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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: the following, all
of which are registered on the New York Stock Exchange, Inc.:
Common Stock, par value $0.01 per share
6.375% Notes due November 1, 2002
6.375% Notes due November 1, 2008
7.30% Debentures due November 1, 2015
7.70% Cumulative Quarterly Income Preferred Securities, Series A, issued
by Hartford Capital I
8.35% Cumulative Quarterly Income Preferred Securities, Series B, issued
by Hartford Capital II
Securities registered pursuant to Section 12 (g) of the Act: None
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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]
As of February 29, 2000, there were outstanding 214,581,962 shares of Common
Stock, $0.01 par value per share, of the registrant. The aggregate market value
of the shares of Common Stock held by non-affiliates of the registrant was
$6,662,649,969 based on the closing price of $31.25 per share of the Common
Stock on the New York Stock Exchange on February 29, 2000.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 2000 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of The Hartford 2
2 Properties 9
3 Legal Proceedings 9
4 Submission of Matters to a Vote of Security Holders 9
PART II 5 Market for The Hartford's Common Stock and Related
Stockholder Matters 9
6 Selected Financial Data 10
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
7A Quantitative and Qualitative Disclosures About
Market Risk 44
8 Financial Statements and Supplementary Data 44
9 Changes in and Disagreements with Accountants
on Accounting and Financial Disclosure 44
PART III 10 Directors and Executive Officers of The Hartford 44
11 Executive Compensation 44
12 Security Ownership of Certain Beneficial Owners
and Management 44
13 Certain Relationships and Related Transactions 44
PART IV 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 44
Signatures II-1
Exhibits Index II-2
PART I
Item 1. BUSINESS OF THE HARTFORD
(Dollar amounts in millions except for share data unless otherwise stated)
GENERAL
The Hartford Financial Services Group, Inc., and its subsidiaries (The Hartford
or the Company), headquartered in Connecticut, are among the largest providers
of both property and casualty insurance and life insurance products in the
United States. Hartford Fire Insurance Company, founded in 1810, is the oldest
of The Hartford's subsidiaries. The Hartford writes insurance and reinsurance in
the United States and internationally. At December 31, 1999, total assets and
total stockholders' equity of The Hartford were $167.1 billion and $5.5 billion,
respectively.
The Hartford Financial Services Group, Inc., a Delaware corporation, was formed
in December, 1985 as a wholly-owned subsidiary of ITT Corporation (ITT). On
December 19, 1995, ITT distributed all of the outstanding shares of The Hartford
Financial Services Group, Inc. to ITT shareholders of record in an action known
herein as the Distribution. As a result of the Distribution, The Hartford became
an independent, publicly traded company.
Pursuant to the initial public offering on May 22, 1997 (the Offering) of Class
A common stock of Hartford Life, Inc. (HLI), the holding company parent of The
Hartford's significant life insurance subsidiaries, 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 represented
approximately 19% of the equity ownership in HLI. As of December 31, 1999, The
Hartford continued to maintain an approximate 81% equity ownership in HLI. 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.
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh Insurance Group, Ltd. (London & Edinburgh)
subsidiary to Norwich Union, a leading provider of general and life insurance in
the United Kingdom. The Hartford received approximately $525, before costs of
sale, and reported an after-tax net realized capital gain of $33 related to the
transaction. The Hartford retained ownership of Excess Insurance Co. Ltd.,
London & Edinburgh's property and casualty insurance and reinsurance subsidiary,
which discontinued writing new business in 1993.
As a holding company, The Hartford Financial Services Group, Inc. has no
significant business operations of its own and, therefore, relies on the
dividends from its insurance company subsidiaries, which are primarily domiciled
in Connecticut, as the principal source of cash to meet its obligations.
Additional information regarding the cash flow and liquidity needs of The
Hartford Financial Services Group, Inc. may be found in the Capital Resources
and Liquidity section of Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A).
REPORTING SEGMENTS
The Hartford's reporting segments consist of Commercial, Personal, Reinsurance,
Life, International and Other Operations. While not considered a segment, the
Company also reports results for North American Property & Casualty, which
include the combined underwriting results of the Commercial, Personal and
Reinsurance segments, along with income and expense items not directly allocable
to these segments such as net investment income and net realized capital gains
and losses. Other Operations include operations which have ceased writing new
business. Also included in Other Operations is the effect of an approximate 19%
minority interest in HLI's operating results. The following is a description of
each segment, including a discussion of principal products, methods of
distribution and competitive environments. Additional information on The
Hartford's reporting segments may be found in the MD&A on pages 11 to 44 and
Note 17 of Notes to Consolidated Financial Statements.
NORTH AMERICAN PROPERTY & CASUALTY
North American Property & Casualty is the tenth largest property and casualty
insurance operation in the United States based on written premiums for the year
ended December 31, 1998 according to A.M. Best. North American Property &
Casualty generated $7.3 billion in revenues, $6.4 billion in written premiums
and $448 in net income in 1999. Total assets for North American Property &
Casualty were $21.5 billion as of December 31, 1999.
COMMERCIAL
The Commercial segment provides insurance coverages to commercial accounts
throughout the United States and Canada. Commercial is organized into three
customer markets: Business Insurance, Commercial Affinity and Commercial
Specialty. Business Insurance provides standard commercial business for small
accounts (Select Customer) and mid-sized insureds (Key Accounts). Commercial
Affinity provides commercial risk management products and services to small and
mid-sized members of affinity groups and customers of financial institutions.
Commercial Specialty provides insurance through retailers and wholesalers to
large commercial clients (Major/National) and insureds requiring a variety of
specialized coverages. The Commercial segment had $3.2 billion in written
premiums and a $171 underwriting loss in 1999.
Principal Products
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The Commercial segment offers workers' compensation, property, automobile,
liability, marine, agricultural and bond coverages. Excess and surplus lines
coverages not normally written by standard line insurers are also provided.
- 2 -
Methods of Distribution
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The Commercial segment provides insurance products and services through its home
office located in Hartford, Connecticut, and multiple domestic regional and
district office locations and insurance centers. The segment markets its
products nationwide utilizing a variety of distribution networks including the
use of approximately 5,400 independent agents, wholesalers and direct marketing
including trade associations, customers of financial institutions and employee
groups. Independent agents, who often represent other companies as well, are
compensated on a commission basis and are not employees of The Hartford.
Competition
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The commercial insurance industry continues to be a highly challenging
environment in which the Commercial segment competes with other stock companies,
mutual companies, self insurers and other underwriting organizations. Intense
competition within the financial services industry continues to create difficult
market conditions in the commercial industry. This competitive environment is
created by tremendous price competition, consolidation and globalization of
companies, excess capital within the commercial insurance industry, exploration
and utilization of alternative distribution techniques and emphasis on cost
containment and reduction.
PERSONAL
The Hartford ranks among the largest carriers of personal lines insurance. The
Personal segment provides insurance coverages to individuals throughout the
United States. Personal is organized to provide customized products and services
to the following markets: the membership of AARP through a direct marketing
operation; customers who prefer local agent involvement through a network of
independent agents in the standard personal lines market and in the non-standard
automobile market through Omni Insurance Group, Inc. (Omni), which was acquired
in 1998; customers of Ford Motor Company and Ford Motor Credit Company
(collectively, Ford) as well as customers of financial institutions through an
affinity center which began in 1996; and customer service for all health
insurance products offered through AARP's Health Care Options effective January
1, 1998. AARP's exclusive licensing arrangement continues through the year 2002
for automobile, homeowners and home-based business and through 2007 for Health
Care Options. The Ford contract is for a five-year term through 2004. Each of
these agreements provides the Personal segment with an important competitive
advantage. The Personal segment had $2.5 billion in written premiums and $34 in
underwriting income in 1999.
Principal Products
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The Personal segment provides homeowners, automobile, home-based business and
fire coverages to individuals across North America, including a special program
designed exclusively for members of AARP.
Methods of Distribution
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The Personal segment reaches diverse markets through multiple distribution
channels. The segment markets directly to the 33 million members of AARP, sells
its products through independent agents and also markets through affinity
groups, including Ford and financial institutions.
Competition
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The personal lines marketplace continues to become increasingly more
competitive, especially in the personal automobile line. The past few years
leading up to 1998 produced favorable returns in personal lines, allowing
companies to drive prices down and utilize varied distribution channels to
increase marketshare. In 1999, however, intense price competition, upward trends
in loss costs and the significant expense of establishing alternative
distribution channels caused underwriting results to decrease. In the absence of
renewal price increases by competitors, attracting new customers becomes more
difficult, forcing companies to offer greater price incentives, product features
and increase advertising costs. Agency companies wishing to grow are offering
agents greater incentives to move business from competitors in order to increase
market share.
