significantly lower catastrophe and weather-related losses. Additionally, increased after-tax net investment income was partially offset by higher debt service costs. (For an analysis of net investment income, see the Investments section.) UNDERWRITING RESULTS Underwriting results represent premiums earned less incurred claims, claim adjustment expenses and underwriting expenses. The following table displays written premiums, underwriting results and combined ratios for The Hartford's North American Property & Casualty segment: <TABLE> <CAPTION> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- -------------- 1997 1996 1997 1996 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> Written premiums $ 1,439 $ 1,435 $ 2,927 $ 2,892 Underwriting results, before-tax $ (40) $ (80) $ (60) $ (220) Combined ratio [1] 102.7 104.6 101.7 106.8 - - -------------------------------------------------------------------------------------------------------------------------------- <FN> [1] "Combined ratio" is a common industry measurement of property and casualty underwriting profitability. This ratio is the sum of the ratio of incurred claims and claim adjustment expenses to premiums earned and the ratio of underwriting expenses incurred to premiums written. </FN> </TABLE> The North American Property & Casualty segment's written premiums were flat for the second quarter and up 1% for the six months ended June 30, 1997 compared to the equivalent prior year periods. Continued solid written premium growth in Reinsurance operations and AARP personal lines was offset by a decrease in Agency Personal lines and a decrease in Commercial Insurance Operations as both of these markets remain intensely competitive. Underwriting results, before-tax, for the second quarter ended June 30, 1997 improved $40 over the comparable prior year period, resulting in a 1.9 point improvement in the combined ratio primarily due to strong performance in the automobile and homeowners' personal lines. For the six months ended June 30, 1997 underwriting results improved by $160, primarily driven by a $136 (4.8 points of combined ratio) improvement in property catastrophe and other weather-related loss experience. Improvement in both 1997 periods also reflected the reduction of incurred environmental and asbestos losses as a result of the charge taken in the third quarter of 1996 upon completion of the Company's environmental and asbestos database study (for further discussion see Environmental and Asbestos Claims section). <TABLE> <CAPTION> ================================================================================ LIFE ================================================================================ OPERATING SUMMARY [1] SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- -------------- 1997 1996 1997 1996 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> TOTAL REVENUES $ 1,042 $ 987 $ 2,097 $ 2,290 - - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 73 $ 43 $ 136 $ 82 Less: Net realized capital losses, after-tax (1) (1) -- (1) - - -------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ 74 $ 44 $ 136 $ 83 - - -------------------------------------------------------------------------------------------------------------------------------- <FN> [1] Life results are presented at 100%. The 18.6% minority interest in HLI is reflected in Other Operations and Minority Interest section. </FN> </TABLE> The Life segment operates in three principal divisions: Annuity, Individual Life Insurance and Employee Benefits. The Life segment also maintains a Guaranteed Investment Contracts division, which is primarily comprised of business written prior to 1995 and a Corporate Operation through which it reports items that are not directly allocable to any of its business divisions. The Annuity division focuses on the savings and retirement needs of the growing number of individuals who are preparing for retirement or have already retired. The variety of products sold within this segment reflects the diverse nature of the market. These include individual variable annuities, fixed market value adjusted (MVA) annuities, deferred compensation and retirement plan services for municipal governments and corporations, structured settlement contracts and other special purpose annuity contracts, investment management contracts and mutual funds. The Individual Life division, which focuses on the high end estate and business planning markets, sells a variety of life insurance products, including variable life and universal life. The Employee Benefits division sells group insurance products, including group life and group disability insurance, and corporate owned life insurance ("COLI") and engages in certain international operations. The Guaranteed Investment Contracts division consists of guaranteed rate contract ("GRC") business that is supported by assets held in either the Company's general account or a guaranteed separate account and includes Closed Book GRC. The Company decided in 1995, after a thorough review of its GRC business, that it would significantly de-emphasize general account GRC, choosing to focus its distribution efforts on other products sold through other divisions. Management expects no material income or loss from the Guaranteed Investment Contracts division in the future. On May 22, 1997, HLI, the holding company parent of The Hartford's significant life subsidiaries, completed the Offering of 18.6% of its common stock. (For additional information, see Capital Resources and Liquidity section under "The Offering".) Revenues for the second quarter ended June 30, 1997 increased $55, or 6%, from the second quarter of 1996 and decreased 193, or 8%, for the first six months of 1997 compared to the same prior year period. Excluding COLI premiums, which decreased as a result of the HIPA Act of 1996, which phases out the deductibility of