Back to GetFilings.com
================================================================================
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, 1997
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: the following, all
of which are registered on the New York Stock Exchange, Inc.:
Common Stock, par value $0.01 per share
6.375% Notes due November 1, 2002
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. [X]
As of February 27, 1998, there were outstanding 117,841,749 shares of Common
Stock, $0.01 par value per share, of the registrant. The aggregate market value
of the shares of Common Stock held by non-affiliates of the registrant was
$11,515,215,088, based on the closing price of $98.25 per share of the Common
Stock on the New York Stock Exchange on February 27, 1998.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1998 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
================================================================================
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
7A Quantitative and Qualitative Disclosures About Market Risk 42
8 Financial Statements and Supplementary Data 42
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 42
PART III 10 Directors and Executive Officers of The Hartford 42
11 Executive Compensation 42
12 Security Ownership of Certain Beneficial Owners and
Management 42
13 Certain Relationships and Related Transactions 42
PART IV 14 Exhibits, Financial Statements, Schedules and Reports
on Form 8-K 42
Signatures II-1
Exhibits Index II-2
PART I
ITEM 1. BUSINESS OF THE HARTFORD
(DOLLAR AMOUNTS IN MILLIONS EXCEPT FOR SHARE DATA UNLESS OTHERWISE STATED)
GENERAL
The Hartford Financial Services Group, Inc., formerly ITT Hartford Group, Inc.,
and its subsidiaries ("The Hartford" or the "Company"), headquartered in
Connecticut, are among the largest providers of both property and casualty
insurance and life insurance products in the United States. Hartford Fire
Insurance Company ("Hartford Fire"), founded in 1810, is the oldest of The
Hartford's subsidiaries. Hartford Fire and its subsidiaries write insurance and
reinsurance in the United States and internationally. At December 31, 1997,
total assets and total stockholders' equity of The Hartford were $131.7 billion
and $6.1 billion, respectively.
The Hartford Financial Services Group, Inc., a Delaware corporation, was formed
in December, 1985 as a wholly-owned subsidiary of ITT Corporation ("ITT"). On
December 19, 1995, ITT distributed all of the outstanding shares of The Hartford
Financial Services Group, Inc. to ITT shareholders of record in an action known
herein as the "Distribution". As a result of the Distribution, The Hartford
became an independent, publicly traded company. In connection with this
transaction, ITT transferred the ownership of First State Insurance Company and
Fencourt Reinsurance Company, Ltd. ("Fencourt"), both of which were wholly owned
subsidiaries of ITT, to The Hartford Financial Services 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.)
On February 10, 1997, Hartford Life, Inc. ("HLI"), the holding company parent of
The Hartford's significant life insurance subsidiaries, filed a registration
statement, as amended, with the Securities and Exchange Commission relating to
the initial public offering of HLI Class A common stock (the "Offering").
Pursuant to the Offering on May 22, 1997, HLI sold to the public 26 million
shares at $28.25 per share and received proceeds, net of offering expenses, of
$687.
The 26 million shares sold in the Offering represented approximately 18.6% of
the equity ownership in HLI and approximately 4.4% of the combined voting power
of HLI's Class A and Class B common stock. The Hartford owns all of the 114
million outstanding shares of Class B common stock of HLI, representing
approximately 81.4% of the equity ownership in HLI and approximately 95.6% of
the combined voting power of HLI's Class A and Class B common stock. Holders of
Class A common stock generally have identical rights to the holders of Class B
common stock except that the holders of Class A common stock are entitled to one
vote per share while holders of Class B common stock are entitled to five votes
per share on all matters submitted to a vote of HLI's stockholders. Also, each
share of Class B common stock is convertible into one share of Class A common
stock (a) upon the transfer of such share of Class B common stock by the holder
thereof to a non-affiliate (except where the shares of Class B common stock so
transferred represent 50% or more of all the outstanding shares of common stock,
calculated without regard to the difference in voting rights between the classes
of common stock) or (b) in the event that the number of shares of outstanding
Class B common stock is less than the 50% of all the common stock then
outstanding. As of December 31, 1997, The Hartford continued to maintain an
81.4% equity ownership in HLI.
In connection with the Offering, The Hartford reported a $368 gain related to
the increased value of its equity ownership in HLI. The Hartford's current
intent is to continue to beneficially own at least 80% of HLI, but it is under
no contractual obligation to do so.
As a holding company, The Hartford Financial Services Group, Inc. has no
significant business operations of its own and, therefore, relies on the
dividends from its insurance company subsidiaries, which are primarily domiciled
in Connecticut, as the principal source of cash to meet its obligations.
Additional information regarding the cash flow and liquidity needs of The
Hartford Financial Services Group, Inc. may be found in the Capital Resources
and Liquidity section of the MD&A.
REPORTING SEGMENTS
The Hartford's reporting segments consist of North American Property & Casualty,
Life, International, and Other Operations. Included in Other Operations is the
effect of an 18.6% minority interest in HLI's operating results. The following
is a 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 41 and
Note 1 and Note 18 of Notes to Consolidated Financial Statements.
NORTH AMERICAN PROPERTY & CASUALTY
The Hartford's North American Property & Casualty segment is the eighth largest
property and casualty insurance operation in the United States based on written
premiums for the year ended December 31, 1996, according to A.M. Best. With
written premiums of $5.8 billion for the year ended December 31, 1997, North
American Property & Casualty is the largest of the Company's segments. In 1997,
the states producing 5% or more of this segment's written premiums were New York
(11%), California (10%), Florida (8%), Connecticut (6%) and Texas (5%). The
North American Property & Casualty segment generated $6.7 billion in revenues
and $583 in net income in 1997.
Principal Products
- ------------------
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
- 2 -
1997 and offers workers' compensation, property, automobile, liability, marine,
agricultural and bond coverages. 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 global reinsurer, with operations in the
United States, Canada, the United Kingdom, Spain, Germany and Hong Kong.
Methods of Distribution
- -----------------------
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 5,900
independent agents and direct marketing including trade associations, customers
of financial institutions and employee groups. Independent agents, who often
represent other companies as well, are compensated on a commission basis and are
not employees of The Hartford. Additionally, the Company assumes insurance from
other insurers and cedes insurance to other insurers or reinsurers in the
worldwide reinsurance market.
Competition
- -----------
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 within
the financial services industry has 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,
excess capital within the property and casualty insurance industry, exploration
and utilization of alternative distribution techniques and emphasis on cost
containment and reduction.
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 Health Care
Options effective January 1, 1998.
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. Growth in the Life segment's total assets has been primarily driven
by its sale of variable annuities. The Company was rated the number one writer
of variable annuities for 1997 according to the Variable Annuity and Research
Data Service (VARDS) with an 11% market share, and sold approximately $869 of
mutual funds in its first full year offering the product, resulting in total
mutual fund assets of $972 at December 31, 1997. According to the latest results
published by the Life Insurance Marketing and Research Association (LIMRA)
(December 1997), the Company was the second largest provider of group disability
insurance for the nine months ended September 30, 1997. In addition, according
to A.M. Best's latest available data, The Hartford's domestic life insurance
operations are ranked as the sixth largest consolidated life insurance company
in the United States based on statutory assets as of December 31, 1996. In the
past year, the Life segment's total assets have grown 26% to $101 billion at
December 31, 1997. The Life segment generated $4.7 billion in revenues and $306
in net income in 1997.
The Life segment, headquartered in Simsbury, Connecticut, operates in three
principal divisions: Annuity, Individual Life Insurance, and Employee Benefits.
The Life segment also maintains a Guaranteed Investment Contracts division,
which is primarily comprised of business written prior to 1995 and a Corporate
Operation through which it reports items that are not directly allocable to any
of its business divisions.
