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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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(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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 0-19277
THE HARTFORD FINANCIAL SERVICES GROUP, INC.
(Exact name of registrant as specified in its charter)
Delaware 13-3317783
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
HARTFORD PLAZA, HARTFORD, CONNECTICUT 06115-1900
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: the following, all
of which are registered on the New York Stock Exchange, Inc.:
Common Stock, par value $0.01 per share
6.375% Notes due November 1, 2002
6.375% Notes due November 1, 2008
7.30% Debentures due November 1, 2015
7.70% Cumulative Quarterly Income Preferred Securities, Series A, issued by
Hartford Capital I
8.35% Cumulative Quarterly Income Preferred Securities, Series B, issued by
Hartford Capital II
Securities registered pursuant to Section 12 (g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months (or for such shorter period that the registrant
was required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 26, 1999, there were outstanding 226,826,658 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
$12,180,499,554 based on the closing price of $54.0625 per share of the Common
Stock on the New York Stock Exchange on February 26, 1999.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1999 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of The Hartford 2
2 Properties 9
3 Legal Proceedings 9
4 Submission of Matters to a Vote of Security Holders 9
PART II 5 Market for The Hartford's Common Stock and Related
Stockholder Matters 9
6 Selected Financial Data 10
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 11
7A Quantitative and Qualitative Disclosures About Market Risk 44
8 Financial Statements and Supplementary Data 44
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 44
PART III 10 Directors and Executive Officers of The Hartford 44
11 Executive Compensation 44
12 Security Ownership of Certain Beneficial Owners
and Management 44
13 Certain Relationships and Related Transactions 44
PART IV 14 Exhibits, Financial Statements, Schedules and
Reports on Form 8-K 44
Signatures II-1
Exhibits Index II-2
PART I
Item 1. BUSINESS OF THE HARTFORD
(Dollar amounts in millions except for share data unless otherwise stated)
GENERAL
The Hartford Financial Services Group, Inc., 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, founded in 1810, is the oldest of The Hartford's
subsidiaries. The Hartford writes insurance and reinsurance in the United States
and internationally. At December 31, 1998, total assets and total stockholders'
equity of The Hartford were $150.6 billion and $6.4 billion, respectively.
The Hartford Financial Services Group, Inc., a Delaware corporation, was formed
in December, 1985 as a wholly-owned subsidiary of ITT Corporation ("ITT"). On
December 19, 1995, ITT distributed all of the outstanding shares of The Hartford
Financial Services Group, Inc. to ITT shareholders of record in an action known
herein as the "Distribution". As a result of the Distribution, The Hartford
became an independent, publicly traded company.
Pursuant to the initial public offering of Hartford Life, Inc. ("HLI"), the
holding company parent of The Hartford's significant life insurance subsidiaries
Class A common stock (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 19% of the
equity ownership in HLI and approximately 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% of the equity ownership in HLI and approximately 96% 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, 1998, The Hartford continued to maintain an approximate 81%
equity ownership in HLI.
In connection with the Offering, The Hartford reported a $368 equity 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.
On November 16, 1998, The Hartford completed the sale of its United
Kingdom-based London & Edinburgh Insurance Group, Ltd. ("London & Edinburgh")
subsidiary to Norwich Union, a leading provider of general and life insurance in
the United Kingdom. The Hartford received approximately $525, before costs of
sale, and reported an after-tax net realized capital gain of $33 related to the
transaction. The Hartford retained ownership of Excess Insurance Co. Ltd.,
London & Edinburgh's property and casualty insurance and reinsurance subsidiary,
which discontinued writing new business in 1993.
As a holding company, The Hartford Financial Services Group, Inc. has no
significant business operations of its own and, therefore, relies on the
dividends from its insurance company subsidiaries, which are primarily domiciled
in Connecticut, as the principal source of cash to meet its obligations.
Additional information regarding the cash flow and liquidity needs of The
Hartford Financial Services Group, Inc. may be found in the Capital Resources
and Liquidity section of Management's Discussion and Analysis of Financial
Condition and Results of Operations ("MD&A").
REPORTING SEGMENTS
The Hartford's reporting segments consist of Commercial, Personal, Reinsurance,
Life, International and Other Operations. While not considered a segment, the
Company also reports results for North American Property & Casualty, which
includes the combined underwriting results of the Commercial, Personal and
Reinsurance segments, along with income and expense items not directly allocable
to these segments, such as net investment income and net realized capital gains
and losses. Other Operations include operations which have ceased writing new
business. Also included in Other Operations is the effect of an approximate 19%
minority interest in HLI's operating results. The following is a description of
each segment, including a discussion of principal products, methods of
distribution and competitive environments. Additional information on The
Hartford's reporting segments may be found in the MD&A on pages 11 to 44 and
Note 17 of Notes to Consolidated Financial Statements.
NORTH AMERICAN PROPERTY & CASUALTY
North American Property & Casualty is the ninth largest property and casualty
insurance operation in the United States based on written premiums for the year
ended December 31, 1997, according to A.M. Best. North American Property &
Casualty generated $7.4 billion in revenues, $6.1 billion in written premiums
and $604 in net income in 1998. Total assets
- 2 -
for North American Property & Casualty were $21.6 billion as of December 31,
1998.
COMMERCIAL
The Commercial segment provides insurance coverages to commercial accounts
throughout the United States and Canada. Commercial is organized into three
customer markets: Business Insurance, Commercial Affinity and Commercial
Specialty. Business Insurance provides standard commercial business for small
accounts (Select Customer) and mid-sized insureds. 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. The Commercial segment had $3.2
billion in written premiums and a $213 underwriting loss in 1998.
Principal Products
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The Commercial segment offers workers' compensation, property, automobile,
liability, marine, agricultural and bond coverages.
Methods of Distribution
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The Commercial segment provides insurance products and services through its home
office located in Hartford, Connecticut, and multiple domestic regional and
district office locations and insurance centers. The segment markets its
products nationwide utilizing a variety of distribution networks including the
use of approximately 5,700 independent agents, wholesalers and direct marketing
including trade associations, customers of financial institutions and employee
groups. Independent agents, who often represent other companies as well, are
compensated on a commission basis and are not employees of The Hartford.
Competition
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The commercial insurance industry is a highly challenging environment in which
the Commercial segment competes with other stock companies, mutual companies,
self insurers and other underwriting organizations. Intense competition within
the financial services industry has created difficult market conditions in the
commercial industry. This competitive environment is created by tremendous price
competition, consolidation and globalization of companies, excess capital within
the commercial insurance industry, exploration and utilization of alternative
distribution techniques and emphasis on cost containment and reduction.
PERSONAL
The Hartford ranks among the largest carriers of personal lines insurance. The
Personal segment provides insurance coverages to individuals throughout the
United States. Personal is organized to provide customized products and services
to five markets: the membership of The American Association of Retired Persons
("AARP") through a direct marketing operation; customers who prefer local agent
involvement through a network of independent agents in the standard personal
lines market and in the non-standard automobile market through Omni Insurance
Group, Inc. ("Omni"), which was acquired in 1998; customers of financial
institutions through an affinity center which began in 1996 and customer service
for all health insurance products offered through AARP's Health Care Options
effective January 1, 1998. AARP's exclusive licensing arrangement continues
through the year 2002 for automobile, homeowners and home-based business and
through 2007 for Health Care Options, thus providing the Personal segment with
an important competitive advantage. The Personal segment had $2.2 billion in
written premiums and $77 in underwriting income in 1998.
Principal Products
- - ------------------
The Personal segment provides homeowners, automobile, home-based business and
fire coverages to individuals across North America, including a special program
designed exclusively for members of AARP.
Methods of Distribution
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The Personal segment reaches diverse markets through multiple distribution
channels. The segment markets directly to the 33 million members of AARP, sells
its products through independent agents and also markets through affinity groups
and financial institutions.
Competition
- - -----------
The personal lines marketplace continues to become increasingly more
competitive, especially in the personal automobile line. The past few years have
produced favorable returns in personal lines, allowing companies to drive prices
down and utilize varied distribution channels to increase marketshare.