interest on policy loans under leveraged COLI by 1998, revenues increased $121, or 16%, and $238, or 15%, respectively, for the second quarter and six months ended June 30, 1997. The increase for both periods was due primarily to an increase in premiums and other considerations resulting from higher fees earned due to growth in individual variable annuity account values reported in the Annuity division as well as strong group disability sales in the Group Insurance operation of the Employee Benefits division. Additionally, new individual annuity sales were approximately $2.5 billion and $5.1 billion for the second quarter and six months ended June 30, 1997, respectively, similar to sales of $2.7 billion and $4.9 billion, respectively, for the same periods of 1996. Core earnings increased $30, or 68%, and $53, or 64%, in the second quarter of 1997 and six months ended June 30, 1997, respectively, compared to the prior year periods. This increase was driven by growth in the Annuity, Individual Life Insurance and Employee Benefits operations of 36%, 20% and 20%, respectively, for the second quarter and 33%, 21%, and 17%, respectively, for the six months, and the reduction of losses in the Guaranteed Investment Contracts division as a result of the actions taken in the third quarter of 1996. Partially offsetting the growth in income was an increase in interest expense in the Corporate Operation as a result of increased indebtedness in conjunction with the Offering. (For additional information, see Capital Resources and Liquidity section under "The Offering".) - 9 -
================================================================================ INTERNATIONAL ================================================================================ <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- -------------- 1997 1996 1997 1996 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> TOTAL REVENUES $ 407 $ 386 $ 824 $ 771 - - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 29 $ 32 $ 65 $ 65 Less: Net realized capital gains, after-tax 16 12 38 24 - - -------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ 13 $ 20 $ 27 $ 41 - - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> Revenues for the second quarter and six months ended June 30, 1997 increased $21, or 5%, and $53, or 7%, respectively, over the comparable periods in 1996. New business attributable to a recent agreement with Nationwide Building Society at ITT London & Edinburgh, in the United Kingdom, to exclusively underwrite its homeowners business, together with higher net realized capital gains resulted in the increase. (For an analysis of net realized capital gains, see the Investments section.) Foreign exchange impacts on revenues for the second quarter and six months ended June 30, 1997 were negligible. Core earnings in the International segment for the second quarter and six months ended June 30, 1997 decreased $7, or 35%, and $14, or 34%, respectively, compared to the same periods in 1996. A second quarter decrease of $7, or 54%, and six month decrease of $15, or 56%, in core earnings at ITT London & Edinburgh, due primarily to soft market conditions in the motor line was the primary reason for the decline in segment core earnings. Foreign exchange had a negligible impact on core earnings for the second quarter and six months ended June 30, 1997. ================================================================================ OTHER OPERATIONS AND MINORITY INTEREST ================================================================================ <TABLE> <CAPTION> OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------- -------------- -------------- -------------- 1997 1996 1997 1996 -------------- -------------- -------------- -------------- <S> <C> <C> <C> <C> TOTAL REVENUES $ 37 $ 44 $ 78 $ 81 - - -------------------------------------------------------------------------------------------------------------------------------- NET INCOME (LOSS) $ 361 $ -- $ 362 $ (2) Less: Net realized capital gains (losses), after-tax (2) 2 -- 2 Equity gain on HLI initial public offering 368 -- 368 -- - - -------------------------------------------------------------------------------------------------------------------------------- CORE EARNINGS $ (5) $ (2) $ (6) $ (4) - - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> Other Operations consist of property and casualty operations of The Hartford which have discontinued writing new and renewal business. These operations primarily include First State Insurance Company and its subsidiaries as well as Fencourt Reinsurance Company, Ltd. and Excess Insurance Company Limited, which has been reclassified from ITT London & Edinburgh in the International segment for all periods presented. The primary focus of these operations is the proper disposition of claims, resolving disputes and collecting reinsurance proceeds related largely to business underwritten and reinsured prior to 1985. The equity gain consists of a non-taxable realized gain following the sale of 18.6% of The Hartford's principal Life subsidiary, HLI. (For additional information, see Note 2 in Notes to Consolidated Financial Statements and Capital Resources and Liquidity section under "The Offering".) Core earnings includes an 18.6% minority interest in HLI's operating results of $(5) for both 1997 periods presented. (For additional information regarding HLI's results, see the Life section.) ================================================================================ ENVIRONMENTAL AND ASBESTOS CLAIMS ================================================================================ The Hartford continues to receive claims asserting damages from environmental exposures and for injuries from asbestos and asbestos-related products, both of which affect the North American Property & Casualty, International and Other Operations