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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, 1996
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
ITT HARTFORD GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (860) 547-5000
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 $.01 per share
6.375% Notes due November 1, 2002
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 28, 1997, there were outstanding 117,850,480 shares of Common
Stock, $.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
$8,795,584,275, based on the closing price of $75.00 per share of the Common
Stock on the New York Stock Exchange on February 28, 1997.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1997 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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[GRAPHIC OMITTED]
ITT Hartford Group, Inc. and its subsidiaries ("The Hartford") is an
international insurance and financial services organization offering commercial,
personal, and reinsurance property and casualty coverages as well as individual
life and annuities, employee benefits and investment product services.
Founded in 1810, The Hartford has grown from a local fire insurance company to
an internationally recognized insurance and financial services enterprise.
CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of The Hartford 2
2 Properties 8
3 Legal Proceedings 8
4 Submission of Matters to a Vote of Security Holders 8
PART II 5 Market for The Hartford's Common Stock and Related
Stockholder Matters 8
6 Selected Financial Data 9
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 10
8 Financial Statements and Supplementary Data 33
9 Changes in and Disagreements with Accountants on
Accounting and Financial Disclosure 33
PART III 10 Directors and Executive Officers of The Hartford 33
11 Executive Compensation 33
12 Security Ownership of Certain Beneficial Owners
and Management 33
13 Certain Relationships and Related Transactions 33
PART IV 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 33
Signatures II-1
Exhibits Index II-2
PART I
Item 1. BUSINESS OF THE HARTFORD
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
GENERAL
ITT Hartford Group, Inc. and its subsidiaries ("The Hartford"), headquartered in
Connecticut, are among the largest providers of both property and casualty
insurance and life insurance products in the United States. (The terms "The
Hartford" and the "Company" when used herein, refer to one or more of ITT
Hartford Group, Inc. and its consolidated subsidiaries.) Hartford Fire Insurance
Company ("Hartford Fire"), founded in 1810, is the oldest and best known of The
Hartford's subsidiaries. Hartford Fire and its subsidiaries write insurance in
all fifty states. At December 31, 1996, the total assets and stockholders'
equity of The Hartford were $108.8 billion and $4.5 billion, respectively.
ITT Hartford 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 ITT Hartford 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. In connection with this transaction, ITT transferred the ownership of
First State Insurance Company, together with its subsidiaries ("First State"),
and Fencourt Reinsurance Company, Ltd. ("Fencourt"), both of which were wholly
owned subsidiaries of ITT, to ITT Hartford Group, Inc. prior to the
Distribution. Additional information regarding the Distribution may be found in
Note 2 of Notes to Consolidated Financial Statements and in Management's
Discussion and Analysis of Financial Condition and Results of Operations
("MD&A") within the Distribution section and "Distribution Agreement" within the
Capital Resources and Liquidity section.
As a holding company, ITT Hartford 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 ITT Hartford Group, Inc. may be
found in the Capital Resources and Liquidity section of the MD&A.
BUSINESS SEGMENTS
The Hartford consists of four business segments: North American Property &
Casualty, Life, International, and Runoff. 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 business segments may be found in the MD&A on pages 10 to 19 and Note
1 and Note 17 of Notes to Consolidated Financial Statements.
NORTH AMERICAN PROPERTY & CASUALTY
The Hartford's North American Property & Casualty segment is the 8th largest
property and casualty insurance operation in the United States based on written
premiums for the year ended December 31, 1995, per A.M. Best. With written
premiums of $5.7 billion for the year ended December 31, 1996, North American
Property & Casualty is the largest of the Company's segments. In 1996, the
states producing 5% or more of this segment's written premiums were New York
(12%), California (10%), Florida (7%), Connecticut (6%) and Illinois and Texas
(5% each).
Principal Products
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The Hartford's North American Property & Casualty segment consists of three
major lines of business: Commercial, Personal and Reinsurance. These lines
provide a wide range of insurance coverages for individuals and businesses.
Commercial is the largest line of business with $3.2 billion in written premiums
in 1996. Workers' compensation, property, automobile, liability, marine,
agricultural and bond coverages are offered by the Commercial line of business.
The Hartford ranks among the largest carriers of personal lines insurance,
providing homeowners, automobile and fire coverages to individuals across North
America including a special program designed exclusively for members of the
American Association of Retired Persons ("AARP"). Additionally, The Hartford is
a major international reinsurer, with operations in Hong Kong, Spain, the United
Kingdom, Germany and Canada. (See the Reinsurance section of Item 1 under Other
Matters for additional information.)
Methods of Distribution
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The North American Property & Casualty segment provides insurance products and
services through its home office located in Hartford, Connecticut, and 39
domestic regional offices. The Company markets its products nationwide utilizing
a variety of distribution networks including the use of approximately 6,000
independent agents and direct marketing. Independent agents, who often represent
other companies as well, are compensated on a commission basis and are not
employees of The Hartford. Additionally, the Company assumes insurance from
other insurers and cedes insurance to other insurers or reinsurers in the
worldwide reinsurance market.
Competition
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The property and casualty insurance industry is a highly challenging environment
in which The Hartford competes with other stock companies, mutual companies,
self insurers and other underwriting organizations. Intense competition among
insurers, combined with the continued effects of the last economic downturn,
have created difficult market conditions in the domestic property and casualty
industry. This competitive environment is created by tremendous price
competition, consolidation and globalization of companies, exploration and
utilization of alternative distribution techniques and emphasis on cost
containment and reduction.
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A major competitive advantage of The Hartford is the exclusive licensing
arrangement with AARP to provide personal automobile, homeowners and home-based
business insurance products to its members through the year 2002. Favorable
"baby boomer" demographics are expected to increase AARP membership
significantly during this period. During 1996, The Hartford'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 Group Health
Insurance Program effective January 1, 1998. Additionally, The Hartford has
implemented expense management disciplines within the North American Property &
Casualty segment which are designed to maintain efficient and effective
underwriting, servicing and claim settlement operations.
LIFE
The Hartford's Life segment provides insurance and retirement products for the
benefit of millions of individuals. This segment has been among the fastest
growing major life insurance operations for the past several years, as measured
by assets. The Hartford's domestic life insurance operations achieved the rank
of 8th largest life insurer in the United States at December 31, 1995, based on
statutory admitted assets according to A.M. Best. In the past year, the Life
segment's total assets have grown 25% to $76.3 billion at December 31, 1996. The
Life segment generated $4.4 billion in revenues and $249 in net income in 1996.
The Life segment, headquartered in Simsbury, Connecticut, operates in three
principal divisions: Investment Products, Individual Life Insurance, and
Employee Benefits. Each division has grown significantly in revenues and
operating income. In addition, the Life segment maintains a Corporate Operation
through which it reports net investment income on assets representing surplus
not assigned to any of its business segments and certain other revenue and
expenses not specifically allocable to any of its business segments.
Principal Products
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The Investment Products division focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired. This division offers fixed and variable annuities, certain
deferred compensation and retirement plan services, mutual funds, investment
management services and certain other financial products. The Individual Life
Insurance division markets both variable and fixed universal life-type
contracts, as well as single premium variable life and term life products. The
primary products of the Employee Benefits division include group life, group
long-term and short-term managed disability, stop-loss and supplementary medical
coverage to employers and employer-sponsored plans, and accidental death and
dismemberment, travel and special risk coverage to employers and associations,
as well as specialty business such as corporate owned life insurance ("COLI")
and reinsurance.
Methods of Distribution
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The Life segment sells a variety of individual and group financial services and
insurance products through a combination of broker-dealers, licensed agents,
third party administrators and a direct sales force. The Investment Products
division primarily distributes through broker-dealers and financial institutions
for individual sales, and through employees of the Company for institutional
sales. The Individual Life Insurance division distributes its products through
insurance agents, broker-dealers and financial institutions, typically assisted
by a dedicated group of Company employees. Employee Benefits division products
are distributed through insurance agents and brokers, usually assisted by a
dedicated group of Company employees.