A major competitive advantage of the Personal segment is the exclusive licensing
arrangement with AARP to provide personal automobile, homeowners and home-based
business insurance products to its members through 2002. Favorable "baby boomer"
demographics are expected to increase AARP membership significantly during this
period. During 1996, the Personal segment's relationship with AARP was further
strengthened when it was awarded a contract to provide customer service for all
health insurance products offered through AARP's Health Care Options effective
January 1, 1998. The Hartford's new contract with Ford joins two major brands in
marketing automobile, homeowners, and home-based business, further enhancing The
Hartford's reputation and competitive advantage.
REINSURANCE
The Hartford is a major global reinsurer, with operations in the United States,
Canada, the United Kingdom, France, Italy, Germany, Spain, Hong Kong and Taiwan.
The Reinsurance segment had $703 in written premiums and a $48 underwriting loss
in 1999.
Principal Products
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The Reinsurance segment offers a full range of treaty and facultative
reinsurance products including property, casualty, marine, fidelity, surety,
finite risk and specialty coverages.
Methods of Distribution
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The Reinsurance segment assumes insurance from other insurers, primarily through
reinsurance brokers in the worldwide reinsurance market.
- 3 -
Competition
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The worldwide property and casualty reinsurance market remains extremely
competitive. Continued soft market conditions make profitable growth difficult
to maintain. Consolidation in the market has created fewer, but stronger
competitors. Also, nontraditional solutions are beginning to reduce demand for
traditional reinsurance products.
LIFE
The Life segment's business is conducted principally by HLI, a leading financial
services and insurance organization providing investment products such as
variable annuities and mutual funds, individual and corporate owned life
insurance and employee benefits products. Among the fastest growing major life
insurance groups for the past several years, The Hartford's consolidated
domestic life insurance operations are ranked as the third largest in the United
States based on statutory assets as of December 31, 1998, according to A.M.
Best's latest available data. Growth in the Life segment's total assets has been
primarily driven by variable annuity sales and equity market appreciation. With
a 9% market share, the Company was ranked the number one writer of individual
variable annuities in the United States for 1999 according to Variable Annuity
and Research Data Service (VARDS). In addition, the Company was the third
largest provider of group disability insurance in the United States for the nine
months ended September 30, 1999 according to the latest results published by
Life Insurance Marketing and Research Association (LIMRA). Also during 1999,
seven of the twelve retail mutual funds received Morningstar ratings and, as of
December 31, 1999, all seven have three-, four- or five-star ratings. In the
past year, the Life segment's total assets under management, which include $6.4
billion of assets invested in the Company's retail mutual funds, increased 17%
to $145.4 billion at December 31, 1999. The Life segment generated $5.5 billion
in revenues and net income of $467 in 1999.
The Life segment, headquartered in Simsbury, Connecticut, has the following
reportable operations: Investment Products, Individual Life, Employee Benefits
and Corporate Owned Life Insurance (COLI). In addition, the Life segment
includes in an Other category its international operations, which are primarily
located in Latin America, and corporate items not directly allocable to any of
its reportable operations.
Principal Products
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The Investment Products operation 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 operation reflects the
diverse nature of the market. These products include individual variable
annuities, fixed market value adjusted (MVA) annuities, retail mutual funds,
retirement plan services and other investment products. The Individual Life
operation, which focuses on the high end estate and business planning markets,
sells a variety of life insurance products, including variable life, universal
life, interest-sensitive whole life and term life insurance. The Employee
Benefits operation sells group life and group disability insurance as well as
other products including stop loss and supplementary medical coverage to
employers and employer sponsored plans. The COLI operation includes life
insurance products purchased by a company on the lives of its employees, with
the company named as beneficiary under the policy, primarily purchased for
funding the company's post-employment benefits and other non-qualified benefit
programs.
Methods of Distribution
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The Life segment sells a variety of individual and group investment and
insurance products primarily through broker-dealers, financial institutions,
licensed agents, insurance brokers, associations and third party administrators.
The Investment Products operation distributes individual annuities and mutual
funds through a network of over 1,500 broker-dealers and over 500 banks through
the use of wholesaling operations and strategic alliances. In 1998, the Company
purchased all of the outstanding shares of PLANCO Financial Services, Inc. and
its affiliate, PLANCO, Incorporated (PLANCO), the nation's largest wholesaler of
individual annuities and a primary distributor of the Company's individual
annuities and mutual funds. In addition, the Company utilizes an internal sales
force to distribute its group investment products. The Individual Life operation
distributes its products through a sales office system of qualified life
insurance professionals who have access to an extensive network of licensed life
insurance agents as well as through broker-dealers, banks and independent life
insurance marketing organizations. The Employee Benefits operation uses an
experienced group of Company employees managed through a regional sales office
system to distribute its products through a variety of distribution outlets
including insurance agents, brokers, associations and third-party
administrators. The COLI operation uses a group of experienced Company employees
who work with specialized brokers and consultants to distribute its products.
Competition
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The Life segment competes with numerous insurance companies in the United
States, as well as certain banks, securities brokerage firms, investment
advisors and other financial intermediaries who market investment and other
retirement-oriented products. As the industry continues to consolidate, some of
these companies have or will gain greater financial strength and resources than
The Hartford. In particular, national banks may become more significant
competitors in the future for insurers who sell annuities as a result of court
decisions and recent regulatory actions. In November 1999, the
Gramm-Leach-Bliley Act of 1999 (the Financial Services Modernization Bill) was
enacted into law, allowing banks, securities firms and insurance companies to
have ownership affiliation. (For additional information, see the Regulatory
Matters and Contingencies section of the MD&A.) Other competitive factors in the
life insurance industry include, but are not limited to, price, name
recognition, quality of distribution systems and products offered, customer
service, financial strength ratings and claims-paying ability ratings. In the
individual annuity market, sales volume is also dependent on fund performance,
the array of fund and product options, product design and credited rates.
- 4 -
INTERNATIONAL
The Hartford's International segment consists primarily of Western European
companies offering a variety of insurance products designed to meet the needs of
local customers. These companies include Zwolsche Algemeene (Zwolsche), located
in the Netherlands, Belgium and Luxembourg, Hartford Seguros Spain (formerly ITT
Ercos), and People's Insurance Company Limited (People's Insurance) in
Singapore, of which The Hartford acquired a 49% interest in January 1998. The
International segment generated $509 in revenues and $27 in net income in 1999.
Assets totaled $2.4 billion at December 31, 1999.
Principal Products
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Zwolsche sells property and casualty, life and asset management products and
services. Personal lines products at Zwolsche include automobile,
hospitalization and homeowners. Commercial lines products, primarily property
coverage, are sold to small to medium-sized clients. Zwolsche life insurance
operations offer term life, mortgage, savings and pension products.
Additionally, Zwolsche has an asset management business offering investment
services through a range of mutual funds and its bank subsidiary. Hartford
Seguros provides both personal and commercial lines property and casualty, and
life insurance products. People's Insurance writes property and casualty
products, primarily automobile.
Methods of Distribution
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The International segment conducts its business primarily through independent
brokers who are compensated on a commission basis. Zwolsche also distributes its
products through various financial institutions. Hartford Seguros recently began
selling life insurance products through a brokerage company in Spain.
Competition
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The Netherlands has historically been an open market with competitors operating
from around the world. While Spain has only opened up its market within the last
fifteen years, it has attracted significant foreign capital with many of the
large global insurance companies establishing a presence, to the extent that
foreign capital now exceeds domestic capital. Singapore is a relatively small
market with traditional local companies as well as a large foreign presence
primarily through branch operations. Each market has its own unique
characteristics but, in general, competition is very strong in most product
lines with pricing set freely by the market.
OTHER OPERATIONS
The Hartford's Other Operations consist of the property and casualty insurance
operations of The Hartford which have ceased writing new business. These
operations primarily include First State Insurance Company, located in Boston,
Massachusetts, Heritage Reinsurance Company, Ltd., headquartered in Bermuda, and
Excess Insurance Company Limited, located in the United Kingdom.
The primary objectives of Other Operations are the proper disposition of claims,
the resolution of disputes, and the collection of reinsurance proceeds primarily
related to policies written and reinsured prior to 1985. As such, Other
Operations have no new product sales, distribution systems, or competitive
issues.
Included in Other Operations is the effect of an approximate 19% minority
interest in HLI's operating results.
PROPERTY AND CASUALTY RESERVES
The Hartford establishes reserves to provide for the estimated costs of paying
claims made by policyholders or against policyholders. These reserves include
estimates for both claims that have been reported and those that have been
incurred but not yet reported to The Hartford and include estimates of all
expenses associated with processing and settling these claims. This estimation
process is primarily based on historical experience and involves a variety of
actuarial techniques which analyze trends and other relevant factors.
The Hartford continually reviews its estimated claims and claim adjustment
expense reserves as additional experience and other relevant data become
available, and reserve levels are adjusted accordingly. Such adjustments are
reflected in net income of the period in which they are made. Further discussion
on The Hartford's property and casualty reserves may be found in the Reserves
section of the MD&A.