Multi-line property and casualty companies are also anxious to grow in the
personal market to bolster the impact of the soft commercial market. In the
absence of renewal price increases, consumer shopping declines, forcing
companies to offer greater price incentives and product features to attract new
prospects. Agency companies wishing to grow are offering agents greater
incentives to move business from competitors in order to increase market share
in a stagnant market.
A major competitive advantage of the Personal segment is the exclusive licensing
arrangement with AARP to provide personal automobile, homeowners and home-based
business insurance products to its members through the year 2002. Favorable
"baby boomer" demographics are expected to increase AARP membership
significantly during this period. During 1996, the Personal segment's
relationship with AARP was further strengthened when it was awarded a contract
to provide customer service for all health insurance products offered through
AARP's Health Care Options effective January 1, 1998.
- 3 -
REINSURANCE
The Hartford is a major global reinsurer, with operations in the United States,
Canada, the United Kingdom, Spain, Germany, Hong Kong and Taiwan. The
Reinsurance segment had $711 in written premiums and a $36 underwriting loss in
1998.
Principal Products
- - ------------------
The Reinsurance segment offers a full range of treaty and facultative
reinsurance products including property, casualty, marine, fidelity, surety,
finite risk and specialty coverages.
Methods of Distribution
- - -----------------------
The Reinsurance segment assumes insurance from other insurers, primarily through
reinsurance brokers in the worldwide reinsurance market.
Competition
- - -----------
The worldwide property and casualty reinsurance market is extremely competitive.
Deepening soft market conditions make profitable growth difficult to maintain.
Consolidation in the market has created fewer, but stronger competitors.
Finally, nontraditional solutions could reduce demand for traditional
reinsurance products.
LIFE
The Life segment is conducted principally by HLI, a leading financial services
and insurance organization providing investment products such as variable
annuities and mutual funds, individual and corporate owned life insurance and
employee benefits products. Among the fastest growing major life insurance
groups for the past several years, The Hartford's consolidated domestic life
insurance operations are ranked as the fourth largest in the United States based
on statutory assets as of December 31, 1997, according to A.M. Best's latest
available data. Growth in the Life segment's total assets has been primarily
driven by variable annuity sales and equity market appreciation. The Company was
ranked the number one writer of individual variable annuities in the United
States for 1998 according to Variable Annuity and Research Data Service
("VARDS") with a 10% market share. In addition, mutual fund assets of
approximately $2.5 billion at December 31, 1998 were more than double prior year
levels. According to the latest results published by Life Insurance Marketing
and Research Association (LIMRA), the Company was the second largest provider of
group disability insurance in the United States for the nine months ended
September 30, 1998. In addition, in the past year, the Life segment's total
assets have grown 21% to $122.0 billion at December 31, 1998. The Life segment
generated $5.8 billion in revenues and earned $386 in 1998.
The Life segment, headquartered in Simsbury, Connecticut, has the following
reportable operations: Investment Products, Individual Life, Employee Benefits
and Corporate Owned Life Insurance ("COLI"). The Life segment separately reports
its international operations and items that are not directly allocable to any of
its reportable operations in an Other category.
Principal Products
- - ------------------
The Investment Products operation focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired. The variety of products sold within this operation reflects the
diverse nature of the market. These products include individual variable
annuities, fixed market value adjusted (MVA) annuities, retail mutual funds,
deferred compensation and retirement plan services, structured settlement
contracts and other special purpose annuity contracts. The Individual Life
Insurance operation, which focuses on the high end estate and business planning
markets, sells a variety of life insurance products, including variable life,
universal life, interest-sensitive whole life and term life insurance. The
Employee Benefits operation sells group life and group disability insurance as
well as other products including stop loss and supplementary medical coverage to
employers and employer sponsored plans. The COLI operation includes life
insurance products sold for funding of other post employment benefits and other
non-qualified benefit programs provided by corporations.
Methods of Distribution
- - -----------------------
The Life segment sells a variety of individual and group financial services and
insurance products primarily through 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 Investment
Products operation primarily distributes through broker-dealers and financial
institutions for individual sales, and through employees of the Company for
institutional sales. Securing an important distribution channel in August 1998,
the Company purchased all of the outstanding shares of PLANCO Financial
Services, Inc. and its affiliate, PLANCO, Incorporated, the nation's largest
wholesaler of annuities. The Individual Life Insurance operation distributes its
products through a sales office system of qualified life insurance professionals
who have access to an extensive network of licensed life insurance agents as
well as through broker-dealers and independent life insurance marketing
organizations. The Employee Benefits operation uses an experienced group of
Company employees managed through a regional sales office system to distribute
its products through a variety of distribution outlets including insurance
agents, brokers, associations and third-party administrators. The COLI operation
uses a group of experienced Company employees who work with specialized brokers
and consultants to distribute its products.
Competition
- - -----------
The Life segment competes with numerous 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 and products offered, customer
service, financial strength ratings
- 4 -
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. With a 10% market share, the Company
was rated the number one writer of individual variable annuities for 1998
according to VARDS.
INTERNATIONAL
The Hartford's International segment consists primarily of Western European
companies offering a variety of insurance products designed to meet the needs of
local customers. These companies include Zwolsche Algemeene ("Zwolsche"),
located in the Netherlands, Belgium and Luxembourg, ITT Ercos in Spain and,
until its sale by The Hartford in November 1998 as previously discussed, London
& Edinburgh headquartered in the United Kingdom. In January 1998, a 49% interest
in People's Insurance Company Limited ("People's Insurance") in Singapore was
acquired. The International segment generated $1.6 billion in revenues and $92
in net income in 1998. Assets totaled $2.5 billion at December 31, 1998.
Principal Products
- - ------------------
Zwolsche sells property and casualty, life and asset management products and
services. Personal lines products at Zwolsche include automobile,
hospitalization and homeowners. Commercial lines products, primarily property
coverage, are sold to small to medium-sized clients. Zwolsche life insurance
operations offer term life, mortgage, savings and pension products.
Additionally, Zwolsche has an asset management business offering investment
services through a range of mutual funds. ITT Ercos provides both personal and
commercial lines property and casualty, and life insurance products. London &
Edinburgh offered both personal and commercial lines property and casualty
insurance. Personal lines included automobile, homeowners and creditor
(including credit life) products. Commercial lines included property and
liability products sold to small to medium-sized clients. London & Edinburgh
also provided marine products within the London market. People's Insurance
writes property and casualty products, primarily automobile.
Methods of Distribution
- - -----------------------
The International segment conducts its business primarily through independent
brokers who are compensated on a commission basis. Zwolsche also distributes, as
did London & Edinburgh until its sale, its 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 with pricing set freely by the market.
OTHER OPERATIONS
The Hartford's Other Operations consist of the property and casualty insurance
operations of The Hartford which have ceased writing new business. These
operations primarily include First State Insurance Company, located in Boston,
Massachusetts, Fencourt and Heritage Reinsurance Companies, Ltd., both
headquartered in Bermuda, and Excess Insurance Company Limited, located in the
United Kingdom.
The primary objectives of Other Operations are the proper disposition of claims,
the resolution of disputes, and the collection of reinsurance proceeds primarily
related to policies written and reinsured prior to 1985. As such, Other
Operations have no new product sales, distribution systems, or competitive
issues.
Included in Other Operations is the effect of an approximate 19% minority
interest in HLI's operating results.
PROPERTY AND CASUALTY RESERVES
The Hartford establishes reserves to provide for the estimated costs of paying
claims made by policyholders or against policyholders. These reserves include
estimates for both claims that have been reported and those that have been
incurred but not yet reported to The Hartford and include estimates of all
expenses associated with processing and settling these claims. This estimation
process is primarily based on historical experience and involves a variety of
actuarial techniques which analyze trends and other relevant factors.
