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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 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) 547-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: the following, which
are registered on the New York Stock Exchange, Inc.:
7.2% Trust Preferred Securities, Series A, issued by Hartford Life
Capital I
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[ ]
As of March 28, 2001 there were outstanding 1,000 shares of Common Stock, $0.01
par value per share, of the registrant, all of which were directly owned by
Hartford Fire Insurance Company, a direct wholly-owned subsidiary of The
Hartford Financial Services Group, Inc.
The registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
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[HARTFORD LIFE LOGO]
Hartford Life, Inc. and its subsidiaries (Hartford Life) is a leading financial
services and insurance organization providing investment products such as
variable annuities and mutual funds, individual and corporate owned life
insurance and group benefits products.
A subsidiary of The Hartford Financial Services Group, Inc., Hartford Life is
the nation's largest writer of individual variable annuities, the number three
writer of group disability insurance, a top provider of individual variable life
insurance and offers the fastest growing non-proprietary family of mutual funds.
CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of Hartford Life* 3
2 Properties* 11
3 Legal Proceedings 11
4 **
PART II 5 Market for Hartford Life's Common Stock and Related Stockholder Matters 11
6 **
7 Management's Discussion and Analysis of Financial Condition and Results
of Operations* 12
7A Quantitative and Qualitative Disclosures About Market Risk 32
8 Financial Statements and Supplementary Data 32
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 32
PART III 10 **
11 **
12 **
13 **
PART IV 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 32
Signatures II-1
Exhibits Index II-2
* Item prepared in accordance with General Instruction I(2) of Form 10-K
** Item omitted in accordance with General Instruction I(2) of Form 10-K
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PART I
ITEM 1. BUSINESS OF HARTFORD LIFE
(Dollar amounts in millions, unless otherwise stated)
GENERAL
Hartford Life, Inc. and its subsidiaries ("Hartford Life" or the "Company"), an
indirect subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"), is headquartered in Simsbury, Connecticut and is a leading financial
services and insurance organization. Hartford Life provides (i) investment
products, including variable annuities, fixed market value adjusted (MVA)
annuities, mutual funds and retirement plan services for the savings and
retirement needs of over 1.5 million customers, (ii) individual life insurance
for income protection and estate planning to approximately 500,000 customers,
(iii) group benefits products such as group life and group disability insurance
for the benefit of millions of individuals and (iv) corporate owned life
insurance. According to the latest publicly available data, with respect to the
United States, the Company is the largest writer of individual variable
annuities based on sales for the year ended December 31, 2000 and the third
largest writer of group disability insurance based on sales for the nine months
ended September 30, 2000. In addition, the Company offers a retail-oriented
mutual fund family that is the fastest in history to reach $10 billion in
assets. The Company's strong position in each of its core businesses provides an
opportunity to increase the sale of Hartford Life's products and services as
individuals increasingly save and plan for retirement, protect themselves and
their families against disability or death and engage in estate planning. The
Company is the third largest consolidated life insurance group based on
statutory assets as of December 31, 1999.
Hartford Life, together with The Hartford, strives to maintain and enhance its
position as a market leader within the financial services industry and to
maximize shareholder value. The Company has pursued a strategy of developing and
selling diverse and innovative products through multiple distribution channels,
continuously developing and expanding those distribution channels, achieving
cost efficiencies through economies of scale and improved technology,
maintaining effective risk management and prudent underwriting techniques and
capitalizing on its brand name and customer recognition of The Hartford Stag
Logo, one of the most recognized symbols in the financial services industry. In
the past year, Hartford Life's total assets under management, which include
$11.4 billion of third party assets invested in the Company's mutual funds,
increased 7% to $155.1 billion at December 31, 2000. Hartford Life generated
$6.0 billion in revenues and net income of $575 in 2000.
ORGANIZATION
Hartford Life, Inc., a Delaware corporation, was formed in December 1996 as a
direct subsidiary of Hartford Accident and Indemnity Company (HA&I) and an
indirect subsidiary of The Hartford. Pursuant to an initial public offering (the
"IPO") on May 22, 1997, Hartford Life sold to the public 26 million shares of
Class A Common Stock at $28.25 per share and received proceeds, net of offering
expenses, of $687. The 26 million shares sold in the IPO represented
approximately 18.6% of the equity ownership in Hartford Life. On June 27, 2000,
The Hartford acquired all of the outstanding common shares of Hartford Life not
already owned by The Hartford (The Hartford Acquisition). As a result of The
Hartford Acquisition, Hartford Life again became a wholly-owned subsidiary of
The Hartford. Additional information regarding the organization of the business
and The Hartford Acquisition may be found in Notes 1 and 3 of Notes to
Consolidated Financial Statements, respectively.
