================================================================================ 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, 1998 OR [ ]TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 For the transition period from ____________ to ______________ Commission file number 0-19277 THE HARTFORD FINANCIAL SERVICES GROUP, INC. (Exact name of registrant as specified in its charter) DELAWARE 13-3317783 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification Number) HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900 (Address of principal executive offices) (860) 547-5000 (Registrant's telephone number, including area code) Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] No[ ] As of July 31, 1998, there were outstanding 233,442,678 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, 1998 and 1997 3 Consolidated Balance Sheets - June 30, 1998 and December 31, 1997 4 Consolidated Statements of Changes in Stockholders' Equity - Six Months Ended June 30, 1998 and 1997 5 Consolidated Statements of Cash Flows - Six Months Ended June 30, 1998 and 1997 6 Notes to Consolidated Financial Statements 7 ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS 9 ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 20 PART II. OTHER INFORMATION - - --------------------------- ITEM 1. LEGAL PROCEEDINGS 21 ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 21 ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21 Signature 22 - 2 -
PART I. FINANCIAL INFORMATION ITEM 1. FINANCIAL STATEMENTS <TABLE> <CAPTION> 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) 1998 1997 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------- (Unaudited) (Unaudited) REVENUES <S> <C> <C> <C> <C> Earned premiums and other considerations $ 2,730 $ 2,495 $ 5,678 $ 4,965 Net investment income 685 638 1,369 1,267 Net realized capital gains 78 36 174 73 - - ------------------------------------------------------------------------------------------------------------------------- TOTAL REVENUES 3,493 3,169 7,221 6,305 -------------------------------------------------------------------------------------------------------------------- BENEFITS, CLAIMS AND EXPENSES Benefits, claims and claim adjustment expenses 2,035 1,928 4,146 3,886 Amortization of deferred policy acquisition costs 567 477 1,054 931 Other expenses 551 489 1,295 939 - - ------------------------------------------------------------------------------------------------------------------------- TOTAL BENEFITS, CLAIMS AND EXPENSES 3,153 2,894 6,495 5,756 -------------------------------------------------------------------------------------------------------------------- OPERATING INCOME 340 275 726 549 Equity gain on HLI initial public offering -- 368 -- 368 - - ------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 340 643 726 917 Income tax expense 87 64 193 134 - - ------------------------------------------------------------------------------------------------------------------------- INCOME BEFORE MINORITY INTEREST 253 579 533 783 Minority interest in consolidated subsidiary (17) (5) (33) (5) - - ------------------------------------------------------------------------------------------------------------------------- NET INCOME $ 236 $ 574 $ 500 $ 778 -------------------------------------------------------------------------------------------------------------------- Basic earnings per share $ 1.00 $ 2.43 $ 2.12 $ 3.30 Diluted earnings per share $ 0.99 $ 2.40 $ 2.09 $ 3.26 - - ------------------------------------------------------------------------------------------------------------------------- Weighted average common shares outstanding 235.4 236.0 235.6 235.7 Weighted average common shares outstanding and dilutive potential common shares 239.1 238.8 239.1 238.5 - - ------------------------------------------------------------------------------------------------------------------------- Cash dividends declared per share $ 0.21 $ 0.20 $ 0.42 $ 0.40 - - ------------------------------------------------------------------------------------------------------------------------- <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) 1998 1997 - - ------------------------------------------------------------------------------------------ ---------------- ------------------ ASSETS (Unaudited) Investments Fixed maturities, available for sale, at fair value (amortized cost of $34,921 and <S> <C> <C> $34,061) $ 36,038 $ 35,053 Equity securities, available for sale, at fair value (cost of $1,303 and $1,509) 1,710 1,922 Policy loans, at outstanding balance 3,770 3,759 Other investments, at cost 627 388 - - ------------------------------------------------------------------------------------------ ---------------- ------------------ Total investments 42,145 41,122 Cash 143 140 Premiums receivable and agents' balances 2,215 1,873 Reinsurance recoverables 10,407 10,839 Deferred policy acquisition costs 4,539 4,181 Deferred income tax 1,034 955 Other assets 2,560 2,502 Separate account assets 81,905 70,131 - - ------------------------------------------------------------------------------------------ ---------------- ------------------ TOTAL ASSETS $ 144,948 $ 131,743 ==================================================================================== ================ ================== LIABILITIES Future policy benefits, unpaid claims and claim adjustment expenses Property and casualty $ 18,202 $ 18,376 Life 5,647 5,271 Other policy claims and benefits payable 21,075 21,143 Unearned premiums 3,258 2,895 Short-term debt 231 291 Long-term debt 1,482 1,482 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 1,250 1,000 Other liabilities 5,021 4,672 Separate account liabilities 81,905 70,131 - - ------------------------------------------------------------------------------------------ ---------------- ------------------ 138,071 125,261 COMMITMENTS AND CONTINGENCIES, NOTE 6 MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY 440 397 STOCKHOLDERS' EQUITY Common stock - authorized 400,000,000, issued 238,405,140 and 239,374,389 shares, par value $0.01 2 2 Additional paid-in capital 1,593 1,641 Retained earnings 4,059 3,658 Treasury stock, at cost - 4,391,198 and 3,421,949 shares (108) (48) Accumulated other comprehensive income 891 832 - - ------------------------------------------------------------------------------------------ ---------------- ------------------ TOTAL STOCKHOLDERS' EQUITY 6,437 6,085 ==================================================================================== ================ ================== TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 144,948 $ 131,743 ==================================================================================== ================ ================== <FN> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. </FN> </TABLE> - 4 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY SIX MONTHS ENDED JUNE 30, 1998 Accumulated Other Comprehensive Income -------------------------------- Common Stock/ Treasury Unrealized Gain Cumulative Outstanding Additional Retained Stock, on Securities, Translation Shares (Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands) - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD <S> <C> <C> <C> <C> <C> <C> <C> AS PREVIOUSLY REPORTED $1,660 $3,658 $(65) $853 $(21) $6,085 117,976 Two-for-one stock split (1) (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 500 500 Other comprehensive income, net of tax (2) Unrealized gain on securities (3) 61 61 Cumulative translation adjustments (2) (2) ---------- Total other comprehensive income 59 ---------- Total comprehensive income 559 ---------- Issuance of shares under incentive and stock purchase plans 23 26 49 1,324 Tax benefit on employee stock options and awards 15 15 Dividends declared on common stock (99) (99) Treasury stock acquired (86) (86) (172) (3,262) - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $1,595 $4,059 $(108) $914 $(23) $6,437 234,014 - - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> <TABLE> <CAPTION> SIX MONTHS ENDED JUNE 30, 1997 Accumulated Other Comprehensive Income -------------------------------- Common Stock/ Treasury Unrealized Gain Cumulative Outstanding Additional Retained Stock, on Securities, Translation Shares (Dollars in millions) (Unaudited) Paid-in Capital Earnings at Cost net of tax Adjustments Total (In thousands) - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD <S> <C> <C> <C> <C> <C> <C> <C> AS PREVIOUSLY REPORTED $1,643 $2,515 $(30) $352 $40 $4,520 117,556 Two-for-one stock split (1) 117,557 - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, BEGINNING OF PERIOD AS ADJUSTED $1,643 $2,515 $(30) $352 $40 $4,520 235,113 Comprehensive income Net income 778 778 Other comprehensive income, net of tax (2) Unrealized gain on securities 175 175 (3) Cumulative translation adjustments (44) (44) ---------- Total other comprehensive income 131 ---------- Total comprehensive income 909 ---------- Issuance of shares under incentive and stock purchase plans 22 22 1,342 Dividends declared on common stock (94) (94) - - ------------------------------------------------------------------------------------------------------------------------------------ BALANCE, END OF PERIOD $1,665 $3,199 $(30) $527 $(4) $5,357 236,455 - - ------------------------------------------------------------------------------------------------------------------------------------ <FN> (1) 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. Information has been restated on a retroactive basis to reflect the effect of the stock split. For additional information, see Note 4 of Notes to Consolidated Financial Statements. (2) Unrealized gain on securities is net of tax of $34 and $96 for the six months ended June 30, 1998 and 1997, respectively. There is no tax effect on cumulative translation adjustments. (3) Net of reclassification adjustment for gains realized in net income of $113 and $49 for the six months ended June 30, 1998 and 1997, respectively. SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. </FN> </TABLE> - 5 -