The Hartford continually reviews its estimated claims and claim adjustment
expense reserves as additional experience and other relevant data become
available, and reserve levels are adjusted accordingly. Such adjustments are
reflected in net income of the period in which they are made. Further discussion
on The Hartford's property and casualty reserves may be found in the Reserves
section of the MD&A.
The Hartford continues to receive claims asserting damages from environmental
pollution and related clean-up costs and injuries from asbestos and
asbestos-related products. Due to deviations from past experience and a variety
of social, economic and legal issues, the Company's ability to estimate the
future policy benefits, unpaid claims and claim adjustment expenses is
significantly impacted. A study, which reviewed and identified environmental and
asbestos exposures in the United States, was performed in 1996 and is fully
discussed in the Environmental and Asbestos Claims section of the MD&A.
Certain liabilities for unpaid claims, principally for permanently disabled
claimants, terminated reinsurance treaties and certain contracts that fund loss
run-offs for unrelated parties, have been discounted to present value. The
amount of the discount was approximately $423 and $449 as of December 31, 1998
and 1997, respectively, and amortization of the discount had no material effect
on net income during 1998, 1997 and 1996, respectively.
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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, [1]
1988 1989 1990 1991 1992 1993 1994 1995 1996 1997 1998
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Liabilities for unpaid claims and
claim adjustment expenses [2] $8,052 $8,506 $9,045 $9,346 $10,630 $10,843 $10,920 $11,229 $12,412 $12,453 $12,662
CUMULATIVE PAID CLAIMS AND CLAIM
EXPENSES
One year later 2,192 2,441 2,619 2,727 2,639 2,625 2,709 2,489 2,622 2,526 --
Two years later 3,543 3,983 4,383 4,400 4,333 4,266 4,247 4,088 4,163 -- --
Three years later 4,591 5,217 5,538 5,606 5,493 5,336 5,361 5,148 -- -- --
Four years later 5,491 6,009 6,377 6,457 6,294 6,184 6,120 -- -- -- --
Five years later 6,072 6,619 7,017 7,086 6,964 6,758 -- -- -- -- --
Six years later 6,553 7,111 7,515 7,637 7,425 -- -- -- -- -- --
Seven years later 6,956 7,516 7,973 8,024 -- -- -- -- -- -- --
Eight years later 7,309 7,905 8,318 -- -- -- -- -- -- -- --
Nine years later 7,649 8,220 -- -- -- -- -- -- -- -- --
Ten years later 7,941 -- -- -- -- -- -- -- -- -- --
LIABILITIES REESTIMATED
One year later 8,204 8,860 9,299 10,659 10,876 10,945 11,173 12,179 12,364 12,276 --
Two years later 8,390 8,987 10,622 10,980 11,092 11,148 12,289 12,162 12,245 -- --
Three years later 8,499 10,254 10,918 11,209 11,309 12,227 12,262 12,088 -- -- --
Four years later 9,777 10,533 11,198 11,534 12,425 12,280 12,250 -- -- -- --
Five years later 10,081 10,775 11,533 12,628 12,518 12,309 -- -- -- -- --
Six years later 10,318 11,147 12,617 12,747 12,576 -- -- -- -- -- --
Seven years later 10,713 12,206 12,713 12,863 -- -- -- -- -- -- --
Eight years later 11,753 12,302 12,835 -- -- -- -- -- -- -- --
Nine years later 11,836 12,439 -- -- -- -- -- -- -- -- --
Ten years later 11,987 -- -- -- -- -- -- -- -- -- --
DEFICIENCY (REDUNDANCY) $3,935 $3,933 $3,790 $3,517 $1,946 $1,466 $1,330 $859 $(167) $(177) $--
- - ------------------------------------------------------------------------------------------------------------------------------------
PROPERTY AND CASUALTY CLAIM AND CLAIM ADJUSTMENT EXPENSE LIABILITY DEVELOPMENT - GROSS
FOR THE YEARS ENDED DECEMBER 31, [1]
1993 1994 1995 1996 1997 1998
- - ------------------------------------------------------------------------------------------------------------------------------------
NET RESERVE [2] $10,843 $10,920 $11,229 $12,412 $12,453 $12,662
Reinsurance recoverables 5,339 5,107 4,858 4,328 4,005 3,286
- - ------------------------------------------------------------------------------------------------------------------------------------
GROSS RESERVE $16,182 $16,027 $16,087 $16,740 $16,458 $15,948
- - ------------------------------------------------------------------------------------------------------------------------------------
NET REESTIMATED RESERVE $12,309 $12,250 $12,088 $12,245 $12,276
Reestimated reinsurance 5,899 5,618 5,062 4,221 3,968
recoverables
- - ------------------------------------------------------------------------------------------------------------------------------------
GROSS REESTIMATED RESERVE $18,208 $17,868 $17,150 $16,466 $16,244
- - ------------------------------------------------------------------------------------------------------------------------------------
GROSS DEFICIENCY/(REDUNDANCY) $2,026 $1,841 $1,063 $(274) $(214)
- - ------------------------------------------------------------------------------------------------------------------------------------
[1] The above tables have been restated to exclude London & Edinburgh as a
result of its sale on November 16, 1998.
[2] The above tables exclude the liabilities and claim developments for
reinsurance coverage written for related parties that fund ultimate net
aggregate loss run-offs since changes to those reserves do not illustrate
the manner in which those reserve estimates changed.
1993 1994 1995 1996 1997 1998
- - ------------------------------------------------------------------------------------------------------------------------------------
Liabilities, net and gross of reinsurance for
unpaid claims and claim adjustment expenses $504 $495 $550 $500 $505 $501
excluded
- - ------------------------------------------------------------------------------------------------------------------------------------
Included in the tables above is the impact of the change in The Hartford's
method of discounting to present value certain workers' compensation reserves,
principally for permanently disabled claimants, which was effective January 1,
1994.
LIFE RESERVES
In accordance with applicable insurance regulations under which the Life segment
operates, life insurance subsidiaries of The Hartford establish and carry as
liabilities actuarially determined reserves which are calculated to meet The
Hartford's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods
- 6 -
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 also include unearned premiums, premium deposits, claims incurred but
not reported and claims reported but not yet paid. 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 accounting
practices.
CEDED REINSURANCE
Consistent with normal industry practice, The Hartford cedes insurance risk to
reinsurance companies. For property and casualty operations, these reinsurance
arrangements provide greater diversification of business and limit The
Hartford's maximum net loss arising from large risks or catastrophes.
A major portion of The Hartford's property and casualty reinsurance is effected
under general reinsurance contracts known as treaties, or, in some instances, is
negotiated on an individual risk basis, known as facultative reinsurance. The
Hartford also has in-force excess of loss contracts with reinsurers that protect
it against a specified part or all of certain losses over stipulated amounts.
The ceding of insurance obligations does not discharge the original insurer from
its primary liability to the policyholder. The original insurer would remain
liable in those situations where the reinsurer is unable to meet the obligations
assumed under reinsurance agreements. The Hartford has established strict
standards that govern the placement of reinsurance and monitors ceded
reinsurance security. Virtually all of The Hartford's property and casualty
reinsurance is placed with reinsurers that meet strict financial criteria
established by a credit committee.
Consistent with normal industry practice, HLI is involved in both the cession
and assumption of insurance with other insurance and reinsurance companies. As
of December 31, 1998, 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 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 is to
maximize after-tax returns consistent with acceptable risk parameters, including
the management of the interest rate sensitivity of invested assets relative to
that of policyholder obligations.
For a further discussion of The Hartford's approach to managing risks, including
derivative utilization, see the Capital Markets Risk Management section of the
MD&A, as well as Note 3 of Notes to Consolidated Financial Statements.
REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory
and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency that must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
- 7 -
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 that regulates insurance holding company
systems such as The Hartford. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
State insurance regulations require property and casualty insurers to
participate in assigned risk plans, reinsurance facilities and joint
underwriting associations, which are mechanisms to provide risks with various
basic or minimum insurance coverage when they are not available in voluntary
markets. Such mechanisms are most prevalent for automobile and workers'
compensation insurance, but a majority of states also mandate participation in
so-called FAIR Plans or Windstorm Plans providing basic property coverage.