Competition
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The life insurance industry in the United States is highly competitive with
approximately 2,000 insurers vying for business. Competitive factors in the life
insurance industry include, but are not limited to, price, name recognition,
quality of distribution systems and financial ratings. In the individual annuity
market, sales volume is also dependent on fund performance, an array of fund and
product options, product design and credited rates. The Company was rated the
number one writer of variable annuities for 1996 with a 13% market share
according to the Variable Annuity and Research Data Service.
INTERNATIONAL
The Hartford's International segment consists of European companies offering a
variety of insurance products designed to meet the needs of local customers.
These companies include ITT London & Edinburgh ("L&E"), headquartered in the
United Kingdom, Zwolsche Algemeene ("Zwolsche"), located in both the Netherlands
and Belgium, and ITT Ercos in Spain. The International segment generated $1.6
billion in revenues and $139 in net income in 1996. Assets totaled $5.3 billion
at December 31, 1996.
Principal Products
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L&E offers both personal and commercial lines property and casualty insurance.
Personal lines include automobile, homeowners and creditor (including credit
life) products. Commercial lines include property and liability products sold to
small to medium sized clients. L&E also provides marine products within the
London market. Zwolsche sells property and casualty and life insurance products.
Personal lines products at Zwolsche include automobile, hospitalization and
homeowners. Commercial products, including automobile, are sold to small to
medium sized clients. Zwolsche life insurance operations offer term life,
mortgage and pension products. ITT Ercos provides both personal and commercial,
property and casualty, and life insurance products.
Methods of Distribution
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The International segment conducts the majority of its business through over
10,000 independent brokers in Western Europe.
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These brokers are not employees of The Hartford and often represent other
companies as well. As such, they are compensated on a commission basis.
Competition
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In the International segment, competition in personal lines insurance comes
primarily from direct writers, while in the commercial insurance market,
competition comes largely from "composites". Composites are well established
companies with both life and property and casualty operations. Within Europe's
life insurance industry, there also exists heavy competition from banks and
direct writers.
RUNOFF
The Hartford's Runoff segment consists of the property and casualty insurance
operations of The Hartford which have ceased writing new and renewal business
and the closed book of guaranteed rate contract business ("Closed Book GRC")
which includes life products with fixed or indexed rates that are guaranteed for
a specific period. Closed Book GRC had no new or renewal business as of the end
of 1994. The Runoff segment has no new product sales, distribution system, or
competitive issues. The property and casualty insurance operations primarily
include First State, located in Boston, Massachusetts and Fencourt,
headquartered in Bermuda.
The primary objective of the Runoff segment is to ensure the full and timely
payment of all runoff liabilities. Specifically, the primary focus of the
property and casualty insurance operations is the proper disposition of claims,
the resolution of disputes, and the collection of reinsurance proceeds related
to policies written and reinsured prior to 1985. The Closed Book GRC's primary
focus is to closely match the interest rate sensitivities of the assets with
those of the liabilities, as well as, matching the duration of its assets to
that of its liabilities.
OTHER MATTERS
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. Further
discussion on The Hartford's property and casualty reserves may be found in the
Reserves section of the MD&A. In addition, a separate process including 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.
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.
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.
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 $472 and $451 as of December 31, 1996 and
1995, respectively, and the amortization of the discount had no material effect
on net income during 1996, 1995 and 1994, 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.
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PROPERTY AND CASUALTY RESERVES (CONTINUED)
A reconciliation of liabilities for unpaid claims and claim adjustment expenses
is herein referenced from Note 1(c) of Notes to Consolidated Financial
Statements. A table depicting the historical development of the liabilities for
unpaid claims and claim adjustment expenses follows.
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT
EXPENSE LIABILITY DEVELOPMENT - NET
FOR THE YEARS ENDED DECEMBER 31,
1986 1987 1988 1989 1990 1991 1992 1993 1994 1995 1996
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Liabilities for unpaid claims and
claim adjustment expenses [1] $5,903 $7,262 $8,168 $8,666 $9,366 $9,796 $11,103 $11,441 $11,623 $12,047 $13,389
Cumulative paid claims and claim
expenses
One year later 1,808 2,089 2,296 2,545 2,789 2,879 2,806 2,832 2,983 2,797 --
Two years later 2,916 3,323 3,618 4,013 4,428 4,465 4,415 4,602 4,667 -- --
Three years later 3,683 4,187 4,577 5,132 5,511 5,605 5,655 5,755 -- -- --
Four years later 4,275 4,846 5,341 5,863 6,304 6,507 6,507 -- -- -- --
Five years later 4,743 5,392 5,872 6,435 6,979 7,173 -- -- -- -- --
Six years later 5,168 5,787 6,320 6,944 7,505 -- -- -- -- -- --
Seven years later 5,481 6,155 6,733 7,360 -- -- -- -- -- -- --
Eight years later 5,803 6,492 7,094 -- -- -- -- -- -- -- --
Nine years later 6,103 6,815 -- -- -- -- -- -- -- -- --
Ten years later 6,397 -- -- -- -- -- -- -- -- -- --
Liabilities reestimated
One year later 6,293 7,437 8,342 8,879 9,636 11,053 11,311 11,484 11,856 13,078 --
Two years later 6,422 7,619 8,432 9,052 10,780 11,202 11,354 11,691 13,020 -- --
Three years later 6,718 7,719 8,482 10,200 10,905 11,315 11,582 12,810 -- -- --
Four years later 6,885 7,827 9,645 10,342 11,151 11,653 12,740 -- -- -- --
Five years later 7,021 9,117 9,829 10,578 11,515 12,794 -- -- -- -- --
Six years later 8,504 9,287 10,068 10,972 12,649 -- -- -- -- -- --
Seven years later 8,652 9,521 10,478 12,075 -- -- -- -- -- -- --
Eight years later 8,878 9,943 11,550 -- -- -- -- -- -- -- --
Nine years later 9,298 10,991 -- -- -- -- -- -- -- -- --
Ten years later 10,321 -- -- -- -- -- -- -- -- -- --
Deficiency $4,418 $3,729 $3,382 $3,409 $3,283 $2,998 $1,637 $1,369 $1,397 $1,031 $ --
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PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE
LIABILITY DEVELOPMENT - GROSS
FOR THE YEARS ENDED DECEMBER 31,
1993 1994 1995 1996
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Net reserve [1] $11,441 $11,623 $12,047 $13,389
Reinsurance recoverables 5,385 5,568 5,209 4,703
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Gross reserve [2] $16,826 $17,191 $17,256 $18,092
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Net reestimated reserve $12,810 $13,020 $13,078
Reestimated reinsurance recoverables 6,007 6,103 5,371
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Gross reestimated reserve $18,817 $19,123 $18,449
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Gross deficiency $ 1,991 $ 1,932 $ 1,193
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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.
[1] Liabilities, net of reinsurance for unpaid claims and claim adjustment
expenses excluded, were $495, $550 and $500 of December 31, 1994, 1995 and
1996, respectively.
[2] Liabilities, gross of reinsurance for unpaid claims and claim adjustment
expenses excluded, were $244, $280 and $211 as of December 31, 1994, 1995
and 1996, respectively.
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. See Note 1(b) of Notes to Consolidated Financial Statements for further
discussion of this accounting change.
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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 modified to reflect The
Hartford's actual experience when appropriate. These reserves are computed at
amounts that, with additions from 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 include unearned premiums, premium
deposits, claims reported but not yet paid, claims incurred but not reported and
claims in the process of settlement. Reserves for assumed reinsurance are
computed on bases essentially comparable to direct insurance reserves.
For The Hartford's individual life, universal life and interest-sensitive whole
life policies, reserves are set according to premiums collected, plus interest
credited, less charges. Other fixed death benefit 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 stability 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 of approximately 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. In addition, The Hartford's fixed
market value adjusted annuities discourage surrender by policyholders. 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 generally
accepted accounting principles, which may vary from statutory requirements.