segments. Environmental claims relate primarily to pollution and related clean-up costs. With regard to these claims, uncertainty exists which impacts the ability of insurers and reinsurers to estimate the ultimate reserves for unpaid losses and related settlement expenses. The Hartford finds that conventional reserving techniques cannot estimate the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. For the majority of environmental claims and many types of asbestos claims, unlike any other type of contractual claim, there is almost no agreement or consistent precedent to determine what, if any, coverage exists or which, if any, policy years and insurers or reinsurers may be liable. Further uncertainty arises with environmental claims since claims are often made under policies, the existence of which may be in dispute, the terms of which may have changed over many years, which may or may not provide for legal defense costs, and which may or may not contain environmental exclusion clauses that may be absolute or allow for fortuitous events. Courts in different jurisdictions have reached disparate conclusions on similar issues and in certain situations have broadened the interpretation of policy coverage and liability issues. In light of the extensive claim settlement process for environmental and asbestos claims, involving comprehensive fact gathering, subject matter expertise and intensive litigation, The Hartford established - 10 -
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 developed 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 1996 Form 10-K Annual Report.) Reserve activity for both reported and unreported environmental and asbestos claims, including reserves for legal defense costs, for the six months ended June 30, 1997 and the year ended December 31, 1996, was as follows (net of reinsurance): <TABLE> <CAPTION> ENVIRONMENTAL AND ASBESTOS CLAIMS CLAIMS AND CLAIM ADJUSTMENT EXPENSES SIX MONTHS ENDED YEAR ENDED JUNE 30, 1997 DECEMBER 31, 1996 ---------------- ----------- ----------- ---------------- ----------- ----------- Environmental Asbestos Total Environmental Asbestos Total ---------------- ----------- ----------- ---------------- ----------- ----------- <S> <C> <C> <C> <C> <C> <C> Beginning liability $ 1,439 $ 717 $ 2,156 $ 926 $ 410 $ 1,336 Claims and claim adjustment expenses incurred -- 1 1 603 322 925 Claims and claim adjustment expenses paid (42) (12) (54) (124) (35) (159) Other [1] -- -- -- 34 20 54 - - --------------------------------------------------------------------------------------------------------------------------------- ENDING LIABILITY [1] [2] $ 1,397 $ 706 $ 2,103 $ 1,439 $ 717 $ 2,156 - - --------------------------------------------------------------------------------------------------------------------------------- <FN> [1] The 1996 ending liability includes reclassifications of reserves that were not previously identified as environmental and asbestos. [2] The ending liabilities are net of reinsurance on reported and unreported claims of $1,895 and $1,972 for June 30, 1997 and December 31, 1996, respectively. Gross of reinsurance, as of June 30, 1997 and December 31, 1996 reserves for environmental and asbestos were $2,253 and $1,745 and $2,342 and $1,786, respectively. </FN> </TABLE> The Hartford believes that the environmental and asbestos reserves reported at June 30, 1997 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. - 11 -
================================================================================ INVESTMENTS ================================================================================ An important element of the financial results of The Hartford is return on invested assets. The Hartford's investment activities are divided between the reportable segments of North American Property & Casualty, Life, International, and Other Operations. The investment portfolios for these segments are managed based on the underlying characteristics and nature of their respective liabilities. The ratings referenced in the fixed maturities by credit quality 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. Please refer to The Hartford's 1996 Form 10-K Annual Report for a description of the Company's investment objectives and policies. NORTH AMERICAN PROPERTY & CASUALTY Total invested assets were $14.5 billion at June 30, 1997 and were comprised primarily of fixed maturities of $12.8 billion and other investments of $1.7 billion, primarily equity securities. FIXED MATURITIES BY TYPE - - ----------------------------------------------------------------- JUNE 30, 1997 DECEMBER 31, 1996 - - ------------------------- ---------- -------- ---------- -------- FAIR FAIR TYPE VALUE PERCENT VALUE PERCENT - - ------------------------- ---------- -------- ---------- -------- Municipal - tax-exempt $7,186 56.2% $7,123 63.2% Corporate 2,546 19.9% 2,160 19.1% Short-term 832 6.5% 419 3.7% ABS 518 4.1% 206 1.8% MBS - agency 475 3.7% 213 1.9% CMO 408 3.2% 655 5.8% Commercial MBS 333 2.6% 107 0.9% Gov't/Gov't agencies - For. 321 2.5% 279 2.5% Municipal - taxable 62 0.5% 68 0.6% Gov't/Gov't agencies - U.S. 49 0.4% 15 0.1% Redeemable pref'd stock 47 0.4% 47 0.4% - - ------------------------- ---------- -------- ---------- -------- TOTAL FIXED MATURITIES $12,777 100.0% $11,292 100.0% - - ------------------------- ---------- -------- ---------- -------- This segment maintains a high quality fixed maturity portfolio. At June 30, 1997, approximately 95% of the fixed maturity portfolio was invested in investment-grade securities. FIXED MATURITIES BY CREDIT QUALITY - - ------------------------------------------------------------------ JUNE 30, 1997 DECEMBER 31, 1996 - - -------------------------- ------------------ ------------------- FAIR FAIR CREDIT QUALITY VALUE PERCENT VALUE PERCENT - - -------------------------- --------- -------- ---------- -------- U.S. Gov't/Gov't agencies $ 820 6.4% $ 720 6.4% AAA 4,743 37.1% 4,296 38.0% AA 2,619 20.5% 2,714 24.0% A 2,149 16.8% 1,731 15.3% BBB 1,042 8.2% 830 7.4% BB & below 572 4.5% 582 5.2% Short-term 832 6.5% 419 3.7% - - -------------------------- --------- -------- ---------- -------- TOTAL FIXED MATURITIES $12,777 100.0% $11,292 100.0% - - -------------------------- --------- -------- ---------- -------- The taxable equivalent duration of the June 30, 1997 fixed maturity portfolio was 4.6 years compared to 5.0 years at December 31, 1996. Duration is defined as the market price sensitivity of the portfolio to parallel shifts in the yield curve. The North American Property & Casualty segment uses a minimal amount of derivatives in managing its investments. The notional amount of derivatives was $125 and $1 as of June 30, 1997 and December 31, 1996, respectively. INVESTMENT RESULTS The table below summarizes the North American Property & Casualty segment's results. SECOND QUARTER SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ------------------- ------------------- 1997 1996 1997 1996 - - -------------------------- --------- -------- --------- --------- Net investment income, before-tax $193 $166 $370 $327 Net investment income, after-tax [1] $154 $132 $297 $259 Yield on average invested assets, 5.9% 5.7% 5.6% 5.6% before-tax [2] Yield on average invested assets, 4.7% 4.5% 4.5% 4.5% after-tax [1] [2] Net realized capital gains, before tax $17 $4 $17 $4 - - ----------------------------------------------------------------- [1] Due to the significant holdings in tax-exempt investments an after-tax net investment income and after-tax yield are also included. [2] Represents annualized six months net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost). For the second quarter ended June 30, 1997, before-tax net investment income was $193 compared to $166 in 1996, an increase of 16%, while after-tax net investment income increased 17%. For the six months ended June 30, 1997, before-tax net investment income was $370 compared to $327 in 1996, an increase of 13%, while after-tax net investment income increased 15%. The increase in net investment income for both periods was primarily due to an increase in invested assets as a result of increased operating cash flow, investment of the proceeds from the sale of Quarterly Income Preferred Securities and repayment of allocated advances from HLI, partially offset by the repayment of short-term debt. For the second quarter ended June 30, 1997, before-tax yields on average invested assets increased to 5.9% from 5.7% in 1996, while the after-tax yields increased to 4.7% from 4.5%. The increase in both before and after-tax yields is the result of a portfolio re-balancing which occurred in 1996. The re-balancing shifted assets from taxable securities to longer duration and higher yielding tax-exempt bonds. For the six months ended June 30, 1997, before and after-tax yields on average invested assets remained unchanged at 5.6% and 4.5%, respectively. Realized capital gains of $43, primarily generated from opportunities in a strong equity market, were offset by $26 of real estate writedowns for both 1997 periods presented. LIFE Invested assets, excluding separate accounts, totaled $20.4 billion at June 30, 1997 and were comprised of $16.3 billion of fixed maturities, $3.8 billion of policy loans, and other investments of $317. Policy loans, which carry a weighted-average interest rate of 10.16% as of June 30, 1997 are secured by the cash value of the life policy. These loans do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. - 12 -
FIXED MATURITIES BY TYPE - - ----------------------------------------------------------------- JUNE 30, 1997 DECEMBER 31, 1996 - - -------------------------- ------------------ ------------------- FAIR FAIR TYPE VALUE PERCENT VALUE PERCENT - - -------------------------- --------- -------- ---------- -------- Corporate $7,696 47.3% $7,587 48.3% ABS 3,468 21.3% 2,693 17.1% Commercial MBS 1,468 9.0% 1,098 7.0% CMO 1,136 7.0% 2,150 13.7% Short-term 1,022 6.3% 765 4.9% MBS - agency 646 3.9% 402 2.6% Gov't/Gov't agencies - For. 387 2.4% 395 2.5% Municipal-taxable 252 1.6% 266 1.7% Gov't/Gov't agencies - U.S. 201 1.2% 355 2.2% - - -------------------------- --------- -------- ---------- -------- TOTAL FIXED MATURITIES $16,276 100.0% $15,711 100.0% - - -------------------------- --------- -------- ---------- -------- During the first six months of 1997, the Company reduced its CMO exposure by 47% with the proceeds redeployed primarily into the asset backed sector. This is consistent with the Company's objective of managing exposure to securities that "underperform" in a falling interest rate environment. The Life segment continued to maintain a high quality fixed maturities portfolio. As of June 30, 1997, approximately 99% of the fixed maturities portfolio was invested in investment-grade securities. FIXED MATURITIES BY CREDIT QUALITY - - -------------------------------------------------------------------- JUNE 30, 1997 DECEMBER 31, 1996 - - ------------------------- -------------------- ------------------- FAIR FAIR CREDIT QUALITY VALUE PERCENT VALUE PERCENT - - ------------------------- --------- ---------- --------- --------- U.S. Gov't/Gov't agencies $ 1,718 10.5% $ 353 2.2% AAA 3,043 18.7% 4,695 29.9% AA 1,901 11.7% 1,902 12.1% A 5,692 35.0% 5,366 34.2% BBB 2,862 17.6% 2,581 16.4% BB & below 38 0.2% 49 0.3% Short-term 1,022 6.3% 765 4.9% - - ------------------------- --------- ---------- --------- --------- TOTAL FIXED MATURITIES $16,276 100.0% $15,711 100.0% - - ------------------------- --------- ---------- --------- --------- INVESTMENT RESULTS The table below summarizes the Life segment's results. SECOND QUARTER SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------- ------------------- 1997 1996 1997 1996 - - ------------------------- --------- --------- --------- --------- Net