Additionally, some states mandate such participation in facilities for providing
medical malpractice insurance. Participation is based upon the amount of a
company's written premiums in a particular state for the classes of insurance
involved.
The extent of insurance regulation on business outside the United States varies
significantly among the countries in which The Hartford operates. Some countries
have minimal regulatory requirements, while others regulate insurers
extensively. Foreign insurers in many countries are faced with greater
restrictions than domestic competitors domiciled in that particular
jurisdiction. The Hartford's international operations are comprised of insurers
licensed in their respective countries and, therefore, are subject to generally
less restrictive domestic insurance regulations. The Monetary Authority of
Singapore, the regulatory body in Singapore, does not currently allow foreign
companies to own a majority share of local companies.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-based Capital".
LEGISLATIVE INITIATIVES
Reference is made to the Regulatory 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, 1999.
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 1999
Proxy Statement. In addition to those executive officers who are listed in the
1999 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"):
JOSEPH H. GAREAU, 52, 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
- 8 -
Fire. Mr. Gareau was elected Vice President of Hartford Fire in 1987.
JOHN N. GIAMALIS, 41, has been Senior Vice President and Controller of The
Hartford since December 1998. He joined The Hartford in January 1997,
functioning as Vice President and Corporate Controller and Director of Corporate
Financial Reporting and Analysis. Prior to joining The Hartford, Mr. Giamalis
held senior financial positions in the insurance and technology industries and
served in public accounting as Senior Manager with Deloitte & Touche.
HELEN G. GOODMAN, 58, has been Senior Vice President, Human Resources of
Hartford Fire since 1994 and became Group 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, 55, has been Senior Vice President, Corporate Relations and
Government Affairs of Hartford Fire since 1993 and became Group 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.
MICHAEL S. WILDER, 57, has been Senior Vice President of Hartford Fire since
1987 and General Counsel of Hartford Fire since 1975. He became Group 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 218 thousand square feet of office space in the Netherlands,
12 thousand square feet in Spain, 7 thousand square feet in Singapore and 600
square feet of office space in the United Kingdom. In addition, The Hartford
leases approximately 5.0 million square feet throughout the United States and 24
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, after consideration
of provisions made for potential losses and costs of defense, will not
materially affect the consolidated financial condition, results of operations or
cash flows of The Hartford.
The Hartford is involved in claims litigation arising in the ordinary course of
business and accounts for such activity through the establishment of policy
reserves. As further discussed above and in the MD&A under the section
Environmental and Asbestos Claims, The Hartford continues to receive
environmental and asbestos claims which involve significant uncertainty
regarding policy coverage issues. Regarding these claims, The Hartford
continually reviews its overall reserve levels, reserving methodologies and
reinsurance coverages.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of The Hartford during the
fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR THE HARTFORD'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
The Hartford's common stock is traded on the New York Stock Exchange ("NYSE")
under the trading symbol "HIG".
On May 21, 1998, the Board of Directors authorized a two-for-one stock split
effected in the form of a 100% stock dividend distributed on July 15, 1998 to
shareholders of record as of June 24, 1998. The following table presents the
high and low closing prices for the common stock of The Hartford on the NYSE for
the periods indicated, and the quarterly dividends declared per share, restated
to reflect the effect of the stock split.
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- - -------------------------- --------- --------- --------- --------
1998
Common Stock Price
High $54.56 $57.50 $59.56 $57.75
Low 44.75 52.38 44.75 38.19
Dividends Declared 0.21 0.21 0.21 0.22
- - -------------------------- --------- --------- --------- --------
1997
Common Stock Price
High $40.38 $43.13 $44.00 $46.78
Low 32.81 34.31 39.88 39.72
Dividends Declared 0.20 0.20 0.20 0.20
- - -------------------------- --------- --------- --------- --------
As of February 26, 1999, there were approximately 55,000 shareholders of record.
On October 15, 1998, The Hartford's Board of Directors approved a 5% increase in
the quarterly dividend to $0.22 per share. Dividend decisions will be based on
and affected by a number of factors, including the operating results and
financial requirements of The Hartford and the impact of regulatory restrictions
discussed in the Capital Resources and Liquidity section of the MD&A under
"Liquidity Requirements".
There are also various legal limitations governing the extent to which The
Hartford's insurance subsidiaries may extend credit, pay dividends or otherwise
provide funds to The Hartford Financial Services Group, Inc. as discussed in the
Capital Resources and Liquidity section of the MD&A under "Liquidity
Requirements".
- 9 -
ITEM 6. SELECTED FINANCIAL DATA
(IN MILLIONS, EXCEPT FOR PER SHARE DATA AND COMBINED RATIOS)
1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA
Total revenues [1] $ 15,022 $ 13,461 $ 12,577 $ 12,247 $ 11,249
Income (loss) before cumulative effect of
accounting changes [2] 1,015 1,332 (99) 559 632
Net income (loss) [2] [3] 1,015 1,332 (99) 559 644
- - ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA
Total assets $ 150,632 $ 131,743 $ 108,840 $ 93,855 $ 76,765
Long-term debt and redeemable preferred stock 1,548 1,482 1,032 1,022 682
Company obligated mandatorily redeemable preferred
securities of subsidiary trusts holding solely junior
subordinated debentures 1,250 1,000 1,000 -- --
Total stockholders' equity 6,423 6,085 4,520 4,702 3,184
- - ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS (LOSS) PER SHARE DATA [4] [5]
BASIC EARNINGS PER SHARE
Income (loss) before cumulative effect of
accounting changes [2] $ 4.36 $ 5.64 $ (0.42) $ 2.39 $ 2.70
Net income (loss) [2] [3] 4.36 5.64 (0.42) 2.39 2.75
DILUTED EARNINGS PER SHARE
Income (loss) before cumulative effect of
accounting changes [2] 4.30 5.58 (0.42) 2.37 2.68
Net income (loss) [2] [3] 4.30 5.58 (0.42) 2.37 2.74
DIVIDENDS DECLARED PER COMMON SHARE [6] 0.85 0.80 0.80 3.33 0.97
- - ------------------------------------------------------------------------------------------------------------------------------------
OPERATING DATA
COMBINED RATIOS
North American Property & Casualty [7] 102.9 102.3 105.2 104.5 102.5
Worldwide Property & Casualty [7] [8] 103.7 103.6 105.0 103.6 100.9
- - ------------------------------------------------------------------------------------------------------------------------------------
[1] Certain reclassifications to prior periods have been made to conform to the
current period presentation. Also, 1998 includes $624 related to the
recapture of an in force block of COLI business from MBL Life Assurance Co.
of New Jersey.
[2] 1997 includes an equity gain of $368, or $1.56 basic/$1.54 diluted earnings
per share, resulting from the initial public offering of HLI. 1996 includes
other charges of $693, after-tax, or $2.96 basic/diluted earnings per
share, consisting primarily of environmental and asbestos reserve increases
and recognition of losses on guaranteed investment contract business (for
additional information, see MD&A).
[3] 1994 includes $12, after-tax, or $0.05 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.
[4] On May 21, 1998, the Board of Directors of The Hartford Financial Services
Group, Inc. declared a two-for-one stock split effected in the form of a
100% stock dividend distributed on July 15, 1998 to shareholders of record
as of June 24, 1998. Share and per share data have been restated to reflect
the effect of the split.
[5] Actual number of weighted average common shares outstanding at December 31,
1995 of 234.2 and actual number of weighted average common shares
outstanding and dilutive potential common shares at December 31, 1995 of
235.4 are retroactively presented for all prior periods.
[6] Prior to the Distribution on December 19, 1995, dividends that The Hartford
declared were paid to ITT, which then paid dividends to its shareholders.
[7] 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 North American Property & Casualty (for additional
information, see MD&A) and 114.6 for Worldwide Property & Casualty.