<TABLE> <CAPTION> THE HARTFORD FINANCIAL SERVICES GROUP, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS Six Months Ended June 30, ---------------------------------- (In millions) 1998 1997 - - ----------------------------------------------------------------------------------------------------------------------------- (Unaudited) OPERATING ACTIVITIES <S> <C> <C> Net income $ 500 $ 778 ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES Increase in receivables, payables and accruals (277) (176) (Increase) decrease in reinsurance recoverables and other related assets 265 (179) Increase in deferred policy acquisition costs (346) (294) Accrued and deferred income taxes (53) 146 Increase in liabilities for future policy benefits, unpaid claims and claim adjustment expenses and unearned premiums 338 635 Minority interest in consolidated subsidiary 33 5 Equity gain on HLI initial public offering -- (368) Net realized capital gains (174) (73) Depreciation and amortization 57 38 Other, net (40) 330 - - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY OPERATING ACTIVITIES 303 842 - - ----------------------------------------------------------------------------------------------------------------------------- INVESTING ACTIVITIES Purchase of investments (18,121) (23,539) Sale of investments 6,245 7,568 Maturity of investments 11,635 14,597 Purchase of affiliate (189) -- Additions to plant, property and equipment (63) (28) - - ----------------------------------------------------------------------------------------------------------------------------- NET CASH USED FOR INVESTING ACTIVITIES (493) (1,402) - - ----------------------------------------------------------------------------------------------------------------------------- FINANCING ACTIVITIES Short-term debt, net (60) (412) Issuance of long-term debt -- 650 Proceeds from issuance of company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures 250 -- Net receipts from (disbursements for) investment and universal life-type contracts credited to (charged from) policyholder accounts 223 (265) Net proceeds from sale of minority interest in subsidiary -- 687 Dividends paid (97) (95) Acquisition of treasury stock (152) -- Proceeds from issuances under incentive and stock purchase plans 28 22 - - ----------------------------------------------------------------------------------------------------------------------------- NET CASH PROVIDED BY FINANCING ACTIVITIES 192 587 - - ----------------------------------------------------------------------------------------------------------------------------- Foreign exchange rate effect on cash 1 (4) - - ----------------------------------------------------------------------------------------------------------------------------- Net increase in cash 3 23 Cash - beginning of period 140 112 - - ----------------------------------------------------------------------------------------------------------------------------- CASH - END OF PERIOD $ 143 $ 135 - - ----------------------------------------------------------------------------------------------------------------------------- SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION: - - ------------------------------------------------- NET CASH PAID (REFUNDS RECEIVED) DURING THE PERIOD FOR: Income taxes $ 191 $ (57) Interest $ 106 $ 116 <FN> SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS. </FN> </TABLE> - 6 -
THE HARTFORD FINANCIAL SERVICES GROUP, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar amounts in millions except for share data unless otherwise stated) NOTE 1. SIGNIFICANT ACCOUNTING POLICIES (A) BASIS OF PRESENTATION The accompanying unaudited consolidated financial statements of The Hartford Financial Services Group, Inc. ("The Hartford" or the "Company") have been prepared in accordance with generally accepted accounting principles for interim periods. Less than majority-owned entities in which The Hartford has at least a 20% interest are reported on an equity basis. In the opinion of management, these statements include all normal recurring adjustments necessary to present fairly the financial position, results of operations and cash flows for the periods presented. For a description of accounting policies, see Note 1 of Notes to Consolidated Financial Statements included in The Hartford's 1997 Form 10-K Annual Report. Certain reclassifications have been made to prior year financial information to conform to the current year classification of transactions and accounts. In addition, the consolidated financial statements have been restated to reflect a two-for-one stock split effected in the form of a stock dividend (see Note 4). Accordingly, all issued, outstanding and weighted average shares, as well as per share amounts, have been adjusted. (B) CHANGES IN ACCOUNTING PRINCIPLES In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging Activities". The new standard establishes accounting and reporting guidance for derivative instruments, including certain derivative instruments embedded in other contracts. The standard requires, among other things, that all derivatives be carried on the balance sheet at fair value. The standard also specifies hedge accounting criteria under which a derivative can qualify for special accounting. In order to receive special accounting, the derivative instrument must qualify as either a hedge of the fair value or the variability of the cash flow of a qualified asset or liability. Special accounting for qualifying hedges provides for matching the timing of gain or loss recognition on the hedging instrument with the recognition of the corresponding changes in value of the hedged item. SFAS No. 133 will be effective for fiscal years beginning after June 15, 1999. Initial application for The Hartford will begin for the first quarter of the year 2000. The Hartford is currently in the process of quantifying the impact of SFAS No. 133. In March 1998, the American Institute of Certified Public Accountants issued Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use". This SOP provides guidance on accounting for costs of internal use software and in determining whether software is for internal use. The SOP defines internal use software as software that is acquired, internally developed, or modified solely to meet internal needs and identifies stages of software development and accounting for the related costs incurred during the stages. This statement is effective for fiscal years beginning after December 15, 1998 and is not expected to have a material impact on the Company's financial condition or results of operations. Effective January 1, 1998, The Hartford adopted SFAS No. 130, "Reporting Comprehensive Income", which establishes standards for reporting and display of comprehensive income and its components in a full set of general purpose financial statements. The objective of this statement is to report a measure of all changes in equity of an enterprise that result from transactions and other economic events of the period other than transactions with owners. Comprehensive income is the total of net income and all other nonowner changes in equity. Accordingly, the Company has reported comprehensive income in the Consolidated Statements of Changes in Stockholders' Equity. NOTE 2. DEBT On June 8, 1998, Hartford Life, Inc. ("HLI"), a public company in which The Hartford has an 81.4% equity interest, filed an omnibus registration statement with the Securities and Exchange Commission for the issuance of up to $1.0 billion of debt and equity securities, including up to $350 of previously registered but unsold securities. After the issuance of Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely Junior Subordinated Debentures on June 29, 1998 discussed below, HLI had $750 remaining on this shelf registration on June 30, 1998. NOTE 3. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES On June 29, 1998, Hartford Life Capital I, a special purpose Delaware trust formed by HLI, issued 10,000,000, 7.2% Trust Preferred Securities, Series A ("Series A Preferred Securities"). The proceeds from the sale of the Series A Preferred Securities were used to acquire $250 of 7.2%Series A Junior Subordinated Deferrable Interest Debentures ("Junior Subordinated Debentures") issued by HLI. HLI used the proceeds from the offering to retire $50 of its outstanding commercial paper and will use the remainder for general corporate purposes, which may include funding working capital, investments in or loans to subsidiaries, or potential strategic acquisitions. The Series A Preferred Securities represent undivided beneficial interests in Hartford Life Capital I's assets, which consist solely of the Junior Subordinated Debentures. HLI owns all of the beneficial interests represented by Series A Common Securities of Hartford Life Capital I. Holders of Series A Preferred Securities are entitled to receive cumulative cash distributions accruing from June 29, 1998, the date of issuance, and payable quarterly in arrears commencing July 15, 1998 at the annual rate of 7.2% of the stated liquidation amount of $25.00 per Series A Preferred Security. The Series A Preferred Securities are subject to mandatory redemption upon repayment of the Junior Subordinate Debentures at maturity or upon earlier redemption. HLI has the right to redeem the Series A Junior Subordinated Debt Securities on or after June 30, 2003 or earlier upon the - 7 -