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 which 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.
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 which 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 regulation requires 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
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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.
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 Initiatives section of the MD&A under
"Legislative Initiatives".
INSOLVENCY FUND
Reference is made to the Regulatory Initiatives section of the MD&A under
"Insolvency Fund".
REINSURANCE
In accordance with normal industry practice, The Hartford is involved in both
the cession and assumption of insurance with other insurance and 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 other reinsurers that
protect it against a specified part or all of certain losses over stipulated
amounts.
The ceding of insurance 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 insurance 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.
Relative to life operations, The Hartford reinsures with other companies. As of
December 31, 1996, the maximum amount of life insurance retained on any one life
by any of the life operations is approximately $1.3, excluding accidental death
benefits.
INVESTMENT OPERATIONS
An important element of the financial results of The Hartford is the return on
invested assets. The Hartford's investment activities are generally divided
between property and casualty insurance and life insurance. The investment
portfolios of both the property and casualty and the life operations are managed
based on the underlying characteristics and nature of their respective
liabilities.
The investment objective of property and casualty operations is the maximization
of after-tax income consistent with long-term capital growth and maintenance of
appropriate liquidity to meet corporate and policyholder obligations. 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 segment'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 to that of policyholder obligations). Life
operations use various derivatives to modify the characteristics of its
investments.
For a further discussion of strategies including derivative utilization, see the
Investments section of the MD&A under "Life Asset and Liability Management
Strategies" , as well as Note 3 of Notes to Consolidated Financial Statements.
EMPLOYEES
The Hartford had approximately 22,000 employees as of December 31, 1996.
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 1997
Proxy Statement. In addition to those executive officers who are listed in the
1997 Proxy Statement, listed below are the following Company executive officers,
the majority of whom have served in similar positions for The Hartford prior to
the Distribution (referred to herein as "Hartford Fire"):
JOHN F. DONAHUE, 61, became Senior Vice President, International/Reinsurance
Operations of The Hartford in June 1996. Prior to that, he served as Senior Vice
President,
- 7 -
Business Development and Director of reinsurance operations of The Hartford. He
also served as Senior Underwriting Officer of Hartford Fire. Mr. Donahue holds
the designation of Chartered Property/Casualty Underwriter. He was elected Vice
President of Hartford Fire in 1980 and named Director of the commercial lines of
business for Hartford Fire in 1987.
JOSEPH H. GAREAU, 50, has been Executive Vice President and Chief Investment
Officer of Hartford Fire since 1993 and became Executive Vice President and
Chief Investment Officer of the Company in December 1995. Prior to that time, he
served as Senior Vice President and Chief Investment Officer for the domestic
property and casualty operations of Hartford Fire. Mr. Gareau was elected Vice
President of Hartford Fire in 1987.
HELEN G. GOODMAN, 56, has been Senior Vice President, Human Resources of
Hartford Fire since 1994 and became Senior Vice President, Human Resources of
the Company in December 1995. Prior to that time, she held the position of
Senior Vice President, Human Resources for Tambrands Inc.
EDWARD L. MORGAN, 53, has been Senior Vice President, Corporate Relations and
Government Affairs of Hartford Fire since 1993 and became Senior Vice President,
Corporate Relations and Government Affairs of the Company in December 1995. From
1991 to 1993, he served as Vice President and Director of Corporate Relations of
Hartford Fire. Prior to that time, Mr. Morgan held the position of Vice
President of Corporate Relations at Allstate Insurance Company.
JAMES J. WESTERVELT, 50, has been Senior Vice President and Group Controller of
Hartford Fire since 1994. He was appointed to the same position for the Company
in December 1995. He was elected Vice President and became Group Controller in
1989.
MICHAEL S. WILDER, 55, has been Senior Vice President of Hartford Fire since
1987 and General Counsel of Hartford Fire since 1975. He became Senior Vice
President and General Counsel of the Company in December 1995.
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 202 thousand square feet of office space in the United
Kingdom, 218 thousand square feet of office space in the Netherlands and 94
thousand square feet of office space in Spain. In addition, The Hartford leases
approximately 5.1 million square feet throughout the United States and 156
thousand square feet in other countries.
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 will not materially
affect the consolidated financial position, results of operations or cash flows
of The Hartford.
The Hartford is involved in claim litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed 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 December 20, 1995, the common stock began
regular trading on the NYSE.
The following table presents 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:
Common Stock Price Dividends
High Low Declared
- ----------------------- ----------------------- -----------------
1996
First quarter $53.00 $47.13 $0.40
Second quarter 54.13 45.50 0.40
Third quarter 59.63 50.75 0.40
Fourth quarter 69.50 59.13 0.40
- ----------------------- ----------- ----------- -----------------
1995
Fourth quarter [1] $49.13 $48.13 $ --
- ----------------------- ----------- ----------- -----------------
[1] Represents the period from December 20, 1995 (the day regular trading of The
Hartford's common stock commenced on the NYSE) through December 29, 1995 (the
last trading day in 1995).
At February 28, 1997, there were approximately 60,000 shareholders of record of
The Hartford's common stock.
In 1997, The Hartford expects to continue to pay quarterly dividends on its
common stock of $0.40 per share. Dividend decisions will be based on and
affected by a number of factors, including the operating results and financial
requirements of The Hartford on a stand-alone basis and the impact of
- 8 -
regulatory restrictions discussed in the Liquidity Requirements section of the
MD&A. Prior to the Distribution, dividends that The Hartford declared were paid
to ITT, which then paid dividends to its shareholders.
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 ITT Hartford 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)
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Revenues $ 12,473 $ 12,150 $ 11,102 $ 10,338 $ 9,862
Income (loss) before cumulative effect of
accounting changes [1] (99) 559 632 537 (274)
Net income (loss) [1] [2] $ (99) $ 559 $ 644 $ 537 $ (653)
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 108,840 $ 93,855 $ 76,765 $ 66,179 $ 54,180
Long-term debt and redeemable preferred stock 1,032 1,022 682 842 867
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
parent junior subordinated debentures 1,000 -- -- -- --
Stockholders' equity $ 4,520 $ 4,702 $ 3,184 $ 4,012 $ 3,679
- ---------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE DATA [3]
Income (loss) before cumulative effect of
accounting changes [1] $ (0.84) $ 4.77 $ 5.40 $ 4.59 $ (2.34)
Net income (loss) [1] [2] $ (0.84) $ 4.77 $ 5.50 $ 4.59 $ (5.58)
Dividends declared per common share [4] $ 1.60 $ 6.65 $ 1.94 $ 1.90 $ 1.16
- ---------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [5] 105.2 104.5 102.5 103.6 112.3
Worldwide Property & Casualty [5] [6] 105.1 104.1 102.2 104.8 114.8
- ---------------------------------------------------------------------------------------------------------------------------------
[1] 1996 includes other charges of $693, after-tax, or $5.91 per share,
consisting primarily of environmental and asbestos reserve increases and
recognition of losses on the closed book of guaranteed rate contract
business (for additional information see MD&A). 1992 includes after-tax
reserve strengthening actions (as described in item 5 below) of $759, or
$6.48 per share.
[2] 1994 includes $12, after-tax, or $0.10 per share, for the net cumulative
effect of accounting changes for accounting for certain investments in debt
and equity securities and the change in the method of discounting to
present value certain workers' compensation reserves (for additional
information see Note 1(b) in Notes to Consolidated Financial Statements).
1992 includes a net charge of $379, or $3.24 per share, for the net
cumulative effect of accounting changes for postemployment and
postretirement benefits other than pensions.
[3] Actual number of average common shares outstanding at December 31, 1995 of
117.1 is retroactively presented for all prior periods.
[4] Prior to the Distribution, dividends that The Hartford declared were paid
to ITT, which then paid dividends to its shareholders.