investment income, before-tax $362 $354 $737 $717 Yield on average invested assets, 7.2% 7.1% 7.4% 7.2% before-tax [1] Net realized capital losses, before-tax $(2) $(1) $(1) $(1) - - ---------------------------------------------------------------- [1] Represents annualized six months net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost). For the second quarter ended June 30, 1997, net investment income totaled $362 compared to $354 in 1996, an increase of 2%. For the six months ended June 30, 1997, net investment income was $737 compared to $717 in 1996, an increase of 3%. For the second quarter ended June 30, 1997, before-tax yields increased to 7.2% from 7.1% in 1996; and, for the six months ended June 30, 1997 before-tax yields increased to 7.4% from 7.2% in 1996. The increase in net investment income and yields was primarily attributable to the repositioning of the Closed Book GRC portfolio, including the sale of certain lower yielding securities whose proceeds were reinvested at substantially higher rates. ASSET AND LIABILITY MANAGEMENT STRATEGIES The Life segment employs several risk management tools to quantify and manage interest rate risk arising from its investments and fixed rate liabilities. Management monitors the changes in present value between assets and liabilities resulting from various interest rate scenarios using integrated asset/liability measurement systems and a proprietary system that simulates the impacts of parallel and non-parallel yield curve shifts. Based on this current and prospective information, management implements risk reducing techniques to improve the match between assets and liabilities. Derivatives play an important role in facilitating the management of interest rate risk, creating opportunities to fund obligations to policyholders and contractholders, hedging against risks that affect the value of certain liabilities and adjust broad investment risk characteristics as a result of any significant changes in market risks. As an end user of derivatives, the segment employs a variety of derivative financial instruments, including swaps, caps, floors, forwards and exchange-traded financial futures and options in order to hedge exposure to price, foreign currency and/or interest rate risk on anticipated investment purchases or existing assets and liabilities. The notional amounts of derivative contracts represent the basis upon which pay and receive amounts are calculated and are not reflective of credit risk for derivative contracts. Credit risk for derivative contracts is limited to the amounts calculated to be due to the Company on such contracts. The Company believes it maintains prudent policies regarding the financial stability and credit standing of its major counterparties and typically requires credit enhancement provisions to further limit its credit risk. Many of these derivative contracts are bilateral agreements that are not assignable without the consent of the relevant counterparty. Notional amounts pertaining to derivative financial instruments totaled $9.2 billion at June 30, 1997 ($6.8 billion related to life insurance investments and $2.4 billion related to life insurance liabilities) and $10.9 billion at December 31, 1996 ($8.3 billion related to life insurance investments and $2.6 billion related to life insurance liabilities). The decrease in notional amounts pertaining to derivative financial instruments was primarily due to continued liquidation of the Closed Book GRC asset portfolio. Management believes that the use of derivatives allows the Company to sell more innovative products, capitalize on market opportunities and execute a more flexible investment strategy for its general account portfolio. INTERNATIONAL Invested assets, excluding separate accounts, totaled $2.8 billion at June 30, 1997 and were comprised of fixed maturities of $2.3 billion and other investments of $460, primarily equity securities. - 13 -
FIXED MATURITIES BY TYPE - - ----------------------------------------------------------------- JUNE 30, 1997 DECEMBER 31, 1996 - - ------------------------- ------------------- ------------------ FAIR FAIR TYPE VALUE PERCENT VALUE PERCENT - - -------------------------- --------- -------- ---------- -------- Gov't/Gov't agencies - For. $1,141 48.9% $1,384 63.1% Corporate 590 25.3% 401 18.3% Short-term 562 24.1% 379 17.3% Gov't/Gov't agencies - U.S. 40 1.7% 29 1.3% - - -------------------------- --------- -------- ---------- -------- TOTAL FIXED MATURITIES $2,333 100.0% $2,193 100.0% - - -------------------------- --------- -------- ---------- -------- As of June 30, 1997, the fixed maturities portfolio consisted of 100% investment grade securities with no security rated lower than A. Minimal use is made of derivatives which, if purchased, are used for hedging market and foreign exchange risk. FIXED MATURITIES BY CREDIT QUALITY - - ------------------------------------------------------------------ JUNE 30, 1997 DECEMBER 31, 1996 - - -------------------------- ------------------ ------------------- FAIR FAIR CREDIT QUALITY VALUE PERCENT VALUE PERCENT - - -------------------------- --------- --------- --------- -------- AAA $1,493 64.0% $1,750 79.8% AA 274 11.7% 60 2.7% A 4 0.2% 4 0.2% Short-term 562 24.1% 379 17.3% - - -------------------------- --------- --------- --------- -------- TOTAL FIXED MATURITIES $2,333 100.0% $2,193 100.0% - - -------------------------- --------- --------- --------- -------- INVESTMENT RESULTS The table below summarizes the International segment's results. SECOND QUARTER SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------- 1997 1996 1997 1996 - - -------------------------- --------- -------- --------- --------- Net investment income, before-tax $43 $43 $84 $86 Yield on average invested assets, 6.6% 7.2% 6.4% 7.2% before-tax [1] Net realized capital gains, before-tax $24 $17 $57 $36 - - ----------------------------------------------------------------- [1] Represents annualized six months net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost). For the second quarter ended June 30, 1997 and June 30, 1996, net investment income totaled $43. For the six months ended June 30, 1997, net investment income totaled $84 compared to $86 in 1996, a decrease of 2%. For the second quarter ended June 30, 1997, before-tax yields decreased to 6.6% from 7.2% in 1996; and for the six months ended June 30, 1997, before-tax yields decreased to 6.4% from 7.2% in 1996. The decrease in net investment income and yields was primarily due to special dividends received on certain utility equity securities owned in 1996 which generated additional investment income. Net realized capital gains were $24 for the second quarter ended June 30, 1997, and $57 for the six months ended June 30, 1997, primarily the result of opportunities in a strong equity market. OTHER OPERATIONS Invested assets were $2.3 billion at June 30, 1997 and were mostly comprised of fixed maturities. FIXED MATURITIES BY TYPE - - ----------------------------------------------------------------- JUNE 30, 1997 DECEMBER 31, 1996 - - -------------------------- ------------------ ------------------- FAIR FAIR TYPE VALUE PERCENT VALUE PERCENT - - -------------------------- --------- -------- ---------- -------- Corporate $1,452 63.9% $1,458 64.7% Short-term 225 9.9% 248 11.0% Gov't/Gov't agencies - U.S. 130 5.7% 141 6.2% ABS 130 5.7% 148 6.6% Commercial MBS 119 5.3% 88 3.9% Gov't/Gov't agencies - For. 104 4.6% 72 3.2% MBS - agency 44 1.9% 36 1.6% Municipal - taxable 36 1.6% 22 1.0% CMO 32 1.4% 40 1.8% - - -------------------------- --------- -------- ---------- -------- TOTAL FIXED MATURITIES $2,272 100.0% $2,253 100.0% - - -------------------------- --------- -------- ---------- -------- Other Operations maintains a 100% investment grade fixed maturity portfolio. FIXED MATURITIES BY CREDIT QUALITY - - ------------------------------------------------------------------ JUNE 30, 1997 DECEMBER 31, 1996 - - -------------------------- ------------------ ------------------- FAIR FAIR CREDIT QUALITY VALUE PERCENT VALUE PERCENT - - -------------------------- --------- -------- ---------- -------- U.S. Gov't/Gov't agencies $206 9.1% $216 9.6% AAA 354 15.6% 253 11.2% AA 246 10.8% 365 16.2% A 1,107 48.7% 1,093 48.5% BBB 134 5.9% 78 3.5% Short-term 225 9.9% 248 11.0% - - -------------------------- --------- -------- ---------- -------- TOTAL FIXED MATURITIES $2,272 100.0% $2,253 100.0% - - -------------------------- --------- -------- ---------- -------- INVESTMENT RESULTS The table below summarizes Other Operations segment's results. SECOND QUARTER SIX MONTHS ENDED JUNE 30, ENDED JUNE 30, ------------------ ------------------- 1997 1996 1997 1996 - - -------------------------- --------- -------- --------- --------- Net investment income, before-tax $40 $38 $76 $74 Yield on average invested assets, 7.0% 6.5% 6.6% 6.3% before-tax [1] Net realized capital gains, before-tax $(3) $2 $-- $2 - - ----------------------------------------------------------------- [1] Represents annualized six months net investment income (excluding net realized capital gains) divided by average invested assets at cost (fixed maturities at amortized cost). For the second quarter ended June 30, 1997, before-tax yields increased to 7.0% from 6.5% in 1996 primarily due to portfolio re-balancing from lower yielding short-term securities to higher yielding long-term securities. - 14 -
================================================================================ 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> JUNE 30, 1997 DECEMBER 31, 1996 - - -------------------------------------------------------------------------------------------------------------------------------- <S> <C> <C> Short-term debt $ 88 $ 500 Long-term debt 1,682 1,032 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely parent junior subordinated debentures (QUIPS) 1,000 1,000 - - -------------------------------------------------------------------------------------------------------------------------------- TOTAL DEBT $ 2,770 $ 2,532 ------------------------------------------------------------------------------------------------------------------------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY $ 324 $ -- ------------------------------------------------------------------------------------------------------------------------- Equity excluding unrealized gain on securities, net of tax $ 4,830 $ 4,168 Unrealized gain on securities, net of tax 527 352 - - -------------------------------------------------------------------------------------------------------------------------------- TOTAL STOCKHOLDERS' EQUITY $ 5,357 $ 4,520 ------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION EXCLUDING UNREALIZED GAIN ON SECURITIES, NET OF TAX $ 7,924 $ 6,700 ------------------------------------------------------------------------------------------------------------------------- Debt to equity excluding unrealized gain on securities, net of tax 57% 61% Debt to capitalization excluding unrealized gain on securities, net of tax 35% 38% - - -------------------------------------------------------------------------------------------------------------------------------- </TABLE> CAPITALIZATION The Hartford's total capitalization, excluding unrealized gain on securities, net of tax, increased by $1,224 as of June 30, 1997 compared to December 31, 1996. This change primarily was the result of earnings and the effects of the offering and additional net borrowings, partially offset by dividends declared on The Hartford common stock. The Company's debt to equity and debt to capitalization ratios (both excluding unrealized gain on securities, net of tax) improved at June 30, 1997 as compared to December 