Principal Products
- ------------------
The Annuity division focuses on the savings and retirement needs of the growing
number of individuals who are preparing for retirement or have already retired.
The variety of products sold within this division reflects the diverse nature of
the market. These products include individual variable annuities, fixed market
value adjusted (MVA) annuities, deferred compensation and retirement plan
services, structured settlement contracts and other special purpose annuity
contracts, investment management services and mutual funds. The Individual Life
Insurance division, which focuses on the high end estate and business planning
markets, sells a variety of life insurance products, including variable life,
universal life, interest-sensitive whole life, and term life insurance policies.
The Employee Benefits division sells group insurance products, including group
life and group disability insurance, and corporate owned life insurance (COLI)
and engages in certain international operations. The Guaranteed Investment
Contracts ("GIC") division consists of guaranteed rate contract ("GRC") business
that is supported by assets held in either the Company's general account or a
guaranteed separate account. Historically, a significant majority of these
contracts were sold as general account contracts with fixed rates and fixed
maturities. The Company decided in 1995, after a thorough review of its GRC
business, that it would significantly de-emphasize general account GRC, choosing
to focus its distribution efforts on other products sold through other
divisions. The Company internally segregates its GIC division into distinct
blocks of business which are separately managed. The Company's GRC business
written prior to 1995 is referred to as Closed Book GRC. Management expects no
material income or loss from the Guaranteed Investment Contracts division in the
future.
Methods of Distribution
- -----------------------
The Life segment sells a variety of individual and group financial services and
insurance products primarily through
- 3 -
broker-dealers, financial institutions, licensed agents, insurance brokers,
associations and third party administrators, often with the assistance of the
Company's internal sales force. The Annuity 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. The Employee Benefits division uses an experienced
group of Company employees to distribute its products through a variety of
distribution outlets including insurance agents, brokers, associations and
third-party administrators.
Competition
- -----------
The Life segment competes with over 2,000 life insurance companies in the United
States, as well as certain banks, securities brokerage firms and investment
advisors who market investment and retirement-oriented products. Competitive
factors in the life insurance industry include, but are not limited to, price,
name recognition, quality of distribution systems, customer service and
financial strength and claims-paying ability 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 1997 according to the Variable
Annuity and Research Data Service with an 11% market share.
INTERNATIONAL
The Hartford's International segment consists of Western 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 $1.7 billion in revenues and $110 in net income in 1997. Assets
totaled $4.7 billion at December 31, 1997.
Principal Products
- ------------------
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, primarily property coverage, are sold to small
to medium sized clients. Zwolsche life insurance operations offer term life,
mortgage, savings and pension products. Additionally, Zwolsche has an asset
management business offering investment services through a range of mutual
funds. ITT Ercos provides both personal and commercial, property and casualty,
and life insurance products.
Methods of Distribution
- -----------------------
The International segment conducts its business primarily through independent
brokers who are compensated on a commission basis. Both L&E and Zwolsche also
distribute their products through various financial institutions.
Competition
- -----------
The United Kingdom and the Netherlands have historically been open markets with
competitors operating from around the world. While Spain has only opened up its
market within the last fifteen years, it has attracted significant foreign
capital with many of the large global insurance companies establishing a
presence, to the extent that foreign capital now exceeds domestic capital. Each
market has its own unique characteristics but, in general, competition is very
strong in most product lines both from existing competitors and relatively new
market entrants.
OTHER OPERATIONS
The Hartford's Other Operations consist of the property and casualty insurance
operations of The Hartford which have ceased writing new and renewal business.
These operations primarily include First State Insurance Company, located in
Boston, Massachusetts, Fencourt and Heritage Reinsurance Company, Ltd.,
headquartered in Bermuda, and Excess Insurance Company Limited, located in the
United Kingdom.
The primary objectives of Other Operations are the proper disposition of claims,
the resolution of disputes, and the collection of reinsurance proceeds primarily
related to policies written and reinsured prior to 1985. As such, Other
Operations have no new product sales, distribution system, or competitive
issues.
Included in Other Operations is the effect of an 18.6% minority interest in
HLI's operating results.
PROPERTY AND CASUALTY RESERVES
The Hartford establishes reserves to provide for the estimated costs of paying
claims made by policyholders or against policyholders. These reserves include
estimates for both claims that have been reported and those that have been
incurred but not yet reported to The Hartford and include estimates of all
expenses associated with processing and settling these claims. This estimation
process is primarily based on historical experience and involves a variety of
actuarial techniques which analyze trends and other relevant factors.
The Hartford continually reviews its estimated claims and claim adjustment
expense reserves as additional experience and other relevant data become
available and reserve levels are adjusted accordingly. Such adjustments are
reflected in net income of the period in which they are made. Further discussion
on The Hartford's property and casualty reserves may be found in the Reserves
section of the MD&A.
The Hartford continues to receive claims asserting damages from environmental
pollution and related clean-up costs
- 4 -
and injuries from asbestos and asbestos-related products. Due to deviations from
past experience and a variety of social, economic and legal issues, the
Company's ability to estimate the future policy benefits, unpaid claims and
claim adjustment expenses is significantly impacted. A study, which reviewed and
identified environmental and asbestos exposures in the United States, was
performed in 1996 and is fully discussed in the Environmental and Asbestos
Claims section of the MD&A.
Certain liabilities for unpaid claims, principally for permanently disabled
claimants, terminated reinsurance treaties and certain contracts that fund loss
run-offs for unrelated parties, have been discounted to present value. The
amount of the discount was approximately $449 and $472 as of December 31, 1997
and 1996, respectively, and amortization of the discount had no material effect
on net income during 1997, 1996 and 1995, respectively.
In the judgment of The Hartford's management, all information currently
available has been properly considered in establishing the reserves for unpaid
claims and claim adjustment expenses.
A reconciliation of liabilities for unpaid claims and claim adjustment expenses
is herein referenced from Note 1(g) 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,
1987 1988 1989 1990 1991 1992 1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
Liabilities for unpaid claims and
claim adjustment expenses [1] $7,262 $8,168 $8,666 $9,366 $9,796 $11,103 $11,441 $11,623 $12,047 $13,389 $13,523
CUMULATIVE PAID CLAIMS AND CLAIM
EXPENSES
One year later 2,089 2,296 2,545 2,789 2,879 2,806 2,832 2,983 2,797 2,975 --
Two years later 3,323 3,618 4,013 4,428 4,465 4,415 4,602 4,667 4,571 -- --
Three years later 4,187 4,577 5,132 5,511 5,605 5,655 5,755 5,889 -- -- --
Four years later 4,846 5,341 5,863 6,304 6,507 6,507 6,661 -- -- -- --
Five years later 5,392 5,872 6,435 6,979 7,173 7,212 -- -- -- -- --
Six years later 5,787 6,320 6,944 7,505 7,753 -- -- -- -- -- --
Seven years later 6,155 6,733 7,360 8,010 -- -- -- -- -- -- --
Eight years later 6,492 7,094 7,788 -- -- -- -- -- -- -- --
Nine years later 6,815 7,470 -- -- -- -- -- -- -- -- --
Ten years later 7,156 -- -- -- -- -- -- -- -- -- --
LIABILITIES REESTIMATED
One year later 7,437 8,342 8,879 9,636 11,053 11,311 11,484 11,856 13,078 13,428 --
Two years later 7,619 8,432 9,052 10,780 11,202 11,354 11,691 13,020 13,156 -- --
Three years later 7,719 8,482 10,200 10,905 11,315 11,582 12,810 13,080 -- -- --
Four years later 7,827 9,645 10,342 11,151 11,653 12,740 12,946 -- -- -- --
Five years later 9,117 9,829 10,578 11,515 12,794 12,917 -- -- -- -- --
Six years later 9,287 10,068 10,972 12,649 12,996 -- -- -- -- -- --
Seven years later 9,521 10,478 12,075 12,864 -- -- -- -- -- -- --
Eight years later 9,943 11,550 12,287 -- -- -- -- -- -- -- --
Nine years later 10,991 11,748 -- -- -- -- -- -- -- -- --
Ten years later 11,185 -- -- -- -- -- -- -- -- -- --
DEFICIENCY $3,923 $3,580 $3,621 $3,498 $3,200 $1,814 $1,505 $1,457 $1,109 $39 $ --
- ----------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS
FOR THE YEARS ENDED DECEMBER 31,
1993 1994 1995 1996 1997
- ----------------------------------------------------------------------------------------------------------------------------------
NET RESERVE [1] $11,441 $11,623 $12,047 $13,389 $13,523
Reinsurance recoverables 5,339 5,317 4,939 4,414 4,348
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS RESERVE $16,780 $16,940 $16,986 $17,803 17,871
- ----------------------------------------------------------------------------------------------------------------------------------
NET REESTIMATED RESERVE $12,946 $13,080 $13,155 $13,427
Reestimated reinsurance recoverables 5,932 5,810 5,055 4,650
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS REESTIMATED RESERVE $18,878 $18,890 $18,210 $18,077
- ----------------------------------------------------------------------------------------------------------------------------------
GROSS DEFICIENCY $ 2,098 $ 1,950 $ 1,224 $ 274
- ----------------------------------------------------------------------------------------------------------------------------------
[1] 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. Liabilities, net and
gross of reinsurance for unpaid claims and claim adjustment expenses
excluded, were $504, $495, $550, $500 and $505 as of December 31, 1993,
1994, 1995, 1996 and 1997, 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.