[5] 1996 excludes the impact of $660, before-tax, environmental and asbestos
charge. Including the impact of this charge, the combined ratio for 1996
was 116.9 for the North American Property & Casualty segment (for
additional information see MD&A) and 114.7 for the Worldwide Property &
Casualty. The 1992 combined ratio excludes the impact of $900, before-tax,
of reserve strengthening actions taken to address loss developments in
surplus lines and reinsurance at First State Insurance Company and its
subsidiaries reported in the Runoff Segment and $250 of legal defense costs
associated with environmental-related claims. Including the impact of these
actions, the combined ratio for 1992 was 135.4 for the North American
Property & Casualty segment and 133.7 for the Worldwide Property &
Casualty.
[6] For the periods after 1992, the combined ratios exclude the results of the
Runoff segment.
Outlined in the table below are U.S. Industry Combined Ratios for each of the
five years ended December 31:
1996 1995 1994 1993 1992
- ---------------------------------------------------------------------------------------------------------------------------------
U.S. Industry Combined Ratios (a) 107.0 106.4 108.4 106.9 115.7
- ---------------------------------------------------------------------------------------------------------------------------------
(a) U.S. Industry Combined Ratio information obtained from A.M. Best. 1996's
combined ratio is an estimate prepared as of January 1997.
- 9 -
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 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. The forward-looking statements are made based upon
management's expectations and beliefs concerning future developments and their
potential effect upon ITT Hartford Group, Inc. ("The Hartford" or the
"Company"). There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on The Hartford will be those anticipated by management. Actual
results could differ materially from those expected by The Hartford, depending
on the outcome of certain factors, including those described with the
forward-looking statements herein.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
================================================================================
INDEX
================================================================================
Distribution 10
Consolidated Results of Operations: Operating Summary 10
North American Property & Casualty 12
Life 14
International 17
Runoff 18
Reserves 20
Environmental and Asbestos Claims 20
Investments 22
Capital Resources and Liquidity 29
Regulatory Initiatives 32
Effect of Inflation 32
================================================================================
DISTRIBUTION
================================================================================
On December 19, 1995, ITT Corporation ("ITT") distributed all of the outstanding
shares of common stock of The Hartford to the shareholders of ITT common stock
(the "Distribution" or "Spin-off"). As a result of the Distribution, The
Hartford became an independent publicly-traded company. "Regular Way" trading of
The Hartford's common stock on the New York Stock Exchange (under the symbol
"HIG") commenced on December 20, 1995. In connection with this transaction, ITT
transferred First State Insurance Company, together with its subsidiaries, and
Fencourt Reinsurance Company, Ltd., both of which were wholly owned companies of
ITT, to The Hartford prior to the Distribution. Consistent with the Consolidated
Financial Statements and related Notes, the financial information included
herein reflects the results of The Hartford as if it were a separate entity for
all periods presented. For additional information, see "Distribution Agreement"
under Capital Resources and Liquidity.
================================================================================
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
================================================================================
OVERVIEW
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 10,076 $ 9,628 $ 8,753
Net investment income 2,523 2,420 2,259
Net realized capital gains (losses) (126) 102 90
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 12,473 12,150 11,102
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 8,942 7,769 7,314
Amortization of deferred policy acquisition costs 1,678 1,658 1,513
Other expenses 2,171 1,981 1,423
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 12,791 11,408 10,250
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (318) 742 852
Income tax expense (benefit) (219) 180 214
Dividends on subsidiary preferred stock -- (3) (6)
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES (99) 559 632
Cumulative effect of accounting changes, net of tax expense of $7 -- -- 12
- --------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (99) 559 644
Less: Cumulative effect of accounting changes, net of tax expense of $7 -- -- 12
Net realized capital gains, after-tax [1] 57 67 59
Other charges (693) -- --
Allocated Distribution items -- 14 50
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 537 $ 478 $ 523
- ---------------------------------------------------------------------------------------------------------------------------------
[1] 1996 excludes the Closed Book GRC (see below) net realized capital loss of
$137, after-tax. This amount is included in other charges.
- 10 -
Net income, excluding the impact of accounting changes, net realized capital
gains, after-tax, other charges and allocated Distribution items was $537 for
1996 compared with $478 for 1995 and $523 in 1994. The Hartford defines this
presentation of after-tax operational results as "core earnings".
Core earnings increased $59, or 12%, to $537 in 1996 due primarily to increased
revenues earned on a growing annuity asset base, growth in net investment
income, increased group insurance premiums and favorable mortality experience,
partially offset by after-tax underwriting losses resulting from higher
catastrophes in 1996.
1995 core earnings decreased $45, or 9%, from 1994 due primarily to the impact
of the Dow Corning breast implant claims settlement, a loss from a single
industrial fire covered by the Industrial Risk Insurance ("IRI") pool and losses
attributable to Hurricane Opal. Additionally, results in the closed book of
guaranteed rate contract business ("Closed Book GRC") reflected losses due to
lower investment earnings on mortgage-backed securities, the result of
prepayment experience in excess of assumed levels. Improved property and
casualty net investment income and growth in sales of annuities and corporate
owned life insurance ("COLI") products partially offset the core earnings
decline.
CUMULATIVE EFFECT OF ACCOUNTING CHANGES
Items excluded from core earnings include the impact of the adoption of
Statement of Financial Accounting Standards ("SFAS") No. 115, "Accounting for
Certain Investments in Debt and Equity Securities", and the change in the method
of discounting to present value certain workers' compensation reserves, the
cumulative net effect of which totaled $12, after-tax, recorded as of January 1,
1994. Upon adoption of SFAS No. 115, the amortized cost basis of mortgage-backed
interest-only investments were written down to fair value and reflected as a
cumulative effect of accounting change of $(30) after-tax. A change in the
method of discounting certain workers' compensation reserves from one that used
statutory interest rates to one utilizing a "risk-free" market rate resulted in
a $42 after-tax cumulative effect benefit.
NET REALIZED CAPITAL GAINS
See Investment Results in the Investments discussion.
OTHER CHARGES
Net income for 1996 includes other charges related to environmental and asbestos
reserve increases, net of taxes, of $(429) in the North American Property &
Casualty segment and $(81) at First State in the Runoff segment (as discussed in
the Environmental and Asbestos Claims section), recognition of losses on Closed
Book GRC of $(169) (as discussed in the Runoff section) and other, primarily
foreign tax-related items, of $(2) in each of the North American Property &
Casualty and Life segments and $(10) in the Runoff segment.
ALLOCATED DISTRIBUTION ITEMS
As part of the Distribution, The Hartford was allocated amounts originally
recorded at the ITT corporate level. The allocations resulted in net income of
$14 and $50 in 1995 and 1994, respectively. For more information on liability
sharing arrangements related to the Distribution, see "Distribution Agreement"
and "Tax Allocation Agreement" under Capital Resources and Liquidity.
INCOME TAXES
The effective tax rates for 1996, 1995 and 1994 were 20%, 24% and 25%,
respectively, excluding the impact of other charges in 1996. 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 in 1996, 1995 and 1994 were $170,
$302 and $317, respectively. For additional information, see "Tax Allocation
Agreement" under Capital Resources and Liquidity.
PER COMMON SHARE
The following table represents per common share data and return on equity for
the past three years:
1996 1995 1994
- -----------------------------------------------------------------
Weighted average common shares
outstanding [1] 117.3 117.1 117.1
Operating income (loss) $(2.71) $6.34 $7.28
Net income (loss) $(0.84) $4.77 $5.50
Return on equity [2] [3] (2.3)% 12.6% 15.4%
- ----------------------------------------------------------------
[1] Actual number of common shares outstanding at December 31, 1995 of 117.1
million is retroactively presented for December 31, 1994.
[2] Calculated by dividing net income by average equity excluding unrealized
gain (loss), after-tax.
[3] 1996 return on equity excluding the other charges noted above from net
income was 13.8%.