The Hartford continues to receive claims asserting damages from environmental
pollution and related clean-up costs and injuries from asbestos and
asbestos-related products. Due to deviations from past experience and a variety
of social, economic and legal issues, the Company's ability to estimate the
future policy benefits, unpaid claims and claim adjustment expenses is
significantly impacted. A study, which reviewed and identified environmental and
asbestos exposures in the United States, was performed in 1996 and is fully
discussed in the Environmental and Asbestos Claims section of the MD&A.
Certain liabilities for unpaid claims, principally for permanently disabled
claimants, terminated reinsurance treaties and certain contracts that fund loss
run-offs for unrelated parties, have been discounted to present value. The
amount of the discount was approximately $480 and $423 as of December 31, 1999
and 1998, respectively, and amortization of the discount had no material effect
on net income during 1999, 1998 and 1997, respectively.
In the judgment of The Hartford's management, all information currently
available has been properly considered in establishing the reserves for unpaid
claims and claim adjustment expenses.
A reconciliation of liabilities for unpaid claims and claim adjustment expenses
is herein referenced from Note 1(h) of Notes to Consolidated Financial
Statements. A table depicting the historical development of the liabilities for
unpaid claims and claim adjustment expenses follows.
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PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - NET
FOR THE YEARS ENDED DECEMBER 31, [1]
1989 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999
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Liabilities for unpaid claims and
claim adjustment expenses [2] $8,506 $9,045 $9,346 $10,630 $10,843 $10,920 $11,229 $12,412 $12,453 $12,662 $12,287
CUMULATIVE PAID CLAIMS AND CLAIM
EXPENSES
One year later 2,441 2,619 2,727 2,639 2,625 2,709 2,489 2,622 2,526 2,994 --
Two years later 3,983 4,383 4,400 4,333 4,266 4,247 4,088 4,163 4,320 -- --
Three years later 5,217 5,538 5,606 5,493 5,336 5,361 5,148 5,486 -- -- --
Four years later 6,009 6,377 6,457 6,294 6,184 6,120 6,178 -- -- -- --
Five years later 6,619 7,017 7,086 6,964 6,758 6,963 -- -- -- -- --
Six years later 7,111 7,515 7,637 7,425 7,471 -- -- -- -- -- --
Seven years later 7,516 7,973 8,024 8,061 -- -- -- -- -- -- --
Eight years later 7,905 8,318 8,603 -- -- -- -- -- -- -- --
Nine years later 8,220 8,858 -- -- -- -- -- -- -- -- --
Ten years later 8,730 -- -- -- -- -- -- -- -- -- --
LIABILITIES REESTIMATED
One year later 8,860 9,299 10,659 10,876 10,945 11,173 12,179 12,364 12,276 12,435 --
Two years later 8,987 10,622 10,980 11,092 11,148 12,289 12,162 12,245 11,983 -- --
Three years later 10,254 10,918 11,209 11,309 12,227 12,262 12,088 12,057 -- -- --
Four years later 10,533 11,198 11,534 12,425 12,280 12,250 11,953 -- -- -- --
Five years later 10,775 11,533 12,628 12,518 12,309 12,210 -- -- -- -- --
Six years later 11,147 12,617 12,747 12,576 12,283 -- -- -- -- -- --
Seven years later 12,206 12,713 12,863 12,521 -- -- -- -- -- -- --
Eight years later 12,302 12,835 12,810 -- -- -- -- -- -- -- --
Nine years later 12,439 12,791 -- -- -- -- -- -- -- -- --
Ten years later 12,422 -- -- -- -- -- -- -- -- -- --
DEFICIENCY (REDUNDANCY) $3,916 $3,746 $3,464 $1,891 $1,440 $1,290 $724 $(355) $(470) $(227) $--
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PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS
FOR THE YEARS ENDED DECEMBER 31, [1]
1993 1994 1995 1996 1997 1998 1999
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NET RESERVE [2] $10,843 $10,920 $11,229 $12,412 $12,453 $12,662 $12,287
Reinsurance recoverables 5,339 5,107 4,858 4,328 4,005 3,286 3,271
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GROSS RESERVE $16,182 $16,027 $16,087 $16,740 $16,458 $15,948 $15,558
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NET REESTIMATED RESERVE $12,283 $12,210 $11,953 $12,057 $11,983 $12,435
Reestimated reinsurance recoverables 5,795 5,442 4,699 4,052 3,793 3,342
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GROSS REESTIMATED RESERVE $18,078 $17,652 $16,652 $16,109 $15,776 $15,777
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GROSS DEFICIENCY (REDUNDANCY) $1,896 $1,625 $565 $(631) $(682) $(171)
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[1] The above tables exclude London & Edinburgh as a result of its sale on
November 16, 1998.
[2] The above tables exclude the liabilities and claim developments for
reinsurance coverage written for related parties that fund ultimate net
aggregate loss run-offs since changes to those reserves do not
illustrate the manner in which those reserve estimates changed.
1993 1994 1995 1996 1997 1998 1999
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Liabilities, net and gross of reinsurance for unpaid claims and claim
adjustment expenses excluded $504 $495 $550 $500 $505 $501 $456
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Included in the tables above is the impact of the change in The Hartford's
method of discounting to present value certain workers' compensation reserves,
principally for permanently disabled claimants, which was effective January 1,
1994.
LIFE RESERVES
In accordance with applicable insurance regulations under which the Life segment
operates, life insurance subsidiaries of The Hartford establish and carry as
liabilities actuarially determined reserves which are calculated to meet The
Hartford's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect The Hartford's actual experience when appropriate. These reserves are
computed at amounts that, with additions from estimated premiums to be received
and with interest on such reserves compounded annually at certain assumed rates,
are expected to be sufficient to meet The Hartford's policy obligations at their
maturities or in the event of an insured's death. Reserves also include unearned
premiums, premium deposits, claims incurred but not reported and claims reported
but not yet paid. Reserves
- 6 -
for assumed reinsurance are computed on bases essentially comparable to direct
insurance reserves.
For The Hartford's universal life and interest-sensitive whole life policies,
reserves are set according to premiums collected, plus interest credited, less
charges. Other fixed death benefit and individual life reserves are based on
assumed investment yield, persistency, mortality and morbidity as per commonly
used actuarial tables, expenses and margins for adverse deviations. For the
Company's group disability policies, the level of reserves is based on a variety
of factors including particular diagnoses, termination rates and benefit
payments.
The persistency of The Hartford's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on the withdrawal of
funds. Withdrawals in excess of allowable penalty-free amounts are assessed a
surrender charge during a penalty period, which is usually at least seven years.
Such surrender charge is initially a percentage of the accumulation value, which
varies by product, and generally decreases gradually during the penalty period.
Surrender charges are set at levels to protect The Hartford from loss on early
terminations and to reduce the likelihood of policyholders terminating their
policies during periods of increasing interest rates, thereby lengthening the
effective duration of policy liabilities and improving the Company's ability to
maintain profitability on such policies.
The Hartford's reserves comply in all material respects with state insurance
department statutory requirements; however, in the Consolidated Financial
Statements, life insurance reserves are determined in accordance with accounting
principles generally accepted in the United States, which may vary from
statutory accounting practices.
CEDED REINSURANCE
Consistent with normal industry practice, The Hartford cedes insurance risk to
reinsurance companies. For property and casualty operations, these reinsurance
arrangements provide greater diversification of business and limit The
Hartford's maximum net loss arising from large risks or catastrophes.
A major portion of The Hartford's property and casualty reinsurance is effected
under general reinsurance contracts known as treaties, or, in some instances, is
negotiated on an individual risk basis, known as facultative reinsurance. The
Hartford also has in-force excess of loss contracts with reinsurers that protect
it against a specified part or all of certain losses over stipulated amounts.
The ceding of insurance obligations does not discharge the original insurer from
its primary liability to the policyholder. The original insurer would remain
liable in those situations where the reinsurer is unable to meet the obligations
assumed under reinsurance agreements. The Hartford has established strict
standards that govern the placement of reinsurance and monitors ceded
reinsurance security. Virtually all of The Hartford's property and casualty
reinsurance is placed with reinsurers that meet strict financial criteria
established by a credit committee. Consistent with normal industry practice, HLI
is involved in both the cession and assumption of insurance with other insurance
and reinsurance companies. As of December 31, 1999, the maximum amount of life
insurance retained on any one life by any of the life operations was
approximately $2.5, excluding accidental death benefits.
INVESTMENT OPERATIONS
An important element of the financial results of The Hartford is return on
invested assets. The Hartford's investment activities are primarily divided
between property and casualty, including other operations, and life operations.
The investment activities of both the property and casualty and life operations
are managed based on the underlying characteristics and nature of their
respective liabilities.
The investment objective for the majority of property and casualty operations is
to maximize economic value while generating after-tax income and sufficient
liquidity to meet corporate and policyholder obligations. For the property and
casualty other operations, the investment objective is to ensure the full and
timely payment of all liabilities. Property and casualty investment strategies
are developed based on a variety of factors including business needs, regulatory
requirements and tax considerations.