[8] 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:
1998 1997 1996 1995 1994
- - ------------------------------------------------------------------------------------------------------------------------------------
U.S. Industry Combined Ratios [a] 105.0 101.8 105.9 106.4 108.4
- - ------------------------------------------------------------------------------------------------------------------------------------
[a] U.S. Industry Combined Ratio information obtained from A.M. Best. Combined
ratio for 1998 is an A.M. Best estimate prepared as of January 1999.
- 10 -
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS, EXCEPT PER SHARE DATA, UNLESS OTHERWISE STATED)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of The Hartford Financial
Services Group, Inc. and its subsidiaries ("The Hartford" or the "Company") as
of December 31, 1998, compared with December 31, 1997, and its results of
operations for the three years ended December 31, 1998, 1997 and 1996. This
discussion should be read in conjunction with the Consolidated Financial
Statements and related Notes beginning on page F-1.
Certain of the statements contained herein (other than statements of historical
fact) are forward-looking statements. Such forward-looking statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
Company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect upon The
Hartford. There can be no assurance that future developments will be in
accordance with management's expectations or that the effect of future
developments on The Hartford will be those anticipated by management. Actual
results could differ materially from those expected by The Hartford, depending
on the outcome of certain factors, including those described with the
forward-looking statements herein.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Consolidated Results of Operations: Operating Summary 11
North American Property & Casualty 13
Commercial 14
Personal 15
Reinsurance 16
Life 17
International 20
Other Operations 22
Reserves 23
Environmental and Asbestos Claims 23
Investments 25
Capital Markets Risk Management 28
Capital Resources and Liquidity 39
Regulatory Initiatives and Contingencies 41
Effect of Inflation 43
Accounting Standards 43
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
OVERVIEW
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums and other considerations $ 11,616 $ 10,479 $ 10,180
Net investment income 3,102 2,655 2,523
Net realized capital gains (losses) 304 327 (126)
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 15,022 13,461 12,577
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 8,613 7,977 8,942
Amortization of deferred policy acquisition costs and other expenses 4,934 4,149 3,953
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 13,547 12,126 12,895
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME (LOSS) 1,475 1,335 (318)
Equity gain on HLI initial public offering -- 368 --
- - ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAXES AND MINORITY INTEREST 1,475 1,703 (318)
Income tax expense (benefit) 388 334 (219)
- - ------------------------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE MINORITY INTEREST 1,087 1,369 (99)
Minority interest in consolidated subsidiary (72) (37) --
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) 1,015 1,332 (99)
Less: Net realized capital gains, after-tax [1] 199 215 57
Other items, after-tax -- 368 (693)
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 816 $ 749 $ 537
- - ------------------------------------------------------------------------------------------------------------------------------------
[1] 1996 excludes GIC (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 (for additional information,
see Note 16 of Notes to Consolidated Financial Statements) and certain other
items. Core earnings is an internal performance measure used by the Company in
the management of its operations. Management believes that this performance
measure delineates the results of operations of the Company's ongoing businesses
in a manner that allows for a better understanding of the underlying 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.
- 11 -
Revenues for 1998 increased $1.6 billion, or 12%, from 1997. This improvement
was due primarily to higher aggregate fees earned on growth in account values in
the Investment Products and Individual Life operations resulting from strong
sales and equity market appreciation, the recapture of an in force block of
corporate owned life insurance ("COLI") business (referred to as "MBL
Recapture") previously ceded to MBL Life Assurance Co. of New Jersey ("MBL
Life"), an increase in earned premiums and service fee revenues in the Personal
segment and higher net investment income. Partially offsetting these increases
were lower net realized capital gains. In addition, revenues for 1998 also
increased as a result of proceeds from the sale of renewal rights and other
considerations related to the Industrial Risk Insurance pool ("IRI
transaction"). (For an analysis of net investment income and net realized
capital gains, see the Investments section.)
In 1998, core earnings increased $67, or 9%, from 1997 primarily due to an
increase in fees earned resulting from growth in account values in the
Investment Products and Individual Life operations due to strong sales and
equity market appreciation, an increase in net other considerations, primarily
as a result of the IRI transaction, and higher net investment income. Partially
offsetting these increases were a decrease in underwriting results, primarily
the result of higher catastrophe losses, as well as an increase in other
non-underwriting expenses.
Revenues for 1997 increased $884, or 7%, from 1996. The growth was primarily due
to increases in fee income earned on separate account assets, higher group life
and disability sales and premium growth in the Reinsurance segment and business
written under an exclusive licensing arrangement with The American Association
of Retired Persons ("AARP"). Partially offsetting this increase was a decrease
in 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 net realized capital gains also
contributed to the revenue increase.
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 Investment Products operation, the
reduction of incurred environmental and asbestos losses and a reduction of
losses on guaranteed investment contract ("GIC") business. Soft market
conditions related to automobile insurance in the United Kingdom and increased
debt service costs partially offset the increase.
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 2 of Notes to
Consolidated Financial Statements and Capital Resources and Liquidity section
under "The Offering".)
Net income for 1996 includes other charges related to environmental and asbestos
reserve increases, net of taxes, of $429 in North American Property & Casualty
and $81 in Other Operations (as discussed in the Environmental and Asbestos
Claims section), recognition of losses on GIC business of $169 (as discussed in
the Life section) and other, primarily foreign tax-related items, of $2 in each
of North American Property & Casualty and the Life segment and $10 in Other
Operations.
INCOME TAXES
The effective tax rates for 1998, 1997 and 1996 were 26%, 25% and 20%,
respectively, excluding the impact of other items, as discussed above, 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 pre-tax
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 1998, 1997 and 1996 were $407,
$(37) and $170, respectively. (For additional information, see Note 14 of Notes
to Consolidated Financial Statements.)
MINORITY INTEREST IN CONSOLIDATED SUBSIDIARY
Minority interest in consolidated subsidiary represents an approximate 19%
minority interest in HLI's operating results. (For additional information, see
Note 2 of Notes to Consolidated Financial Statements and Capital Resources and
Liquidity section under "The Offering".)
PER COMMON SHARE
On May 21, 1998, the Board of Directors authorized a two-for-one stock split
effected in the form of a 100% stock dividend distributed on July 15, 1998 to
shareholders of record as of June 24, 1998. The following table represents per
common share data, restated to reflect the effect of the stock split, and return
on equity for the past three years:
1998 1997 1996
- - -----------------------------------------------------------------
Basic earnings per share $4.36 $5.64 ($0.42)
Weighted average common shares
outstanding 232.8 236.0 234.5
Diluted earnings per share $4.30 $5.58 ($0.42)
Weighted average common shares
outstanding and dilutive potential
common shares 236.2 238.9 234.5
Return on equity [1] 18.7% 28.3% (2.3)%
- - -----------------------------------------------------------------
[1] 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.
- 12 -
SEGMENT RESULTS
The Hartford's reporting segments consist of Commercial, Personal, Reinsurance,
Life, International and Other Operations. While the measure of profit or loss
used by The Hartford's management in evaluating performance is core earnings for
the Life, International and Other Operations segments, the Commercial, Personal
and Reinsurance segments are evaluated by The Hartford's management primarily
based upon underwriting results. While not considered a segment, the Company
also reports and evaluates core earnings results for North American Property &
Casualty, which include the combined underwriting results of the Commercial,
Personal and Reinsurance segments, along with income and expense items not
directly allocable to these segments such as net investment income and net
realized capital gains and losses. Other Operations include operations which
have ceased writing new business. Also, included in Other Operations is the
effect of an approximate 19% minority interest in HLI's operating results.
Certain transactions between segments occur during the year that primarily
relate to tax settlements, insurance coverage, expense reimbursements, services
provided and capital contributions. Certain reinsurance stop loss agreements
exist between the segments which specify that one segment will reimburse another
for losses incurred in excess of a predetermined limit. Also, one segment may
purchase group annuity contracts from another to fund pension costs and claim
annuities to settle casualty claims.