SEGMENT RESULTS
The Hartford's reporting segments reflect the management structure of the
Company. These segments consist of North American Property & Casualty, Life, and
International, all of which represent ongoing operations, and Runoff. Runoff
includes operations which have ceased writing new and renewal business.
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 for consideration received, 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 core earnings by segment.
1996 1995 1994
- ----------------------------------------------------------------
N. A. Property & Casualty $ 270 $ 251 $ 309
Life 251 221 149
International 87 91 62
Runoff (71) (85) 3
- ----------------------------------------------------------------
CORE EARNINGS $ 537 $ 478 $ 523
- ----------------------------------------------------------------
A description of each 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.
- 11 -
================================================================================
NORTH AMERICAN PROPERTY & CASUALTY
================================================================================
OPERATING SUMMARY
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 5,657 $ 5,662 $ 5,504
Net investment income 661 646 606
Net realized capital gains 15 29 69
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 6,333 6,337 6,179
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 4,994 4,315 4,070
Amortization of deferred policy acquisition costs 1,154 1,178 1,121
Other expenses 584 510 524
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 6,732 6,003 5,715
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (399) 334 464
Income tax expense (benefit) (248) 61 104
Dividends on subsidiary preferred stock -- (3) (6)
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES (151) 270 354
Cumulative effect of accounting changes, net of tax expense of $7 -- -- 12
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (151) 270 366
Less: Cumulative effect of accounting changes, net of tax expense of $7 -- -- 12
Net realized capital gains, after-tax 10 19 45
Other charges (431) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 270 $ 251 $ 309
- ---------------------------------------------------------------------------------------------------------------------------------
Core earnings for the North American Property & Casualty segment were $270, an
increase of $19 from 1995, primarily due to a $53 increase in after-tax net
investment income partially offset by a $37 increase in after-tax underwriting
loss. The increased underwriting loss resulted from significantly higher
catastrophe and winter storm losses in 1996 partially offset by two material
items discussed in the following Summary Underwriting Results section, which
adversely affected underwriting results in 1995. 1995 core earnings of $251 were
down $58 from 1994 due to the two material items noted, as well as decreased
income from third party servicing contracts and very favorable workers'
compensation loss experience in 1994.
Within the North American Property & Casualty segment, management analyzes the
results of operations by the following four major components on a before-tax
basis:
1996 1995 1994
- ----------------------------------------------------------------
Underwriting results $ (986) $ (270) $ (182)
Net investment income 661 646 606
Net realized capital gains 15 29 69
Other miscellaneous expenses 89 71 29
- ----------------------------------------------------------------
Operating income $ (399) $ 334 $ 464
- ----------------------------------------------------------------
The following discussion summarizes underwriting results by major operation (as
defined below) and other miscellaneous expenses. As previously noted, net
investment income and net realized capital gains are covered in a separate
discussion in the Investments section. Other charges, consisting primarily of an
increase in environmental and asbestos reserves, are discussed in the
Environmental and Asbestos Claims section.
SUMMARY UNDERWRITING RESULTS
Underwriting results represent premiums earned less incurred claims, claim
adjustment expenses and underwriting expenses. The following table shows written
premiums, underwriting results and combined ratios for The Hartford's North
American Property & Casualty segment.
1996 1995 1994
- ----------------------------------------------------------------
Written premiums $ 5,688 $ 5,670 $ 5,648
Underwriting results [1] $ (326) $ (270) $ (182)
Combined ratio [1] [2] 105.2 104.5 102.5
- ----------------------------------------------------------------
[1] 1996 excludes the impact of $660, before-tax, environmental and asbestos
charge. Including the impact of this charge, the combined ratio for 1996 was
116.9 for the North American Property & Casualty segment.
[2] "Combined ratio" is a common industry measurement of the results of property
and casualty insurance underwriting. This ratio is the sum of the ratio of
incurred claims and claim expenses to premiums earned (the "loss ratio") and the
ratio of underwriting expenses incurred to premiums written (the "expense
ratio"). A combined ratio under 100.0 generally indicates an underwriting
profit. Federal income taxes, net investment income, deferred policy acquisition
costs and other non-underwriting expenses are not reflected in the combined
ratio.
Written premiums for this segment were up slightly in 1996 and 1995 from the
respective prior year's results. Continued growth in target markets such as
reinsurance, small commercial accounts and business written under an exclusive
licensing arrangement with The American Association of Retired Persons ("AARP")
was offset by decreased premiums from mid-to-large commercial accounts, agency
personal lines and residual markets. The conversion of certain workers'
compensation business to large deductible programs also depressed the growth in
written premiums.
- 12 -
1996 underwriting losses before-tax increased $56 over 1995 primarily due to
severe weather-related catastrophe experience, most notably several first
quarter winter storms and Hurricane Fran in September. These events drove total
catastrophe losses in 1996 to exceed 1995 by approximately $130 causing a 2.3
point increase in the combined ratio.
Underwriting results for 1995 were $88 lower than the prior year largely due to
the impact of two items: a $40 loss, net of reinsurance, in connection with the
settlement of claims against Dow Corning Corporation alleging product defects
arising from breast implants, and a net $32 loss resulting from a single
industrial fire covered by the IRI pool. These non-recurring items increased the
combined ratio by 1.3 points in 1995. The 1994 combined ratio of 102.5 was lower
than both the adjusted (excluding the non-recurring items) 1995 and 1996
combined ratios by 0.7 points and 0.4 points, respectively, largely due to
favorable loss experience in workers' compensation in 1994.
The North American Property & Casualty segment consists of three major
operations: Commercial, Personal and Reinsurance. A description of each
operation, including an analysis of underwriting results, follows.
Commercial
- ----------
1996 1995 1994
- ----------------------------------------------------------------
Written premiums $ 3,211 $ 3,335 $ 3,427
Underwriting results $ (201) $ (227) $ (119)
Combined ratio 105.7 106.6 102.5
- ----------------------------------------------------------------
Commercial Insurance Operations (CIO) 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. CIO
is organized into three customer market segments: Commercial Business Insurance
Operations (CBI), Commercial Affinity Segment (CAS), and Specialty Commercial
Lines (SCL). CBI provides standard commercial business for small accounts
(Select Customer) and mid-sized insureds (Key Accounts). Agricultural, livestock
and marine products are also managed within CBI. CAS provides commercial risk
management products and services to members of affinity groups and customers of
financial institutions. SCL provides insurance through retailers and wholesalers
to large commercial clients and insureds requiring a variety of specialized
coverages. SCL's results include the bond lines and First State Management
Group, a leading underwriter of excess and surplus lines business produced
primarily through wholesale brokers.
Written premiums decreased 4% in 1996 to $3.2 billion, compared to a 3% decrease
in the previous year. A decline in workers' compensation premium from less
profitable involuntary workers' compensation pools and increasingly intense
price competition are the primary causes for the 1996 decrease. The decrease in
1995 premium volume reflected the conversion of workers' compensation business
to large deductible programs and a reduction in The Hartford's participation in
the less profitable voluntary and involuntary workers' compensation pools.
1996 underwriting results improved $26 compared with the prior year, reflecting
the impact in 1995 of a $40 loss, net of reinsurance, in connection with a
settlement of claims against Dow Corning Corporation alleging product defects
arising from breast implants. Excluding the impact of this settlement on the
prior year comparison, 1996 underwriting results deteriorated $14 from 1995,
reflecting a 0.3 increase in the combined ratio to 105.7 from the adjusted 1995
level. This decline was due to deterioration in property results which were
adversely impacted by severe catastrophes and winter storms and several large
losses. Despite intense competition, workers' compensation results partially
offset the 1996 deterioration reflecting the impacts of legislative reforms,
depopulation in residual pools and effective managed care related initiatives.
1995 underwriting performance deteriorated $108 compared with 1994, increasing
the combined ratio 4.1 points to 106.6. Excluding the impact of the Dow Corning
settlement, 1995 results declined $68 over 1994. This decline was the result of
higher claims and claim adjustment expense costs in workers' compensation and
liability products and the increase in intensity of competition.