The primary investment objective of the life operation's general account and
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters, including the management of the interest rate
sensitivity of invested assets relative to that of policyholder obligations.
For a further discussion of The Hartford's approach to managing risks, including
derivative utilization, see the Capital Markets Risk Management section of the
MD&A, as well as Note 3 of Notes to Consolidated Financial Statements.
REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory
and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency that must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
- 7 -
Regulatory requirements applying to property and casualty premium rates vary
from state to state, but generally provide that rates shall not be inadequate,
excessive or unfairly discriminatory. Rates for many products, including
automobile and homeowners insurance, are subject to prior regulatory approval in
many states. Ocean marine insurance rates are exempt from rate regulation.
Subject to regulatory requirements, management determines the rates charged for
its policies. Methods for arriving at rates vary by product, exposure assumed
and size of risk.
While premium rates in the property and casualty insurance business are for the
most part subject to regulation, such rates are not in most instances uniform
for all insurers within a given jurisdiction, or in all jurisdictions. The
Hartford is a member of various fire, casualty and surety rating organizations.
For some lines of business, The Hartford uses the rates and rating plans which
are filed by these organizations in the various states, while for other lines of
business it uses loss cost data published by such organizations. The Hartford
also uses its own independent rates or otherwise departs from rating
organization rates, where appropriate.
Most states have enacted legislation that regulates insurance holding company
systems such as The Hartford. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
State insurance regulations require property and casualty insurers to
participate in assigned risk plans, reinsurance facilities and joint
underwriting associations, which are mechanisms to provide risks with various
basic or minimum insurance coverage when they are not available in voluntary
markets. Such mechanisms are most prevalent for automobile and workers'
compensation insurance, but a majority of states also mandate participation in
so-called FAIR Plans or Windstorm Plans providing basic property coverage.
Additionally, some states mandate such participation in facilities for providing
medical malpractice insurance. Participation is based upon the amount of a
company's written premiums in a particular state for the classes of insurance
involved.
The extent of insurance regulation on business outside the United States varies
significantly among the countries in which The Hartford operates. Some countries
have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors domiciled in that particular
jurisdiction. The Hartford's international operations are comprised of insurers
licensed in their respective countries and, therefore, are subject to generally
less restrictive domestic insurance regulations. The Monetary Authority of
Singapore, the regulatory body in Singapore, does not currently allow foreign
companies to own a majority share of local companies.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-based Capital".
LEGISLATIVE INITIATIVES
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Legislative Initiatives".
INSOLVENCY FUND
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Insolvency Fund".
NAIC PROPOSALS
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "NAIC Proposals".
YEAR 2000
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Year 2000".
EMPLOYEES
The Hartford had approximately 26,000 employees as of February 29, 2000.
EXECUTIVE OFFICERS OF THE HARTFORD
Information about the executive officers of The Hartford who are also directors
and/or nominees for election as directors is set forth in The Hartford's 2000
Proxy Statement. In addition to those executive officers who are listed in the
2000 Proxy Statement, listed below are other Company executive officers, certain
of whom have served in similar positions for The Hartford prior to the
Distribution:
BRENDA FURLONG, 51, became Chief Investment Officer of the Company and President
of Hartford Investment Management Company (HIMCO), a wholly owned subsidiary of
the Company, effective October 1999. Previously, Ms. Furlong was Senior Vice
President, Capital Planning and Development, with responsibility for mergers and
acquisitions, strategic planning and capital allocation. Prior to joining the
Company in 1996, she served as Vice President and Treasurer of the Sheraton
Corp., the worldwide hospitality and gaming company, and held senior positions
at several ITT Corporation
- 8 -
companies. She began her career at State Street Bank and Trust, where she was an
officer in commercial lending. Ms. Furlong holds a Master's degree in
international studies from American University and an MBA from Northeastern
University. She is a graduate of Whittier College.
JOHN N. GIAMALIS, 42, is Senior Vice President and Controller of the Company.
Mr. Giamalis joined the Company in January 1997, functioning as Corporate
Controller and Director, Financial Reporting and Analysis. He was appointed in
mid-1998 to the position of Deputy Controller. Prior to joining the Company, Mr.
Giamalis held senior financial positions in the insurance and technology
industries. Previously, he served in public accounting positions, including as
Senior Manager with responsibility for insurance, securities and middle market
clients for Deloitte & Touche. He holds a B.S. degree in business administration
and a Master of professional accountancy from West Virginia University. He is a
member of the American Institute and Connecticut Society of Certified Public
Accountants.
RANDALL I. KIVIAT, 49, is Group Senior Vice President of Human Resources for the
Company. He oversees human resources for the Company's domestic and
international insurance operations and has held this position since June 1999.
Mr. Kiviat joined the Company in 1982 as Assistant Director of Employee
Benefits. He advanced to increasingly responsible positions, becoming Director
of Payroll and then Director of Employee Benefits. In 1993 he was named Vice
President of Human Resources Services. Prior to joining the Company, Mr. Kiviat
was Manager of Benefits Administration at Kennecott Corporation. He is a
graduate of the Polytechnic Institute of Brooklyn.
EDWARD L. MORGAN, 56, has been Group Senior Vice President, Corporate Relations
and Government Affairs of The Hartford since 1998. He was Senior Vice President,
Corporate Relations and Government Affairs of the Company from 1993 to 1998.
From 1991 to 1993, he served as Vice President and Director of Corporate
Relations. Prior to joining The Hartford, Mr. Morgan held the position of Vice
President of Corporate Relations at Allstate Insurance Company.
MICHAEL S. WILDER, 58, has been Group Senior Vice President and General Counsel
of the Company since 1995. He became Senior Vice President in 1987 and General
Counsel in 1975.
ITEM 2. PROPERTIES
The Hartford owns the land and buildings comprising its Hartford location and
other properties within the greater Hartford, Connecticut area which total
approximately 1.6 million square feet. The Hartford's international subsidiaries
own approximately 218 thousand square feet of office space in the Netherlands
and 9 thousand square feet in other countries. In addition, The Hartford leases
approximately 5.0 million square feet throughout the United States and 54
thousand square feet in other countries. The Company believes its properties and
facilities are suitable and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
The Hartford is a defendant in various lawsuits arising out of its business. In
the opinion of management, final outcome of these matters, after consideration
of provisions made for potential losses and costs of defense, will not
materially affect the consolidated financial condition, results of operations or
cash flows of The Hartford.
The Hartford is involved in claims litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed above and in the MD&A under the section
Environmental and Asbestos Claims, 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
No matter was submitted to a vote of security holders of The Hartford during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE HARTFORD'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Hartford's common stock is traded on the New York Stock Exchange (NYSE)
under the trading symbol "HIG".
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. The following table presents the
high and low closing prices for the common stock of The Hartford on the NYSE for
the periods indicated, and the quarterly dividends declared per share.
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- -------------------------- --------- --------- --------- --------
1999
Common Stock Price
High $58.81 $65.06 $61.94 $53.44
Low 48.31 57.13 40.88 37.31
Dividends Declared 0.22 0.23 0.23 0.24
- -------------------------- --------- --------- --------- --------
1998
Common Stock Price
High $54.56 $57.50 $59.56 $57.75
Low 44.75 52.38 44.75 38.19
Dividends Declared 0.21 0.21 0.21 0.22
- -------------------------- --------- --------- --------- --------
As of February 29, 2000, there were approximately 145,000 shareholders.
- 9 -
On October 21, 1999, The Hartford's Board of Directors approved a 4% increase in
the quarterly dividend to $0.24 per share. Dividend decisions are based on and
affected by a number of factors, including the operating results and financial
requirements of The Hartford and the impact of regulatory restrictions discussed
in the Capital Resources and Liquidity section of the MD&A under "Liquidity
Requirements".
There are also various legal limitations governing the extent to which The
Hartford's insurance subsidiaries may extend credit, pay dividends or otherwise
provide funds to The Hartford Financial Services Group, Inc. as discussed in the
Capital Resources and Liquidity section of the MD&A under "Liquidity
Requirements".
Item 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS)
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Total revenues [1] $ 13,528 $ 15,022 $ 13,461 $ 12,577 $ 12,247
Net income (loss) [2] 862 1,015 1,332 (99) 559
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 167,051 $ 150,632 $ 131,743 $ 108,840 $ 93,855
Long-term debt and redeemable preferred stock 1,548 1,548 1,482 1,032 1,022
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 1,250 1,250 1,000 1,000 --
Total stockholders' equity 5,466 6,423 6,085 4,520 4,702
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE DATA
Basic earnings (loss) per share [2] 3.83 4.36 5.64 (0.42) 2.39
Diluted earnings (loss) per share [2] 3.79 4.30 5.58 (0.42) 2.37
Dividends declared per common share [3] 0.92 0.85 0.80 0.80 3.33
- ------------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [4] 103.3 102.9 102.3 105.2 104.5
Worldwide Property & Casualty [4] [5] 103.5 103.7 103.6 105.0 103.6
- ------------------------------------------------------------------------------------------------------------------------------------
[1] 1998 includes $541 related to the recapture of an in force block of COLI
business from MBL Life Assurance Co. of New Jersey. Also, includes
revenues from London & Edinburgh for 1998, 1997, 1996 and 1995 of $1,117,
$1,225, $1,056 and $1,071, respectively.