The following is a summary of underwriting results by segment within North
American Property & Casualty.
1998 1997 1996
- - -----------------------------------------------------------------
Commercial $ (213) $ (149) $ (206)
Personal 77 37 (110)
Reinsurance (36) (14) (10)
- - -----------------------------------------------------------------
TOTAL [1] $ (172) $ (126) $ (326)
- - -----------------------------------------------------------------
[1] 1996 excludes the impact of a $660, before-tax, environmental and asbestos
charge.
The following is a summary of core earnings and net income (loss).
CORE EARNINGS 1998 1997 1996
- - -----------------------------------------------------------------
N. A. Property & Casualty $ 457 $ 433 $ 270
Life 386 306 200
International 42 46 79
Other Operations (69) (36) (12)
- - -----------------------------------------------------------------
CORE EARNINGS $ 816 $ 749 $ 537
- - -----------------------------------------------------------------
NET INCOME (LOSS) 1998 1997 1996
- - -----------------------------------------------------------------
N. A. Property & Casualty $ 604 $ 583 $ (151)
Life 386 306 24
International 92 110 127
Other Operations [1] (67) 333 (99)
- - -----------------------------------------------------------------
NET INCOME (LOSS) $ 1,015 $ 1,332 $ (99)
- - -----------------------------------------------------------------
[1] 1997 includes a $368 equity gain resulting from the initial public offering
of HLI.
A description of North American Property & Casualty, along with each reporting
segment, as well as an analysis of the operating results summarized above, is
included on the following pages. Reserves, Environmental and Asbestos Claims,
and Investments are discussed in separate sections.
NORTH AMERICAN PROPERTY & CASUALTY
OPERATING SUMMARY
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Underwriting revenue
Earned premiums $ 6,006 $ 5,704 $ 5,657
Other considerations [1] 363 156 104
Net investment income 824 777 661
Net realized capital gains 231 231 15
- - ------------------------------------------------------------------------------------------------------------------------------------
Total revenues 7,424 6,868 6,437
--------------------------------------------------------------------------------------------------------------------------
Underwriting expenses
Benefits, claims and claim adjustment expenses 4,287 4,069 4,994
Amortization of deferred policy acquisition costs and other
underwriting expenses 1,891 1,761 1,649
Other non-underwriting expenses 486 311 193
- - ------------------------------------------------------------------------------------------------------------------------------------
Total benefits, claims and expenses 6,664 6,141 6,836
--------------------------------------------------------------------------------------------------------------------------
Operating income (loss) 760 727 (399)
Income tax expense (benefit) 156 144 (248)
- - ------------------------------------------------------------------------------------------------------------------------------------
Net income (loss) 604 583 (151)
Less: Net realized capital gains, after-tax 147 150 10
Other items, after-tax [2] -- -- (431)
- - ------------------------------------------------------------------------------------------------------------------------------------
Core earnings $ 457 $ 433 $ 270
- - ------------------------------------------------------------------------------------------------------------------------------------
[1] Other considerations represent servicing fee revenues and for 1998, $55 of
proceeds related to the IRI transaction.
[2] Other items include environmental and asbestos reserve increases, net of
taxes, of $429 and other, primarily foreign tax-related items, of $2.
As discussed above, The Hartford's management reviews and evaluates the
performance of the three segments within North American Property & Casualty,
Commercial, Personal and Reinsurance, primarily on an underwriting results
basis. The
- 13 -
combined underwriting results, along with items not directly allocable to the
individual segments, are used in determining net income and core earnings of
North American Property & Casualty. Items not directly allocable to the
individual segments include net investment income, net realized capital gains
and losses, other non-underwriting expenses, income taxes and certain other
items.
The following is a summary of North American Property & Casualty core earnings
by major component after-tax. Core earnings exclude net realized capital gains
and other items.
1998 1997 1996
- - ----------------------------------------------------------------
Underwriting results [1] $ (112) $ (82) $ (212)
Net other considerations 52 3 15
Net investment income 656 619 531
Interest and other non-
underwriting expenses [2] (139) (107) (64)
- - ----------------------------------------------------------------
CORE EARNINGS $ 457 $ 433 $ 270
- - ----------------------------------------------------------------
[1] 1996 excludes the impact of a $429, after-tax, environmental and asbestos
charge.
[2] Excludes expenses related to other considerations.
Underwriting results are discussed in each of the Commercial, Personal and
Reinsurance segment sections. Net investment income is discussed in the
Investments section.
Core earnings in 1998 for North American Property & Casualty were $457, an
increase of $24, or 6%, from 1997. The increase was primarily due to a $37, or
6%, increase in net investment income and a $49 increase in net other
considerations (primarily as a result of the IRI transaction), partially offset
by a $30, or 37%, decrease in after-tax underwriting results and a $32, or 30%,
increase in interest and other non-underwriting expenses.
Core earnings in 1997 for North American Property & Casualty 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 net investment income, partially offset by a $12, or 80%, decrease
in net other considerations and a $43, or 67%, increase in interest and other
non-underwriting expenses.
Interest and other non-underwriting expenses increased $32 in 1998 from 1997 and
$43 in 1997 from 1996, on an after-tax basis. The increase in 1998 was primarily
the result of an increase in certain corporate benefit and outside services
expenses, while the 1997 increase was primarily the result of increased debt
costs from additional borrowings and a reallocation of debt costs to North
American Property & Casualty.
COMMERCIAL
OPERATING SUMMARY
1998 1997 1996
- - ----------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 3,188 $ 3,190 $ 3,253
- - ----------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 3,222 $ 3,190 $ 3,293
Benefits, claims and claim adjustment expenses 2,250 2,225 2,380
Amortization of deferred policy acquisition costs and other
underwriting expenses 1,185 1,114 1,119
- - -------------------------------------------------------------------------------- -------------------------------------------------
UNDERWRITING RESULTS $ (213) $ (149) $ (206)
------------------------------------------------------------------------------------------------------------------------
Combined ratio 106.2 104.5 105.8
- - ----------------------------------------------------------------------------------------------------------------------------------
Other considerations [1] $ 163 $ 97 $ 104
- - ----------------------------------------------------------------------------------------------------------------------------------
[1] Other considerations represent fee revenues earned on servicing businesses
and for 1998, included $55 of proceeds related to the IRI transaction.
Commercial provides workers' compensation, property, automobile, liability,
marine, agricultural and bond coverages to commercial accounts throughout the
United States and Canada. Excess and surplus lines business not normally written
by standard lines insurers is also provided. Commercial is organized into three
customer markets: Business Insurance, Commercial Affinity and Commercial
Specialty. Business Insurance provides standard commercial business for small
accounts ("Select Customer") and mid-sized insureds. 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 slightly in 1998 compared to 1997. Solid premium
growth in the small commercial businesses, Select Customer and Commercial
Affinity, as well as in the bond and agricultural lines, totaled 11% in 1998
compared to 1997. These growth businesses represented 42% of the Commercial
segment's written premiums and contributed 4% to the segment's total written
premium growth. Enhanced product offerings, specific geographic expansion
strategies and partnerships with other entities were the primary drivers of
these growth businesses. These increases, however, were offset by declines in
the middle and large national account businesses primarily due to intense price
competition in the casualty lines, where disciplined underwriting allowed
business to move to other carriers rather than under pricing in order to
- 14 -
retain accounts. In addition, the disposal of IRI in early 1998 and another unit
in late 1997, with combined written premiums of $53 in 1997, contributed to the
lack of growth in the Commercial segment. Excluding the impact of the disposed
businesses, 1998 total Commercial written premiums would have increased 2% over
1997.
Underwriting results decreased $64, or 1.7 combined ratio points, in 1998 as
compared with 1997. Increases in property catastrophe losses of $70, or 2.1
combined ratio points, were the primary factor in the decline, as catastrophe
experience was worse in 1998 as compared to the highly favorable experience in
the prior year. In addition, intense price competition in the mid and
large-sized marketplace has resulted in reduced profit margins, as decreases in
rate and price, particularly in the workers' compensation line, have outpaced
loss cost savings. The Commercial segment, however, does continue to experience
the benefit of its extensive cost containment strategies which mitigate the rate
and price pressure on underwriting results.