As a holding company, Hartford Life, Inc. has no significant business operations
of its own and, therefore, relies mainly 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 Hartford Life, Inc. may be found
in the Capital Resources and Liquidity section of the Management's Discussion
and Analysis of Financial Condition and Results of Operations (MD&A).
The Company maintains a retail mutual fund operation, whereby the Company,
through wholly-owned subsidiaries, provides investment management and
administrative services to The Hartford Mutual Funds, Inc., a family of fourteen
mutual funds. Investors can purchase "shares" in the mutual funds, all of which
are registered with the Securities and Exchange Commission, in accordance with
the Investment Company Act of 1940. The mutual funds are owned by the
shareholders of those funds and not by the Company.
On January 25, 2001, The Hartford, through Hartford Life, agreed to acquire the
U.S. individual life insurance, annuity and mutual fund businesses of Fortis,
Inc. (operating as Fortis Financial Group and referred to as "Fortis") for $1.12
billion in cash. The Company will effect the acquisition through several
reinsurance agreements with subsidiaries of Fortis and the purchase of 100% of
the stock of Fortis Advisors, Inc. and Fortis Investors, Inc., wholly-owned
subsidiaries of Fortis. The Fortis transaction, which is subject to insurance
regulatory approval and other customary conditions, is expected to be completed
in the second quarter of 2001. The acquisition will be accounted for as a
purchase transaction. (For additional information, see the Capital Resources and
Liquidity section of the MD&A under "Subsequent Event".)
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DISTRIBUTION
Hartford Life utilizes a multiple channel distribution network which provides a
distinct competitive advantage in selling products and services to a broad
cross-section of customers throughout varying economic and market cycles. In
particular, the Company has developed an extensive network of banks and
broker-dealers, which is one of the largest in the industry, including over
1,500 national, regional and independent broker-dealers and approximately 500
banks. Consistent with this strategy, in 1998, the Company purchased all the
outstanding shares of PLANCO Financial Services, Inc. and its affiliate, PLANCO,
Incorporated (collectively, "PLANCO"), the nation's largest wholesaler of
individual annuities and the Company's primary wholesale distributor of The
Director(R) variable annuity and retail mutual funds, thus securing an important
distribution channel. In connection with the previously mentioned acquisition of
Fortis, Hartford Life will broaden its reach in the emerging affluent market
with the addition of a retail broker-dealer consisting of approximately 3,000
registered representatives. Additionally, the Company continues to expand its
opportunity to sell through financial institutions. As of September 30, 2000,
the Company was selling products through 24 of the nation's 25 largest retail
banks, including proprietary relationships with 10 of the top 25. The Company's
broad distribution network has enabled the Company to introduce new products and
services in an effective manner and allows the Company significant opportunity
to access its customer base. Hartford Life sells variable annuities, mutual
funds, fixed MVA annuities, variable life insurance and retirement plan services
through its broker-dealer and bank distribution systems.