[2] 1997 includes an equity gain of $368, or $1.56 basic/$1.54 diluted
earnings per share, resulting from the initial public offering of HLI.
1996 includes other charges of $693, after-tax, or $2.96 basic/diluted
earnings per share, consisting primarily of environmental and asbestos
reserve increases and recognition of losses on guaranteed investment
contract business.
[3] Prior to the Distribution on December 19, 1995, dividends that The
Hartford declared were paid to ITT, which then paid dividends to its
shareholders.
[4] 1996 excludes the impact of a $660, before-tax, environmental and asbestos
charge. Including the impact of this charge, the combined ratio for 1996
was 116.9 for North American Property & Casualty (for additional
information, see MD&A) and 114.6 for Worldwide Property & Casualty.
[5] Combined ratios exclude the results of the Other Operations segment for
all periods presented.
Outlined in the table below are U.S. Industry Combined Ratios for each of the
five years ended December 31:
1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
U.S. Industry Combined Ratios [a] 107.5 105.0 101.8 105.9 106.4
- ------------------------------------------------------------------------------------------------------------------------------------
[a] U.S. Industry Combined Ratio information obtained from A.M. Best. Combined
ratio for 1999 is an A.M. Best estimate prepared as of January 2000.
- 10 -
Item 7. 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 Financial
Services Group, Inc. and its subsidiaries (The Hartford or the Company) as of
December 31, 1999, compared with December 31, 1998, and its results of
operations for the three years ended December 31, 1999, 1998 and 1997. This
discussion should be read in conjunction with the Consolidated Financial
Statements and related Notes beginning on page F-1.
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 the possibility of general economic
and business conditions that are less favorable than anticipated, changes in
interest rates or the stock markets, stronger than anticipated competitive
activity, more frequent or severe natural catastrophes than anticipated and
those described in 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 11
North American Property & Casualty 13
Commercial 14
Personal 15
Reinsurance 16
Life 17
International 20
Other Operations 22
Reserves 22
Environmental and Asbestos Claims 23
Investments 25
Capital Markets Risk Management 28
Capital Resources and Liquidity 39
Regulatory Matters and Contingencies 41
Effect of Inflation 43
Accounting Standards 43
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
Overview
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums, fee income and other $ 10,867 $ 11,616 $ 10,479
Net investment income 2,627 3,102 2,655
Net realized capital gains 34 304 327
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 13,528 15,022 13,461
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 7,902 8,613 7,977
Amortization of deferred policy acquisition costs and other expenses 4,391 4,934 4,149
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 12,293 13,547 12,126
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 1,235 1,475 1,335
Equity gain on HLI initial public offering -- -- 368
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAXES AND MINORITY INTEREST 1,235 1,475 1,703
Income tax expense 287 388 334
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE MINORITY INTEREST 948 1,087 1,369
Minority interest in consolidated subsidiary (86) (72) (37)
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 862 1,015 1,332
Less: Net realized capital gains, after-tax 25 199 215
Equity gain on HLI initial public offering -- -- 368
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 837 $ 816 $ 749
- ------------------------------------------------------------------------------------------------------------------------------------
The Hartford defines "core earnings" as after-tax operational results excluding,
as applicable, net realized capital gains or losses, the cumulative effect of
accounting changes, allocated Distribution items (for additional information,
see Note 17 of Notes to Consolidated Financial Statements) and certain other
items. Core earnings is an internal performance measure used by the Company in
the management of its operations. Management believes that this performance
measure delineates the results of operations of the Company's ongoing businesses
in a manner that allows for a better understanding of the underlying
- 11 -
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 1999 decreased $1.5 billion, or 10%, from 1998 primarily as a
result of the November 1998 sale of United Kingdom-based London & Edinburgh
Insurance Group, Ltd. (London & Edinburgh), which was The Hartford's largest
international subsidiary, the declining block of leveraged corporate owned life
insurance (COLI) business and lower net realized capital gains. The decrease was
partially offset by earned premium growth in the Personal segment and higher fee
income in the Investment Products operation of the Life segment as a result of
increasing account values. (For an analysis of net investment income and net
realized capital gains, see the Investments section.)
In 1999, core earnings increased $21, or 3%, from 1998 primarily due to higher
fee income in the Investment Products operation as a result of increasing assets
under management. Partially offsetting this increase were a decrease in North
American Property & Casualty net service fee and other income, due primarily to
$55 of proceeds received in 1998 related to the Industrial Risk Insurance pool
(IRI transaction), and lower International segment core earnings as a result of
the sale of London & Edinburgh.
Revenues for 1998 increased $1.6 billion, or 12%, from 1997. This improvement
was due primarily to higher aggregate fees earned on growth in account values in
the Investment Products and Individual Life operations resulting from strong
sales and equity market appreciation, the recapture of an in force block of COLI
business (referred to as MBL Recapture) previously ceded to MBL Life Assurance
Co. of New Jersey (MBL Life), an increase in earned premiums and service fee
revenues in the Personal segment and higher net investment income. Partially
offsetting these increases were lower net realized capital gains. In addition,
revenues for 1998 also increased as a result of proceeds from the sale of
renewal rights and other considerations related to the IRI transaction.
In 1998, core earnings increased $67, or 9%, from 1997 primarily due to an
increase in fees earned resulting from growth in account values in the
Investment Products and Individual Life operations due to strong sales and
equity market appreciation, an increase in net service fee and other income,
primarily as a result of the IRI transaction, and higher net investment income.
Partially offsetting these increases were a decrease in underwriting results,
primarily the result of higher catastrophe losses, as well as an increase in
other non-underwriting expenses.
NET REALIZED CAPITAL GAINS
See "Investment Results" in the Investments section.
EQUITY GAIN ON HLI INITIAL PUBLIC OFFERING
Net income for 1997 includes a $368 equity gain resulting from the initial
public offering of Hartford Life, Inc. (HLI), the holding company parent of The
Hartford's significant life insurance subsidiaries, Class A common stock (The
Offering). (For additional information, see Note 2 of Notes to Consolidated
Financial Statements and Capital Resources and Liquidity section under "The
Offering".)
INCOME TAXES
The effective tax rates for 1999, 1998 and 1997 were 23%, 26% and 25%,
respectively, excluding the impact of the HLI equity gain, as discussed above,
in 1997. The decrease in the effective tax rate for 1999 was due to an increase
in the proportionate share of tax-exempt net investment income to total pre-tax
income for 1999 compared to 1998. Tax-exempt interest earned on invested assets
was the principal cause of effective rates lower than the 35% U.S. statutory
rate. Income taxes paid (refunds received) in 1999, 1998 and 1997 were $41, $407
and $(37), respectively. (For additional information, see Note 14 of Notes to
Consolidated Financial Statements.)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Minority interest in consolidated subsidiary represents an approximate 19%
minority interest in HLI's operating results. (For additional information, see
Note 2 of Notes to Consolidated Financial Statements and Capital Resources and
Liquidity section under "The Offering".)
PER COMMON SHARE
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. The following table represents per
common share data and return on equity for the past three years:
1999 1998 1997
- -----------------------------------------------------------------
Basic earnings per share $3.83 $4.36 $5.64
Weighted average common shares
outstanding 224.9 232.8 236.0
Diluted earnings per share $3.79 $4.30 $5.58
Weighted average common shares
outstanding and dilutive potential
common shares 227.5 236.2 238.9
Return on equity [1] 15.3% 18.7% 28.3%
- -----------------------------------------------------------------
[1] Calculated by dividing net income by average equity excluding unrealized
gain, after-tax. In 1997, return on equity excluding the HLI equity gain (as
discussed earlier) from net income was 20.5%.
SEGMENT RESULTS
The Hartford's reporting segments consist of Commercial, Personal, Reinsurance,
Life, International and Other Operations. While the measure of profit or loss
used by The Hartford's management in evaluating performance is core earnings for
the Life, International and Other Operations segments, the Commercial, Personal
and Reinsurance segments are evaluated by The Hartford's management primarily
based upon underwriting results. While not considered a segment, the Company
also reports and evaluates core earnings results for North American Property &
Casualty, which include the combined underwriting results of the Commercial,
Personal and Reinsurance segments, along with income and expense items not
directly allocable to these segments such as net
- 12 -
investment income. Other Operations include operations which have ceased writing
new business. Also, included in Other Operations is the effect of an approximate
19% minority interest in HLI's operating results.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided and capital contributions. Certain reinsurance stop loss agreements
exist between the segments which specify that one segment will reimburse another
for losses incurred in excess of a predetermined limit. Also, one segment may
purchase group annuity contracts from another to fund pension costs and claim
annuities to settle casualty claims.