31, 1996 primarily as a result of earnings and the effects of the offering partially offset by increased consolidated debt entered into by HLI as described below. THE OFFERING On February 10, 1997, Hartford Life, Inc. ("HLI"), the holding company parent of The Hartford's significant life insurance subsidiaries, filed a registration statement with the Securities and Exchange Commission, as amended, relating to the initial public offering of HLI class A common stock (the "Offering"). Pursuant to the Offering on May 22, 1997, HLI sold to the public 26 million shares at $28.25 per share and received proceeds, net of offering expenses, of $687. The 26 million shares sold in the Offering represent approximately 18.6% of the equity ownership in HLI and approximately 4.4% of the combined voting power of HLI's class A and class B common stock. The Hartford owns all of the 114 million outstanding shares of class B common stock of HLI, representing approximately 81.4% of the equity ownership in HLI and approximately 95.6% of the combined voting power of HLI's class A and class B common stock. Holders of class A common stock generally have identical rights to the holders of class B common stock except that the holders of class A common stock are entitled to one vote per share while holders of class B common stock are entitled to five votes per share on all matters submitted to a vote of HLI's stockholders. In connection with the Offering, The Hartford reported a $368 gain related to the increased value of its equity ownership in HLI. Management used or will use the proceeds from the Offering to reduce certain debt outstanding, to fund growth initiatives, and for other general corporate purposes. The Hartford's current intent is to continue to beneficially own at least 80% of HLI, but it is under no contractual obligation to do so. DEBT On February 14, 1997, HLI filed a shelf registration statement for the issuance and sale of up to $1.0 billion in the aggregate of senior debt securities, subordinated debt securities and preferred stock of HLI. On June 17, 1997, HLI issued and sold $650 of unsecured redeemable long-term debt in the form of notes and debentures. Of this amount, $200 was in the form of 6.90% notes due June 15, 2004, $200 of 7.10% notes due June 15, 2007, and $250 of 7.65% debentures due June 15, 2027. Interest on each of the notes and debentures is payable semi-annually on June 15 and December 15, of each year, commencing December 15, 1997. HLI also issued $50 of short-term debt in the form of commercial paper. HLI used the proceeds from these issuances for the repayment of short-term debt and for other general corporate purposes. In the first quarter of 1997, HLI borrowed $1.1 billion against a $1.3 billion unsecured short-term credit facility with four banks. During the second quarter of 1997, HLI retired the borrowing with proceeds from the Offering and the new debt issuances (discussed above), and subsequently reduced the capacity of its unsecured short-term credit facility from $1.3 billion to $250. DIVIDENDS On May 2, 1997, The Hartford declared a dividend on its common stock of $0.40 per share payable on July 1, 1997 to all shareholders of record as of June 2, 1997. - 15 -
CASH FLOWS SIX MONTHS ENDED JUNE 30, ---------------------------- 1997 1996 - - ---------------------------------------------------------------- Cash provided by operating activities $ 842 $ 355 Cash used for investing activities $ (1,402) $ (224) Cash provided by (used for) $ $ financing activities 587 (72) Cash - end of period $ 135 $ 156 - - ---------------------------------------------------------------- The change in cash provided by or used for financing activities between periods was due primarily to the proceeds of $687 from the Offering, partially offset by declines in investment-type contracts written in the Life segment, coupled with increases in investment-type contract maturities in 1997. The increase in cash used for investing activities reflects the investment of the additional cash from operating and financing activities. Operating cash flows in both periods have been more than adequate to meet liquidity requirements. 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, the ultimate liability with respect to such lawsuits is not expected to be material to the consolidated financial position, results of operations or cash flow of The Hartford. The Hartford is involved in claim litigation arising in the ordinary course of business and accounts for such activity through the establishment of policy reserves. As further discussed in the MD&A under the Environmental and Asbestos Claims section, The Hartford continues to receive environmental and asbestos claims which involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels, reserving methodologies and reinsurance coverages. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 2, 1997, The Hartford held its annual meeting of stockholders. The following matters were considered and voted upon: (1) the election of directors to serve for a one year term; (2) the amendment of the Company's certificate of incorporation to change the Company's name from ITT Hartford Group, Inc. to The Hartford Financial Services Group, Inc.; (3) the approval of certain material terms of the Company's annual executive bonus program; (4) the approval of certain material terms of The Hartford 1995 Incentive Stock Plan; (5) the approval of certain material terms of the 1997 Hartford Life, Inc. Incentive Stock Plan; and (6) the ratification of the appointment of Arthur Andersen LLP as independent auditors of the Company for the fiscal year ending December 31, 1997. Each of the nominees for election as directors was elected to the Board of Directors, and each of the other items set forth above was approved. Set forth below is the vote tabulation relating to the election of directors and