PRODUCTS
It is Hartford Life's belief that, as Americans journey through life, they have
specific needs related to building and preserving their financial resources. The
Company's goal is to be the "official supplier" of that journey -- the preferred
source of financial solutions for both individuals and employers, as well as the
financial professionals who serve them. To achieve this goal, Hartford Life has
focused its efforts on offering products that provide mechanisms for saving
(e.g. mutual funds), planning for retirement (e.g. annuities) and protecting and
preserving income and wealth (e.g. individual life, group life and group
disability). To ensure that it is able to meet the emerging opportunities that
will arise for individuals pursuing their dreams in the new millennium, the
Company expects to continue to expend significant resources and development
efforts in creating innovative new products and services.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
Hartford Life maintains advantageous economies of scale and operating
efficiencies due to its continued growth, attention to expense and claims
management and commitment to customer service and technology. These advantages
allow the Company to competitively price its products for its distribution
network and policyholders. The Company continues to achieve operating
efficiencies in its Investment Products segment. Operating expenses associated
with the Company's individual annuity products as a percentage of total
individual annuity account values reduced by more than half, declining from 43
basis points in 1992 to 21 basis points in 2000. In addition, the Company
utilizes computer technology to enhance communications within the Company and
throughout its distribution network in order to improve the Company's efficiency
in marketing, selling and servicing its products and, as a result, provides
high-quality customer service. In recognition of excellence in customer service
for variable annuities, Hartford Life was awarded the 2000 Annuity Service Award
by DALBAR Inc., a recognized independent financial services research
organization, for the fifth consecutive year. Hartford Life is the only company
to receive this prestigious award in every year of the award's existence. Also,
The Hartford Mutual Funds, Inc. have been named the leading mid-sized fund
complex in the industry for top service providers, according to a survey of
broker-dealers conducted by DALBAR Inc.
RISK MANAGEMENT
Hartford Life's product designs, prudent underwriting standards and risk
management techniques protect it against disintermediation risk and greater than
expected mortality and morbidity experience. As of December 31, 2000, the
Company had limited exposure to disintermediation risk on approximately 98% of
its domestic life insurance and annuity liabilities through the use of
non-guaranteed separate accounts, MVA features, policy loans, surrender charges
and non-surrenderability provisions. The Company effectively utilizes prudent
underwriting to select and price insurance risks and regularly monitors
mortality and morbidity assumptions to determine if experience remains
consistent with these assumptions and to ensure that its product pricing remains
appropriate. The Company also enforces disciplined claims management to protect
itself against greater than expected morbidity experience.
BRAND NAME AND FINANCIAL STRENGTH
The Hartford Stag Logo is one of the most recognized symbols in the insurance
and financial services industry. This brand recognition, coupled with a strong
balance sheet and sound ratings, has enabled the Company to establish the
reputation and financial strength necessary to maintain distribution
relationships, make strategic acquisitions and enhance important alliances and
generate new customer sales. Pursuant to a Master Intercompany Agreement with
The Hartford, the Company has been granted a perpetual non-exclusive license to
use the Stag Logo in connection with the sale of Hartford Life's products and
services. However, in the event that The Hartford reduces its beneficial
ownership below 50% of the combined voting power of the Company's then
outstanding securities, the license may be revoked upon the later of the fifth
anniversary of the date of consummation of the
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Company's IPO of its Class A Common Stock or one year after receipt by the
Company of written notice of The Hartford's intention to revoke the license.
REPORTING SEGMENTS
Hartford Life has the following reportable operating segments: Investment
Products, Individual Life, Group Benefits (formerly Employee Benefits) and
Corporate Owned Life Insurance (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, which are
primarily located in Latin America and the Far East. The following is a
description of each segment, including a discussion of principal products,
methods of distribution and competitive environments. Additional information on
Hartford Life's segments may be found in the MD&A and Note 17 of Notes to
Consolidated Financial Statements.
INVESTMENT PRODUCTS
The Investment Products segment focuses, through the sale of individual variable
and fixed annuities, mutual funds, retirement plan services and other investment
products, on the savings and retirement needs of the growing number of
individuals who are preparing for retirement or who have already retired. From
December 31, 1995 to December 31, 2000, this segment's assets under management
grew to $116.0 billion from $43.9 billion, a five year compounded annual growth
rate of 21%. Investment Products generated revenues of $2.4 billion, $2.0
billion and $1.8 billion in 2000, 1999 and 1998, respectively, of which
individual annuities accounted for $1.5 billion, $1.4 billion and $1.1 billion
of total Investment Products revenues in 2000, 1999 and 1998, respectively. Net
income in the Investment Products segment was $424 in 2000, a 28% increase over
1999.
Hartford Life sells both variable and fixed individual annuity products through
a wide distribution network of national and regional broker-dealer
organizations, banks and other financial institutions and independent financial
advisors. Hartford Life is a market leader in the annuity industry with sales of
$10.7 billion, $10.9 billion and $10.0 billion in 2000, 1999 and 1998,
respectively. According to Variable Annuity and Research Data Service (VARDS),
Hartford Life was the number one writer of individual variable annuities in the
United States for 2000, 1999 and 1998 with sales of $9.0 billion, $10.3 billion
and $9.9 billion, respectively. In addition, the Company was the number one
seller of individual variable annuities through banks in 2000, 1999 and 1998,
according to Kenneth Kehrer Associates (a leading consultant to banks).