Written premiums decreased $63, or 2%, in 1997 compared with 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 the segment's total
written 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 1997, underwriting results improved $57, or 1.3 combined ratio points,
compared with the prior year. 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. Also, favorable loss and loss expense development
trends, particularly in workers' compensation and other casualty lines, were
generated through the execution of the segment's total cost containment strategy
which included 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 premiums from large national accounts.
OUTLOOK
Difficult market conditions and intense price competition within many markets of
the commercial sector are likely to continue into the foreseeable future. The
combined effects of excess capital, decreasing demand and new forms of
competition have particularly impacted the mid-to-large commercial accounts
markets over the past few years. In response to these conditions, the Commercial
segment has undertaken several major strategic actions, with many completed in
1998. Pricing actions in the mid-to-large account marketplace were initiated
during 1998 and are expected to have a positive impact on profitability in 1999.
Strategic alliances have been formed with several major national and regional
banks, insurance and other companies to market commercial products to their
customers. Investments in such areas as advertising, product research and
development, technology and staff training have continued, in an effort to
heighten brand awareness, increase product offerings, further develop
alternative distribution channels and improve productivity. Management believes
the result of these and other actions taken may counterbalance the negative
external factors in the commercial market and position the Commercial segment
for improved written premium growth in 1999 and beyond, while maintaining core
profitability.
PERSONAL
OPERATING SUMMARY
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 2,220 $ 1,893 $ 1,864
- - ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 2,068 $ 1,869 $ 1,835
Benefits, claims and claim adjustment expenses 1,477 1,371 1,555
Amortization of deferred policy acquisition costs and other
underwriting expenses 514 461 390
- - ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ 77 $ 37 $ (110)
--------------------------------------------------------------------------------------------------------------------------
Combined ratio 97.1 98.6 105.2
- - ------------------------------------------------------------------------------------------------------------------------------------
Other considerations [1] $ 200 $ 59 $ --
- - ------------------------------------------------------------------------------------------------------------------------------------
[1] Other considerations represent service fee revenues earned on AARP's Health
Care Options (discussed below).
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 five markets: the membership of AARP through
a direct marketing operation; customers who prefer local agent involvement
through a network of independent agents in the standard personal lines market
and in the non-standard automobile market through Omni Insurance Group, Inc.
("Omni"), which was acquired in 1998; customers of financial institutions
through an affinity center which began in 1996 and is building from the AARP
operation competencies; and customer service for all health insurance products
offered through AARP's Health Care Options effective January 1, 1998. AARP's
exclusive licensing arrangement continues through the year 2002 for automobile,
homeowners and home-based business and through 2007 for
- 15 -
Health Care Options, thus providing the Personal segment with an important
competitive advantage.
Written premiums increased $327, or 17%, in 1998 compared with 1997. The
acquisition of Omni accounted for $167, or 9%, of the written premiums increase.
As of December 31, 1998, non-standard auto coverage through Omni was available
in 19 states compared with 13 states at the time of acquisition. Favorable
underwriting experience was passed through to AARP members in reduced rates, and
the program posted a written premiums increase of $65, or 5%, contributing 3% to
the segment's total written premium growth in 1998. Agency experienced
substantial premium growth improvement in 1998 with an increase of $67, or 11%,
contributing 4% to the segment's total written premium growth. A primary driver
of this premium growth was the strategic shift from homeowners to automobile
coverages which began in 1997. The Affinity unit, which is still in a start-up
phase, experienced growth of $28, or 105%, in 1998, contributing 1% to the
segment's total written premium growth.
Underwriting results improved by $40, with a corresponding 1.5 point improvement
in the combined ratio, in 1998 compared with 1997. The combined ratio decrease
resulted from loss cost improvements in automobile and homeowners from expanded
cost containment initiatives, effecting the combined ratio by 3.8 points.
Offsetting this improvement were significantly higher property catastrophes in
1998 of $71 compared to $32 in 1997, impacting the combined ratio by 1.8 points,
and increased underwriting expenses impacting the combined ratio by 0.5 points.
Property catastrophe and other severe weather-related experience was unusually
low in 1997. The increase in underwriting expenses was primarily from
investments in growth initiatives, acquisition costs related to premium growth
and from investment in the Affinity unit start-up organization, partially offset
by lower dividends to policyholders.
Written premiums increased $29, or 2%, in 1997 compared to 1996 due primarily to
strong growth in AARP premiums of $78, or 7%, contributing 4% to the segment's
total written premium growth, which benefited from the favorable expansion of
this demographic group. Partially offsetting the increase in AARP was a decline
in Agency premiums of $49, or 7%, contributing a reduction of 3% to the
segment's total written premiums. The Agency 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. AARP written premiums of $1.3 billion
represented 67% of the 1997 Personal premiums, up from 64% in 1996.
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.
OUTLOOK
Intense competition in the personal markets will remain in the foreseeable
future, primarily in the personal automobile line. Several major strategic
actions have been initiated over the past two years, with many completed in
1998. Aggressive entry into and subsequent expansion in the non-standard
personal automobile insurance market through the acquisition of Omni, in early
1998, provides the Personal segment with a highly-regarded and well-established
franchise as a leverage for future growth. (For additional information, see the
Capital Resources and Liquidity section under "Omni".) Strategic alliances have
been formed with several major national and regional banks to market personal
products to their customers. The Hartford Customer Services Group contracted
with AARP to service its group health insurance plan partners and recipients
beginning January 1, 1998. Investments in such areas as advertising, product
research and development, agency relations, technology and staff training have
continued, in an effort to heighten brand awareness, increase product offerings,
further develop alternative distribution channels and improve productivity. As a
result of these and other actions taken, management believes the Personal
segment is positioned for continued written premium growth increases in 1999 and
beyond, while maintaining core profitability.
REINSURANCE
Operating Summary
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Written premiums $ 711 $ 688 $ 571
- - ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums $ 716 $ 645 $ 529
Benefits, claims and claim adjustment expenses 560 473 399
Amortization of deferred policy acquisition costs and other
underwriting expenses 192 186 140
- - ------------------------------------------------------------------------------------------------------------------------------------
UNDERWRITING RESULTS $ (36) $ (14) $ (10)
--------------------------------------------------------------------------------------------------------------------------
Combined ratio 105.7 102.6 102.1
- - ------------------------------------------------------------------------------------------------------------------------------------
- 16 -
The Hartford assumes reinsurance worldwide through its ten Hartford Reinsurance
Company ("HartRe") offices located in Hartford, San Francisco, Miami,
Philadelphia, Toronto, London, Madrid, Munich, Hong Kong and Taipei. HartRe
primarily writes treaty reinsurance through professional reinsurance brokers
covering various property, casualty, specialty and marine classes of business.
Written premiums increased $23, or 3%, in 1998 primarily due to the acquisition
of renewal rights for the reinsurance business of a large Italian insurance
company and a significant single finite risk account. Partially offsetting these
increases were reductions in North American and European premiums caused by rate
reductions arising from market conditions and the impact of unfavorable foreign
exchange rates on Hong Kong premiums. Written premiums increased $117, or 20%,
in 1997 primarily due to the acquisition in late 1996 of renewal rights for the
business of Security Re and San Francisco Re.
Underwriting results for 1998 decreased $22, or 3.1 combined ratio points, from
1997 due primarily to the impact of higher net property catastrophe losses of
$47, which were somewhat offset by increased new business premiums in finite
casualty which has a lower combined ratio than traditional casualty lines.
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.
OUTLOOK
The reinsurance market is highly competitive and prices remain relatively soft
in most product lines in most parts of the world. While HartRe remains focused
on its long-term goals, the discipline of writing profitable business will be
maintained, even at the expense of premium growth. On a positive note,
responsible buyers are looking to establish core relationships with a select
group of financially strong reinsurers which possess specialized product and
geographic spread, service capabilities, and expertise. HartRe stands ready to
capitalize on these strengths in view of the changing marketplace.