Personal
- --------
1996 1995 1994
- ----------------------------------------------------------------
Written premiums $ 1,864 $ 1,813 $ 1,740
Underwriting results $ (110) $ (21) $ (56)
Combined ratio 105.2 100.9 102.7
- ----------------------------------------------------------------
Personal operations provides automobile, homeowners, home-based business and
fire coverages to individuals throughout the United States and Canada. Personal
operations are organized to provide customized products and services to three
market opportunities: the membership of AARP through a direct marketing
operation; customers who prefer local agent involvement through a network of
independent agents; and members of other affinity groups through a new
organization that is building from the AARP operation competencies. AARP's
exclusive licensing arrangement continues through the year 2002, thus providing
the Company with an important competitive advantage.
Written premiums increased 3% in 1996 compared to a 4% increase in 1995. Both
years include strong growth in AARP premium which is benefiting from the
favorable expansion of this demographic group, partially offset by a selective
disinvestment in unprofitable states and under-performing agents. AARP premiums
represented 64% of the 1996 Personal operations premium, up from 62% in 1995 and
59% in 1994.
Underwriting results decreased by $89 in 1996, with a 4.3 point increase in the
combined ratio. These results were due to severe catastrophe and winter storm
losses, partially offset by improved automobile profitability resulting from
expanded cost containment initiatives. Underwriting results improved by $35 in
1995 over 1994 with a corresponding 1.8 point improvement in the combined ratio
due to lower catastrophe losses and improved automobile results.
- 13 -
Reinsurance
- -----------
1996 1995 1994
- ----------------------------------------------------------------
Written premiums $ 613 $ 522 $ 481
Underwriting results $ (15) $ (22) $ (7)
Combined ratio 102.8 104.3 101.8
- ----------------------------------------------------------------
The Hartford assumes reinsurance worldwide through its seven Hartford
Reinsurance Company ("HartRe") offices located in Hartford, San Francisco,
Toronto, London, Madrid, Munich and Hong Kong. HartRe primarily writes treaty
reinsurance through professional reinsurance brokers covering various property,
casualty, specialty and marine classes of business.
Written premiums increased 17% in 1996 and 9% in 1995 primarily due to growth in
U.S. casualty and specialty lines. This growth resulted from a combination of
new business opportunities, an increased level of renewals, and continued new
product development in specialty lines, partially offset by a reduction in
domestic and international property and marine rates.
1996 underwriting results increased $7 compared with 1995. Excluding the impact
of the 1995 IRI fire loss described previously, underwriting results decreased
$25 in 1996 due to underwriting losses of $11, resulting from a strategic shift
in the business mix to longer-tailed casualty and specialty lines, catastrophe
and severe winter storm losses of $5 and several large individual risk losses of
$9.
1995 underwriting results decreased $15 compared with 1994 due primarily to
HartRe's participation in the IRI pool which suffered its largest single loss.
HartRe's share of that single loss was $32. Excluding the impact of this loss,
HartRe generated an underwriting gain of $10 and a combined ratio of 97.4 in
1995.
OTHER MISCELLANEOUS EXPENSES
Other miscellaneous expenses, which also include miscellaneous income items,
were $89 in 1996, up from $71 in 1995. This increase was primarily due to
increased debt costs from additional borrowings partially offset by increased
service fee income from third party administration and involuntary pool
servicing contracts. Two major national servicing contracts, entered into in
1996, contributed to this increase in service fee income.
Other miscellaneous expenses for 1995 of $71 increased from $29 in 1994. This
increase was largely attributable to a decrease in service fee income from third
party administration and involuntary pool servicing contracts. The reduction in
service fee income was due to lower servicing carrier allowances caused by the
substantial depopulation of workers' compensation and involuntary pools.
Increased debt costs also impacted other miscellaneous expenses in 1995.
OUTLOOK
Difficult market conditions and intense price competition within the property
and casualty industry show no signs of diminishing in the near term. However,
two major actions were completed in 1996 which management believes will
counterbalance these negative external factors and position the North American
Property & Casualty segment for significant improvement in operating performance
in 1997. First, the adverse impact on earnings from environmental and asbestos
liabilities that had been experienced in prior years was addressed through the
establishment of additional reserves upon completion of a thorough database
review as described in the Environmental and Asbestos Claims section. In
addition, the North American Property & Casualty segment was reorganized to
maximize responsiveness to its customers by grouping market segments and product
lines according to their respective markets and further strengthening an already
strong, results-focused management team. As a result of these actions, as well
as dedication to growing targeted market segments, rigorous expense management
and utilization of alternative distribution channels, management believes the
North American Property & Casualty segment stands poised to successfully
overcome the challenges ahead.
================================================================================
LIFE
================================================================================
OPERATING SUMMARY
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Earned premiums and other considerations $ 3,068 $ 2,643 $ 2,116
Net investment income 1,323 1,114 922
Net realized capital gains (losses) -- (4) 1
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,391 3,753 3,039
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 2,435 1,978 1,909
Amortization of deferred policy acquisition costs 241 193 145
Other expenses 1,337 1,251 764
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,013 3,422 2,818
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 378 331 221
Income tax expense 129 113 71
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 249 218 150
Less: Net realized capital gains (losses), after-tax -- (3) 1
Other charges (2) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 251 $ 221 $ 149
- ---------------------------------------------------------------------------------------------------------------------------------
- 14 -
Core earnings in the Life segment increased $30, or 14%, to $251 in 1996 from
$221 in 1995 primarily reflecting (i) an increase in earnings of $32 in the
Investment Products division principally driven by an increase in total account
value due to sales of individual annuities and stock market appreciation, (ii) a
$7 increase in the Individual Life Insurance division due to growth in
individual life insurance in force and favorable mortality experience, (iii) an
increase in earnings of $13 in the Employee Benefits division principally due to
an increase in group insurance premiums and favorable morbidity experience and
(iv) a decrease in core earnings of $22 in the Corporate Operation division due
primarily to a guaranty fund adjustment of $10 in 1995 resulting from lower than
expected insolvencies in the insurance industry as well as an increase in debt
service costs in 1996.
Core earnings increased $72, or 48%, to $221 in 1995 from $149 in 1994 largely
due to (i) a $30 increase in the Investment Products division principally driven
by an increase in total account value, (ii) an $11 increase in the Individual
Life Insurance division principally due to growth in the inforce block and
favorable mortality experience and expense trends and (iii) a $21 increase in
the Employee Benefits division principally due to an increase in group premiums
and favorable morbidity experience, as well as growth in the COLI block of
business.
The Life segment operates in three principal divisions: Investment Products,
Individual Life Insurance and Employee Benefits as outlined in the table below.
In addition, the Life segment maintains a Corporate Operation through which it
reports net investment income on assets representing surplus not assigned to any
of its business segments and certain other revenue and expenses not specifically
allocable to any of its business segments.
SUMMARY RESULTS BY DIVISION
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Core Core Core
Revenues Earnings Revenues Earnings Revenues Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
Investment Products $ 1,018 $ 146 $ 761 $ 114 $ 571 $ 84
Individual Life Insurance 472 44 408 37 391 26
Employee Benefits 2,834 79 2,523 66 2,049 45
Corporate Operation 67 (18) 61 4 28 (6)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 4,391 $ 251 $ 3,753 $ 221 $ 3,039 $ 149
- ---------------------------------------------------------------------------------------------------------------------------------
The following describes each division, including products and services offered,
and analyzes the above results.
Investment Products
- -------------------
The Investment Products division markets fixed and variable annuities, deferred
compensation plan services for municipal governments and corporations,
structured settlements and other special purpose annuity contracts, investment
management contracts, and mutual funds. The Company was rated the number one
writer of variable annuities for 1996 with a 13% market share according to the
Variable Annuity and Research Data Service.