occurrence of certain events. Holders of Series A Preferred Securities generally have no voting rights. The Junior Subordinated Debentures bear interest at the annual rate of 7.2% of the principal amount, payable quarterly in arrears commencing June 29, 1998, and mature on June 30, 2038. The Junior Subordinated Debentures are unsecured and rank junior and subordinate in right of payment to all present and future senior debt of HLI and are effectively subordinated to all existing and future liabilities of its subsidiaries. HLI has the right at any time, and from time to time, to defer payments of interest on the Junior Subordinated Debentures for a period not exceeding 20 consecutive quarters up to the debentures' maturity date. During any such period, interest will continue to accrue and HLI may not declare or pay any cash dividends or distributions on , or purchase, HLI's capital stock nor make any principal, interest or premium payments on or repurchase any debt securities that rank pari passu with or junior to the Junior Subordinated Debentures. HLI will have the right at any time to dissolve the Trust and cause the Series A Junior Subordinated Debt Securities to be distributed to the holders of the Series A Preferred Securities and the Series A Common Securities. HLI has guaranteed, on a subordinated basis, all of the Hartford Life Capital I obligations under the Series A Preferred Securities including payment of the redemption price and any accumulated and unpaid distributions upon dissolution, winding up or liquidation to the extent funds are available. NOTE 4. STOCKHOLDERS' EQUITY On May 21, 1998, The Hartford's shareholders approved an increase in the number of authorized common shares from 200,000,000 to 400,000,000. On that date, the Board of Directors declared 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. Agreements concerning stock options and other commitments payable in shares of the Company's common stock either provide for the issuance of the additional shares due to the declaration of the stock split or have been modified to reflect the stock split. In addition, retroactive adjustments to treasury stock and additional paid-in capital have been made to reflect the stock split. All references to issued, outstanding and weighted average shares, as well as per share amounts, have been adjusted to reflect the stock split in the consolidated financial statements and related notes. Par value per common share remained unchanged at $0.01. NOTE 5. EARNINGS PER SHARE The Company adopted SFAS No. 128, "Earnings per Share", effective December 15, 1997, and as a result, the Company's reported earnings per share for June 30, 1997 were restated to reflect the effect of reporting diluted earnings per share. The following tables present a reconciliation of income and shares used in calculating basic earnings per share to those used in calculating diluted earnings per share. <TABLE> <CAPTION> Second Quarter Ended Six Months Ended ------------------------------------- ------------------------------------- Per Share Per Share JUNE 30, 1998 Income Shares Amount Income Shares Amount ---------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE <S> <C> <C> <C> <C> <C> <C> Income available to common shareholders $ 236 235.4 $ 1.00 $ 500 235.6 $ 2.12 ------------- ------------ DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 3.7 -- 3.5 ------------------------ ------------------------- Income available to common shareholders plus assumed conversions $ 236 239.1 $ 0.99 $ 500 239.1 $ 2.09 ---------------------------------------------------------------------------------------------------------------------------------- JUNE 30, 1997 ---------------------------------------------------------------------------------------------------------------------------------- BASIC EARNINGS PER SHARE Income available to common shareholders $ 574 236.0 $ 2.43 $ 778 235.7 $ 3.30 ------------- ------------ DILUTED EARNINGS PER SHARE Options and contingently issuable shares -- 2.8 -- 2.8 ------------------------ ------------------------- Income available to common shareholders plus assumed conversions $ 574 238.8 $ 2.40 $ 778 238.5 $ 3.26 ---------------------------------------------------------------------------------------------------------------------------------- </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 stock options, using the treasury stock method, and also contingently issuable shares. Under the treasury stock method, exercise of options is assumed with the proceeds used to purchase common stock at the average market price for the period. The difference between the number of shares assumed issued and number of shares purchased represents the dilutive shares. Contingently issuable shares are included upon satisfaction of certain conditions related to the contingency. NOTE 6. COMMITMENTS AND CONTINGENCIES (A) LITIGATION The Hartford is involved in various legal actions, some of which involve claims for substantial amounts. In the opinion of management, the ultimate liability with respect to such lawsuits is not expected to be material to the consolidated financial condition, results of operations or cash flows of The Hartford. (B) ENVIRONMENTAL AND ASBESTOS CLAIMS Information regarding environmental and asbestos claims may be found in the Environmental and Asbestos Claims section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. - 8 -
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, 1998, compared with December 31, 1997, and its results of operations for the second quarter and six months ended June 30, 1998 compared with the equivalent 1997 periods. This discussion should be read in conjunction with the MD&A included in The Hartford's 1997 Form 10-K Annual Report. Certain of the statements contained herein (other than statements of historical fact) are forward-looking statements. Such forward-looking statements are made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 and include estimates and assumptions related to economic, competitive and legislative developments. These forward-looking statements are subject to change and uncertainty which are, in many instances, beyond the Company's control and have been made based upon management's expectations and beliefs concerning future developments and their potential effect upon The Hartford. There can be no assurance that future developments will be in accordance with management's expectations or that the effect of future developments on The Hartford will be those anticipated by management. Actual results could differ materially from those expected by The Hartford, depending on the outcome of certain factors, including those described with the forward-looking statements herein. Certain reclassifications have been made to prior year financial information to conform to the current year presentation. INDEX Consolidated Results of Operations: Operating Summary 9 North American Property & Casualty 10 Life 11 International 12 Other Operations 13 Environmental and Asbestos Claims 13 Investments 15 Capital Markets Risk Management 17 Capital Resources and Liquidity 18 Regulatory Initiatives and Contingencies 20 Accounting Standards 20 <TABLE> <CAPTION> CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------------------- 1998 1997 1998 1997 -------------------------------------------------------- <S> <C> <C> <C> <C> TOTAL REVENUES $ 3,493 $ 3,169 $ 7,221 $ 6,305 - - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 236 $ 574 $ 500 $ 778 Less: Net realized capital gains, after-tax 50 24 113 49 Equity gain on HLI initial public offering -- 368 -- 368 - - ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 186 $ 182 $ 387 $ 361 - - ------------------------------------------------------------------------------------------------------------------------------------ </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 and certain other items. Core earnings is an internal performance measure used by the Company in the management of its operations. Management believes that this performance measure delineates the results of operations of the Company's ongoing lines of business in a manner that allows for a better understanding of the underlying trends in the Company's current business. However, core earnings should only be analyzed in conjunction with, and not in lieu of, net income and may not be comparable to other performance measures used by the Company's competitors. Revenues for the second quarter and six months ended June 30, 1998 increased $324, or 10%, and $916, or 15%, over the comparable prior year periods. Contributing to the increase in both periods were an increase in the aggregate fees earned on separate account assets, an increase in service fee revenue, and higher net investment income and net realized capital gains. In addition, revenues for the six month period also increased as the result of an increase in fees associated with new variable corporate owned life insurance ("COLI") sales and proceeds from the sale of renewal rights and other considerations related to the Industrial Risk Insurance pool ("IRI transaction"). (For an analysis of net investment income and net realized capital gains, see the Investments section.) Core earnings increased $4, or 2%, and $26, or 7%, for the second quarter and six months ended June 30, 1998 from the comparable prior year periods. Contributing to the increase in both periods were higher fee income earned on increasing account values in the Annuity division of the Life segment and an increase in net investment income, partially offset by increased underwriting losses, primarily the result of higher catastrophe losses in North American Property & Casualty totaling $57 and $86, after-tax, for the second quarter and six months ended June 30, 1998, respectively, compared to $3 and $19, after-tax, for the - 9 -