The following is a summary of underwriting results by segment within North
American Property & Casualty.
UNDERWRITING RESULTS 1999 1998 1997
- -----------------------------------------------------------------
Commercial $ (171) $ (213) $ (149)
Personal 34 77 37
Reinsurance (48) (36) (14)
- -----------------------------------------------------------------
TOTAL $ (185) $ (172) $ (126)
- -----------------------------------------------------------------
The following is a summary of core earnings and net income.
CORE EARNINGS 1999 1998 1997
- -----------------------------------------------------------------
N. A. Property & Casualty $ 434 $ 457 $ 433
Life 467 386 306
International 16 42 46
Other Operations (80) (69) (36)
- -----------------------------------------------------------------
CORE EARNINGS $ 837 $ 816 $ 749
- -----------------------------------------------------------------
NET INCOME 1999 1998 1997
- -----------------------------------------------------------------
N. A. Property & Casualty $ 448 $ 604 $ 583
Life 467 386 306
International 27 92 110
Other Operations [1] (80) (67) 333
- -----------------------------------------------------------------
NET INCOME $ 862 $ 1,015 $ 1,332
- -----------------------------------------------------------------
[1] 1997 includes a $368 equity gain resulting from the initial public
offering of HLI.
A description of North American Property & Casualty, along with each reporting
segment, as well as an analysis of the operating results summarized above, is
included on the following pages. Reserves, Environmental and Asbestos Claims,
and Investments are discussed in separate sections.
NORTH AMERICAN PROPERTY & CASUALTY
OPERATING SUMMARY
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting revenue
Earned premiums $ 6,153 $ 6,006 $ 5,704
Service fees and other 303 363 156
Net investment income 853 824 777
Net realized capital gains 22 231 231
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 7,331 7,424 6,868
--------------------------------------------------------------------------------------------------------------------------
Underwriting expenses
Benefits, claims and claim adjustment expenses 4,394 4,287 4,069
Amortization of deferred policy acquisition costs and other
underwriting expenses 1,944 1,891 1,761
Other non-underwriting expenses 496 486 311
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 6,834 6,664 6,141
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 497 760 727
Income tax expense 49 156 144
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 448 604 583
Less: Net realized capital gains, after-tax 14 147 150
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 434 $ 457 $ 433
- ------------------------------------------------------------------------------------------------------------------------------------
As discussed above, The Hartford's management reviews and evaluates the
performance of the three segments within North American Property & Casualty,
Commercial, Personal and Reinsurance, primarily on an underwriting results
basis. The combined underwriting results, along with items not directly
allocable to the individual segments, are used in determining net income and
core earnings of North American Property & Casualty. Items not directly
allocable to the individual segments include net investment income, net realized
capital gains or losses, other non-underwriting expenses, income taxes and
certain other items.
The following is a summary of North American Property & Casualty core earnings
by major component, after-tax. Core earnings exclude net realized capital gains
and other items.
(after-tax) 1999 1998 1997
- ----------------------------------------------------------------
Underwriting results $ (120) $ (112) $ (82)
Net service fee and
other income 12 52 3
Net investment income 684 656 619
Interest and other
non-underwriting expenses[1] (142) (139) (107)
- ----------------------------------------------------------------
CORE EARNINGS $ 434 $ 457 $ 433
- ----------------------------------------------------------------
[1] Excludes expenses related to service fees.
Underwriting results are discussed in each of the Commercial, Personal and
Reinsurance segment sections. Net investment income is discussed in the
Investments section.
- 13 -
Core earnings in 1999 for North American Property & Casualty were $434, a
decrease of $23, or 5%, from 1998. The decrease was primarily the result of a
$40 decrease in net service fee and other income, due primarily to proceeds
received in 1998 related to the IRI transaction and an $8, or 7%, decrease in
after-tax underwriting results. Partially offsetting the decrease was an
increase in net investment income of $28, or 4%.
Core earnings in 1998 for North American Property & Casualty were $457, an
increase of $24, or 6%, from 1997. The increase was primarily due to a $37, or
6%, increase in net investment income and a $49 increase in net service fee and
other income (primarily as a result of the IRI transaction), partially offset by
a $30, or 37%, decrease in after-tax underwriting results and a $32, or 30%,
increase in interest and other non-underwriting expenses, which was primarily
the result of an increase in certain corporate benefit and outside services
expenses.
COMMERCIAL
OPERATING SUMMARY
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 3,181 $ 3,188 $ 3,190
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 3,130 $ 3,222 $ 3,190
Benefits, claims and claim adjustment expenses 2,155 2,250 2,225
Amortization of deferred policy acquisition costs and other
underwriting expenses 1,146 1,185 1,114
- ------------------------------------------------------------------------------------------------------------------------------------
Underwriting results $ (171) $ (213) $ (149)
--------------------------------------------------------------------------------------------------------------------------
Combined ratio 105.5 106.2 104.5
- ------------------------------------------------------------------------------------------------------------------------------------
Service fee and other revenue [1] $ 141 $ 163 $ 97
- ------------------------------------------------------------------------------------------------------------------------------------
[1] 1998 includes $55 of proceeds related to the IRI transaction.
Commercial provides workers' compensation, property, automobile, liability,
marine, agricultural and bond coverages to commercial accounts throughout the
United States and Canada. Excess and surplus lines business not normally written
by standard lines insurers is also provided. Commercial is organized into three
customer markets: Business Insurance, Commercial Affinity and Commercial
Specialty.
Business Insurance provides standard commercial business for small accounts
(Select Customer) and mid-sized insureds (Key Accounts). Commercial Affinity
provides commercial risk management products and services to small and mid-sized
members of affinity groups and customers of financial institutions. Commercial
Specialty provides insurance through retailers and wholesalers to large
commercial clients (Major/National) and insureds requiring a variety of
specialized coverages. Its results also include the bond lines and First State
Management Group, a leading underwriter of excess and surplus lines business
produced primarily through wholesale brokers. Agricultural, livestock and marine
products are also included within Commercial Specialty.
Written premiums decreased slightly in 1999 compared to 1998. Solid premium
growth in The Hartford's small commercial businesses resulted in growth of 15%.
These growth businesses represented 31% of the Commercial segment's written
premiums in 1999 versus 27% in 1998. Enhanced product offerings, targeted
geographic strategies and partnerships with other entities continued to be the
primary drivers of these growth businesses. These increases, however, were more
than offset by declines in the middle and large national account businesses
primarily due to intense price competition in the casualty lines, where The
Hartford's disciplined underwriting allowed business to move to other carriers
rather than underpricing in order to retain accounts.
Underwriting results improved $42, or 0.7 combined ratio points, in 1999 as
compared with 1998. This improvement can be attributed to a decline in the loss
ratio of 1.3 points resulting from underwriting initiatives and price increases.
Partially offsetting this improvement was an increase in the other underwriting
expense ratio due to investments in growth areas, primarily Select Customer.
In 1998, written premiums decreased slightly compared to 1997. Small commercial
business premiums grew 25%, and the bond and agricultural lines experienced 14%
growth. Small commercial businesses represented 27% of the Commercial segment's
written premiums in 1998 versus 21% in 1997. However, premium growth in these
businesses was more than offset by declines in the middle and large national
account businesses due to intense competition.
In 1998, underwriting results decreased $64, or 1.7 combined ratio points,
compared to 1997. Increases in property catastrophe losses of $70, or 2.1
combined ratio points, were the primary factor in the decline, as catastrophe
experience was worse in 1998 as compared to the highly favorable experience in
1997. In addition, intense price competition in the mid- and large-sized
marketplace resulted in reduced profit margins, as decreases in rate and price,
particularly in the workers' compensation line, outpaced loss cost savings. The
Commercial segment, however, continued to experience the benefit of its
extensive cost containment strategies which mitigate the rate and price pressure
on underwriting results.
OUTLOOK
Difficult market conditions and intense price competition within many markets of
the commercial sector are likely to continue into the foreseeable future despite
some favorable trends. Each
- 14 -
market within the Commercial segment has implemented plans to achieve greater
profitability in a marketplace that has experienced relatively flat growth
overall. The segment has undertaken several major strategic actions, with some
to be completed in 2000. Continued pricing and underwriting actions, primarily
in the mid-to-large account marketplace should have a positive impact on overall
profitability. Management expects the impacts of these efforts to continue into
2000 and beyond. Investments in such areas as technology, product research and
development, advertising and staff training have continued, in an effort to
heighten brand awareness, increase product offerings, further develop
alternative distribution channels and improve productivity. Management believes
the results of these and other actions taken may counterbalance the negative
external factors in the commercial market and position the Commercial segment
for improved written premium growth in 2000 and beyond, while maintaining core
profitability.