- 5 -
LIFE RESERVES
In accordance with applicable insurance regulations under which the Life segment
operates, life insurance subsidiaries of The Hartford establish and carry as
liabilities actuarially determined reserves which are calculated to meet The
Hartford's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect The Hartford's actual experience when appropriate. These reserves are
computed at amounts that, with additions from 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 universal life and interest-sensitive whole life policies,
reserves are set according to premiums collected, plus interest credited, less
charges. Other fixed death benefit and individual life reserves are based on
assumed investment yield, persistency, mortality and morbidity as per commonly
used actuarial tables, expenses and margins for adverse deviations. For the
Company's group disability policies, the level of reserves is based on a variety
of factors including particular diagnoses, termination rates and benefit
payments.
The persistency of The Hartford's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on the withdrawal of
funds. Withdrawals in excess of allowable penalty-free amounts are assessed a
surrender charge during a penalty period, which is usually at least seven years.
Such surrender charge is initially a percentage of the accumulation value, which
varies by product, and generally decreases gradually during the penalty period.
Surrender charges are set at levels to protect The Hartford from loss on early
terminations and to reduce the likelihood of policyholders terminating their
policies during periods of increasing interest rates, thereby lengthening the
effective duration of policy liabilities and improving the Company's ability to
maintain profitability on such policies.
The Hartford's reserves comply in all material respects with state insurance
department statutory requirements; however, in the Consolidated Financial
Statements, life insurance reserves are determined in accordance with generally
accepted accounting principles, which may vary from statutory requirements.
REINSURANCE
In accordance with normal industry practice, The Hartford cedes insurance risk
to reinsurance companies. For property and casualty operations, these
reinsurance arrangements provide greater diversification of business and limit
The Hartford's maximum net loss arising from large risks or catastrophes.
A major portion of The Hartford's property and casualty reinsurance is effected
under general reinsurance contracts known as treaties, or, in some instances, is
negotiated on an individual risk basis, known as facultative reinsurance. The
Hartford also has in-force excess of loss contracts with reinsurers that protect
it against a specified part or all of certain losses over stipulated amounts.
The ceding of insurance obligations does not discharge the original insurer from
its primary liability to the policyholder. The original insurer would remain
liable in those situations where the reinsurer is unable to meet the obligations
assumed under reinsurance agreements. The Hartford has established strict
standards that govern the placement of reinsurance and monitors ceded
reinsurance security. Virtually all of The Hartford's property and casualty
reinsurance is placed with reinsurers that meet strict financial criteria
established by a credit committee.
In accordance with normal industry practice, HLI is involved in both the cession
and assumption of insurance with other insurance and reinsurance companies. As
of December 31, 1997, the maximum amount of life insurance retained on any one
life by any of the life operations is approximately $2.5, 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 primarily divided
between property and casualty and life operations. 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 to maximize
economic value while generating after-tax income and sufficient 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 operation's general account and
guaranteed separate accounts is to maximize after-tax returns consistent with
acceptable risk parameters, including the management of the interest rate
sensitivity of invested assets relative to that of policyholder obligations.
For a further discussion of The Hartford's approach to managing risks, including
derivative utilization, see the Capital Markets Risk Management section of the
MD&A, as well as Note 4 of Notes to Consolidated Financial Statements.
REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory
and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency
- 6 -
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 regulations require property and casualty insurers to
participate in assigned risk plans, reinsurance facilities and joint
underwriting associations, which are mechanisms to provide risks with various
basic or minimum insurance coverage when they are not available in voluntary
markets. Such mechanisms are most prevalent for automobile and workers'
compensation insurance, but a majority of states also mandate participation in
so-called FAIR Plans or Windstorm Plans providing basic property coverage.
Additionally, some states mandate such participation in facilities for providing
medical malpractice insurance. Participation is based upon the amount of a
company's written premiums in a particular state for the classes of insurance
involved.
The extent of insurance regulation on business outside the United States varies
significantly among the countries in which The Hartford operates. Some countries
have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors domiciled in that particular
jurisdiction. The Hartford's International operations are comprised of insurers
licensed in their respective countries and, therefore, are subject to generally
less restrictive domestic insurance regulations.
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 and Contingencies section of the
MD&A under "Legislative Initiatives".
INSOLVENCY FUND
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "Insolvency Fund".
NAIC PROPOSALS
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "NAIC Proposals".
YEAR 2000
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "Year 2000".
EMPLOYEES
The Hartford had approximately 25,000 employees as of February 28, 1998.
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 1998
Proxy Statement. In addition to those executive officers who are listed in the
1998 Proxy Statement, listed below are other 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"):
- 7 -
JOHN F. DONAHUE, 62, became Senior Vice President, International/Reinsurance
Operations of The Hartford in June 1996. Prior to that, he served as Senior Vice
President, 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, 51, 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, 57, 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, 54, 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, 51, 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, 56, 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 203 thousand square feet of office space in the United
Kingdom, 218 thousand square feet of office space in the Netherlands and 74
thousand square feet of office space in Spain. In addition, The Hartford leases
approximately 4.9 million square feet throughout the United States and 204
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 condition, results of operations or cash flows
of The Hartford.
The Hartford is involved in claims litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed above and in the MD&A under the section
Environmental and Asbestos Claims, The Hartford continues to receive
environmental and asbestos claims which involve significant uncertainty
regarding policy coverage issues. Regarding these claims, The Hartford
continually reviews its overall reserve levels, reserving methodologies and
reinsurance coverages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of The Hartford during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE HARTFORD'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Hartford's common stock is traded on the New York Stock Exchange ("NYSE")
under the trading symbol "HIG".
The following table presents the high and low closing prices for the common
stock of The Hartford on the NYSE for the periods indicated, and the quarterly
dividends declared per share:
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- ------------------------ --------- ---------- --------- ----------
1997
Common Stock Price
High $80.75 $86.25 $88.00 $93.56
Low 65.63 68.63 79.75 79.44
Dividends Declared 0.40 0.40 0.40 0.40
- ------------------------ --------- ---------- --------- ----------
1996
Common Stock Price
High $53.00 $54.13 $59.63 $69.50
Low 47.13 45.50 50.75 59.13
Dividends Declared 0.40 0.40 0.40 0.40
- ------------------------ --------- ---------- --------- ----------
At February 27, 1998, there were approximately 150,000 beneficial owners of The
Hartford's common stock, including approximately 55,000 shareholders of record
and approximately 95,000 shareholders whose shares are held by brokers and other
nominees.