same periods in 1997. In addition, core earnings for the six month period also were higher as a result of proceeds from the IRI transaction, partially offset by additional reserves associated with the IRI transaction. The effective tax rates for the second quarter and six months ended June 30, 1998, excluding the equity gain on Hartford Life, Inc. ("HLI"), were 26% and 27%, respectively, compared to 23% and 24% for the comparable periods in 1997. Tax-exempt interest earned on invested assets was a principal cause of effective tax rates lower than the 35% U.S. statutory rate. Net income for 1997 includes a $368 equity gain resulting from the initial public offering of HLI's Class A common stock ("The Offering") on May 22, 1997 as discussed in The Hartford's 1997 Form 10-K Annual Report in Note 3 of Notes to Consolidated Financial Statements and in the Capital Resources and Liquidity section under "The Offering". HLI is the holding company parent of The Hartford's significant life insurance subsidiaries. SEGMENT RESULTS The Hartford's reporting segments consist of North American Property & Casualty, Life, International and Other Operations. Included in Other Operations is the effect of an 18.6% minority interest in HLI's operating results. The following is a summary of core earnings and net income by segment. <TABLE> <CAPTION> SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------------------- CORE EARNINGS 1998 1997 1998 1997 - - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> <C> <C> North American Property & Casualty $ 100 $ 100 $ 215 $ 204 Life 94 74 178 136 International 9 13 26 27 Other Operations (17) (5) (32) (6) - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 186 $ 182 $ 387 $ 361 ==================================================================================================================================== NET INCOME - - ------------------------------------------------------------------------------------------------------------------------------------ North American Property & Casualty $ 127 $ 111 $ 293 $ 215 Life 94 73 178 136 International 32 29 60 65 Other Operations (17) 361 (31) 362 - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL $ 236 $ 574 $ 500 $ 778 ==================================================================================================================================== </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, -------------------------------------------------------- 1998 1997 1998 1997 -------------------------------------------------------- <S> <C> <C> <C> <C> TOTAL REVENUES $ 1,817 $ 1,683 $ 3,654 $ 3,306 - - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 127 $ 111 $ 293 $ 215 Less: Net realized capital gains, after-tax 27 11 78 11 - - ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 100 $ 100 $ 215 $ 204 - - ------------------------------------------------------------------------------------------------------------------------------------ </TABLE> Revenues for the North American Property & Casualty segment increased $134, or 8%, for the second quarter and $348, or 11%, for the six months ended June 30, 1998 compared with the same periods in 1997. The increase for the quarter was primarily due to a $50 increase in earned premiums, a $46 increase in servicing revenues and $25 of additional before-tax net realized capital gains. The increase for the six months resulted from a $43 increase in earned premiums, a $108 increase in servicing revenues, an increase in before-tax net realized capital gains of $104, proceeds of $55 from the IRI transaction and an increase of $38 in net investment income. The primary contributor to the increase in servicing revenues was the Hartford Customer Services Group, which provides customer and telemarketing services for The American Association of Retired Persons ("AARP") Health Care Options program as of January 1, 1998, generating $41 of the revenue increase for the quarter and $100 of the increase for the six month period. Core earnings were flat for the quarter and increased $11, or 5%, for the first six months of 1998 compared to the same period in 1997. This increase was primarily due to increased after-tax net investment income and after-tax proceeds from the IRI transaction, partially offset by increased underwriting losses due to adverse property catastrophe losses and additional reserves associated with the IRI transaction. - 10 -
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, -------------------------------------------------------- 1998 1997 1998 1997 -------------------------------------------------------- <S> <C> <C> <C> <C> Written premiums $ 1,569 $ 1,439 $ 3,031 $ 2,927 Underwriting results, before-tax $ (59) $ (40) $ (122) $ (60) Combined ratio [1] 103.5 102.7 103.9 101.7 - - ------------------------------------------------------------------------------------------------------------------------------------ <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 increased 9% for the second quarter and 4% for the six months ended June 30, 1998 compared to the same prior year periods. Increases in Personal and, for the second quarter, Commercial operations, were partially offset by a decrease in Reinsurance operations. Written premiums in the Commercial operation decreased slightly for the six month period. Commercial written premiums for the second quarter increased $48, or 6%, contributing 3% to the increase in the North American Property and Casualty segment. While growth was generated across most lines of business, strong growth in three of the largest customer segments: Select Customers of 8%, Key Accounts of 7% and Marine/Agriculture of 24% were the primary contributors. For the six months, Commercial written premiums declined 1% resulting in a slight decrease in the North American Property & Casualty segment, as growth in Select Customers of 8%, Key Accounts of 4% and Marine/Agriculture of 15% were offset by decreases in Major/National Accounts of 14% and Other Specialty of 36%. These decreases were primarily due to increased conversion of workers' compensation to high deductible policies and the elimination of Industrial Risk Insurance premiums in 1998 as a result of the IRI transaction. Personal written premiums increased $90, or 18%, for the quarter and $137, or 15%, for the six months ended June 30, 1998. This contributed 6% and 5% of growth to the North American Property & Casualty segment for the second quarter and six months ended June 30, 1998, respectively. All three customer divisions within Personal (AARP, Agency and Affinity) produced positive premium growth for both 1998 periods over 1997. In addition, the acquisition of Omni Insurance Group, Inc., completed on February 12, 1998, contributed $38 and $60 of this increase, respectively, for the quarter and six months ended June 30, 1998. Reinsurance written premiums declined $8, or 4%, in the second quarter and $24, or 7%, for the six months ended June 30, 1998 resulting in a slight decrease to the North American Property and Casualty segment in both periods. This decrease was primarily due to timing of premium bookings in North America and reductions in international premiums resulting from rate decreases, increased customer risk retentions and unfavorable foreign exchange rates. Underwriting results, before-tax, for the second quarter and six months ended June 30, 1998 deteriorated over the comparable prior year periods $19, or 0.8 combined ratio points and $62 or 2.2 combined ratio points, respectively. The deterioration in both 1998 periods was due to significantly increased property catastrophe losses, partially offset by increased earned premiums and a reduction in policyholder dividends in Personal operations. Also contributing to the six month deterioration was the establishment of additional reserves in connection with the IRI transaction in the first quarter of 1998 upon review of existing claims and outstanding reinsurance assets of the Industrial Risk Insurers pool. <TABLE> <CAPTION> LIFE OPERATING SUMMARY [1] SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------------------- 1998 1997 1998 1997 -------------------------------------------------------- <S> <C> <C> <C> <C> TOTAL REVENUES $ 1,155 $ 1,042 $ 2,559 $ 2,097 - - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 94 $ 73 $ 178 $ 136 Less: Net realized capital losses, after-tax -- (1) -- -- - - ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 94 $ 74 $ 178 $ 136 ==================================================================================================================================== <FN> [1] Life results are presented before the effect of the 18.6% minority interest in HLI, which is reflected in Other Operations. </FN> </TABLE> Revenues increased $113, or 11%, and $462, or 22%, for the second quarter and six months ended June 30, 1998 compared to the second quarter and six months ended June 30, 1997, respectively. Excluding COLI, revenues increased $120, or 13%, and $308, or 17%, respectively, for the second quarter and six months ended June 30, 1998 compared to the equivalent 1997 periods. This increase was principally driven by the Annuity division which experienced a substantial increase in the aggregate - 11 -
fees earned due to growth in variable annuity account values. Average total annuity account values increased $19.3 billion, or 34%, compared to the second quarter of 1997 and $16.9 billion, or 31%, compared to the six months ended June 30, 1997. The increase in average annuity account values resulted in an increase in fee revenue of $83, or 50%, and $159, or 52%, over the second quarter and six months ended June 30, 1997, respectively. The increase in account values was driven primarily by sales of individual variable annuities as well as continued market appreciation. Sales of individual variable annuities were $2.8 billion and $5.1 billion for the second quarter and six months ended June 30, 1998, respectively, compared to sales of $2.3 billion and $4.7 billion for the second quarter and six months ended June 30, 1997, respectively. In addition, revenues related to the Group Insurance operation of the Employee Benefits division increased $21, or 5%, and $111, or 14%, compared to the second quarter and six months ended June 30, 1997, respectively, as a result of strong sales. Core earnings increased $20, or 27%, and $42, or 31%, for the second quarter and six months ended June 30, 1998, respectively, primarily due to growth in the Annuity, Individual Life and Employee Benefits divisions. Annuity earnings increased $17, or 35%, and $35, or 38%, respectively, compared to the prior year periods, as a result of higher fee income earned on increasing account values and continued operating efficiencies. Individual Life earnings increased $3, or 25%, and $5, or 22%, respectively, compared to the prior year periods, primarily as a result of continued growth in variable life account values. Earnings in the Group Insurance operation increased $2, or 13%, and $6, or 23%, respectively, compared to the prior year periods, as a result of increased premium revenues. Partially offsetting these increases was an operating loss from the division's international operation of ($2) and ($4) for the second quarter and six months ended June 30, 1998, respectively, compared to earnings of $1 and $2 for the second quarter and six months ended June 30, 1997, respectively. <TABLE> <CAPTION> INTERNATIONAL OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------------------- 1998 1997 1998 1997 -------------------------------------------------------- <S> <C> <C> <C> <C> TOTAL REVENUES $ 478 $ 407 $ 924 $ 824 - - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME $ 32 $ 29 $ 60 $ 65 Less: Net realized capital gains, after-tax 23 16 34 38 - - ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ 9 $ 13 $ 26 $ 27 ==================================================================================================================================== </TABLE> Revenues for the second quarter and six months ended June 30, 1998 increased $71, or 17%, and $100, or 12%, over the comparable periods in 1997. This increase was primarily due to earned premium growth of $57, or 17%, and $101, or 15%, respectively, for the second quarter and six month periods, principally at ITT London & Edinburgh, as a result of growth in creditor, property and life business, partially offset by reductions in the motor business. In addition, for the six month period, earned premiums increased $5, or 15%, at ITT Ercos primarily due to growth in the motor business. Net investment income also increased $3, or 7%, and $5, or 6%, for the second quarter and six month periods, respectively, as compared to the equivalent 1997 periods. An increase in net realized capital gains of $14, or 67%, at Zwolsche Algemeene contributed to the increase for the quarter while, for the six month period, net realized capital gains in the International segment decreased by $6, or 11%. (For an analysis of net investment income and net realized capital gains, see the Investments section.) Core earnings for the second quarter and six months ended June 30, 1998 decreased $4, or 31%, and $1, or 4%, respectively, compared to the same periods in 1997. The decline for the quarter was primarily due to a $3, or 50%, decrease at ITT London & Edinburgh due to flood damage of approximately $15, before-tax, in the United Kingdom in early April 1998. This decrease was partially offset by improved underwriting results in other lines of business at ITT London & Edinburgh. For the six month period, core earnings at ITT London & Edinburgh of $12 were flat compared with the prior year. Underwriting results for the six month period at ITT London & Edinburgh declined $3, before-tax, over the prior year due to January 1998 winter storms and the effect of the April flood damage. Partially offsetting this decline were improvements resulting from strong pricing and underwriting actions taken in the motor line of business at ITT London & Edinburgh in 1997. For the six month period, core earnings at ITT Ercos and Zwolsche Algemeene were in line with the prior year. In local currency terms, Zwolsche Algemeene achieved 10% growth in core earnings while ITT Ercos declined 8% in core earnings over the prior year. The U.S. dollar remained weak against the sterling while strengthening against the guilder during the second quarter and six months ended June 30, 1998 as compared to the same periods in 1997. This resulted in an overall negligible foreign exchange impact on revenues and core earnings for the second quarter. For the six month period, there was an overall negative foreign exchange impact on total revenues and core earnings of $8 and $1, respectively. In a July 1998 decision, which could adversely impact loss reserves and underwriting results at ITT London & Edinburgh, a court in the United Kingdom changed the formula for determination of lump-sum settlements of bodily injury claims, including the discount rate to be used. This decision is subject to change by a government official having the authority to prescribe the discount rate. While the impact of this development may be material to the results of operations of the International segment, management does not expect the impact to be material to The Hartford's consolidated financial condition or results of operations. - 12 -
<TABLE> <CAPTION> OTHER OPERATIONS OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED JUNE 30, JUNE 30, -------------------------------------------------------- 1998 1997 1998 1997 -------------------------------------------------------- <S> <C> <C> <C> <C> TOTAL REVENUES $ 43 $ 37 $ 84 $ 78 - - ------------------------------------------------------------------------------------------------------------------------------------ NET INCOME (LOSS) $ (17) $ 361 $ (31) $ 362 Less: Net realized capital gains (losses), after-tax -- (2) 1 -- Equity gain on HLI initial public offering -- 368 -- 368 - - ------------------------------------------------------------------------------------------------------------------------------------ CORE EARNINGS $ (17) $ (5) $ (32) $ (6) ==================================================================================================================================== </TABLE> Other Operations consist of property and casualty operations of The Hartford which have discontinued writing new and renewal business as well as the effect of an 18.6% minority interest in HLI's operating results. For the second quarter and six months ended June 30, 1998, core earnings respectively included $(17) and $(33) minority interest in HLI's operating results while 1997 included $(5) for both periods. (For additional information regarding HLI's results, see the Life section.) Excluding minority interest, core earnings increased $2 over the six months ended June 30, 1997. The equity gain consisted of a $368 non-taxable gain related to the increased value of its equity ownership in HLI, as discussed in The Hartford's 1997 Form 10-K Annual Report in the Life section of the MD&A. ENVIRONMENTAL AND ASBESTOS CLAIMS The Hartford continues to receive claims asserting damages from environmental exposures and for injuries from asbestos and asbestos-related products, both of which affect the North American Property & Casualty, International and Other Operations segments. Environmental claims relate primarily to pollution and related clean-up costs. With regard to these claims, uncertainty exists which impacts the ability of insurers and reinsurers to estimate the ultimate reserves for unpaid losses and related settlement expenses. The Hartford finds that conventional reserving techniques cannot estimate the ultimate cost of these claims because of inadequate development patterns and inconsistent emerging legal doctrine. For the majority of environmental claims and many types of asbestos claims, unlike any other type of contractual claim, there is almost no agreement or consistent precedent to determine what, if any, coverage exists or which, if any, policy years and insurers or reinsurers may be liable. Further uncertainty arises with environmental claims since claims are often made under policies, the existence of which may be in dispute, the terms of which may have changed over many years, which may or may not provide for legal defense costs, and which may or may not contain environmental exclusion clauses that may be absolute or allow for fortuitous events. Courts in different jurisdictions have reached disparate conclusions on similar issues and in certain situations have broadened the interpretation of policy coverage and liability issues. In light of the extensive claim settlement process for environmental and asbestos claims, involving comprehensive fact gathering, subject matter expertise and intensive litigation, The Hartford established an environmental claims facility in 1992 to defend itself aggressively against unwarranted claims and to minimize costs. Within the property and casualty insurance industry, progress has been made in developing sophisticated, alternative methodologies utilizing company experience and supplemental databases to assess environmental and asbestos liabilities. Consistent with The Hartford's practice of using the best techniques to estimate the Company's environmental and asbestos exposures, a study was conducted in 1996 utilizing internal staff supplemented by outside legal and actuarial consultants. Use of these new methodologies resulted in The Hartford adjusting its environmental and asbestos liabilities in the third quarter of 1996. (For additional information, see The Hartford's 1997 Form 10-K Annual Report.) Reserve activity for both reported and unreported environmental and asbestos claims, including reserves for legal defense costs, for the six months ended June 30, 1998 and the year ended December 31, 1997, was as follows (net of reinsurance): - 13 -
<TABLE> <CAPTION> ENVIRONMENTAL AND ASBESTOS CLAIMS CLAIMS AND CLAIM ADJUSTMENT EXPENSES SIX MONTH ENDED YEAR ENDED JUNE 30, 1998 DECEMBER 31, 1997 -------------------------------------------------------------------------------- Environmental Asbestos Total Environmental Asbestos Total -------------------------------------------------------------------------------- <S> <C> <C> <C> <C> <C> <C> Beginning liability $ 1,312 $ 688 $ 2,000 $ 1,439 $ 717 $ 2,156 Claims and claim adjustment expenses incurred 2 3 5 -- 2 2 Claims and claim adjustment expenses paid (90) (23) (113) (113) (45) (158) Other [1] -- -- -- (14) 14 -- - - --------------------------------------------------------------------------------------------------------------------------------- ENDING LIABILITY [2] $ 1,224 $ 668 $ 1,892 $ 1,312 $ 688 $ 2,000 ================================================================================================================================= <FN> [1] Other represents reclassifications of beginning reserves between environmental and asbestos for December 31, 1997. [2] The ending liabilities are net of reinsurance on reported and unreported claims of $1,716 and $1,853 for June 30, 1998 and December 31, 1997, respectively. Gross of reinsurance, as of June 30, 1998 and December 31, 1997 reserves for environmental and asbestos were $1,960 and $1,648 and $2,165 and $1,688, respectively. </FN> </TABLE> The Hartford believes that the environmental and asbestos reserves recorded at June 30, 1998 are a reasonable estimate of the ultimate remaining liability for these claims based upon known facts, current assumptions and The Hartford's methodologies. Future social, economic, legal or legislative developments may alter the original intent of policies and the scope of coverage. The Hartford will continue to evaluate new developments and methodologies as they become available for use in supplementing the Company's ongoing analysis and review of its environmental and asbestos exposures. These future reviews may result in a change in reserves, impacting The Hartford's results of operations in the period in which the reserve estimates are changed. While the effects of future changes in facts, legal and other issues could have a material effect on future results of operations, The Hartford does not expect such changes would have a material effect on its liquidity or financial condition. - 14 -
