1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended March 31, 2000
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 1-12749
HARTFORD LIFE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1470915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 525-8555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days.
Yes [X] No [ ]
As of April 28, 2000, there were outstanding 26,037,391 shares of Class A Common
Stock, $0.01 par value per share, and 114,000,000 shares of Class B Common
Stock, $0.01 par value per share, of the registrant.
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2
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Consolidated Statements of Income - Three Months
Ended March 31, 2000 and 1999 3
Consolidated Balance Sheets - March 31, 2000 and December 31, 1999 4
Consolidated Statements of Changes in Stockholders' Equity -
Three Months Ended March 31, 2000 and 1999 5
Consolidated Statements of Cash Flows - Three Months Ended
March 31, 2000 and 1999 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 17
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
Signature 18
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS
ENDED
MARCH 31,
--------------------------
(In millions, except for per share data) 2000 1999
(Unaudited)
- ---------------------------------------------------------------------------------------------
REVENUES
Premiums and other considerations $ 1,064 $ 934
Net investment income 382 401
- ---------------------------------------------------------------------------------------------
TOTAL REVENUES 1,446 1,335
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BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 729 755
Amortization of deferred policy acquisition costs 172 124
Dividends to policyholders 41 17
Interest expense 17 17
Other expenses 267 265
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TOTAL BENEFITS, CLAIMS AND EXPENSES 1,226 1,178
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INCOME BEFORE INCOME TAX EXPENSE 220 157
Income tax expense 70 51
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NET INCOME $ 150 $ 106
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Basic earnings per share $ 1.07 $ 0.76
Diluted earnings per share $ 1.07 $ 0.76
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Weighted average common shares outstanding 139.9 139.9
Weighted average common shares outstanding and
dilutive potential common shares 140.1 140.3
- ---------------------------------------------------------------------------------------------
Cash dividends declared per share $ 0.10 $ 0.09
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
4
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(In millions, except for share data) 2000 1999
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(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$17,652 and $17,602) $ 17,129 $ 17,035
Equity securities, at fair value 83 153
Policy loans, at outstanding balance 3,549 4,222
Other investments 475 376
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Total investments 21,236 21,786
Cash 90 89
Premiums receivable and agents' balances 175 214
Reinsurance recoverables 473 449
Deferred policy acquisition costs 4,287 4,210
Deferred income tax 431 522
Other assets 1,015 1,111
Separate account assets 116,543 110,652
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TOTAL ASSETS $ 144,250 $ 139,033
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LIABILITIES
Future policy benefits $ 6,382 $ 6,236
Other policyholder funds 15,667 16,873
Long-term debt 650 650
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures 250 250
Other liabilities 2,293 2,066
Separate account liabilities 116,543 110,652
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TOTAL LIABILITIES 141,785 136,727
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STOCKHOLDERS' EQUITY
Class A common stock - 600,000,000 shares authorized;
26,125,994 and 26,122,383 shares issued, par value $0.01 -- --
Class B common stock - 600,000,000 shares authorized;
114,000,000 shares issued and outstanding, par value $0.01 1 1
Capital surplus 1,281 1,282
Treasury stock, at cost - 101,585 and 208,536 shares (5) (10)
Accumulated other comprehensive loss
Net unrealized capital losses on securities, net of tax (319) (336)
Cumulative translation adjustments (10) (12)
----------------------------------
Total accumulated other comprehensive loss (329) (348)
----------------------------------
Retained earnings 1,517 1,381
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TOTAL STOCKHOLDERS' EQUITY 2,465 2,306
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TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 144,250 $ 139,033
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SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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5
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 2000
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
-----------------------
NET
UNREALIZED
CAPITAL
GAINS
(LOSSES)
CLASS A CLASS B TREASURY ON CUMULATIVE TOTAL
COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION RETAINED STOCKHOLDERS'
(In millions) (Unaudited) STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $ - $ 1 $ 1,282 $ (10) $ (336) $ (12) $ 1,381 $ 2,306
Comprehensive income (loss)
Net income 150 150
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Other comprehensive income (loss), net
of tax (1)
Net unrealized capital gains on
securities (2) 17 17
Cumulative translation adjustments 2 2
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Total other comprehensive income (loss) 19
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Total comprehensive income (loss) 169
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Dividends declared (14) (14)
Issuance of shares under incentive and
stock purchase plans (1) 7 6
Treasury stock acquired (2) (2)
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BALANCE, MARCH 31, 2000 $ - $ 1 $ 1,281 $ (5) $ (319) $ (10) $ 1,517 $ 2,465
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THREE MONTHS ENDED MARCH 31, 1999
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
-----------------------
NET
UNREALIZED
CAPITAL
GAINS
(LOSSES)
CLASS A CLASS B TREASURY ON CUMULATIVE TOTAL
(In millions) (Unaudited) COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION RETAINED STOCKHOLDERS'
STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1998 $ - $ 1 $ 1,281 $ (9) $ 263 $ (7) $ 964 $ 2,493
Comprehensive income (loss)
Net income 106 106
--------
Other comprehensive income (loss), net
of tax (1)
Net unrealized capital losses on
securities (2) (131) (131)
Cumulative translation adjustment (8) (8)
--------
Total other comprehensive income (loss) (139)
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Total comprehensive income (loss) (33)
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Dividends declared (12) (12)
Issuance of shares under incentive and
stock purchase plans 2 4 6
Treasury stock acquired (2) (2)
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BALANCE, MARCH 31, 1999 $ - $ 1 $ 1,283 $ (7) $ 132 $ (15) $ 1,058 $ 2,452
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(1) Net unrealized capital gains (losses) on securities are reflected net of
tax provision (benefit) of $9 and ($71) for the three months ended March
31, 2000 and 1999, respectively. There is no tax effect on cumulative
translation adjustments.