On February 19, 1998, The Hartford's Board of Directors approved a 5% increase
in its quarterly dividend to $0.42 per share. The dividend will be payable on
April 1, 1998 to shareholders of record as of March 2, 1998. The Hartford
expects to continue paying quarterly dividends on its common stock of $0.42 per
share throughout 1998. Dividend decisions will be based on and affected by a
number of factors, including the operating results and financial requirements of
The Hartford and the impact of regulatory restrictions discussed in the Capital
- 8 -
Resources and Liquidity section under "Liquidity Requirements" of the MD&A.
There are also various legal limitations governing the extent to which The
Hartford's insurance subsidiaries may extend credit, pay dividends or otherwise
provide funds to The Hartford Financial Services Group, Inc. as discussed in the
Capital Resources and Liquidity section of the MD&A under "Liquidity
Requirements".
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS)
1997 1996 1995 1994 1993
- --------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Total revenues $ 13,305 $ 12,473 $ 12,150 $ 11,102 $ 10,338
Income (loss) before cumulative effect of
accounting changes [1] 1,332 (99) 559 632 537
Net income (loss) [1] [2] 1,332 (99) 559 644 537
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 131,743 $ 108,840 $ 93,855 $ 76,765 $ 66,179
Long-term debt and redeemable preferred stock 1,482 1,032 1,022 682 842
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely
parent junior subordinated debentures 1,000 1,000 -- -- --
Total stockholders' equity 6,085 4,520 4,702 3,184 4,012
- --------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE DATA [3]
BASIC EARNINGS PER SHARE
Income (loss) before cumulative effect of
accounting changes [1] $ 11.29 $ (0.84) $ 4.77 $ 5.40 $ 4.59
Net income (loss) [1] [2] 11.29 (0.84) 4.77 5.50 4.59
DILUTED EARNINGS PER SHARE
Income (loss) before cumulative effect of
accounting changes [1] 11.16 (0.84) 4.75 5.37 4.56
Net income (loss) [1] [2] 11.16 (0.84) 4.75 5.47 4.56
DIVIDENDS DECLARED PER COMMON SHARE [4] 1.60 1.60 6.65 1.94 1.90
- --------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [5] 102.3 105.2 104.5 102.5 103.6
Worldwide Property & Casualty [5] [6] 103.6 105.0 103.6 100.9 102.8
- --------------------------------------------------------------------------------------------------------------------------------
[1] 1996 includes other charges of $693, after-tax, or $5.91 basic/diluted
earnings 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).
[2] 1994 includes $12, after-tax, or $0.10 basic/diluted earnings 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.
[3] Actual number of weighted average common shares outstanding at December 31,
1995 of 117.1 and actual number of weighted average common shares
outstanding and dilutive potential common shares at December 31, 1995 of
117.7 are retroactively presented for all prior periods. Per share data has
been restated for all periods presented to reflect the adoption of
Statement of Financial Accounting Standards No. 128 (for additional
information, see Note 10 of Notes to Consolidated Financial Statements).
[4] Prior to the Distribution on December 19, 1995, 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 114.6 for the Worldwide Property &
Casualty.
[6] Combined ratios exclude the results of the Other Operations segment for all
periods presented.
Outlined in the table below are U.S. Industry Combined Ratios for each of the
five years ended December 31:
1997 1996 1995 1994 1993
- -------------------------------------------------------------------------------------------------------------------------------
U.S. Industry Combined Ratios [a] 101.8 105.9 106.4 108.4 106.9
- -------------------------------------------------------------------------------------------------------------------------------
[a] U.S. Industry Combined Ratio information obtained from A.M. Best. Combined
ratio for 1997 is an estimate prepared as of January 1998.
- 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 OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS SHOULD BE READ IN CONJUNCTION WITH THE CONSOLIDATED FINANCIAL
STATEMENTS AND RELATED NOTES BEGINNING ON PAGE F-1.
Certain of the statements contained herein (other than statements of historical
fact) are forward-looking statements. Such forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect upon The
Hartford Financial Services Group, Inc., formerly ITT Hartford Group, Inc., and
its subsidiaries ("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 11
North American Property & Casualty 13
Life 16
International 19
Other Operations 21
Reserves 22
Environmental and Asbestos Claims 22
Investments 24
Capital Markets Risk Management 27
Capital Resources and Liquidity 37
Regulatory Initiatives and Contingencies 40
Effect of Inflation 41
Accounting Standards 41
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 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 regarding the Distribution, see Note 2 of Notes to
Consolidated Financial Statements.)
- 10 -
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
OVERVIEW
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Earned premiums and other considerations $ 10,323 $ 10,076 $ 9,628
Net investment income 2,655 2,523 2,420
Net realized capital gains (losses) 327 (126) 102
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 13,305 12,473 12,150
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 7,977 8,942 7,769
Amortization of deferred policy acquisition costs 1,888 1,678 1,658
Other expenses 2,105 2,171 1,981
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 11,970 12,791 11,408
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1,335 (318) 742
Equity gain on HLI initial public offering 368 -- --
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES, DIVIDENDS ON SUBSIDIARY
PREFERRED STOCK AND MINORITY INTEREST 1,703 (318) 742
Income tax expense (benefit) 334 (219) 180
Dividends on subsidiary preferred stock -- -- 3
- ---------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 1,369 (99) 559
Minority interest in consolidated subsidiary (37) -- --
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 1,332 (99) 559
Less: Net realized capital gains, after-tax [1] 215 57 67
Other items 368 (693) --
Allocated Distribution items -- -- 14
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 749 $ 537 $ 478
- ---------------------------------------------------------------------------------------------------------------------------------
[1] 1996 excludes Closed Book GRC (see below) net realized capital losses of
$137, after-tax. This amount is included in other items.
The Hartford defines "core earnings" as after-tax operational results excluding,
as applicable, net realized capital gains or losses, the cumulative effect of
accounting changes, allocated Distribution items and certain other items. Core
earnings is an internal performance measure used by the Company in the
management of its operations. Management believes that this performance measure
delineates the results of operations of the Company's ongoing lines of business
in a manner that allows for a better understanding of the underlying trends in
the Company's current business. However, core earnings should only be analyzed
in conjunction with, and not in lieu of, net income and may not be comparable to
other performance measures used by the Company's competitors.
Revenues for 1997 increased $832, or 7%, from 1996, while revenues for 1996 were
up $323, or 3%, from 1995. The growth in both years was primarily due to
increases in the Annuity division fee income earned on separate account assets,
higher group life and disability sales and premium growth in reinsurance
operations and business written under an exclusive licensing arrangement with
The American Association of Retired Persons ("AARP"). Partially offsetting these
increases were a decrease in corporate owned life insurance "COLI" premiums as a
result of the Health Insurance Portability and Accountability Act of 1996 ("HIPA
Act of 1996"), which phases out the deductibility of interest on policy loans
under leveraged COLI by 1998, and a decrease in premium in mid-to-large
commercial accounts and agency personal lines. Higher net investment income and,
for 1997, net realized capital gains also contributed to the revenue increase.
(For an analysis of net investment income and net realized capital gains, see
the Investments section.)
In 1997, core earnings increased $212, or 39%, from 1996 primarily due to a
reduction in domestic property catastrophe and other severe weather-related
losses of $132, after-tax. Also contributing to the increase were higher net
investment income, growth in earnings in the Annuity division, the reduction of
incurred environmental and asbestos losses and the reduction of losses in the
Guaranteed Investment Contracts division. Soft market conditions related to
automobile insurance in the United Kingdom and increased debt service costs
partially offset the increase.