INVESTMENTS An important element of the financial results of The Hartford is return on invested assets. The Hartford's investment activities are divided between the reportable segments of North American Property & Casualty, Life, International and Other Operations. The investment portfolios for these segments are managed based on the underlying characteristics and nature of their respective liabilities. For a further discussion on The Hartford's approach to managing risks, see the Capital Markets Risk Management section. Please refer to The Hartford's 1997 Form 10-K Annual Report for a description of the Company's investment objectives and policies. NORTH AMERICAN PROPERTY & CASUALTY Total invested assets were $15.0 billion at June 30, 1998 and were comprised of fixed maturities of $13.6 billion and other investments of $1.4 billion, primarily equity securities. FIXED MATURITIES BY TYPE - - ---------------------------------------------------------------- JUNE 30, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- Municipal - tax-exempt $ 7,981 58.5% $ 7,873 58.5% Corporate 2,029 14.9% 2,257 16.8% Commercial MBS 670 4.9% 687 5.1% CMO 586 4.3% 483 3.6% Gov't/Gov't agencies - For. 576 4.2% 459 3.4% ABS 505 3.7% 559 4.2% MBS - agency 396 2.9% 540 4.0% Gov't/Gov't agencies - U.S. 53 0.4% 32 0.2% Municipal - taxable 25 0.2% 31 0.2% Short-term 763 5.6% 479 3.6% Redeemable pref'd stock 61 0.4% 56 0.4% - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 13,645 100.0% $ 13,456 100.0% - - ---------------------------------------------------------------- The taxable equivalent duration of the June 30, 1998 fixed maturity portfolio was 4.5 years compared to 4.7 years at December 31, 1997. Duration is defined as the market price sensitivity of the portfolio to parallel shifts in the yield curve. INVESTMENT RESULTS The table below summarizes the North American Property & Casualty segment's results. SECOND QUARTER SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------------------------------- 1998 1997 1998 1997 - - ----------------------------------------------------------------- Net investment income, before-tax $ 206 $ 193 $ 408 $ 370 Net investment income, after-tax [1] $ 164 $ 154 $ 326 $ 297 Yield on average invested assets, before-tax [2] 5.8% 5.7% 5.8% 5.6% Yield on average invested assets, after-tax [1] [2] 4.6% 4.5% 4.6% 4.5% Net realized capital gains, before-tax $ 42 $ 17 $ 121 $ 17 - - ----------------------------------------------------------------- [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 net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). For the second quarter ended June 30, 1998, before-tax net investment income was $206 compared to $193 in 1997, an increase of 7%, while after-tax net investment income increased 6% to $164. For the six months ended June 30, 1998, before-tax net investment income was $408 compared to $370 in 1997, an increase of 10%, while after-tax net investment income also increased by 10%. Yields on average invested assets also increased for both the second quarter and six month period. The increase in investment income for both periods was the result of higher invested assets as a result of increased cash flow from operating and financing activities. The increase in yields on average invested assets was due primarily to the reallocation from equities to higher yielding fixed maturities. Year to date before-tax net realized capital gains increased to $121 at June 30, 1998 resulting primarily from opportunities taken in a strong equity market. LIFE Invested assets, excluding separate accounts, totaled $21.8 billion at June 30, 1998 and were comprised of $17.5 billion of fixed maturities, $3.8 billion of policy loans, and other investments of $520. Policy loans, which had a weighted-average interest rate of 11.1% as of June 30, 1998, are secured by the cash value of the life policy. These loans do not mature in a conventional sense, but expire in conjunction with the related policy liabilities. FIXED MATURITIES BY TYPE - - ----------------------------------------------------------------- JUNE 30, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- Corporate $ 7,998 45.7% $ 7,970 47.3% ABS 3,081 17.6% 3,199 19.0% Commercial MBS 1,903 10.9% 1,606 9.5% CMO 961 5.5% 978 5.8% Municipal - tax-exempt 653 3.7% 171 1.0% Gov't/Gov't agencies - For. 589 3.4% 502 3.0% MBS - agency 561 3.2% 514 3.1% Municipal - taxable 240 1.4% 267 1.6% Gov't/Gov't agencies - U.S. 97 0.5% 241 1.4% Short-term 1,417 8.1% 1,395 8.3% Redeemable preferred stock 5 -- 5 -- - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 17,505 100.0% $ 16,848 100.0% - - ---------------------------------------------------------------- INVESTMENT RESULTS The table below summarizes the Life segment's results. SECOND QUARTER SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------------------------------- (before-tax) 1998 1997 1998 1997 - - ----------------------------------------------------------------- Net investment income $ 392 $ 362 $ 792 $ 737 Yield on average invested assets, [1] 7.4% 7.2% 7.6% 7.4% Net realized capital losses $ -- $ (2) $ -- $ (1) - - ----------------------------------------------------------------- [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). For the second quarter ended June 30, 1998, before-tax net investment income totaled $392, compared to $362 in 1997, an increase of 8% as a result of higher average invested assets and - 15 -
increased yields on average invested assets. Before-tax yields on average invested assets for the second quarter increased to 7.4%. For the six months ended June 30, 1998, before-tax net investment income was $792 compared to $737 in 1997, an increase of $55, or 7%. Before-tax yields for the six month period increased to 7.6% from 7.4% in 1997. The increase in yields on average invested assets for both periods was due, in part, to an increase in allocation to assets rated BBB. There were no net realized capital gains for the quarter and six months ended June 30, 1998. INTERNATIONAL Invested assets, excluding separate accounts, were $2.8 billion at June 30, 1998 and were comprised of fixed maturities of $2.4 billion and other investments of $406, primarily equity securities. FIXED MATURITIES BY TYPE - - ----------------------------------------------------------------- JUNE 30, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- Gov't/Gov't agencies - For. $ 885 36.4% $ 829 36.5% Corporate 517 21.3% 414 18.3% Gov't/Gov't agencies - U.S. 11 0.5% 19 0.8% Short-term 1,015 41.8% 1,007 44.4% - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 2,428 100.0% $ 2,269 100.0% - - ---------------------------------------------------------------- INVESTMENT RESULTS The table below summarizes the International segment's results. SECOND QUARTER SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------------------------------- (before-tax) 1998 1997 1998 1997 - - ----------------------------------------------------------------- Net investment income $ 46 $ 43 $ 89 $ 84 Yield on average invested assets, [1] 7.0% 6.6% 6.8% 6.4% Net realized capital gains $ 35 $ 24 $ 51 $ 57 - - ----------------------------------------------------------------- [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). For the second quarter ended June 30, 1998, before-tax net investment income increased $3, or 7%, as compared to the same period in 1997. Yields on average invested assets increased to 7.0% as of June 30, 1998 from 6.6% in 1997. For the six months ended June 30, 1998, before-tax net investment income increased 6%, and before-tax yields increased to 6.8% from 6.4% for the same period in 1997. The increase in yields on average invested assets was primarily due to an increase in short-term interest rates in the U.K. and a reallocation of funds from equities to fixed maturities. Net realized capital gains for the second quarter ended June 30, 1998 increased to $35 compared to $24 for the same period in 1997, resulting primarily from opportunities taken in a strong equity market. OTHER OPERATIONS Invested assets were $2.5 billion at June 30, 1998 and were substantially comprised of fixed maturities. FIXED MATURITIES BY TYPE - - ----------------------------------------------------------------- JUNE 30, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- Corporate $ 1,605 65.2% $ 1,530 61.7% Commercial MBS 150 6.1% 149 6.0% ABS 137 5.6% 142 5.7% Gov't/Gov't agencies - U.S. 99 4.0% 88 3.5% Gov't/Gov't agencies - For. 62 2.5% 83 3.3% MBS - agency 49 2.0% 56 2.3% Municipal - taxable 39 1.6% 39 1.6% CMO 21 0.9% 27 1.1% Short-term 289 11.7% 357 14.4% Redeemable preferred stock 9 0.4% 9 0.4% - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 2,460 100.0% $ 2,480 100.0% - - ---------------------------------------------------------------- INVESTMENT RESULTS The table below summarizes the Other Operations segment's results. SECOND QUARTER SIX MONTHS ENDED ENDED JUNE 30, JUNE 30, ---------------------------------------- (before-tax) 1998 1997 1998 1997 - - ----------------------------------------------------------------- Net investment income $ 41 $ 40 $ 80 $ 76 Yield on average invested assets, [1] 6.8% 7.0% 6.6% 6.6% Net realized capital gains (losses) $ 1 $ (3) $ 2 $ -- - - ----------------------------------------------------------------- [1] Represents annualized net investment income (excluding net realized capital gains (losses)) divided by average invested assets at cost (fixed maturities at amortized cost). For the second quarter ended June 30, 1998, before-tax net investment income totaled $41 compared to $40 in 1997, an increase of 3%. For the six months ended June 30, 1998, before-tax net investment income increased 5% to $80 and before-tax yields remained at 6.6% . - 16 -