LIFE
OPERATING SUMMARY [1]
1998 1997 1996
- - ------------------------------------------------------------------------------------------------------------------------------------
Earned premiums and other considerations $ 3,833 $ 3,163 $ 3,069
Net investment income 1,955 1,536 1,530
Net realized capital losses -- -- (219)
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 5,788 4,699 4,380
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 3,227 2,671 2,727
Amortization of deferred policy acquisition costs and other expenses 1,976 1,548 1,622
- - ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 5,203 4,219 4,349
--------------------------------------------------------------------------------------------------------------------------
OPERATING INCOME 585 480 31
Income tax expense 199 174 7
- - ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME 386 306 24
Less: Net realized capital losses, after-tax [2] -- -- (5)
Other items, after-tax [3] -- -- (171)
- - ------------------------------------------------------------------------------------------------------------------------------------
CORE EARNINGS $ 386 $ 306 $ 200
- - ------------------------------------------------------------------------------------------------------------------------------------
[1] Life results are presented before the effect of an approximate 19% minority
interest in HLI, which is reflected in Other Operations.
[2] 1996 excludes GIC (discussed below) net realized capital losses of $137,
after-tax, which is included in other items.
[3] Other items primarily consist of a $169, after-tax, third quarter 1996 loss
in GIC.
The Life segment consists of the following reportable operations: Investment
Products, Individual Life, Employee Benefits and COLI. The Life segment includes
in an Other category its international operations, which are primarily located
in Latin America, and corporate items not directly allocable to any of its
reportable operations.
On May 22, 1997, HLI, the holding company parent of The Hartford's significant
life subsidiaries, completed the initial public offering of approximately 19% of
its common stock. (For additional information, see Capital Resources and
Liquidity section under "The Offering".)
Revenues increased $1.1 billion, or 23%, to $5.8 billion in 1998 from $4.7
billion in 1997. The increase was due to the continued growth of revenues in the
Investment Products operation of $274 and the Individual Life operation of $57
as a result of higher aggregate fees earned on growth in account values due to
strong sales and equity market appreciation. Additionally, revenues in the COLI
operation increased $587 primarily due to the fourth quarter of 1998 recapture
of an in force block of COLI business previously ceded to MBL Life. Higher
revenues in the Employee Benefits operation of $109, primarily due to strong
sales and renewals, also contributed to the revenue increase.
Core earnings increased $80, or 26%, to $386 in 1998 from $306 in 1997,
primarily as a result of an increase in earnings in the Investment Products
operation of $64 and in the Individual Life operation of $9, both of which were
driven by fees earned on increased separate account assets due to strong sales
and equity market appreciation. Additionally, earnings in the
- 17 -
Employee Benefits operation increased $13 principally due to an increase in
group insurance revenue and favorable mortality and morbidity experience.
Revenues increased $319, or 7%, to $4.7 billion in 1997 from $4.4 billion in
1996. The growth was primarily due to the Investment Products operation where
revenues increased $503 in 1997 from 1996 as a result of fee income earned on
growth in separate account assets due to strong annuity sales and equity market
appreciation. Investment Products revenues were also impacted by the segment's
GIC business, where revenues increased $205, primarily as a result of net
realized capital losses in the third quarter of 1996. Additionally, strong sales
and renewals related to the Employee Benefits operation contributed $237 to the
revenue growth. Partially offsetting these increases was a decrease in COLI
revenues of $380 due to the HIPA Act of 1996, which virtually eliminated all new
sales of leveraged COLI.
Core earnings increased $106, or 53%, to $306 in 1997 from $200 in 1996,
primarily as a result of an increase in earnings in the Investment Products
operation of $107. This growth was the result of increased earnings of $51 from
individual annuity products which was driven by fees earned on an increase in
total account value due to strong sales and equity market appreciation, as well
as a reduction in losses of $50 in the GIC business as a result of actions taken
in the third quarter of 1996. Earnings in the Employee Benefits operation
increased $13 principally due to growth in group insurance revenue and favorable
mortality and morbidity experience. In addition, earnings in the Individual Life
operation increased $12 due to fees earned on total account value which grew due
to strong sales and equity market appreciation. Partially offsetting these
increases was a decrease in core earnings of $27 in Other due primarily to an
increase in capital allocated to the operations, 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".) In addition, the 1997 results were impacted by a $6
operating loss related to the Life segment's international operations.
SUMMARY RESULTS
1998 1997 1996
--------------------------------- ---------------------------------- ----------------------------------
Net Net Net
Core Income Core Income Core Income
Revenues Earnings [1] (Loss) Revenues Earnings [1] (Loss) Revenues Earnings [1] (Loss)
- - ------------------------------------------------------------------------------------------------------------------------------------
Investment Products $ 1,784 $ 266 $ 266 $ 1,510 $ 202 $ 202 $ 1,007 $ 95 $ (79)
Individual Life 567 65 65 510 56 56 472 44 44
Employee Benefits 1,809 71 71 1,700 58 58 1,463 45 45
Corporate Owned Life
Insurance 1,567 24 24 980 27 27 1,360 26 26
Other 61 (40) (40) (1) (37) (37) 78 (10) (12)
- - ------------------------------------------------------------------------------------------------------------------------------------
Total $ 5,788 $ 386 $ 386 $ 4,699 $ 306 $ 306 $ 4,380 $ 200 $ 24
- - ------------------------------------------------------------------------------------------------------------------------------------
[1] Core earnings represent after-tax operational results excluding, as
applicable, net realized capital gains or losses and certain other items,
primarily GIC charges in 1996.
The following describes each operation, including products and services offered,
and analyzes the above results.
Investment Products
- - -------------------
The Investment Products operation focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired through the sale of individual annuities and other investment
products. The individual annuity products offered include individual variable
annuities, fixed market value adjusted (MVA) annuities and fixed and variable
immediate annuities. The other investment products offered include retail mutual
funds, deferred compensation and retirement plan services, structured settlement
contracts, other special purpose annuity contracts and investment management
services. The Company was ranked the number one writer of individual variable
annuities in the United States for 1998 according to Variable Annuity and
Research Data Service (VARDS) with a 10% market share. In addition, mutual fund
assets of approximately $2.5 billion at December 31, 1998 were more than double
prior year levels.
Revenues in 1998 increased $274, or 18%, to $1.8 billion from $1.5 billion in
1997. This growth was driven by individual annuity revenues which increased $268
over the prior year due to fee income earned on growth in separate account
assets. Average individual variable annuity account values increased $14.9
billion, or 38%, to $54.6 billion in 1998 from $39.7 billion in 1997, primarily
due to continued strong sales of individual variable annuities as well as equity
market appreciation. Individual variable annuity sales reached $9.9 billion and
$9.7 billion in 1998 and 1997, respectively. Associated with the strong sales
and continued growth in Investment Products, amortization of deferred costs
increased $76 and other expenses increased $107 over prior year levels.
Substantial growth in total average account values in 1998, coupled with
continued operating efficiencies, increased the operation's core earnings $64,
or 32%, to $266 in 1998 from $202 in 1997.
Revenues increased $503, or 50%, to $1.5 billion in 1997 from $1.0 billion in
1996. This increase was primarily due to improved individual annuity revenues
which increased $253, reflecting a substantial increase in aggregate fees earned
as a
- 18 -
result of the operation's growing block of separate account assets. Average
individual variable annuity account values increased $13.1 billion to $39.7
billion in 1997 from $26.6 billion in 1996, primarily due to strong sales of
individual variable annuities, as well as equity market appreciation. In
addition, $205 of the revenue increase was related to GIC business, which was
primarily impacted by $219 of net realized capital losses in the third quarter
of 1996. Associated with the strong sales and continued growth in this
operation, benefits, claims and expenses grew $67 over the prior year. A 27%
growt