(2) There were no reclassification adjustments for after-tax gains (losses)
realized in net income for the three months ended March 31, 2000 and 1999.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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6
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
--------------------------
(In millions) (Unaudited) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 150 $ 106
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 9 3
Decrease (increase) in premiums receivable and agents' balances 39 (64)
Decrease in other liabilities (92) (140)
Change in receivables, payables and accruals 19 80
Increase (decrease) in accrued tax 58 (55)
Decrease in deferred income tax 81 25
Increase in deferred policy acquisition costs (77) (96)
Increase in future policy benefits 146 124
Decrease in reinsurance recoverables 7 1
Other, net 51 (21)
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NET CASH PROVIDED BY (USED FOR) OPERATING ACTIVITIES 391 (37)
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INVESTING ACTIVITIES
Purchases of investments (1,909) (1,803)
Sales of investments 2,397 3,618
Maturities and principal paydowns of fixed maturity investments 363 559
Purchase of affiliates and other (16) (7)
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NET CASH PROVIDED BY INVESTING ACTIVITIES 835 2,367
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FINANCING ACTIVITIES
Dividends paid (13) (12)
Net disbursements for investment and universal life-type contracts charged against
policyholder accounts (1,216) (2,300)
Net issuance of common stock 4 3
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NET CASH USED FOR FINANCING ACTIVITIES (1,225) (2,309)
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Net increase in cash 1 21
Cash - beginning of period 89 36
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CASH - END OF PERIOD $ 90 $ 57
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SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID (RECEIVED) DURING THE PERIOD FOR
Income taxes $ (79) $ 25
Interest $ 5 $ 5
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hartford Life,
Inc. and subsidiaries ("Hartford Life" or the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures which are normally included in
financial statements prepared on the basis of accounting principles generally
accepted in the United States have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information presented not misleading. In the opinion of
management, these statements include all adjustments which were normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. For a description of
significant accounting policies, see Note 2 of Notes to Consolidated Financial
Statements in Hartford Life's 1999 Form 10-K Annual Report.
Certain reclassifications have been made to prior year financial information to
conform to the current year classification of transactions and accounts.
(b) ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 2000, Hartford Life adopted Statement of Position (SOP) No.
98-7, "Accounting for Insurance and Reinsurance Contracts That Do Not Transfer
Insurance Risk". This SOP provides guidance on the method of accounting for
insurance and reinsurance contracts that do not transfer insurance risk, defined
in the SOP as the deposit method. Adoption of this SOP did not have a material
impact on the Company's financial condition or results of operations.
2. COMMON STOCK SUBJECT TO PROPOSED ACQUISITION
On March 27, 2000, Hartford Life's Board of Directors received an offer from The
Hartford Financial Services Group, Inc. (The Hartford) for the acquisition of
all of the common shares of Hartford Life not already owned by The Hartford at a
price of $44 per share in cash. As of March 31, 2000, The Hartford owned
approximately 81.5 percent of the outstanding shares of common stock of Hartford
Life. A special committee consisting of Hartford Life directors not affiliated
with The Hartford has been appointed by the Hartford Life Board of Directors to
consider the offer. As of May 12, 2000, the committee was considering the offer.