CAPITAL MARKETS RISK MANAGEMENT The Hartford has a disciplined approach to managing risks associated with its capital markets and asset/liability management activities. Investment portfolio management is organized to focus investment management expertise on specific classes of investments while asset/liability management is the responsibility of separate and distinct risk management units supporting the property and casualty and life operations. Derivative instruments are utilized in accordance with established Company policy and are monitored internally and reviewed by senior management. The Company is exposed to two primary sources of investment and asset/liability management risk: credit risk, relating to the uncertainty associated with the ability of an obligor or counterparty to make timely payments of principal and/or interest, and market risk, relating to the market price and/or cash flow variability associated with changes in interest rates, securities prices, market indices, yield curves or currency exchange rates. The Company does not hold any financial instruments entered into for trading purposes. Please refer to The Hartford's 1997 Form 10-K Annual Report for a description of the Company's objectives, policies and strategies. CREDIT RISK The Company invests primarily in investment grade securities and has established exposure limits, diversification standards and review procedures for all credit risks whether borrower, issuer or counterparty. Creditworthiness of specific obligors is determined by an internal credit evaluation supplemented by consideration of external determinants of creditworthiness, typically ratings assigned by nationally recognized ratings agencies. Obligor, geographic, asset sector and industry concentrations are subject to established limits and monitored on a regular interval. The Hartford is not exposed to any significant credit concentration risk of a single issuer. The following tables identify fixed maturity securities for the property and casualty operations, including international and other operations, and the life operations, including international operations and guaranteed separate accounts, by credit quality. The ratings referenced in the tables are based on the ratings of a nationally recognized rating organization or, if not rated, assigned based on the Company's internal analysis of such securities. PROPERTY AND CASUALTY OPERATIONS As of June 30, 1998, over 95% of the fixed maturity portfolio was invested in investment-grade securities. FIXED MATURITIES BY CREDIT QUALITY - - ---------------------------------------------------------------- JUNE 30, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- U.S. Gov't/Gov't agencies$ 1,047 6.4% $ 1,083 6.1% AAA 5,843 35.5% 6,337 35.4% AA 3,038 18.4% 3,426 19.1% A 3,138 19.1% 3,096 17.3% BBB 1,549 9.4% 1,352 7.6% BB & below 782 4.7% 767 4.3% Short-term 1,072 6.5% 1,832 10.2% - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 16,469 100.0% $ 17,893 100.0% - - ---------------------------------------------------------------- LIFE OPERATIONS As of June 30, 1998, 99% of the fixed maturity portfolio was invested in investment-grade securities. FIXED MATURITIES BY CREDIT QUALITY - - --------------------------------------------------------------- JUNE 30, 1998 DECEMBER 31, 1997 - - ---------------------------------------------------------------- CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT - - ---------------------------------------------------------------- U.S.Gov't/Gov't agencies $ 2,758 9.3% $ 2,907 10.6% AAA 4,777 16.0% 4,252 15.4% AA 3,005 10.1% 2,990 10.9% A 9,061 30.4% 9,351 33.9% BBB 6,982 23.4% 5,966 21.7% BB & below 307 1.0% 205 0.7% Short-term 2,907 9.8% 1,880 6.8% - - ---------------------------------------------------------------- TOTAL FIXED MATURITIES $ 29,797 100.0% $ 27,551 100.0% - - ---------------------------------------------------------------- MARKET RISK The Hartford has material exposure to both interest rate and equity market risk. The Company employs several risk management tools to quantify and manage market risk arising from its investments and interest sensitive liabilities. For certain portfolios, 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. There have been no material changes in market risk exposures since December 31, 1997. DERIVATIVE INSTRUMENTS The Hartford utilizes a variety of derivative instruments, including swaps, caps, floors, forwards and exchange traded futures and options, in accordance with Company policy and in order to achieve one of three Company approved objectives: to hedge risk arising from interest rate, price or currency exchange rate volatility; to manage liquidity; or to control transaction costs. The Company does not make a market or trade derivatives for the express purpose of earning trading profits. - 17 -
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 $11.6 billion and $11.1 billion at June 30, 1998 and December 31, 1997, respectively. For a further discussion of market risk exposure including derivative instruments please refer to the Hartford's 1997 Form 10-K Annual Report. 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, 1998 DECEMBER 31, 1997 - - ------------------------------------------------------------------------------------------------------------------------------------ <S> <C> <C> Short-term debt $ 231 $ 291 Long-term debt 1,482 1,482 Company obligated mandatorily redeemable preferred securities of subsidiary trusts holding solely junior subordinated debentures (QUIPS and TruPS) 1,250 1,000 - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL DEBT $ 2,963 $ 2,773 ----------------------------------------------------------------------------------------------------------------------------- MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY [1] $ 379 $ 351 ----------------------------------------------------------------------------------------------------------------------------- Equity excluding unrealized gain on securities, net of tax $ 5,523 $ 5,232 Unrealized gain on securities, net of tax 914 853 - - ------------------------------------------------------------------------------------------------------------------------------------ TOTAL STOCKHOLDERS' EQUITY $ 6,437 $ 6,085 ----------------------------------------------------------------------------------------------------------------------------- TOTAL CAPITALIZATION [2] $ 8,865 $ 8,356 ----------------------------------------------------------------------------------------------------------------------------- Debt to equity [2] [3] 54% 53% Debt to capitalization [2] [3] 33% 33% - - ------------------------------------------------------------------------------------------------------------------------------------ <FN> [1] Excludes unrealized gain on securities, net of tax, of $61 and $46 as of June 30, 1998 and December 31, 1997, respectively. [2] Excludes unrealized gain on securities, net of tax. [3] Excluding QUIPS and TruPS, the debt to equity ratios were 31% and 34% as of June 30, 1998 and December 31, 1997, respectively, and the debt to capital ratios were 19% and 21% as of June 30, 1998 and December 31, 1997, respectively. </FN> </TABLE> CAPITALIZATION The Hartford's total capitalization, excluding unrealized gain on securities, net of tax, increased by $509 as of June 30, 1998 compared to December 31, 1997. This change primarily was the result of earnings and additional net borrowings, partially offset by dividends declared on The Hartford's common stock and the effect of treasury stock acquired net of reissuances under incentive and stock purchase plans. DEBT For a discussion of Debt, see Note 2 of Notes to Consolidated Financial Statements. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY TRUSTS HOLDING SOLELY JUNIOR SUBORDINATED DEBENTURES (TRUPS) For a discussion of Company Obligated Mandatorily Redeemable Preferred Securities of Subsidiary Trusts Holding Solely Junior Subordinated Debentures, see Note 3 of Notes to Consolidated Financial Statements. STOCKHOLDERS' EQUITY Stock Split in the Form of a Stock Dividend - For a discussion of stock split in the form of a stock dividend, see Note 4 of Notes to Consolidated Financial Statements. Dividends - On February 19, 1998, The Hartford's Board of Directors approved a 5% increase in the quarterly dividend to $0.21 per share (post-split basis). The dividend was paid on April 1, 1998 to shareholders of record as of March 2, 1998. On May 21, 1998, The Hartford declared a dividend on its common stock of $0.21 per share payable on July 1, 1998 to shareholders of record as of June 1, 1998. On July 16, 1998, The Hartford declared a dividend on its common stock of $0.21 per share payable October 21, 1998 to shareholders of record as of September 1, 1998. The Hartford expects to continue to pay quarterly dividends on its common stock of $0.21 per share throughout the remainder of 1998. Treasury Stock - During the six months of 1998, The Hartford repurchased 3,261,600 shares of its common stock in the open market at a total cost of $172 under the Company's $1.0 billion repurchase program announced in December 1997. Certain of - 18 -