The Company's total account value related to individual annuity products was
$87.2 billion as of December 31, 2000. Of this total account value, $78.2
billion, or 90%, related to individual variable annuity products and $9.0
billion, or 10%, related primarily to fixed MVA annuity products.
Hartford Life is emerging as a significant participant in the mutual fund
business. The Company is among the top providers of retirement products and
services, including asset management and plan administration, to municipalities
pursuant to Section 457 and plans to corporations under Section 401(k) of the
Internal Revenue Code of 1986, as amended (referred to as "Section 457" and
"Section 401(k)", respectively). The Company also provides structured settlement
contracts, terminal funding products and other investment products such as
guaranteed investment contracts (GICs).
As previously mentioned, in January 2001, The Hartford, through Hartford Life,
agreed to acquire the U.S. annuity and mutual fund businesses of Fortis. This
acquisition is expected to increase assets under management in the Company's
fast growing mutual fund business by over 30%, as well as solidify the Company's
number one position in variable annuities. (For additional information, see the
Capital Resources and Liquidity section of the MD&A under "Subsequent Event".)
Principal Products
Individual Variable Annuities -- Hartford Life earns fees, based on the
policyholders' account values, for managing variable annuity assets and
maintaining policyholder accounts. The Company uses specified portions of the
periodic deposits paid by a customer to purchase units in one or more mutual
funds as directed by the customer who then assumes the investment performance
risks and rewards. As a result, variable annuities permit policyholders to
choose aggressive or conservative investment strategies, as they deem
appropriate, without affecting the composition and quality of assets in the
Company's general account. These products offer the policyholder a variety of
equity and fixed income options, as well as the ability to earn a guaranteed
rate of interest in the general account of the Company. The Company offers an
enhanced guaranteed rate of interest for a specified period of time (no longer
than twelve months) if the policyholder elects to dollar-cost average funds from
the Company's general account into one or more non-guaranteed separate accounts.
Due to this enhanced rate and the volatility experienced in the overall equity
markets, this option continues to be popular with policyholders. Policyholders
may make deposits of varying amounts at regular or irregular intervals and the
value of these assets fluctuates in accordance with the investment performance
of the funds selected by the policyholder. To encourage persistency, many of the
Company's individual variable annuities are subject to withdrawal restrictions
and surrender charges ranging initially from 6% to 8% of the contract's initial
deposit less withdrawals which reduce to zero on a sliding scale, usually within
seven policy years. Volatility experienced by the equity markets in 2000, 1999
and 1998 did not cause a significant
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increase in variable annuity surrenders, demonstrating that policyholders are
generally aware of the long-term nature of these products. Individual variable
annuity account values of $78.2 billion as of December 31, 2000, has grown
significantly from $13.1 billion as of December 31, 1994 due to strong net cash
flow, the result of a high level of sales, low levels of surrenders and equity
market appreciation. Approximately 96% and 95% of the individual variable
annuity account values were held in non-guaranteed separate accounts as of
December 31, 2000 and 1999, respectively.
The assets underlying the Company's variable annuities are managed both
internally and by outside money managers, while the Company provides all policy
administration services. The Company utilizes a select group of money managers,
such as Wellington Management Company, LLP (Wellington), Putnam Financial
Services, Inc. (Putnam), American Funds, MFS Investment Management (MFS),
Franklin Templeton Group and Morgan Stanley Dean Witter InterCapital, Inc. All
have an interest in the continued growth in sales of the Company's products and
greatly enhance the marketability of the Company's annuities and the strength of
its product offerings. Two of the industry's top twenty leading variable
annuities, (based on sales for the year ended 2000) The Director(R) and Putnam
Hartford Capital Manager Variable Annuity, are sponsored by Hartford Life and
are managed in part by Wellington and Putnam, respectively. The Hartford
Leaders, a multi-manager variable annuity introduced in July 1999, combines the
product manufacturing, wholesaling and service capabilities of Hartford Life
with the investment management expertise of three of the nation's most
successful investment management organizations, American Funds, Franklin
Templeton Group and MFS. The Hartford Leaders has proved to be a strong product
from inception and is poised to join The Director(R) and Putnam Hartford Capital
Manager Variable Annuity as an industry leader.