Core earnings increased $59, or 12%, to $537 in 1996 from 1995 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
property catastrophe and other severe weather-related losses in 1996.
NET REALIZED CAPITAL GAINS
See "Investment Results" in the Investments section.
OTHER ITEMS
Net income for 1997 includes a $368 equity gain resulting from the initial
public offering of Hartford Life, Inc. ("HLI"), the holding company parent of
The Hartford's significant life insurance subsidiaries, Class A common stock
("The Offering"). (For additional information, see Note 3 of Notes to
Consolidated Financial Statements and Capital Resources and Liquidity section
under "The Offering".)
- 11 -
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 in Other Operations (as discussed in the Environmental
and Asbestos Claims section), recognition of losses on guaranteed rate contract
business ("Closed Book GRC") of $169 (as discussed in the Life section) and
other, primarily foreign tax-related items, of $2 in each of the North American
Property & Casualty and Life segments and $10 in Other Operations.
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 in 1995. (For more information on liability sharing arrangements related to
the Distribution, see Note 2 of Notes to Consolidated Financial Statements.)
INCOME TAXES
The effective tax rates for 1997, 1996 and 1995 were 25%, 20% and 24%,
respectively, excluding the impact of other items in 1997 and 1996. The increase
in the effective tax rate for 1997 was due to a reduction in the proportionate
share of tax-exempt net investment income to total net income for 1997 compared
to 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/(refunds received) in 1997, 1996 and 1995 were $(37), $170 and $302,
respectively. For additional information, see Note 14 of Notes to Consolidated
Financial Statements.
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Minority interest in consolidated subsidiary represents an 18.6% minority
interest in HLI's operating results. (For additional information, see Note 3 of
Notes to Consolidated Financial Statements and Capital Resources and Liquidity
section under "The Offering".)
PER COMMON SHARE
The following table represents per common share data and return on equity for
the past three years:
1997 1996 1995
- -----------------------------------------------------------------
Basic earnings per share $11.29 $(0.84) $4.77
Weighted average common shares
outstanding [1] 118.0 117.3 117.1
Diluted earnings per share $11.16 $(0.84) $4.75
Weighted average common shares
outstanding and dilutive
potential common shares [1]
119.4 117.3 117.7
Return on equity [2] 28.3% (2.3)% 12.6%
- ----------------------------------------------------------------
[1] 1995 weighted average common shares outstanding represents actual number of
common shares outstanding at December 31, 1995.
[2] Calculated by dividing net income (loss) by average equity excluding
unrealized gain, after-tax. In 1997 and 1996, return on equity excluding
other items (as discussed earlier) from net income (loss) was 20.5% and
13.8%, respectively.
SEGMENT RESULTS
The Hartford's reporting segments consist of North American Property & Casualty,
Life, International and Other Operations. Included in Other Operations is the
effect of an 18.6% minority interest in HLI's operating results. Other
Operations include 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.
1997 1996 1995
- ----------------------------------------------------------------
N. A. Property & Casualty $ 433 $ 270 $ 251
Life 306 200 153
International 46 79 94
Other Operations (36) (12) (20)
- ----------------------------------------------------------------
CORE EARNINGS $ 749 $ 537 $ 478
- ----------------------------------------------------------------
The following is a summary of net income (loss) by segment.
1997 1996 1995
- ----------------------------------------------------------------
N. A. Property & Casualty $ 583 $ (151) $ 270
Life 306 24 150
International 110 127 126
Other Operations [1] 333 (99) (1)
Allocated Distribution items -- -- 14
- ----------------------------------------------------------------
NET INCOME (LOSS) $ 1,332 $ (99) $ 559
- ----------------------------------------------------------------
[1] For 1997, includes a $368 equity gain resulting from the initial public
offering of HLI.
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.
- 12 -
NORTH AMERICAN PROPERTY & CASUALTY
OPERATING SUMMARY
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 5,704 $ 5,657 $ 5,662
Net investment income 777 661 646
Net realized capital gains 231 15 29
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 6,712 6,333 6,337
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 4,069 4,994 4,315
Amortization of deferred policy acquisition costs 1,196 1,154 1,178
Other expenses 720 584 510
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 5,985 6,732 6,003
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 727 (399) 334
Income tax expense (benefit) 144 (248) 61
Dividends on subsidiary preferred stock -- -- 3
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 583 (151) 270
Less: Net realized capital gains, after-tax 150 10 19
Other items -- (431) --
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 433 $ 270 $ 251
- ---------------------------------------------------------------------------------------------------------------------------------
Revenues for 1997 increased $379, or 6%, over 1996, while revenues for 1996 were
essentially flat compared to 1995. For a further discussion of premiums, see
Summary Underwriting Results below and for net investment income and net
realized capital gains, see the Investments section.
Core earnings for the North American Property & Casualty segment were $433, an
increase of $163, or 60%, from 1996. The increase was primarily due to a $130,
or 61%, improvement in after-tax underwriting results and an $88, or 17%,
increase in after-tax net investment income, partially offset by a $36, or 60%,
increase in debt service costs. The improved underwriting results were
attributable to favorable property catastrophe and other severe weather-related
losses in 1997 and a reduction in incurred environmental and asbestos losses.
The increase in debt service costs is the result of the 1996 sale of Quarterly
Income Preferred Securities and an increase in debt allocated to the North
American Property & Casualty segment. (For additional information, see Capital
Resources and Liquidity section under "Debt".) In addition, for an analysis of
net investment income, see the Investments section.
Core earnings for 1996 of $270 increased $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 primarily due to adverse property catastrophe and
other severe weather-related losses.
Within the North American Property & Casualty segment, management analyzes the
results of operations by the following four major components on a before-tax
basis:
1997 1996 1995
- ---------------------------------------------------------------
Underwriting results [1] $ (126) $ (986) $ (270)
Net investment income 777 661 646
Net realized capital gains 231 15 29
Miscellaneous expenses, net (155) (89) (71)
- ---------------------------------------------------------------
OPERATING INCOME (LOSS) $ 727 $ (399) $ 334
- ---------------------------------------------------------------
[1] 1996 includes the impact of a $660, before-tax, environmental and asbestos
charge.
The following discussion summarizes underwriting results by major operation (as
defined below) and net miscellaneous expenses. As previously noted, net
investment income and net realized capital gains are covered in a separate
discussion in the Investments section. Other items, 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.
1997 1996 1995
- ---------------------------------------------------------------
Written premiums $ 5,771 $ 5,688 $ 5,670
Underwriting results [1] $ (126) $ (326) $ (270)
Combined ratio [1] [2] 102.3 105.2 104.5
- ---------------------------------------------------------------
[1] 1996 excludes the impact of a $660, before-tax, environmental and asbestos
charge. Including the impact of this charge, the combined ratio for 1996 was
116.9 for 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.
- 13 -
Written premiums for this segment increased 1% in 1997 from 1996, while premiums
for 1996 were up slightly from 1995. Premiums from the segment's primary target
markets of reinsurance, small commercial accounts and AARP grew 10% in 1997 and
6% in 1996, contributing 4% and 2% growth to the total segment in 1997 and 1996,
respectively. However, 3% of this segment growth was offset in each year by an
8% and 6% premium reduction in mid-to-large commercial accounts and agency
personal lines in 1997 and 1996, respectively.
Underwriting results for 1997 improved $200, or 2.9 combined ratio points, from
1996 primarily from a decrease in property catastrophe and other severe
weather-related losses of $204 and a reduction of $67 in incurred environmental
and asbestos losses as a result of the charge taken in the third quarter of 1996
upon completion of the Company's environmental and asbestos database study (for
further discussion see, the Environmental and Asbestos Claims section).