Revenues increased $257, or 34%, to $1.0 billion in 1996 from $761 in 1995. This
increase was principally the result of a $216 increase in premiums and other
considerations, reflecting a substantial increase in aggregate fees earned due
to the division's growing block of separate account assets. The average separate
account assets of this segment increased to $37.5 billion in 1996 from $26.3
billion in 1995 primarily due to sales of individual annuities of approximately
$10 billion in 1996 and $7 billion in 1995, as well as significant market
appreciation in both 1996 and 1995. In addition, the average general account
assets of this segment increased to $7.7 billion in 1996 from $6.5 billion in
1995 largely as a result of growth in the general account portion of the
individual variable annuity products of the Investment Products division. The
growth in this division in 1996 also resulted in an increase in total benefits,
claims and expenses of $199, or 34%, to $791 in 1996 from $592 in 1995. The 38%
growth in average account value in 1996, coupled with an overall reduction in
individual annuity expenses as a percentage of total individual annuity account
value to 28 basis points in 1996 from 31 basis points in 1995, contributed to
the growth in core earnings of $32, or 28%, to $146 in 1996 from $114 in 1995.
Similar factors generated an increase in 1995, as compared with 1994, in
revenues of $190, or 33%, average general account assets of $1.3 billion, or
26%, average separate account assets of $8.0 billion, or 44%, total benefits,
claims and expenses of $149, or 34%, core earnings of $30, or 36%, and a
reduction in individual annuity expenses as a percentage of total individual
annuity account value to 31 basis points in 1995 from 35 basis points in 1994.
Individual Life Insurance
- -------------------------
Individual Life Insurance products include variable life insurance, universal
life insurance, interest-sensitive whole life insurance and term life policies.
Individual Life Insurance business also includes modified guaranteed life and
traditional whole life.
Revenues increased $64, or 16%, to $472 from $408 in 1995. This increase was
primarily due to a $47 increase in premiums and other considerations, reflecting
an increase in cost of insurance charges and variable life fees applied to a
larger
- 15 -
block of business as insurance in force increased to $52 billion in 1996 from
$48 billion in 1995. Total benefits, claims and expenses increased $54, or 15%,
to $404 in 1996 from $350 in 1995. This increase reflects the increase in the
block of individual life insurance business offset partially by favorable
mortality results. The combination of business growth and favorable mortality
experience resulted in an increase in core earnings of $7, or 19%, to $44 in
1996 from $37 in 1995.
Two other events, along with those mentioned above, influenced the results of
1995 compared with 1994. In 1994, the Life segment assumed $218 of individual
life insurance reserves from the Pacific Standard Life Insurance Company. This
affected both revenues and total benefits, claims and expenses for 1994.
Expenses were also positively influenced by the consolidation of the
professional functions previously performed in Minneapolis, Minnesota into the
Life segment's Simsbury, Connecticut location. The combination of this
acquisition, internal growth, expense management and favorable mortality
experience caused core earnings in this division to increase $11, or 42%, to $37
in 1995 from $26 in 1994.
Employee Benefits
- -----------------
Employee Benefits consists of two areas of operation: Group Insurance and
Specialty Insurance Operations. Through the Group Insurance Operation, the
Company markets group long-term and short-term managed disability, group life,
stop loss, and supplementary medical coverage to employers and
employer-sponsored plans and accidental death and dismemberment, travel and
special risk coverage to associations. The Specialty Insurance Operation unit
consists of the Company's COLI business, life/health reinsurance operations, and
international operations.
Revenues increased $311, or 12%, to $2.8 billion in 1996 from $2.5 billion in
1995. This increase was largely the result of (i) a $162 increase in premiums
and other considerations, reflecting a $226 increase in group insurance premiums
from strong group disability sales and renewals, partially offset by a decline
in leveraged COLI premiums as a result of the Health Insurance Portability and
Accountability Act of 1996 ("HIPA Act of 1996", as discussed below) legislation
and (ii) a $149 increase in net investment income, primarily due to an increase
in COLI account values. Total benefits, claims and expenses increased $295, or
12%, to $2.7 billion in 1996 from $2.4 billion in 1995. This increase generally
reflected an increased block of group disability business and other group
insurance and an increase in the Life segment's COLI block of business,
partially offset by a $41 decrease in dividends to policyholders primarily due
to the elimination of sales of leveraged COLI as a result of the enactment of
the HIPA Act of 1996. In addition, expenses in the group insurance business, as
a percentage of premiums, have declined over the past several years. This trend,
along with favorable mortality and morbidity experience, as well as the factors
mentioned above, resulted in an increase in core earnings in this division of
$13, or 20%, to $79 in 1996 from $66 in 1995.
Sales of leveraged COLI were $867 and $306 in 1995 and 1994, respectively.
Revenues increased $474, or 23%, in 1995, primarily due to a $353 increase
related to COLI premiums. Total benefits, claims and expenses increased $442, or
22%, in 1995 of which $344 related to COLI. The additional growth in the COLI
and group insurance business, expense reductions associated with the decision to
exit the fully insured medical business, and factors similar to those discussed
above for 1996 caused core earnings in this division to increase $21, or 47%, to
$66 in 1995 from $45 in 1994.
OUTLOOK
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader within the financial services
industry, to continue the Life segment's asset growth and to maximize
shareholder value. The Life segment's strong market position in each of its
businesses, coupled with the growth potential management believes exists in its
markets, provides opportunities to increase sales of the Life segment's products
and services as individuals increasingly save and plan for retirement, protect
themselves and their families against disability or death and prepare their
estates for an efficient transfer of wealth between generations.
The HIPA Act of 1996 phases out the deductibility of interest on policy loans
under COLI by 1998, thus eliminating all future sales of leveraged COLI. The
leveraged COLI product has been an important contributor to the Life segment's
profitability in recent years and will continue to contribute to the
profitability of the Life segment in the future, although the level of profit
will decline after 1998. However, the Employee Benefits division has growth
opportunities through variable COLI and other non-qualified deferred
compensation vehicles, reinsurance and international operations. The Company
expects continued growth in core earnings for the Life segment in 1997. See the
Capital Resources and Liquidity section under "Subsequent Events".
- 16 -
================================================================================
INTERNATIONAL
================================================================================
OPERATING SUMMARY
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 1,342 $ 1,309 $ 1,116
Net investment income 205 183 135
Net realized capital gains 79 48 23
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,626 1,540 1,274
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 931 901 757
Amortization of deferred policy acquisition costs 284 276 241
Other expenses 201 179 163
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,416 1,356 1,161
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 210 184 113
Income tax expense 71 61 37
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 139 123 76
Less: Net realized capital gains, after-tax 52 32 14
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 87 $ 91 $ 62
- ---------------------------------------------------------------------------------------------------------------------------------
The International segment includes direct insurance business written by local
companies in the United Kingdom, namely ITT London & Edinburgh, the Netherlands
and Belgium, Zwolsche Algemeene, and Spain, ITT Ercos. These companies primarily
offer property and casualty products in both personal and commercial lines.
Zwolsche Algemeene and ITT Ercos also offer life products designed to meet the
needs of local customers.
Core earnings in the International segment of $87 in 1996 decreased $4, or 4%,
from 1995, following a $29, or 47%, increase in 1995 over 1994. The decrease in
earnings from 1995 was primarily the result of deteriorating underwriting
results due to heightened competition in the United Kingdom and unfavorable
foreign exchange impacts, partially offset by growth in net investment income.
1996 revenues of $1.6 billion were $86, or 6%, higher than 1995 primarily due to
growth at Zwolsche Algemeene and 1995 results at ITT Ercos only reflecting eight
months of activity due to its acquisition by the Company in May 1995. Growth
over 1995 was dampened by soft market conditions in the United Kingdom.
Additionally, the U.S. dollar strengthened during 1996 compared to 1995,
resulting in unfavorable foreign exchange translation movements during 1996
resulting in approximately $37 and $3 of the decrease in revenues and core
earnings, respectively.