Fixed MVA Annuities -- Fixed MVA annuities are fixed rate annuity contracts
which guarantee a specific sum of money to be paid in the future, either as a
lump sum or as monthly income. In the event that a policyholder surrenders a
policy prior to the end of the guarantee period, the MVA feature increases or
decreases the cash surrender value of the annuity in respect of any interest
rate decreases or increases, respectively, thereby protecting the Company from
losses due to higher interest rates at the time of surrender. The amount of
payment will not fluctuate due to adverse changes in the Company's investment
return, mortality experience or expenses. The Company's primary fixed MVA
annuities have terms varying from one to ten years with an average term of
approximately seven years. Sales of the Company's fixed MVA annuities increased
during 2000 as a result of the higher interest rate environment making 2000 the
best sales year for this product since 1995. Account values of fixed MVA
annuities were $9.0 billion and $8.4 billion as of December 31, 2000 and 1999,
respectively.
Mutual Funds -- In September 1996, the Company launched a family of retail
mutual funds. The Company provides investment management and administrative
services to The Hartford Mutual Funds, Inc., a family of fourteen mutual funds.
These funds are managed by Wellington and Hartford Investment Management
Company, a wholly-owned subsidiary of The Hartford. The Company has entered into
agreements with over 750 financial services firms to distribute these mutual
funds.
The Company charges management fees to the shareholders of the mutual funds,
which are recorded as revenue by the Company. Investors can purchase shares in
the mutual funds, all of which are registered with the Securities and Exchange
Commission, in accordance with the Investment Company Act of 1940. The mutual
funds are owned by the shareholders of those funds and not by the Company. As
such, the mutual fund assets and liabilities, as well as related investment
returns, are not reflected in the Company's consolidated financial statements
since they are not assets, liabilities and operations of the Company.
According to Strategic Insight (a mutual fund research and consulting
organization), The Hartford Mutual Funds, Inc. reached $10 billion in assets
faster than any other retail-oriented fund family in history. Eight of the
fourteen funds have Morningstar ratings and all eight have three-, four- or
five-star ratings as of December 31, 2000. Total retail mutual fund sales were
$5.2 billion, $3.3 billion and $1.6 billion in 2000, 1999 and 1998,
respectively.
Corporate -- The Company sells retirement plan products and services to
corporations under Section 401(k) plans targeting the small and medium case
markets since the Company believes these markets are underpenetrated in
comparison to the large case market. As of December 31, 2000, the Company
administered over 1,400 Section 401(k) plans.
Governmental -- The Company sells retirement plan products and services to
municipalities under Section 457 plans. The Company offers a number of different
funds, both fixed income and equity, to the employees in Section 457 plans.
Generally, the Company manages the fixed income funds and certain other outside
money managers act as advisors to the equity funds offered in Section 457 plans
administered by the Company. As of December 31, 2000, the Company administered
over 2,000 Section 457 plans.
Institutional Liabilities -- The Company also sells structured settlement
contracts which provide for periodic payments to an injured person or survivor
for a generally determinable number of years, typically in settlement of a claim
under a liability policy in lieu of a lump sum settlement. The Company's
structured settlements are sold through The Hartford's property-casualty
insurance operations as well as specialty brokers. The Company also markets
other annuity contracts for special purposes such as the funding of terminated
defined benefit pension plans. In addition, the Company offers GICs and
short-term funding agreements.
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Marketing and Distribution
The Investment Products distribution network is based on management's strategy
of utilizing multiple and competing distribution channels to achieve the
broadest distribution to reach target customers. The success of the Company's
marketing and distribution system depends on its product offerings, fund
performance, successful utilization of wholesaling organizations, quality of
customer service, and relationships with national and regional broker-dealer
firms, banks and other financial institutions, and independent financial
advisors (through which the sale of the Company's individual annuities to
customers is consummated).