3. EARNINGS PER SHARE
Basic earnings per share are computed based upon the weighted average number of
shares outstanding during the respective periods. Diluted earnings per share
include the dilutive effect of outstanding options, using the treasury stock
method, and also contingently issuable shares. Under the treasury stock method,
it is assumed that options are exercised and the proceeds are assumed to be used
to purchase common stock at the average market price for the period. The
difference between the number of shares assumed issued and number of shares
assumed purchased represents the dilutive shares. Contingently issuable shares
are included upon satisfaction of certain conditions related to contingency.
7
8
The following table presents a reconciliation of income and shares used in
calculating basic earnings per share to those used in calculating diluted
earnings per share.
THREE MONTHS ENDED
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PER SHARE
MARCH 31, 2000 INCOME SHARES AMOUNT
- -------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 150 139.9 $ 1.07
---------------
DILUTED EARNINGS PER SHARE
Impact of options and contingently issuable shares - 0.2
--------------------
Amounts available to common shareholders
plus assumed conversions $ 150 140.1 $ 1.07
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MARCH 31, 1999
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BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 106 139.9 $ 0.76
---------------
DILUTED EARNINGS PER SHARE
Impact of options and contingently issuable shares - 0.4
--------------------
Amounts available to common shareholders
plus assumed conversions $ 106 140.3 $ 0.76
- -------------------------------------------------------------------------------------------------------------
4. COMMITMENTS AND CONTINGENT LIABILITIES
(a) LITIGATION
Hartford Life is involved in pending and threatened litigation in the normal
course of its business in which claims for alleged economic and punitive damages
have been asserted. Some of these cases have been filed as purported class
actions and some cases have been filed in certain jurisdictions that permit
punitive damage awards disproportionate to the actual damages incurred. Although
there can be no assurances, at the present time the Company does not anticipate
that the ultimate liability arising from such pending or threatened litigation,
after consideration of provisions made for estimated losses and costs of
defense, will have a material adverse effect on the financial condition or
operating results of the Company.
Subsequent to the announcement of The Hartford's proposal to acquire all of the
outstanding common shares of Hartford Life which The Hartford does not already
own, The Hartford and certain members of its Board of Directors, and Hartford
Life and the members of its Board of Directors were named as defendants in six
similar actions filed in the Chancery Court of Delaware. The plaintiffs in these
actions assert, on behalf of themselves and a purported class of other public
shareholders of Hartford Life, that The Hartford and the individual director
defendants are breaching fiduciary obligations to the public shareholders of
Hartford Life and that The Hartford is engaging in unfair dealing by seeking to
acquire the publicly-held shares of Hartford Life at an inadequate price. The
plaintiffs seek to enjoin the defendants from proceeding with or implementing
the proposed transaction or, if it is consummated, to rescind it, as well as
compensatory damages and other relief. No motion for preliminary relief has been
made by the plaintiffs and the cases are still in a preliminary stage.
(b) TAX MATTERS
Hartford Life's federal income tax returns are routinely audited by the Internal
Revenue Service. The Company's 1996-1997 federal income tax returns are
currently under audit by the Internal Revenue Service. Management believes that
sufficient provision has been made in the financial statements for issues that
may result from tax examinations and other tax related matters for all open tax
years.
5. SEGMENT INFORMATION
Hartford Life is organized into four reportable operating segments: Investment
Products, Individual Life, Employee Benefits and Corporate Owned Life Insurance
(COLI). Investment Products offers individual fixed and variable annuities,
mutual funds, retirement plan services and other investment products. Individual
Life sells a variety of life insurance products, including variable life,
universal life, interest sensitive whole life and term life insurance. Employee
Benefits sells group insurance products, including group life and group
disability insurance as well as other products, including stop loss and
supplementary medical coverage to employers and employer sponsored plans,
accidental death and dismemberment, travel accident, long-term care insurance
and other special risk coverages to employers and associations. COLI primarily
offers variable products used by employers to fund non-qualified benefits or
other postemployment benefit obligations as well as leveraged COLI. The Company
includes in "Other" corporate items not directly allocable to any of its
reportable operating segments, principally interest expense, as well as its
international operations.
8
9
The accounting policies of the reportable operating segments are the same as
those described in the summary of significant accounting policies in Note 2 of
Notes to Consolidated Financial Statements in Hartford Life's 1999 Form 10-K
Annual Report. Hartford Life evaluates performance of its segments based on
revenues, net income and the segment's return on allocated capital. The Company
charges direct operating expenses to the appropriate segment and allocates the
majority of indirect expenses to the segments based on an intercompany expense
arrangement. Intersegment revenues are not significant and primarily occur
between corporate and the operating segments. These amounts include interest
income on allocated surplus and the allocation of net realized capital gains and
losses through net investment income utilizing the duration of the segment's
investment portfolios. The following tables present summarized financial
information concerning the Company's segments.