1995 revenues of $1.5 billion and core earnings of $91 were $266, or 21%, and
$29, or 47%, respectively, higher than 1994, the result of significantly
improved investment and underwriting performance, premium growth, and the
acquisition of ITT Ercos. Favorable foreign exchange translation movements
during 1995 accounted for approximately $89 and $2 of the increase in revenues
and core earnings, respectively.
The International segment is organized into the following three business units:
ITT London & Edinburgh, Zwolsche Algemeene and ITT Ercos. In addition, Other
primarily represents home office expenses associated with managing international
operations.
SUMMARY RESULTS BY BUSINESS UNIT
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Core Core Core
Revenues Earnings Revenues Earnings Revenues Earnings
- ---------------------------------------------------------------------------------------------------------------------------------
ITT London & Edinburgh $ 1,088 $ 56 $ 1,071 $ 66 $ 945 $ 46
Zwolsche Algemeene 459 32 416 25 328 17
ITT Ercos 78 3 51 2 -- --
Other 1 (4) 2 (2) 1 (1)
- ---------------------------------------------------------------------------------------------------------------------------------
Total $ 1,626 $ 87 $ 1,540 $ 91 $ 1,274 $ 62
- ---------------------------------------------------------------------------------------------------------------------------------
ITT London & Edinburgh
- ----------------------
1996 revenues at ITT London & Edinburgh of $1.1 billion increased $17, or 2%,
over 1995. Core earnings of $56 decreased $10, or 15%, from 1995 primarily the
result of deteriorating underwriting results due to heightened competition in
the United Kingdom, partially offset by growth in net investment income. Also,
strengthening of the U.S. dollar resulted in negative foreign exchange impacts
on revenues of $15 and core earnings of $2. The increase in revenues was due to
improved investment income, partially offset by a shortfall in written premiums
due to the intense competitive climate in the United Kingdom. Personal lines
underperformed the prior year where shortfalls in automobile were partially
offset by improvements in personal credit insurance, including life. Commercial
lines sales were also dampened due to the increasingly competitive market.
- 17 -
1995 revenues at ITT London & Edinburgh of $1.1 billion and core earnings of $66
were $126, or 13%, and $20, or 44%, respectively, higher than 1994. These
increases were due to significant improvement in investment performance, premium
growth and foreign exchange rates, offset somewhat by slightly lower
underwriting results. Commercial lines growth moderated during the year due to a
more competitive market. Personal lines growth was mixed with continued
improvement in automobile and creditor products.
Zwolsche Algemeene
- ------------------
Zwolsche Algemeene's 1996 revenues of $459 and core earnings of $32 improved
$43, or 10%, and $7, or 28%, respectively, compared with 1995. These increases
were due to improved premium growth and stronger underwriting results. Due to
the strengthening U.S. dollar, foreign exchange had an adverse effect of $20 on
revenues and a negligible impact on core earnings. Property and casualty growth
in 1996 was relatively strong in motor as market pricing improved. Performance
was also strong in life savings and mortgage products business.
Zwolsche Algemeene's 1995 revenues of $416 and core earnings of $25 improved
$88, or 27%, and $8, or 47%, respectively, compared with 1994. These increases
were due to improved investment performance, moderate premium growth, stronger
underwriting results and foreign exchange impacts. Property and casualty growth
in 1995 was moderate as market pricing slowly improved. Strong growth in life
savings and pension products was partially offset by lower than expected growth
in mortgage savings product business.
ITT Ercos
- ---------
The Hartford acquired ITT Ercos in May 1995. 1996 revenues at ITT Ercos of $78
exceeded the eight months reported for 1995 by $27. Core earnings of $3 were $1
higher than 1995. During 1996 the company has consolidated its branch offices
into one centralized location and reorganized its national sales organization.
These actions were taken to improve expense competitiveness and service which
will position the company for future growth.
OUTLOOK
The outlook for 1997 for commercial and personal lines at ITT London & Edinburgh
is a continuation of heightened competition. Personal lines should experience
strong growth in homeowners business due to an agreement entered into during
1996 with Nationwide Building Society. This agreement provides exclusive rights
to ITT London & Edinburgh to sell homeowners products to the retail customers of
Nationwide. Continuing competition from direct writing companies and entry by
non-traditional risk bearers into markets such as homeowners is anticipated.
The outlook at Zwolsche Algemeene for 1997 is for moderate written premium
growth in property and casualty due to an increase in competition. Continued
growth is also expected for life operations. Sales expectations of life savings
and pension products in the Netherlands continue to be strong due to their
associated tax advantages and expected continued low interest rate environment.
The Company continues to explore the viability of opportunities in both life and
property and casualty business in the Netherlands in 1997 as the government
continues to review moving certain social security programs into the private
sector.
Relative to ITT Ercos, the outlook in the Spanish market is for moderate growth.
ITT Ercos will build on the improved expense and operational foundation
established in 1996 to expand its presence in both life and non-life business
during 1997.
The International segment continues to explore acquisition opportunities in
Western Europe, Latin America and Asia.
================================================================================
RUNOFF
================================================================================
OPERATING SUMMARY
1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 9 $ 14 $ 17
Net investment income 334 477 596
Net realized capital gains (losses) (220) 29 (3)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 123 520 610
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 582 575 578
Amortization of deferred policy acquisition costs (1) 11 6
Other expenses 49 35 23
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 630 621 607
------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) (507) (101) 3
Income tax expense (benefit) (171) (35) 1
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) (336) (66) 2
Less: Net realized capital gains (losses), after-tax [1] (5) 19 (1)
Other charges (260) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ (71) $ (85) $ 3
- ---------------------------------------------------------------------------------------------------------------------------------
[1] 1996 excludes the Closed Book GRC net realized capital losses of $137,
after-tax. This amount is included in other charges.
- 18 -
The Runoff segment consists of operations of The Hartford which have
discontinued writing new and renewal business. The property and casualty
operations of the Runoff segment primarily include First State Insurance Company
and its subsidiaries ("First State") and Fencourt Reinsurance Company, Ltd.
("Fencourt"). The primary focus of these operations is the proper disposition of
claims, resolving disputes and collecting reinsurance proceeds related largely
to business underwritten and reinsured prior to 1985.
The Runoff segment also consists of Closed Book GRC which had no new or renewal
business as of the end of 1994. Substantially all of the products included in
Closed Book GRC are guaranteed investment contracts with guaranteed fixed or
indexed rates for a specific period. Prior to 1996, Closed Book GRC was reported
as a component of the Life segment.
Closed Book GRC results have been negatively affected by lower investment rates
and earnings in the related investment portfolio (primarily consisting of
collateralized mortgage obligations and mortgage backed securities) due to
prepayments experienced in excess of assumed levels in years prior to 1995.
Closed Book GRC was also affected by the interest rate rise in 1994 when the
duration of its assets lengthened relative to that of the liabilities. Due to
the reduced investment earnings and duration mismatch, the portfolio had
insufficient assets to fully fund its liability commitments. During the third
quarter of 1996, the Life segment transferred assets in the amount of $200 to
the Runoff segment to adequately fund Closed Book GRC so that future cash
infusions would be minimal.
Although the Closed Book GRC asset portfolio as a whole is duration matched with
its liabilities, certain investments continue to have a longer maturity than
their corresponding liabilities and will need to be liquidated prior to maturity
in order to meet the specific liability commitments. To protect the existing
value of these investments, the Company entered into various hedge transactions
in late September 1996 which substantially eliminated further fluctuation in
fair value of the investments due to interest rate changes.
The Hartford's accounting policy for impairment of investments requires
recognition of an other than temporary impairment charge on a security if it is
determined that the Company is unable to recover all amounts due under the
contractual obligations of the security. In addition, the Company has
established specific criteria to be used in the impairment evaluation of an
individual portfolio of assets. Specifically, if the asset portfolio is
supporting a runoff operation, is forced to be liquidated prior to maturity to
meet liability commitments, and has a fair value belo