Hartford Life maintains a distribution network of approximately 1,500
broker-dealers and approximately 500 banks. As of September 30, 2000, the
Company was selling products through 24 of the 25 largest retail banks in the
United States, including proprietary relationships with 10 of the top 25. The
Company periodically negotiates provisions and terms of its relationships with
unaffiliated parties, and there can be no assurance that such terms will remain
acceptable to the Company or such third parties. In August 1998, the Company
completed the purchase of all outstanding shares of PLANCO, a primary wholesaler
of the Company's individual annuities and mutual funds. PLANCO is the nation's
largest wholesaler of individual annuities and has played a significant role in
Hartford Life's growth over the past decade. As a wholesaler, PLANCO distributes
Hartford Life's fixed and variable annuities, mutual funds and single premium
variable life insurance by providing sales support to registered
representatives, financial planners and broker-dealers at brokerage firms and
banks across the United States. This acquisition secured an important
distribution channel for the Company and gives the Company a wholesale
distribution platform which it can expand in terms of both the number of
individuals wholesaling its products and the portfolio of products which they
wholesale. In addition, the Company uses internal personnel with extensive
experience in the Section 457 market, as well as access to the Section 401(k)
market, to sell its products and services in the retirement plan market.
Competition
The Investment Products segment competes with numerous other insurance companies
as well as certain banks, securities brokerage firms, investment advisors and
other financial intermediaries marketing annuities, mutual funds and other
retirement-oriented products. As a result of court decisions and regulatory
actions, national banks may become more significant competitors in the future
for insurers which sell annuities. The 1999 Gramm-Leach-Bliley Act (the
Financial Services Modernization Act), which allows affiliations among banks,
insurance companies and securities firms, did not precipitate any significant
changes in ownership in 2000. (For additional information, see the Regulatory
Matters and Contingencies section of the MD&A.) Product sales are affected by
competitive factors such as investment performance ratings, product design,
visibility in the marketplace, financial strength ratings, distribution
capabilities, levels of charges and credited rates, reputation and customer
service.
INDIVIDUAL LIFE
The Individual Life segment sells a variety of products including variable life,
universal life, interest sensitive whole life and term life insurance primarily
to the high end estate and business planning markets. Life insurance in force
increased 13% to $75.1 billion as of December 31, 2000 from $66.7 billion as of
December 31, 1999. Account values grew 8% to $5.8 billion as of December 31,
2000 from $5.4 billion as of December 31, 1999. The Individual Life segment
generated revenues of $640, $584 and $567 in 2000, 1999 and 1998, respectively.
Net income in the Individual Life segment was $79 in 2000, an 11% increase over
1999.
As previously mentioned, in January 2001, The Hartford, through Hartford Life,
agreed to acquire the U.S. individual life insurance business of Fortis. This
acquisition will add significant scale to the Company's individual life
business, and according to data provided by Tillinghast-Towers Perrin, Hartford
Life will move to third largest from fifth largest writer of variable life
insurance in the United States based upon new premium sales. It will also
broaden the Company's reach in the emerging affluent market with the addition of
a retail broker-dealer consisting of approximately 3,000 registered
representatives. (For additional information, see the Capital Resources and
Liquidity section of the MD&A under "Subsequent Event".)
Principal Products
The trend in the individual life industry has been a shift away from traditional
products and fixed universal life insurance towards variable life (including
variable universal life) insurance products, in which Hartford Life has been on
the leading edge. In 2000, of the Company's new sales of individual life
insurance, 89% was variable life and 10% was either universal life or interest
sensitive whole life. The Company also sold a small amount of term life
insurance.
Variable Life -- Variable life insurance provides a return linked to an
underlying investment portfolio and the Company allows policyholders to
determine their desired asset mix among a variety of underlying mutual funds. As
the return on the investment portfolio increases or decreases, as the case may
be, the death benefit or surrender value of the variable life policy may
increase or decrease. The Company's single premium variable life product
provides a death benefit to the policy beneficiary based on a single premium
deposit. The Company's second-to-die products are distinguished from other
products in that two lives are insured rather than one, and the policy proceeds
are paid upon the death of both insureds. Second-to-die policies are frequently
used in estate
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planning, often to fund estate taxes for a married couple. Variable life account
values were $2.9 billion and $2.6 billion as of December 31, 2000 and 1999,
respectively.