THREE MONTHS ENDED Investment Individual Employee
MARCH 31, 2000 Products Life Benefits COLI Other Total
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Total revenues $ 585 $ 157 $ 520 $ 165 $ 19 $ 1,446
Net income 102 18 19 8 3 150
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THREE MONTHS ENDED Investment Individual Employee
MARCH 31, 1999 Products Life Benefits COLI Other Total
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Total revenues $ 483 $ 133 $ 475 $ 224 $ 20 $ 1,335
Net income (loss) 78 15 17 6 (10) 106
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ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, except for 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 Company as of March
31, 2000, compared with December 31, 1999, and its results of operations for the
three months ended March 31, 2000 compared with the equivalent period in 1999.
This discussion should be read in conjunction with the MD&A included in the
Company's 1999 Form 10-K Annual Report.
Certain statements contained in this discussion, other than statements of
historical fact, are forward-looking statements. These 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 on Hartford
Life, Inc. and subsidiaries ("Hartford Life" or the "Company"). There can be no
assurance that future developments will be in accordance with management's
expectations or that the effect of future developments on Hartford Life will be
those anticipated by management. Actual results could differ materially from
those expected by the Company, depending on the outcome of certain factors,
including the possibility of general economic, business and legislative
conditions that are less favorable than anticipated, changes in interest rates
or the stock markets, stronger than anticipated competitive activity and those
described in the forward-looking statements.
INDEX
Consolidated Results of Operations 10
Investment Products 11
Individual Life 12
Employee Benefits 12
Corporate Owned Life Insurance (COLI) 13
Investments 13
Capital Markets Risk Management 14
Capital Resources and Liquidity 16
Regulatory Initiatives and Contingencies 17
Accounting Standards 17
CONSOLIDATED RESULTS OF OPERATIONS
OPERATING SUMMARY THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
- --------------------------------------------------------------------------
Revenues $ 1,446 $ 1,335
Expenses 1,296 1,229
- --------------------------------------------------------------------------
NET INCOME $ 150 $ 106
- --------------------------------------------------------------------------
Hartford Life has the following reportable segments: Investment Products,
Individual Life, Employee Benefits and Corporate Owned Life Insurance (COLI).
The Company reports corporate items not directly allocable to any of its
segments, principally interest expense, as well as its international operations
in "Other".
Revenues increased $111, or 8%, and $170, or 15%, excluding the COLI segment
where revenues decreased primarily due to the declining block of leveraged COLI
business. The increase in revenues was attributable to growth across each of the
Company's other operating segments. The revenue growth in the Investment
Products segment was, for the most part, due to higher fee income related to the
individual annuity and mutual fund operations which is directly attributable to
increased assets under management. In addition, Employee Benefits and Individual
Life contributed to the increased revenues as a result of sales growth and
favorable persistency.
Expenses increased $67, or 5%, and $128, or 13%, excluding the COLI segment
where expenses decreased primarily due to the declining block of leveraged COLI
business. The increase in expenses was lower than the growth in revenues as the
Company continues to be able to create operating leverage by expanding its
distribution platform to accelerate sales volume while utilizing technology and
prudent expense management to increase productivity. For example, operating
expenses as a percentage of average assets under management in the individual
annuity operation declined to 18 basis points from 20 basis points in the first
quarter of 1999.
Net income increased $44, or 42%, led by a $24, or 31%, increase in the
Investment Products segment, where related assets under management grew 28% to
$118.3 billion. Additionally, the remaining three operating segments each
reported a double digit increase over the prior year. The Company also reported
a one-time benefit relating to state income taxes of $8. Excluding this item,
net income was up $36, or 34%.
10
11
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
- ---------------------------------------------------------------------------------
Investment Products $ 102 $ 78
Individual Life 18 15
Employee Benefits 19 17
Corporate Owned Life Insurance (COLI) 8 6
Other 3 (10)
- ---------------------------------------------------------------------------------
NET INCOME $ 150 $ 106
- ---------------------------------------------------------------------------------
The sections that follow analyze each segment's results. Investment results are
discussed separately following the segment overviews.