Partially offsetting these two favorable items were expenses related to
significant investments in future growth initiatives and dividends to
policyholders in two states in recognition of favorable personal lines
automobile results.
In 1996, underwriting losses before-tax increased $56, or 0.7 combined ratio
points, over 1995 primarily due to a $130 increase in property catastrophe and
other severe weather-related losses, most notably several first quarter winter
storms and Hurricane Fran in September. Partially offsetting this increase were
the impact of two significant losses, net of reinsurance, in 1995: $40 in
connection with the settlement of claims against Dow Corning Corporation
alleging product defects arising from breast implants, and $32 resulting from
the Company's share of a single industrial fire covered by the Industrial Risk
Insurance ("IRI") pool.
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
- ----------
1997 1996 1995
- ---------------------------------------------------------------
Written premiums $ 3,190 $ 3,253 $ 3,373
Underwriting results $ (149) $ (206) $ (249)
Combined ratio 104.5 105.8 107.1
- ---------------------------------------------------------------
Commercial provides workers' compensation, property, automobile, liability,
marine, agricultural and bond coverages to commercial accounts throughout the
United States and Canada. Excess and surplus lines business not normally written
by standard lines insurers is also provided. Commercial is organized into three
customer market segments: Business Insurance, Commercial Affinity and Commercial
Specialty. Business Insurance provides standard commercial business for small
accounts (Select Customer) and mid-sized insureds. Commercial Affinity provides
commercial risk management products and services to members of affinity groups
and customers of financial institutions. Commercial Specialty provides insurance
through retailers and wholesalers to large commercial clients and insureds
requiring a variety of specialized coverages. Its results include the bond lines
and First State Management Group, a leading underwriter of excess and surplus
lines business produced primarily through wholesale brokers.
Agricultural, livestock and marine products are also managed within Commercial
Specialty.
Written premiums decreased 2% in 1997, compared to a 4% decrease in 1996.
Premium growth in several markets and lines of business including Select
Customer, Commercial Affinity, Bond, Marine and Agriculture, Specialty Property
and Specialty Casualty totaled 6% in 1997, contributing 3% to Commercial's total
premium growth rate. However, this total premium growth was more than offset by
a 23% decline in large national accounts caused by declining workers'
compensation rates and intense price competition. In 1996, the primary causes
for the decrease from the prior year were intense price competition primarily in
larger national accounts and a decline in workers' compensation premium from
workers' compensation pools and a shift to large deductibles.
Underwriting results improved $57, or 1.3 combined ratio points, in 1997 as
compared with 1996. The primary factors contributing to the improvement were
reductions in property catastrophe and other severe weather-related losses of
$76 and a reduction of asbestos and environmental incurred losses of $67 as a
result of the charge taken in 1996. Also, continued favorable loss and loss
expense development trends, particularly in workers' compensation and other
casualty lines, have been generated through the execution of the operation's
total cost containment strategy which includes loss prevention and avoidance,
early reporting, active claim management and prompt return to work programs.
Partially offsetting the favorable losses described above was a $103 reduction
in earned premiums, primarily from the declining written premium from large
national accounts over the last two years, which have a high percentage of
January renewals and therefore a more significant impact on earned premiums.
In 1996, underwriting results improved $43, or 1.3 combined ratio points,
compared with the prior year. This improvement reflected 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
and a net $32 loss resulting from a single industrial fire covered by the IRI
pool. Excluding the impact of these items on the prior year comparison, 1996
underwriting results decreased $29 from 1995, reflecting a 0.8 point increase in
the combined ratio from the adjusted 1995 level. This decline was primarily due
to a decrease in property results of approximately $50 which were adversely
impacted by property catastrophe and other severe weather-related losses.
Despite intense competition, favorable workers' compensation results partially
offset this decrease reflecting the impacts of legislative reforms, depopulation
in residual pools and effective managed care related initiatives.
Personal
- --------
1997 1996 1995
- ---------------------------------------------------------------
Written premiums $ 1,893 $ 1,864 $ 1,813
Underwriting results $ 37 $ (110) $ (21)
Combined ratio 98.6 105.2 100.9
- ---------------------------------------------------------------
- 14 -
Personal provides automobile, homeowners, home-based business and fire coverages
to individuals throughout the United States. Personal is 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 an affinity center which began in 1996 and 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 2% in 1997 compared to a 3% increase in 1996. Both
years included strong growth in AARP premium of 7% which is benefiting from the
favorable expansion of this demographic group, partially offset by declines in
Agency premiums of 7% in 1997 and 4% in 1996. The decline in 1997 was due to the
sale of the Company's Canadian personal lines as well as disruption in the
incoming flow of business associated with a major strategic shift in emphasis
from homeowners to automobile coverages. The 1996 decline was due to selective
disinvestment in unprofitable states and underperforming agents. AARP premiums
represented 67% of the 1997 Personal premiums, up from 64% in 1996 and 62% in
1995.
Underwriting results improved by $147 in 1997 over 1996, with a corresponding
6.6 point improvement in the combined ratio. This improvement was primarily due
to significantly lower property catastrophe and other severe weather-related
losses of $137. Improved automobile and homeowners profitability resulting from
expanded cost containment initiatives was partially offset by expenses related
to significant investments in future growth initiatives and a $34 dividend to
policyholders in two states in recognition of favorable personal lines
automobile results. Underwriting results decreased by $89 in 1996, with a 4.3
point increase in the combined ratio. These results were due to an increase in
property catastrophe and other severe weather-related losses of $93, partially
offset by improved automobile results.
Reinsurance
- -----------
1997 1996 1995
- ---------------------------------------------------------------
Written premiums $ 688 $ 571 $ 484
Underwriting results $ (14) $ (10) $ --
Combined ratio 102.6 102.1 99.9
- ---------------------------------------------------------------
The Hartford assumes reinsurance worldwide through its nine Hartford Reinsurance
Company ("HartRe") offices located in Hartford, San Francisco, Miami,
Philadelphia, 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 20% in 1997 primarily due to the acquisition of
renewal rights for the business of Security Re and San Francisco Re which
occurred in late 1996. Written premiums grew 18% in 1996 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.
Underwriting results for 1997 decreased $4, or 0.5 combined ratio points, from
1996 as favorable worldwide property catastrophe experience was offset by
increasingly competitive market conditions which softened premium rate levels.
During 1996, HartRe began a strategic shift in its business mix to longer-tailed
casualty and specialty lines to provide further growth opportunities and better
diversify its portfolio. The expected profitability composition of such
longer-tailed lines includes a higher investment income component, which allows
for higher targeted combined ratios. As a result of this strategy, along with
higher property catastrophe losses, 1996 underwriting results decreased $10
compared with 1995.
MISCELLANEOUS EXPENSES, NET
Miscellaneous expenses, net of miscellaneous income items, were $155 in 1997, up
from $89 in 1996. This increase was primarily due to increased debt service
costs of $55 resulting from additional borrowings and a reallocation of
corporate debt costs to the North American Property & Casualty segment.
Miscellaneous expenses for 1996 were $89, up from $71 in 1995. This increase was
primarily due to increased debt costs of $27 from additional borrowings
partially offset by increased service fee income from involuntary pool servicing
contracts net of other miscellaneous expenses.
OUTLOOK
Difficult market conditions and intense price competition within the property
and casualty industry show no signs of diminishing in the near term. However,
several major strategic actions are underway, with many completed in 1997, which
management believes may counterbalance these negative external factors and
position the North American Property & Casualty segment for improved written
premium growth in 1998 and beyond, while maintaining core profitability. The
acquisition of Omni Insurance Group, Inc., which was completed on February 12,
1998, provides Personal immediate access to the non-standard automobile market
with a highly-regarded and well-established franchise. (For additional
information, see Capital Resources and Liquidity section under "Omni".)