PERSONAL
OPERATING SUMMARY
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 2,470 $ 2,220 $ 1,893
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 2,343 $ 2,068 $ 1,869
Benefits, claims and claim adjustment expenses 1,732 1,477 1,371
Amortization of deferred policy acquisition costs and other
underwriting expenses 577 514 461
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ 34 $ 77 $ 37
--------------------------------------------------------------------------------------------------------------------------
Combined ratio 99.6 97.1 98.6
- ------------------------------------------------------------------------------------------------------------------------------------
Service fee revenue $ 162 $ 200 $ 59
- ------------------------------------------------------------------------------------------------------------------------------------
Personal provides automobile, homeowners, home-based business and fire coverages
to individuals across North America. Personal is organized to provide customized
products and services to the following markets: the membership of AARP through a
direct marketing operation; customers who prefer local agent involvement through
a network of independent agents in the standard personal lines market and in the
non-standard automobile market through Omni Insurance Group, Inc. (Omni), which
was acquired in 1998; customers of Ford Motor Company and Ford Motor Credit
Company (collectively, Ford) as well as customers of financial institutions
through an affinity center which began in 1996 and is building from the AARP
operation competencies; and customer service for all health insurance products
offered through AARP's Health Care Options effective January 1, 1998. AARP's
exclusive licensing arrangement continues through 2002 for automobile,
homeowners and home-based business and through 2007 for Health Care Options. The
Ford contract is for a five-year term through 2004. Management believes each of
these agreements provides the Personal segment with an important competitive
advantage.
Written premiums increased $250, or 11%, in 1999 compared with 1998. Omni
written premiums increased $88, or 53%, contributing 4% to the segment's total
written premium growth in 1999. As of December 31, 1999, non-standard automobile
coverage through Omni was available in 33 states compared with 13 states at the
time of acquisition in 1998. AARP written premiums increased $65, or 5%,
contributing 3% to the segment's total written premium growth in 1999. Agency
written premium growth was $31, or 5%, contributing 1% to the segment's total
written premium growth in 1999. The Affinity unit experienced written premium
growth of $66, or 120%, contributing 3% to the segment's total written premium
growth in 1999. Written premium increases in all the units were achieved in
light of very competitive pricing in the personal lines market, primarily in the
personal automobile line. Servicing revenues from AARP's Health Care Options
unit declined by $38 in 1999 due to revenues related to the transfer of business
from the prior carrier in 1998.
Underwriting results decreased by $43, with a corresponding 2.5 point increase
in the combined ratio, when compared to 1998. The decrease in underwriting
results and increase in combined ratio resulted primarily from increased claim
and claim adjustment expenses. Loss experience in the property line was higher
in 1999 when compared to 1998 due to increases in both frequency and severity of
claims. Claim adjustment expenses increased due to investments in claim
initiatives for automobile bodily injury, physical damage and property to reduce
loss costs in future periods. Catastrophe losses impacted the combined ratio by
2.9 points in 1999 compared to 3.5 points in 1998.
Written premiums increased $327, or 17%, in 1998 compared with 1997. The
acquisition of Omni accounted for $167, or 9%, of the written premium increase.
Favorable underwriting experience was passed through to AARP members in reduced
rates and, despite the reduced rates, the program posted a written premium
increase of $65, or 5%, contributing 3% to the segment's total written premium
growth in 1998. Agency experienced substantial premium growth improvement in
1998 with an increase of $67, or 11%, contributing 4% to the segment's total
written premium growth. A primary driver of this premium growth was the
strategic shift from homeowners to automobile coverages, which began in 1997.
The Affinity unit, which was still in a start-up phase, experienced growth of
$28, or 105%, in 1998, contributing 1% to the segment's total written premium
growth.
Underwriting results improved by $40, with a corresponding 1.5 point improvement
in the combined ratio in 1998 compared
- 15 -
with 1997. The combined ratio decrease resulted from loss cost improvements in
automobile and homeowners from expanded cost containment initiatives, effecting
the combined ratio by 3.8 points. Offsetting this improvement were significantly
higher property catastrophes in 1998 of $71 compared to $32 in 1997, impacting
the combined ratio by 1.8 points, and increased underwriting expenses impacting
the combined ratio by 0.5 points. Property catastrophe and other severe
weather-related experience were unusually low in 1997. The increase in
underwriting expenses was primarily from investments in growth initiatives,
acquisition costs related to premium growth and from investment in the Affinity
unit start-up organization, partially offset by lower dividends to
policyholders.
OUTLOOK
Intense competition and consolidation in the personal market will remain in the
foreseeable future. Management anticipates pricing will be moderately positive
in 2000 versus the reductions that occurred in the last few years. Significant
investments in claim initiatives in 1999 are expected to favorably impact loss
cost trends in 2000 and beyond. Management believes the Personal segment is
positioned for continued written premium growth through multiple distribution
channels. Initiatives are being introduced, as a result of research findings,
which are expected to attract more AARP members to the program. In 1999,
Affinity entered into an agreement with Ford to market to its customers. The
Hartford expects the Ford program to be a major market in the future. In the
independent agency channel, investments in agency interface, new products and
agency relations position The Hartford for premium growth. Omni will continue to
expand into more states and penetrate a broader base of agents. Investments in
such areas as advertising, product research and development, agency relations,
technology and staff training will continue, in an effort to further heighten
brand awareness, increase product offerings, further develop alternative
distribution channels, improve productivity and reduce the expense ratio.
REINSURANCE
OPERATING SUMMARY
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 703 $ 711 $ 688
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 680 $ 716 $ 645
Benefits, claims and claim adjustment expenses 507 560 473
Amortization of deferred policy acquisition costs and other
underwriting expenses 221 192 186
- ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (48) $ (36) $ (14)
--------------------------------------------------------------------------------------------------------------------------
Combined ratio 107.2 105.7 102.6
- ------------------------------------------------------------------------------------------------------------------------------------
The Hartford assumes reinsurance worldwide through its thirteen Hartford
Reinsurance Company (HartRe) offices located in the United States, Canada, the
United Kingdom, France, Italy, Germany, Spain, Hong Kong and Taiwan. HartRe
primarily writes treaty reinsurance through professional reinsurance brokers
covering various property, casualty, specialty and marine classes of business.
Written premiums decreased $8, or 1%, in 1999 primarily due to an increase in
ceded reinsurance premium, principally as a result of cessions under an
aggregate stop loss treaty in 1999, and the non-recurrence of a significant
single finite risk account written in 1998. These decreases were partially
offset by the first quarter 1999 acquisition of renewal rights for the
reinsurance business of Vesta Fire Insurance Corp., a subsidiary of Vesta
Insurance Group Inc. Written premiums increased $23, or 3%, in 1998 primarily
due to the acquisition of renewal rights for the reinsurance business of a large
Italian insurance company and the finite risk account referred to above.
Partially offsetting these increases were reductions in North American and
European premiums caused by rate reductions arising from market conditions and
the impact of unfavorable foreign exchange rates on Hong Kong premiums.
Underwriting results for 1999 decreased $12, with a corresponding 1.5 point
increase in the combined ratio from 1998. Excluding the finite risk account
referred to above, which had no significant impact on underwriting results in
1998, the decrease in underwriting results was due primarily to loss development
in 1999 from business written principally in 1998 in certain business classes,
partially offset by recoveries under the aggregate stop loss treaty.
Underwriting results for 1998 decreased $22, with a corresponding 3.1 point
increase in the combined ratio, from 1997 due primarily to the impact of higher
net property catastrophe losses of $47, which were somewhat offset by increased
new business premiums in finite casualty which has a lower combined ratio than
traditional casualty lines.
OUTLOOK
The reinsurance market is highly competitive and prices continue to remain
relatively soft in most product lines in most parts of the world. However, some
early positive signs appear to be emerging which indicate market pricing may
begin to improve in 2000 and continue into 2001. Until market pricing is fully
restored to more reasonable levels, HartRe remains focused on writing long-term
profitable business, even at the expense of premium growth. On a positive note,
responsible buyers are looking to establish core relationships with a select
group of financially strong reinsurers, which possess specialized product and
geographic spread, service capabilities, and expertise. HartRe stands ready to
capitalize on its strengths in these areas in view of the changing marketplace.
- 16 -
LIFE
OPERATING SUMMARY [1]
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums, fee income and other $ 3,979 $ 3,833 $ 3,163
Net investment income 1,562 1,955 1,536
Net realized capital losses (5) -- --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 5,536 5,788 4,699
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 3,054 3,227 2,671
Amortization of deferred policy acquisition costs and other expenses 1,796 1,976 1,548
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,850 5,203 4,219
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 686 585 480
Income tax expense 219 199 174
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 467 386 306
Less: Net realized capital losses, after-tax -- -- --
- ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 467 $ 386 $ 306
- ------------------------------------------------------------------------------------------------------------------------------------
[1] Life results are presented before the effect of an approximate 19%
minority interest in HLI, which is reflected in Other Operations.
The Life segment consists of the following reportable operations: Investment
Products, Individual Life, Employee Benefits and COLI. In addition, the Life
segment includes in an Other category its international operations, which are
primarily located in Latin America, and corporate items not directly allocable
to any of its reportable operations.