these repurchased shares were reissued pursuant to certain stock-based benefit plans. RATINGS As of July 1998, the financial ratings for Hartford Life Capital I's trust preferred securities from the major independent rating organizations were A from Duff & Phelps, a2 from Moody's and A- from Standard & Poor's. CASH FLOWS SIX MONTHS ENDED JUNE 30, -------------------------- 1998 1997 - - ------------------------------------------------------------------ Cash provided by operating activities $ 303 $ 842 Cash used for investing activities $ (493) $ (1,402) Cash provided by financing activities $ 192 $ 587 Cash - end of period $ 143 $ 135 - - ------------------------------------------------------------------ The change in cash provided by operating activities was primarily the result of timing in settlement of receivables and payables and an increase in income taxes paid. The decrease in cash provided by financing activities was primarily the result of proceeds from the HLI offering in May of 1997 partially offset by increases in investment type contracts written in the Life segment. The change in cash used for investing activities primarily reflects the investment of cash from operating and financing activities. Operating cash flows in both periods have been more than adequate to meet liquidity requirements. OMNI On February 12, 1998, The Hartford completed the purchase of all outstanding shares of Omni Insurance Group, Inc. ("Omni"), a holding company of two non-standard auto insurance subsidiaries licensed in 25 states and the District of Columbia. The Hartford paid cash of $31.75 per share, plus transaction costs, for a total of $189. The acquisition has been reported as a purchase transaction and accordingly, the results of Omni's operations have been included in The Hartford's consolidated financial statements from the closing date of the transaction. SUBSEQUENT EVENT On July 30, 1998, HLI announced that it will acquire PLANCO Financial Services Inc. ("PLANCO") and its affiliate, PLANCO Incorporated. PLANCO, a primary distributor of HLI's annuity and investment products, is the nation's largest wholesaler of individual annuities and has played a significant role in HLI's growth over the past decade. As a wholesaler, PLANCO distributes HLI's annuity and investment products, including fixed and variable annuities, mutual funds and single premium variable life insurance, as well as providing sales support to registered representatives, financial planners and broker-dealers at brokerage firms and banks across the United States. Management anticipates that the closing of the transaction, which is subject to regulatory approval, will take place during the third quarter of 1998. - 19 -
REGULATORY INITIATIVES AND CONTINGENCIES NAIC PROPOSALS The National Association of Insurance Commissioners ("NAIC") adopted the Codification of Statutory Accounting Principles ("SAP") in March, 1998. The proposed effective date for the statutory accounting guidance is January 1, 2001. It is expected that each of The Hartford's domiciliary states will adopt SAP and the Company will make the necessary changes required for implementation. These changes are not anticipated to have a material impact on the statutory financial statements of The Hartford. YEAR 2000 The Year 2000 issue relates to the ability or inability of computer systems to properly process information and data containing or related to dates beginning with the year 2000 and beyond. The Year 2000 issue exists because, historically, many computer systems that are in use today were developed years ago when a year was identified using a two-digit field rather than a four-digit field. As information and data containing or related to the century date are introduced to computer hardware, software and other systems, date sensitive systems may recognize the year 2000 as "1900", or not at all, which may result in computer systems processing information incorrectly. This, in turn, may significantly and adversely affect the integrity and reliability of information databases and may result in a wide variety of adverse consequences to a company. In addition, Year 2000 problems that occur with third parties with which a company does business, such as suppliers, computer vendors, distributors and others, may also adversely affect any given company. As an insurance and financial services company, The Hartford has thousands of individual and business customers that have insurance policies, annuities, mutual funds and other financial products of The Hartford. Nearly all of these policies and products contain date sensitive data, such as policy expiration dates, birth dates, premium payment dates, and the like. In addition, The Hartford has business relationships with numerous third parties that affect virtually all aspects of The Hartford's business, including, without limitation, suppliers, computer hardware and software vendors, insurance agents and brokers, securities broker-dealers and other distributors of financial products. Beginning in 1990, The Hartford began working on making its computer systems Year 2000 ready, either through installing new programs or replacing systems. In January 1998, The Hartford commenced a company-wide program to further identify, assess and remediate the impact of Year 2000 problems in The Hartford's business segments. The Hartford currently anticipates that this internal program will be substantially completed by the end of 1998, and testing of computer systems will continue through 1999. The costs of addressing the Year 2000 issue that have been incurred by The Hartford through the year ended December 31, 1997 have not been material to The Hartford's financial condition or results of operations. Management estimates that after-tax costs related to these Year 2000 efforts in 1998 and 1999 will be from $40 to $50 in total. These costs are being expensed as incurred and are not expected to have a material impact to the Company's financial condition or results of operations. As part of its Year 2000 program, The Hartford is identifying third parties with which it has significant business relations in order to attempt to assess the potential impact on The Hartford of their Year 2000 issues and remediation plans. The Hartford currently anticipates that it will substantially complete this evaluation by the end of 1998, and will conduct systems testing with certain third parties through 1999. The Hartford does not have control over these third parties and, as a result, The Hartford cannot currently determine to what extent future operating results may be adversely affected by the failure of these third parties to successfully address their Year 2000 issues. However, The Hartford expects to develop plans to attempt to minimize identified third party exposures. In addition, as an insurer, The Hartford may incur losses and loss adjustment expenses (including attorneys' fees and other legal expenses) arising from property and casualty insurance claims by its insureds, who may incur losses as a result of Year 2000 problems. To the extent claims are ultimately made, insurance coverage, if any, will depend upon the provisions of the policies and the facts and circumstances of each claim. It is not possible to determine in advance whether and to what extent insureds would incur losses, the amount of the losses, or whether any such losses would be covered under The Hartford's insurance policies. Because of this uncertainty, it is also not possible to determine in advance whether such losses and related loss adjustment expenses would have a material impact upon The Hartford's financial condition or results of operations. ACCOUNTING STANDARDS For a discussion of accounting standards, see Note 1 of Notes to Consolidated Financial Statements. ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Reference is made to the Capital Markets Risk Management section of the Management's Discussion and Analysis of Financial Condition and Results of Operations. - 20 -
PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS The Hartford is a defendant in various lawsuits arising out of its business. In the opinion of management, final outcome of these matters will not materially affect the consolidated financial condition, results of operations or cash flows of The Hartford. The Hartford is involved in claims litigation arising in the ordinary course of business and accounts for such activity through the establishment of policy reserves. As further discussed in the MD&A under the Environmental and Asbestos Claims section, The Hartford continues to receive environmental and asbestos claims which involve significant uncertainty regarding policy coverage issues. Regarding these claims, The Hartford continually reviews its overall reserve levels, reserving methodologies and reinsurance coverages. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS On May 21, 1998, The Hartford held its annual meeting of shareholders. The following matters were considered and voted upon: (1) the election of directors to serve for a one year term; (2) the amendment of the Company's certificate of incorporation to increase the number of the Company's authorized shares of common stock from 200,000,000 to 400,000,000; and (3) the ratification of the appointment of Arthur Andersen LLP as independent auditors of the Company for the fiscal year ending December 31, 1998. 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: (All shares are on a pre-split basis) (1) Election of Directors NAME OF DIRECTOR NOMINEES SHARES FOR SHARES WITHHELD* ---------------------- ---------------- --------------------- Bette B. Anderson 105,222,651 545,791 Rand V. Araskog 104,647,679 1,120,763 Ramani Ayer 105,313,794 454,648 Robert A. Burnett 105,208,021 560,421 Donald R. Frahm 105,272,769 495,673 Paul G. Kirk, Jr. 105,264,113 504,329 Robert W. Selander 105,303,703 464,739 Lowndes A. Smith 105,295,154 473,288 H. Patrick Swygert 105,288,124 480,318 DeRoy C. Thomas 104,996,542 771,900 Gordon I. Ulmer 105,258,238 510,204 David K. Zwiener 105,323,043 443,399 ---------------------- ---------------- --------------------- * Shares withheld include broker non-votes and abstentions. (2) Amendment of the Company's Certificate of Incorporation to increase the Company's Authorized Shares of Common Stock Shares For 84,624,809 Shares Against 20,697,778 Shares Abstained 445,855 (3) Ratification of the appointment of Arthur Andersen LLP Shares For 105,107,701 Shares Against 422,599 Shares Abstained 238,142 Shareholders of record on March 24, 1998 were entitled to vote at the annual meeting. As of that date, there were 117,748,146 shares of the Company's common stock outstanding. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits - See Exhibits Index. (b) Reports on Form 8-K - During the second quarter of 1998, The Hartford filed two Reports on Form 8-K under Item 5, Other Events. In the Form 8-K dated May 21, 1998, The Hartford reported that its Board of Directors declared a two-for-one stock split on the Company's shares of common stock in the form of a 100% stock dividend. In the Form 8-K dated June 18, 1998, The Hartford reported that it issued a press release regarding anticipated catastrophe losses for the quarter ending June 30, 1998. - 21 -
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, 1998 - 22 -
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"), amended effective May 21,1998, is filed herewith. 27 Financial Data Schedule is filed herewith. - 23 -