Strategic alliances have been formed with several major national and regional
banks to market personal and/or commercial products to each banks' customers.
The Hartford Customer Services Group contracted with AARP to service its group
health insurance plan partners and recipients beginning January 1, 1998.
Significant investments have been made in such areas as advertising, product
research and development, technology and staff training to heighten brand
awareness, increase product offerings, further develop alternative distribution
channels and improve productivity. On-going claim initiatives have kept claim
cost increases below national trends. As a result of these and other actions and
initiatives, management believes the North American Property & Casualty segment
stands poised to capitalize on the opportunities that lie ahead.
- 15 -
LIFE
OPERATING SUMMARY [1]
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Earned premiums and other considerations $ 3,163 $ 3,069 $ 2,643
Net investment income 1,536 1,530 1,451
Net realized capital losses -- (219) (4)
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 4,699 4,380 4,090
-----------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 2,671 2,727 2,395
Amortization of deferred policy acquisition costs 345 241 205
Other expenses 1,203 1,381 1,264
- ---------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,219 4,349 3,864
-----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 480 31 226
Income tax expense 174 7 76
- ---------------------------------------------------------------------------------------------------------------------------------
NET INCOME 306 24 150
Less: Net realized capital losses, after-tax [2] -- (5) (3)
Other items -- (171) --
- ---------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 306 $ 200 $ 153
- ---------------------------------------------------------------------------------------------------------------------------------
[1] Life results are presented before the effect of the 18.6% minority interest
in HLI, which is reflected in Other Operations.
[2] 1996 excludes the Closed Book GRC net realized capital losses of $137,
after-tax, which is included in other items.
The Life segment operates in three principal divisions: Annuity, Individual Life
Insurance and Employee Benefits. The Life segment also maintains a Guaranteed
Investment Contracts ("GIC") division, which is primarily comprised of
guaranteed rate contract ("GRC") business written prior to 1995 ("Closed Book
GRC") and a Corporate Operation through which it reports net investment income
on assets representing surplus not assigned to any of its business divisions and
certain other revenue and expenses not specifically allocable to any of its
business divisions. On May 22, 1997, HLI, the holding company parent of The
Hartford's significant life subsidiaries, completed the Offering of 18.6% of its
common stock. (For additional information, see Capital Resources and Liquidity
section under "The Offering".)
Revenues increased $319, or 7%, to $4.7 billion in 1997 from $4.4 billion in
1996. Revenues were impacted by the HIPA Act of 1996, which virtually eliminated
all new sales of leveraged COLI, and by GRC, where net realized capital losses
and other charges were taken in the third quarter of 1996 related to Closed Book
GRC. Excluding revenues associated with COLI and GRC, revenues increased $490,
or 16%, in 1997 as compared to 1996. The increase was primarily due to growth in
the Annuity division where revenues increased as a result of higher fee income
earned on growth in separate account assets due to strong annuity sales and
stock market appreciation. Additionally, strong sales and renewals of group
insurance premiums within the Employee Benefits division contributed to the
revenue growth.
Core earnings increased $106, or 53%, to $306 in 1997 from $200 in 1996,
primarily as a result of (i) an increase in earnings in the Annuity division of
$57 and in the Individual Life Insurance division of $12, both of which were
driven by an increase in total account value due to strong sales and stock
market appreciation, (ii) an increase in earnings of $6 in the Employee Benefits
division principally due to an improvement in group insurance premiums and
favorable mortality and morbidity experience and (iii) a reduction in losses of
$50 in the GIC division as a result of actions taken in the third quarter of
1996 related to Closed Book GRC (discussed below), partially offset by a
decrease in core earnings of $19 in the Corporate Operation due primarily to an
increase in capital allocated to the divisions, as well as higher interest
expense as a result of increased indebtedness in conjunction with the Offering.
(For additional information, see Capital Resources and Liquidity section under
"The Offering" and "Debt".)
Revenues increased $290, or 7%, in 1996 as compared to 1995. Excluding revenues
associated with COLI and GRC as discussed above, revenues increased $549, or
22%, in 1996 compared to 1995. The increase was primarily due to growth in the
Annuity division where revenues increased due to a substantial increase in
aggregate fees earned on a larger block of separate account assets as a result
of strong annuity sales and stock market appreciation. Additionally, revenues in
the Employee Benefits division grew resulting from strong sales and renewals of
group insurance premiums.
Core earnings increased $47, or 31%, to $200 in 1996 from $153 in 1995,
primarily as a result of (i) an increase in earnings in the Annuity division of
$32 and in the Individual Life Insurance division of $7, both of which were
driven by an increase in total account value due to strong sales and stock
market appreciation, (ii) an increase in earnings of $13 in the Employee
Benefits division principally as a result of an increase in group insurance
premiums and favorable mortality and morbidity experience and (iii) a reduction
in losses of $17 in the GIC division as a result of actions taken in the third
quarter of 1996 related to Closed Book GRC, partially offset by a decrease in
earnings in the Corporate Operation of $22 due primarily to a favorable guaranty
fund adjustment of $10 in 1995 resulting
- 16 -
from lower than expected insolvencies in the insurance industry as well as an
increase in debt service costs in 1996.
Other items primarily consist of a $169 third quarter 1996 loss in Closed Book
GRC (discussed below).
SUMMARY RESULTS
1997 1996 1995
---------------------------------- ---------------------------------- --------------------------------
Net Net Net
Core Income Core Income Core Income
Revenues Earnings [1] (Loss) Revenues Earnings [1] (Loss) Revenues Earnings [1] (Loss)
- ----------------------------------------------------------------------------------------------------------------------------------
Annuity $ 1,271 $ 202 $ 202 $ 974 $ 145 $ 145 $ 721 $ 113 $ 113
Individual Life Insurance 510 56 56 472 44 44 408 37 37
Employee Benefits 2,644 85 85 2,834 79 79 2,523 66 66
Guaranteed Investment
Contracts 239 -- -- 33 (50) (224) 377 (67) (67)
Corporate Operation 35 (37) (37) 67 (18) (20) 61 4 1
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL $ 4,699 $ 306 $ 306 $ 4,380 $ 200 $ 24 $ 4,090 $ 153 $ 150
- ----------------------------------------------------------------------------------------------------------------------------------
[1] Core earnings represent after-tax operational results excluding, as
applicable, net realized capital gains or losses and certain other items,
primarily Closed Book GRC charges in 1996.
The following describes each division, including products and services offered,
and analyzes the above results.
Annuity
- -------
The Annuity division focuses on the savings and retirement needs of the growing
number of individuals who are preparing for retirement or have already retired.
The variety of products sold within this division reflects the diverse nature of
the market. These include individual variable annuities, fixed market value
adjusted (MVA) annuities, deferred compensation and retirement plan services,
structured settlement contracts and other special purpose annuity contracts,
investment management contracts and mutual funds. The Company was rated the
number one writer of variable annuities for 1997 according to the Variable
Annuity and Research Data Service (VARDS) with an 11% market share, and sold
approximately $869 of mutual funds in its first full year offering the product,
resulting in total mutual fund assets of $972 at December 31, 1997.
Revenues increased $297, or 30%, to $1.3 billion in 1997 from $974 in 1996. This
increase was principally the result of a $229 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 division increased to $50.7 billion in 1997 from $37.2
billion in 1996, primarily due to annual sales of individual variable annuities
of approximately $9.7 billion in 1997, as well as significant stock market
appreciation. In addition, the average general account assets of this division
increased to $8.1 billion in 1997 from $7.2 billion in 1996 largely as a result
of growth in the general account portion of the individual variable annuity
products. The growth in this division in 1997 also resulted in an increase in
total benefits, claims and expenses of $207, or 28%, to $957 in 1997 from $750
in 1996. A 33% growth in average account value in 1997, coupled with an overall
reduction in individual annuity expenses as a percentage of total individual
annuity account value to 25 basis points in 1997 from 28 basis points in 1996,
contributed to the growth in core earnings of $57, or 39%, to $202 in 1997 from
$145 in 1996.