INVESTMENT PRODUCTS
THREE MONTHS ENDED
MARCH 31,
------------------------
2000 1999
- --------------------------------------------------------------------------------------
Revenues $ 585 $ 483
Expenses 483 405
- --------------------------------------------------------------------------------------
NET INCOME $ 102 $ 78
- --------------------------------------------------------------------------------------
Individual variable annuity account values $ 85,264 $ 65,560
Other individual annuity account values 8,254 8,503
Other investment products account values 16,773 14,928
- --------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 110,291 88,991
Retail mutual fund assets under management 7,969 3,210
- --------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $118,260 $ 92,201
- ---------------------------------------------------------------------------------------
Revenues in the Investment Products segment increased $102, or 21%, primarily
due to higher fee income in the individual annuity and retail mutual fund
operations. Fee income generated by individual annuities increased $76, or 30%,
as related account values grew $19.5 billion, or 26%. The growth in individual
annuity account values was mostly due to significant net cash flow, resulting
primarily from strong individual annuity sales (including $2.9 billion for the
first three months of 2000) and equity market appreciation. In addition, fee
income from other investment products increased $24, or 55%, primarily driven
by the Company's retail mutual fund operation, where assets under management
increased $4.8 billion or 148%. This substantial growth was mostly due to strong
sales (including $1.4 billion for the first three months of 2000) and equity
market appreciation.
Due to the continued growth in this segment's individual annuity and mutual fund
operations, expenses increased $78, or 19%. This increase was driven by
amortization of deferred policy acquisition costs, which grew $27, or 26%, and
other expenses which increased $25, or 24%. The segment's operating expenses as
a percentage of average assets under management declined versus the equivalent
prior year period.
Net income increased $24, or 31%, primarily due to the growth in revenues
associated with the segment's significant increase in assets under management.
Additionally, the Investment Products segment continued to maintain its profit
margins related to its primary businesses thus contributing to the segment's
earnings growth.
11
12
INDIVIDUAL LIFE
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
- ------------------------------------------------------------------------------
Revenues $ 157 $ 133
Expenses 139 118
- ------------------------------------------------------------------------------
NET INCOME $ 18 $ 15
- ------------------------------------------------------------------------------
Variable life account values $ 2,817 $ 1,874
Total account values $ 5,653 $ 4,676
- ------------------------------------------------------------------------------
Variable life insurance in force $ 25,788 $ 17,696
Total life insurance in force $ 68,223 $ 61,986
- ------------------------------------------------------------------------------
Revenues in the Individual Life segment increased $24, or 18%, resulting
primarily from higher fee income associated with the growing block of variable
life insurance. Fee income increased $27, or 32%, as variable life account
values increased $943, or 50%, and variable life insurance in force increased
$8.1 billion, or 46%. Expenses increased $21, or 18%, principally due to a $21
increase in amortization of deferred policy acquisition costs associated with
the growth in this segment. Net income increased $3, or 20%, primarily due to
the higher fee income described above and favorable mortality experience.
EMPLOYEE BENEFITS
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
- ------------------------------------------------------------------------
Revenues $ 520 $ 475
Expenses 501 458
- ------------------------------------------------------------------------
NET INCOME $ 19 $ 17
- ------------------------------------------------------------------------
Revenues in the Employee Benefits segment increased $45, or 9%, and excluding
buyouts, increased $59, or 13%. This increase was primarily driven by growth in
fully insured premiums, excluding buyouts, which increased $50, or 12%, due to
favorable persistency of the in force block of business and increased sales to
new customers.
Expenses increased $43, or 9%, and $57, or 13%, excluding buyouts. The increase
was primarily due to higher benefits, claims and claim adjustment expenses
which, excluding buyouts, increased $46, or 13%. However, the loss ratio
(defined as benefits, claims and claim adjustment expenses as a percentage of
premiums and other considerations excluding buyouts) of 83.9% remained
relatively consistent with the comparable prior year period. The revenue growth
described above, coupled with the segment's stable loss ratio, resulted in an
increase in net income of $2, or 12%.
12
13
CORPORATE OWNED LIFE INSURANCE (COLI)
THREE MONTHS ENDED
MARCH 31,
---------------------
2000 1999
- ------------------------------------------------------------------------------
Revenues $ 165 $ 224
Expenses 157 218
- ------------------------------------------------------------------------------
NET INCOME $ 8 $ 6
- ------------------------------------------------------------------------------
Variable COLI account values $ 12,601 $ 11,761
Leveraged COLI account values 4,960 6,507
- ------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 17,561 $ 18,268
- ------------------------------------------------------------------------------
COLI revenues decreased $59, or 26%, mostly due to lower net investment income
on the leveraged COLI block of business, where related account values decreased
$1.5 billion, or 24%, due to the block's downsizing caused by the Health
Insurance Portability and Accountability Act of 1996. COLI expenses decreased
$61, or 28%, also primarily due to the downsizing of the leveraged COLI
business.