On May 22, 1997, HLI, the holding company parent of The Hartford's significant
life subsidiaries, completed the initial public offering of approximately 19% of
its common stock. (For additional information, see the Capital Resources and
Liquidity section under "The Offering".)
Revenues of $5.5 billion in 1999 decreased $252, or 4%, from 1998, primarily due
to the declining block of leveraged COLI business. Excluding the COLI operation,
revenues increased $484, or 11%, to $4.7 billion in 1999. This increase was
driven primarily by the Investment Products and Employee Benefits operations
where revenues increased $257 and $215, respectively. The Investment Products
operation experienced higher fee income in the individual annuity and mutual
fund businesses as a result of increased assets under management. The growth in
assets under management was attributed to strong net cash flow, the result of
higher sales and favorable persistency, as well as equity market appreciation.
The Employee Benefits operation experienced higher premium revenue due to strong
sales and persistency.
Core earnings of $467 in 1999 increased $81, or 21%, from 1998, primarily driven
by the Company's increased fee income associated with higher assets under
management in the Investment Products operation, as well as continued growth
across its other reportable operations.
Revenues of $5.8 billion in 1998 increased $1.1 billion, or 23%, from 1997. The
increase was due to the continued growth of revenues in the Investment Products
operation of $274 and the Individual Life operation of $57 as a result of fees
earned on higher assets under management which increased due to strong net cash
flow and equity market appreciation. Additionally, revenues in the COLI
operation increased $587 primarily due to the recapture in the fourth quarter of
1998 of an in force block of COLI business previously ceded to MBL Life. Higher
revenues in the Employee Benefits operation of $109, primarily due to strong
sales and renewals, also contributed to the revenue increase.
Core earnings of $386 in 1998 increased $80, or 26%, from 1997, primarily as a
result of an increase in earnings in the Investment Products operation of $64
and in the Individual Life operation of $9, both of which were driven by higher
fees associated with growth in assets under management. Additionally, earnings
in the Employee Benefits operation increased $13 principally due to an increase
in group insurance revenue and favorable mortality and morbidity experience.
- 17 -
SUMMARY RESULTS
1999 1998 1997
------------------------------- ------------------------------- -------------------------------
Net Income(Loss)/ Net Income(Loss)/ Net Income(Loss)/
Revenues Core Earnings [1] Revenues Core Earnings [1] Revenues Core Earnings [1]
- -----------------------------------------------------------------------------------------------------------------------------------
Investment Products $ 2,041 $ 330 $ 1,784 $ 266 $ 1,510 $ 202
Individual Life 584 71 567 65 510 56
Employee Benefits 2,024 79 1,809 71 1,700 58
Corporate Owned Life
Insurance 831 30 1,567 24 980 27
Other 56 (43) 61 (40) (1) (37)
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 5,536 $ 467 $ 5,788 $ 386 $ 4,699 $ 306
- ------------------------------------------------------------------------------------------------------------------------------------
[1] Core earnings represent after-tax operational results excluding, as
applicable, net realized capital gains or losses and certain other items.
The following describes each operation, including products and services offered,
and analyzes the above results.
Investment Products
- -------------------
The Investment Products operation focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired through the sale of individual fixed and variable annuities,
retail mutual funds, retirement plan services and other investment products. The
Company was ranked the number one writer of individual variable annuities in the
United States for 1999 according to Variable Annuity and Research Data Service
(VARDS). In addition, during 1999, seven of the twelve retail mutual funds
received Morningstar ratings and, as of December 31, 1999, all seven have
three-, four- or five-star ratings.
Revenues in the Investment Products operation of $2.0 billion in 1999 increased
$257, or 14%, from 1998. This increase was primarily driven by higher fee income
in the individual annuity and retail mutual fund businesses. Fees generated by
individual annuities increased $248, or 29%, while related account values grew
$18.2 billion, or 26%, to $89.0 billion in 1999. The growth in account values
was due, in part, to strong individual annuity sales of $10.9 billion in 1999,
as well as favorable persistency and equity market appreciation. In addition,
fee income from other investment products increased $68, or 59%, primarily
driven by the Company's continued growth in its retail mutual fund operations.
The substantial growth in retail mutual fund assets under management of $3.9
billion, or 154%, was primarily due to strong sales of $3.3 billion and
favorable persistency as well as equity market appreciation. Associated with
continued growth in this operation, amortization of deferred policy acquisition
costs grew $104, or 32%, and operating expenses increased $32, or 13%. Core
earnings of $330 in 1999 increased $64, or 24%, from 1998, primarily due to the
operation's growth in fee income as a result of the increase in assets under
management, as well as increased operating efficiencies.
Revenues in 1998 of $1.8 billion increased $274, or 18%, from 1997. This growth
was driven by individual annuity revenues, which increased $268, or 31%, over
the prior year due to higher fee income earned as a result of increased assets
under management. Individual variable annuity account values increased $15.3
billion, or 33%, to $62.2 billion as of December 31, 1998, primarily due to
continued strong net cash flow of individual variable annuities, as well as
equity market appreciation. Individual variable annuity sales reached $9.9
billion and $9.7 billion in 1998 and 1997, respectively. Associated with the
strong sales and continued growth in Investment Products, amortization of
deferred policy acquisition costs increased $76, or 30%, and operating expenses
increased $52, or 27%, over prior year levels. Substantial growth in assets
under management in 1998, coupled with continued operating efficiencies,
increased the operation's core earnings $64, or 32%, to $266 in 1998 from $202
in 1997.
Individual Life
- ---------------
The Individual Life operation, which focuses on the high-end estate and business
planning markets, sells a variety of life insurance products, including variable
life, universal life, interest-sensitive whole life and term life insurance.
Revenues in the Individual Life operation were slightly higher in 1999 as
compared to 1998. Fee income increased $59, or 18%, in 1999, primarily as a
result of an increase in life insurance in force of 9% to $66.7 billion in 1999,
as well as higher variable life account values which increased $868, or 50%, to
$2.6 billion in 1999. The higher fee income was partially offset by a decrease
in premium revenue resulting from the sale of HLI's Canadian life insurance
operations. Benefits, claims and expenses increased slightly in 1999 as compared
to 1998, primarily due to higher amortization of deferred policy acquisition
costs associated with growth in the operation, partially offset by favorable
mortality experience. Core earnings increased $6, or 9%, in 1999, primarily
driven by increased fees associated with higher insurance in force and variable
life account values, as well as favorable mortality as described above.
Revenues of $567 in 1998 increased $57, or 11%, from 1997, due to growth in fee
income associated with increases in life insurance in force and variable life
account values. Life insurance in force increased 10% to $61.1 billion in 1998;
and variable life account values increased $651, or 61%, to $1.7 billion in 1998
due to strong sales of $127 in 1998, a 30% increase over prior year levels, as
well as equity market appreciation. Benefits, claims and claim adjustment
expenses and amortization of deferred costs increased $18, or 7%, and
- 18 -
$21, or 24%, respectively, over prior year levels. The growth in the Individual
Life operation's account values, particularly variable life, and life insurance
in force resulted in an increase in core earnings of $9, or 16%, in 1998.
Employee Benefits
- -----------------
The Employee Benefits operation sells group life and group disability insurance
as well as other products including stop loss and supplementary medical coverage
to employers and employer sponsored plans. According to the latest results
published by Life Insurance Marketing and Research Association (LIMRA), the
Company was the third largest provider of group disability insurance in the
United States for the nine months ended September 30, 1999.
Revenues in the Employee Benefits operation of $2.0 billion in 1999 increased
$215, or 12%, from 1998. Revenues, excluding buyouts, increased $191, or 11%, in
1999 as a result of increased premiums due to strong sales and persistency, as
well as higher net investment income. Benefits, claims and expenses increased
$211, or 12%, in 1999, primarily due to higher benefits, claims and claim
adjustment expenses due to the growth in this operation. Excluding buyouts,
total benefits, claims and expenses increased $187, or 11%, and as a percentage
of revenues were consistent in 1999 as compared to 1998, indicating a
continuation of favorable mortality and morbidity experience. The increased
revenues resulted in an increase in core earnings of $8, or 11%, in 1999.
Revenues of $1.8 billion in 1998 increased $109, or 6%, from 1997. This increase
in revenues was driven by strong sales of fully insured business, excluding
buyouts, of $397 in 1998, which increased $68, or 21%, compared to 1997. This
growth in new sales was driven by group life and group disability business where
sales, excluding buyouts, grew 20% compared to the prior year. Benefits, claims
and expenses increased $101, or 6%, as compared to the prior year, primarily due
to higher benefits, claims and claim adjustment expenses associated with this
growing block of business. As a result of increased premium revenue, an
increased level of investment in tax-exempt securities and favorable mortality
and morbidity experience, core earnings increased $13, or 22%, to $71 in 1998
from $58 in 1997.
Corporate Owned Life Insurance
- ------------------------------
The COLI operation includes