each of the other items voted upon: (1) Election of Directors Name of Director Nominees Shares For Shares Withheld* ----------------------- ----------------- ------------------- Bette B. Anderson 101,434,666 1,268,239 Rand V. Araskog 100,632,434 2,070,471 Ramani Ayer 101,001,799 1,701,106 Robert A. Burnett 101,446,443 1,256,462 Donald R. Frahm 101,033,058 1,669,847 Arthur A. Hartman 101,374,802 1,328,103 Paul G. Kirk, Jr. 101,424,823 1,278,082 Lowndes A. Smith 101,045,967 1,658,938 H. Patrick Swygert 101,442,353 1,260,552 DeRoy C. Thomas 100,945,185 1,757,720 Gordon I. Ulmer 101,443,536 1,259,369 David K. Zwiener 101,025,576 1,677,329 ----------------------- ----------------- ------------------- Shares withheld include broker non-votes and abstentions. (2) Amendment of the Company's Certificate of Incorporation to Change the Company Name Shares For 101,866,542 Shares Against 499,828 Shares Abstained 336,535 (3) Approval of Certain Material Terms of the Company's Annual Executive Bonus Program Shares For 97,278,443 Shares Against 4,424,293 Shares Abstained 1,000,169 (4) Approval of Certain Material Terms of The Hartford 1995 Incentive Stock Plan Shares For 95,636,812 Shares Against 6,115,987 Shares Abstained 950,106 - 16 -
(5) Approval of Certain Material Terms of the 1997 Hartford Life, Inc. Incentive Stock Plan Shares For 94,077,589 Shares Against 7,703,968 Shares Abstained 921,348 (6) Ratification of the appointment of Arthur Andersen LLP Shares For 102,080,373 Shares Against 330,397 Shares Abstained 292,135 There were 117,850,584 shares of the Company's common stock that were issued and outstanding and entitled to vote at the annual meeting as of the March 4, 1997 record date. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibits Index. (b) Reports on Form 8-K - None. - 17 -
SIGNATURE Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. The Hartford Financial Services Group, Inc. (Registrant) /s/ James J. Westervelt --------------------------------------------- James J. Westervelt Senior Vice President and Group Controller (Chief Accounting Officer) AUGUST 13, 1997 - 18 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. FORM 10-Q EXHBITS INDEX EXHIBIT # - - --------- 3.01 Amended and Restated Certificate of Incorporation of The Hartford Financial Services Group, Inc. ("The Hartford", formerly known as ITT Hartford Group, Inc.), amended effective May 2, 1997, is filed herewith. 3.02 Amended Bylaws of The Hartford, amended effective May 2, 1997, are filed herewith. 10.01 Master Intercompany Agreement among Hartford Life, Inc. ("Hartford Life"), The Hartford and with respect to Articles VI and XII, Hartford Fire Insurance Company, was filed as Exhibit 10.01 to Hartford Life's Form 10-Q filed for the quarter ended June 30, 1997, and is incorporated herein by reference. 10.02 Tax Sharing Agreement among The Hartford and its subsidiaries, including Hartford Life, was filed as Exhibit 10.02 to Hartford Life's Form 10-Q filed for the quarter ended June 30, 1997, and is incorporated herein by reference. 10.03 Management Agreement between Hartford Life Insurance Company and The Hartford Investment Management Company, was filed as Exhibit 10.03 to Hartford Life's Form 10-Q filed the quarter ended June 30, 1997, and is incorporated herein by reference. 10.04 Management Agreement among certain subsidiaries of Hartford Life and Hartford Investment Services, Inc., was filed as Exhibit 10.04 to Hartford Life's Form 10-Q filed the quarter ended June 30, 1997, and is incorporated herein by reference. 10.05 Sublease Agreement between Hartford Fire Insurance Company and Hartford Life was filed as Exhibit 10.05 to Hartford Life's Form 10-Q filed for the quarter ended June 30, 1997, and is incorporated herein by reference. 10.06 1997 Hartford Life, Inc. Incentive Stock Plan was filed as Exhibit 10.07 to Hartford Life's Form 10-Q filed for the quarter ended June 30, 1997, and is incorporated herein by reference. 10.07 1997 Hartford Life, Inc. Deferred Restricted Stock Unit Plan was filed as Exhibit 10.08 to Hartford Life's Form 10-Q filed for the quarter ended June 30, 1997, and is incorporated herein by reference. 10.08 1997 Hartford Life, Inc. Restricted Stock Plan for Non-Employee Directors was filed as Exhibit 10.09 to Hartford Life's Form 10-Q filed for the quarter ended June 30, 1997, and is incorporated herein by reference. 10.09 Promissory Note dated February 20, 1997, executed by Hartford Life for the benefit of Hartford Accident & Indemnity Company, was filed as Exhibit 10.09 to Hartford Life's Registration Statement on Form S-1 (Amendment No. 2) dated April 24, 1997 (Registration No. 333-21459) and is incorporated herein by reference. - 19 -
10.10 Promissory Note dated April 4, 1997, executed by Hartford Life for the benefit of Hartford Accident and Indemnity Company, was filed as Exhibit 10.16 to Hartford Life's Registration Statement on Form S-1 (Amendment No. 2) dated April 24, 1997 (Registration No. 333-21459) and is incorporated herein by reference. 11.01 Computation of Earnings Per Share is filed herewith. 27 Financial Data Schedule is filed herewith. - 20 -
<TABLE> <CAPTION> EXHIBIT 11.01 THE HARTFORD FINANCIAL SERVICES GROUP, INC. COMPUTATION OF EARNINGS PER SHARE (In millions, except per share data) Second Quarter Ended Six Month Ended June 30, June 30, ------------------------------- ------------------------------ 1997 1996 1997 1996 - - --------------------------------------------------------------- --------------- --------------- -------------- --------------- (Unaudited) (Unaudited) <S> <C> <C> <C> <C> Net income $ 574 $ 143 $ 778 $ 239 Weighted average common shares outstanding 118.0 117.2 117.8 117.2 Earnings per share $ 4.86 $ 1.22 $ 6.60 $ 2.04 - - --------------------------------------------------------------- -- ------------ -- ------------ -- ----------- --- ----------- </TABLE> - 21 -