Net income increased $2, or 33%, driven primarily by growth in the variable COLI
business where account values increased $840, or 7%. In addition, the segment
recaptured an in force block of leveraged COLI business in 1998 which also
contributed to the increase in net income. (For a discussion of the MBL
Recapture, see the Capital Resources and Liquidity section in Hartford Life's
1999 Form 10-K Annual Report.)
INVESTMENTS
Invested assets, excluding separate account assets, totaled $21.2 billion as of
March 31, 2000 and were comprised of $17.1 billion of fixed maturities, $3.5
billion of policy loans, equity securities of $83 and other investments of $475.
As of December 31, 1999, general account invested assets totaled $21.8 billion
and were comprised of $17.0 billion of fixed maturities, $4.2 billion of policy
loans, equity securities of $153 and other investments of $376. Policy loans are
secured by the cash value of the underlying life policy and do not mature in a
conventional sense, but expire in conjunction with the related policy
liabilities. Policy loans decreased by $673 from December 31, 1999 as a result
of the Company's declining block of leveraged COLI business.
MARCH 31, 2000 DECEMBER 31, 1999
----------------------------------------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- -------------------------------------------------------------------------------------------------------------
Corporate $ 7,808 45.6% $ 7,737 45.4%
Asset backed securities 2,772 16.2% 2,508 14.7%
Commercial mortgage backed securities 2,307 13.5% 2,112 12.4%
Municipal - tax-exempt 1,264 7.4% 1,108 6.5%
Mortgage backed securities - agency 919 5.4% 853 5.0%
Short-term 819 4.8% 1,346 7.9%
Collateralized mortgage obligations 619 3.6% 592 3.5%
Government/Government agencies - Foreign 322 1.9% 339 2.0%
Government/Government agencies - U.S. 126 0.7% 229 1.3%
Municipal - taxable 112 0.6% 165 1.0%
Redeemable preferred stock 61 0.3% 46 0.3%
- -------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 17,129 100.0% $ 17,035 100.0%
- -------------------------------------------------------------------------------------------------------------
During the first quarter of 2000, the Company continued its investment strategy
of increasing its allocation to municipal tax-exempt securities with the
objective of increasing after-tax yields, and also increasing its allocation to
asset backed securities and commercial mortgage backed securities while reducing
its position in short-term investments.
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INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
THREE MONTHS ENDED
MARCH 31,
---------------------
(Before-tax) 2000 1999
- ---------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 308 $ 290
Policy loan income 74 111
- ---------------------------------------------------------------------------------------------
Net investment income - total $ 382 $ 401
- ---------------------------------------------------------------------------------------------
Yield on average invested assets (1) 6.9% 6.9%
- ---------------------------------------------------------------------------------------------
(1) Represents annualized net investment income (excluding net realized capital
gains or losses) divided by average invested assets at cost (fixed maturities at
amortized cost).
Total net investment income decreased $19, or 5%, primarily due to a 33%
decrease in policy loan income associated with the declining block of leveraged
COLI business.
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life has a disciplined approach to managing risks associated with its
capital markets and asset/liability management activities. Investment portfolio
management is organized to focus investment management expertise on specific
classes of investments, while asset/liability management is the responsibility
of separate and distinct risk management units supporting the Company's
operations. Derivative instruments are utilized in accordance with established
Company policy and are monitored internally and reviewed by senior management.
The Company is exposed to two primary sources of investment and asset/liability
management risk: credit risk, relating to the uncertainty associated with the
ability of an obligor or counterparty to make timely payments of principal
and/or interest, and market risk, relating to the market price and/or cash flow
variability associated with changes in interest rates, securities prices, market
indices, yield curves or currency exchange rates. The Company does not hold any
financial instruments entered into for trading purposes.
Please refer to Hartford Life's 1999 Form 10-K Annual Report for a description
of the Company's objectives, policies and strategies.
CREDIT RISK
The Company invests primarily in securities rated investment grade and has
established exposure limits, diversification standards and review procedures for
all credit risks including borrower, issuer or counterparty. Creditworthiness of
specific obligors is determined by an internal credit evaluation supplemented by
consideration of external determinants of creditworthiness, typically ratings
assigned by nationally recognized ratings agencies. Obligor, asset sector and
industry concentrations are subject to established limits and monitored at
regular intervals. Hartford Life is not exposed to any significant credit
concentration risk of a single issuer.
The following table identifies fixed maturity securities for the Company's
operations by credit quality. The ratings referenced in the table are based on
the ratings of a nationally recognized rating organization or, if not rated,
assigned based on the Company's internal analysis of such securities.
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As of March 31, 2000 and December 31, 1999, over 97% of the fixed maturity
portfolio, including guaranteed separate accounts, was invested in
investment-grade securities.