Similar factors generated an increase in 1996, as compared with 1995, in
revenues of $253, or 35%, average general account assets of $1.0 billion, or
16%, average separate account assets of $11.1 billion, or 42%, total benefits,
claims and expenses of $196, or 35%, core earnings of $32, or 28%, and a
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.
Individual Life Insurance
- -------------------------
The Individual Life Insurance division, which focuses on the high end estate and
business planning markets, sells a variety of life insurance products, including
variable life, universal life, interest-sensitive whole life, and term life
insurance policies.
Revenues in 1997 increased $38, or 8%, to $510 from $472 in 1996. In the first
quarter of 1996, a block of business was assumed from Investors Equity Life
Insurance Company which increased 1996 revenues by $9. Excluding this
transaction, 1997 revenues increased $47, or 10%, as compared to 1996,
reflecting the impact of applying cost of insurance charges and variable life
fees to a larger block of business. Account values increased $555, or 17%, to
$3.8 billion in 1997 from $3.2 billion in 1996. Total benefits, claims and
expenses increased $19, or 5%, to $423 in 1997 from $404 in 1996. The growth in
the Individual Life Insurance division's account values, particularly variable
life, along with favorable mortality experience contributed to an increase in
core earnings of $12 in 1997.
Revenues in 1996 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 block of business as account values increased $678 to $3.2
billion in 1996 from $2.6 billion in 1995. Total benefits, claims and expenses
increased $54, or 15%, to $404 in 1996
- 17 -
from $350 in 1995. This increase reflects the growth in the block of individual
life insurance business and is partially offset by favorable mortality results
and the full year impact of expense leverage due to the consolidation of the
division's two individual life operations in 1995. The combination of account
value growth, operational efficiencies, and favorable mortality experience
resulted in an increase in core earnings of $7, or 19%, to $44 in 1996 from $37
in 1995.
Employee Benefits
- -----------------
The Employee Benefits division sells group insurance products, including group
life and group disability insurance, and COLI and engages in certain
international operations, primarily in South America. According to the latest
results published by the Life Insurance Marketing and Research Association
(LIMRA) (December 1997), the Company was the second largest provider of group
disability insurance for the nine months ended September 30, 1997.
Revenues decreased $190, or 7%, to $2.6 billion in 1997 from $2.8 billion in
1996. This decrease was primarily attributable to the COLI business for which
associated revenues decreased $380, or 28%, to $980 from $1.4 billion in 1996.
The decrease in COLI revenues is primarily a result of the elimination of sales
of leveraged COLI due to the HIPA Act of 1996 which phases out the deductibility
of interest on policy loans under leveraged COLI by the end of 1998. Partially
offsetting this decrease was an increase in group insurance revenues of $237, or
16%, to $1.7 billion from $1.5 billion in 1996. The increase in revenues is
mainly attributable to group life and group disability premium growth, as a
result of strong new business sales and renewals. Total benefits, claims and
expenses decreased $212, or 8%, to $2.5 billion in 1997 from $2.7 billion in
1996. This decrease generally reflected a decrease in dividends to policyholders
of $394, or 62%, primarily due to the elimination of sales of leveraged COLI,
partially offset by an increase in group insurance of $216, or 15%, as a result
of growth in group life and group disability products. The 1997 results were
impacted by a $6 operating loss related to the division's international
operations. This loss was primarily attributable to the segment's operations in
Argentina, specifically, the Company's 60% investment in ITT Hartford
Sudamericana Holdings, S.A. ("Suda"). In November 1997, the Company replaced the
Argentine management team with a new management team and purchased the remaining
40% interest in Suda from the local shareholders. The Argentine loss was
primarily due to higher than anticipated costs and expenditures. As a result of
the factors mentioned above, and the impact of favorable mortality and morbidity
results, core earnings in this division increased $6, or 8%, to $85 in 1997 from
$79 in 1996.
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 $221 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 HIPA Act of 1996 and (ii) a $149
increase in net investment income, primarily due to an increase in COLI account
value as a result of strong sales in 1995. 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
an increase in COLI account value, 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. This
premium growth in group insurance, along with favorable mortality and morbidity
experience, resulted in an increase in core earnings in this division of $13, or
20%, to $79 in 1996 from $66 in 1995.
Guaranteed Investment Contracts
- -------------------------------
The GIC division consists of GRC business that is supported by assets held in
either the Company's general account or a guaranteed separate account and
includes Closed Book GRC. Historically, a significant majority of these
contracts were sold as general account contracts with fixed rates and fixed
maturities. The Company decided in 1995, after a thorough review of its GRC
business, that it would significantly de-emphasize general account GRC, choosing
instead to focus its distribution efforts on other products sold through other
divisions and selling general account GRC primarily as an accommodation to
customers. From 1992 to 1994, the GIC division sold over $5.0 billion of GRC. In
contrast, the GIC division sold only $47 and $108 general account GRC in 1997
and 1996, respectively. Consistent with management's expectations, the division
had no core earnings in 1997 and expects no material income or loss from the GIC
division in the future.
Closed Book GRC results in 1996 and 1995 were 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 and historical
levels in years prior to 1995. Closed Book GRC was also negatively affected by
the interest rate rise in 1994 when the duration of its assets lengthened
relative to that of the liabilities. 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. As of December 31, 1997, Closed
Book GRC had general account assets and liabilities of $2.2 billion. The
scheduled maturities are $1.0 billion, or 45%, in 1998, $0.7 billion, or 32%, in
1999 and $0.5 billion, or 23%, thereafter.
During 1996, Closed Book GRC incurred a $51, after-tax, loss from operations as
a result of negative interest spread, as compared with an after-tax loss from
operations of $68 in 1995. With the initiation of the hedge transactions
discussed above, which eliminated the possibility that the fair value of Closed
Book GRC investments would recover to their current amortized cost prior to
sale, an other than temporary impairment
- 18 -
loss of $82, after-tax, was determined to have occurred and was recorded in
September 1996. An additional other than temporary impairment loss of $6,
after-tax, occurred in the fourth quarter of 1996 bringing the total 1996
impairment to $88. Also, during the third quarter of 1996, Closed Book GRC had
asset sales resulting in proceeds of approximately $500 and a realized loss of
$55, after-tax. The asset sales were undertaken as a result of liquidity needs
and favorable market conditions for certain securities. Other charges of $32,
after-tax, were also incurred in the third quarter of 1996.
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
primary 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,
financially protect themselves and their families against disability or death
and prepare their estates for an efficient transfer of wealth between
generations.
Management expects that the net income (loss) from Closed Book GRC in the years
subsequent to 1997 will be immaterial based on the actual results from 1997,
current projections for the performance of the assets and liabilities associated
with Closed Book GRC, and the stabilizing effect of the hedge transactions
implemented in 1996. However, no assurance can be given that, under certain
unanticipated economic circumstances, further losses in respect of Closed Book
GRC will not occur in the future.
The HIPA Act of 1996 phases out the deductibility of interest on policy loans
under COLI by the end of 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 is
declining. However, the Employee Benefits division has other growth
opportunities particularly through its group insurance products.
Certain proposed legislative initiatives which could impact the Life segment are
discussed in the Regulatory Initiatives and Contingencies section.
The Company expects continued growth in core earnings for the Life segment in
1998.
INTERNATIONAL
OPERATING SUMMARY
1997 1996 1995
- ---------------------------------------------------------------------------------------------------------------------------------
Earned premiums and other considerations $ 1,452 $ 1,338 $ 1,303
Net investment income 185 183 158
Net realized capital gains