MARCH 31, 2000 DECEMBER 31, 1999
-------------------------------------------------------
FIXED MATURITIES BY CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- ----------------------------------------------------------------------------------------------------------
U.S. Government/Government agencies $ 2,201 8.5% $ 2,404 9.3%
AAA 3,902 15.0% 3,535 13.6%
AA 3,346 12.9% 3,199 12.3%
A 8,912 34.4% 8,731 33.6%
BBB 6,004 23.2% 5,816 22.4%
BB and below 664 2.6% 559 2.1%
Short-term 884 3.4% 1,728 6.7%
- ----------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 25,913 100.0% $ 25,972 100.0%
- ----------------------------------------------------------------------------------------------------------
MARKET RISK
Hartford Life has material exposure to both interest rate and equity market
risk. The Company employs several risk management tools to quantify and manage
market risk arising from its investments and interest sensitive liabilities. For
certain portfolios, management monitors the changes in present value between
assets and liabilities resulting from various interest rate scenarios using
integrated asset/liability measurement systems and a proprietary system that
simulates the impacts of parallel and non-parallel yield curve shifts. Based on
this current and prospective information, management implements risk reducing
techniques to improve the match between assets and liabilities. There have been
no material changes in market risk exposures from December 31, 1999.
DERIVATIVE INSTRUMENTS
Hartford Life utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and regulatory requirements in order to hedge exposure
primarily to interest rate risk on anticipated investment purchases or existing
assets and liabilities. The Company does not make a market or trade derivatives
for the express purpose of earning trading profits.
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities.
Derivative activities are monitored by an internal compliance unit and are
reviewed frequently by senior management. The notional amounts of derivative
contracts, which represent the basis upon which pay or receive amounts are
calculated, are not reflective of credit risk. Notional amounts pertaining to
derivative instruments for both general and guaranteed separate accounts totaled
$9.3 billion and $9.6 billion at March 31, 2000 and December 31, 1999,
respectively.
For a further discussion of market risk exposure, including derivative
instruments, please refer to Hartford Life's 1999 Form 10-K Annual Report.
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CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of
Hartford Life and its ability to generate cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The Company maintained cash and short-term investments totaling $909 and
$1.4 billion as of March 31, 2000 and December 31, 1999, respectively.
The capital structure of the Company consists of debt and equity, and is
summarized as follows:
MARCH 31, 2000 DECEMBER 31, 1999
- ---------------------------------------------------------------------------------------------------------------------------
Long-term debt $ 650 $ 650
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures (TruPS) 250 250
-------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 900 $ 900
-------------------------------------------------------------------------------------------------------------------------
Equity excluding net unrealized capital losses on securities, net of tax $ 2,784 $ 2,642
Net unrealized capital losses on securities, net of tax (319) (336)
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 2,465 $ 2,306
-------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION (1) $ 3,684 $ 3,542
-------------------------------------------------------------------------------------------------------------------------
Debt to equity (1) (2) 32% 34%
Debt to capitalization (1) (2) 24% 25%
- ---------------------------------------------------------------------------------------------------------------------------
(1) Excludes net unrealized capital losses on securities, net of tax.
(2) Excluding TruPS, the debt to equity ratios were 23% and 25% as of March 31,
2000 and December 31, 1999, respectively, and the debt to capitalization
ratios were 18% as of March 31, 2000 and December 31, 1999.
CAPITALIZATION
The Company's total capitalization, excluding net unrealized capital losses on
securities, net of tax, increased $142, or 4%, as of March 31, 2000, as compared
to December 31, 1999. This increase was primarily the result of net income of
$150 partially offset by dividends declared of $14. As a result, both the debt
to equity and debt to capitalization ratios (both excluding net unrealized
capital losses on securities, net of tax) decreased to 32% and 24% as of March
31, 2000, respectively, from 34% and 25% as of December 31, 1999, respectively.
DIVIDENDS
Hartford Life declared $14 in dividends for the three months ended March 31,
2000 to holders of Class A and Class B Common Stock. Future dividend decisions
will be based on, and affected by, a number of factors, including the operating
results and financial requirements of Hartford Life on a stand-alone basis and
the impact of regulatory restrictions.
The Company's direct regulated life insurance subsidiary, Hartford Life and
Accident Insurance Company, declared dividends of $17 for the three months ended
March 31, 2000.
TREASURY STOCK
During the first three months of 2000, to make shares available to employees
pursuant to stock based benefit plans, the Company repurchased 40,000 shares of
its Class A Common Stock in the open market at a total cost of $2. Shares
repurchased in the open market are carried at cost and reflected as a reduction
to stockholders' equity. Treasury shares subsequently reissued are reduced from
treasury stock on a weighted average cost basis. The Company currently intends
to purchase additional shares of its Class A Common Stock to make shares
available for its various employee stock based benefit plans.
CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
-------------------------
2000 1999
- ---------------------------------------------------------------------------------------------
Cash provided by (used for) operating activities $ 391 $ (37)
Cash provided by investing activities 835 2,367
Cash used for financing activities (1,225) (2,309)
Cash - end of period 90 57
- ---------------------------------------------------------------------------------------------
The increase in cash provided by (used for) operating activities was primarily
the result of increased net income, a federal income tax refund received in the
first quarter of 2000 and the timing of the settlement of receivables and
payables in the first three months of 2000. The decrease in cash provided by
investing activities and the decrease in cash used for financing activities
primarily relates to the significant downsizing of the leveraged COLI block of
business during the first quarter of 1999. Operating cash flows in both periods
have been more than adequate to meet liquidity requirements.
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COMMON STOCK SUBJECT TO PROPOSED ACQUISITION
On March 27, 2000, Hartford Life's Board of Directors received an offer from The
Hartford Financial Services Group, Inc. (The Hartford) for the acquisition of
all of the common shares of Hartford Life not already owned by The Hartford at a
price of $44 per share in cash. As of March 31, 2000, The Hartford owned
approximately 81.5 percent of the outstanding shares of common stock of Hartford
Life. A special committee consisting of Hartford Life directors not affiliated
with The Hartford has been appointed by the Hartford Life Board of Directors to
consider the offer. As of May 12, 2000, the committee was considering the offer.
REGULATORY INITIATIVES AND CONTINGENCIES
NAIC CODIFICATION
The NAIC adopted the Codification of Statutory Accounting Principles (SAP) in
March 1998. The effective date for the statutory accounting guidance is January
1, 2001. It is expected that each of Hartford Life's domiciliary states will
adopt the SAP and the Company will make the necessary changes required for
implementation. The Company has not yet determined the impact that the SAP will
have on the statutory financial statements of the insurance subsidiaries of
Hartford Life.
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
Hartford Life distributes its annuity and life insurance products through a
variety of distribution channels, including broker-dealers, banks, wholesalers,
its own internal sales force and other third party marketing organizations. The
Company periodically negotiates provisions and renewals of these relationships
and there can be no assurance that such terms will remain acceptable to the
Company or such service providers. An interruption in the Company's continuing
relationship with certain of these third parties could materially affect the
Company's ability to market its products.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Consolidated
Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the Capital Markets Risk Management section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Hartford Life is involved in pending and threatened litigation in the normal
course of its business in which claims for alleged economic and punitive damages
have been asserted. Some of these cases have been filed as purported class
actions and some cases have been filed in certain jurisdictions that permit
punitive damage awards disproportionate to the actual damages incurred. Although
there can be no assurances, at the present time the Company does not anticipate
that the ultimate liability arising from such pending or threatened litigation,
after consideration of provisions made for estimated losses and costs of
defense, will have a material adverse effect on the financial condition or
operating results of the Company.
Subsequent to the announcement of The Hartford's proposal to acquire all of the
outstanding common shares of Hartford Life which The Hartford does not already
own, The Hartford and certain members of its Board of Directors, and Hartford
Life and the members of its Board of Directors were named as defendants in six
similar actions filed in the Chancery Court of Delaware. The plaintiffs in these
actions assert, on behalf of themselves and a purported class of other public
shareholders of Hartford Life, that The Hartford and the individual director
defendants are breaching fiduciary obligations to the public shareholders of
Hartford Life and that The Hartford is engaging in unfair dealing by seeking to
acquire the publicly-held shares of Hartford Life at an inadequate price. The
plaintiffs seek to enjoin the defendants from proceeding with or implementing
the proposed transaction or, if it is consummated, to rescind it, as well as
compensatory damages and other relief. No motion for preliminary relief has been
made by the plaintiffs and the cases are still in a preliminary stage.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index.
(b) Reports on Form 8-K - On March 31, 2000, Hartford Life, Inc. (Hartford Life)
filed a report on Form 8-K, under Item 5, Other Events, to report that the Board
of Directors of Hartford Life announced that it received on March 27, 2000 an
offer from the Board of Directors of The Hartford Financial Services Group, Inc.
(The Hartford) for the acquisition of all of the common shares of Hartford Life
not already owned by The Hartford.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTFORD LIFE, INC.
/s/ Mary Jane B. Fortin
-----------------------------------
Mary Jane B. Fortin
Vice President and Chief Accounting
Officer
MAY 12, 2000
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HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-Q
EXHIBITS INDEX
EXHIBIT # DESCRIPTION
- --------- -----------
27 Financial Data Schedule is filed herewith.
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