Universal Life and Interest Sensitive Whole Life -- Universal life and interest
sensitive whole life insurance coverages provide life insurance with adjustable
rates of return based on current interest rates. The Company offers both
flexible and fixed premium policies and provides policyholders with flexibility
in the available coverage, the timing and amount of premium payments and the
amount of the death benefit, provided there are sufficient policy funds to cover
all policy charges for the coming period. The Company also sells universal life
insurance policies with a second-to-die feature similar to that of the variable
life insurance product offered. Universal life and interest sensitive whole life
account values were $2.1 billion and $2.0 billion as of December 31, 2000 and
1999, respectively.
Marketing and Distribution
Consistent with the Company's strategy to access multiple distribution outlets,
the Individual Life distribution organization has been developed to penetrate a
multitude of retail sales channels. These include independent life insurance
sales professionals; agents of other companies; national, regional and
independent broker-dealers; banks and property and casualty insurance
organizations. The primary organization used to wholesale Hartford Life's
products to these outlets is a group of highly qualified life insurance
professionals with specialized training in sophisticated life insurance sales,
particularly as it pertains to estate and business planning. These individuals
are generally employees of Hartford Life, who are managed through a regional
sales office system. The Company has grown this organization rapidly the past
few years to over 210 individuals and expects to continue to increase the number
of wholesalers in the future.
Competition
The Individual Life segment competes with approximately 1,500 life insurance
companies in the United States, as well as other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered, pricing,
relationships with third-party distributors and the quality of underwriting and
customer service.
GROUP BENEFITS
The Group Benefits segment 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, accidental death and dismemberment,
travel accident and other special risk coverages to employers and associations.
The Company also offers disability underwriting, administration, claims
processing services and reinsurance to other insurers and self-funded employer
plans. According to the latest results published by Life Insurance Marketing and
Research Association (LIMRA), the Company, based on sales, was the third largest
provider of group disability insurance and the fourth largest writer of group
term life insurance in the United States for the nine months ended September 30,
2000. Generally, policies sold in this segment are term insurance, typically
with one or two year rate guarantees. These rate guarantees allow the Company to
make adjustments in rate or terms of its policies in order to minimize the
adverse effect of various market trends. In the disability market, the Company
focuses on strong underwriting and claims management to derive a competitive
advantage. As of December 31, 2000 and 1999, the Company had group disability
reserves of $2.0 billion and $1.8 billion and group life reserves of $601 and
$560, respectively. The Group Benefits segment generated revenues of $2.2
billion, $2.0 billion and $1.8 billion in 2000, 1999 and 1998, respectively, of
which group disability insurance accounted for $939, $860 and $763 and group
life insurance accounted for $687, $654 and $593 of total Group Benefits
revenues in 2000, 1999 and 1998, respectively. Net income in the Group Benefits
segment was $90 in 2000, a 14% increase over 1999.
Principal Products
Group Disability -- Hartford Life is one of the largest participants in the
"large case" market of the group disability insurance business. The large case
market, as defined by the Company, generally consists of group disability
policies covering over 500 employees in a particular company. The Company is
continuing its focus on the "small case" and "medium case" group markets,
emphasizing name recognition and reputation as well as the Company's managed
disability approach to claims and administration. The Company's efforts in the
group disability market focus on early intervention, return-to-work programs,
reduction of long-term disability claims and successful rehabilitation. Over the
last several years, the focus of new disability products introduced is to
provide incentives for employees to return to independence. The Company also
works with disability claimants to improve the receipt rate of Social Security
offsets (i.e., reducing payment of benefits by the amount of Social Security
payments received).
Hartford Life has concentrated on a managed disability approach, which
emphasizes early claimant intervention in an effort to facilitate a disabled
claimant's return to work and thereby contain costs. This approach, coupled with
an individualized approach to claim servicing, and an incentive to contain
costs, leads to an overall reduction in the cost of disability coverage for
employers. The Company's short-term disability benefit plans provide a weekly
benefit amount (typically 60% to 70% of the employee's earned income up to a
specified maximum benefit) to insured employees when they are unable to work due
to an accident or illness. Long-
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term disability insurance provides a monthly benefit for those extended periods
of time not covered by a short-term disability benefit plan when insured
employees are unable to work due to disability. Employees may receive total or
partial disability benefits. Most of these policies begin providing benefits
following a 90 or 180 day waiting period and generally continue providing
benefits until the employee reaches age 65. Long-term disability benefits are
paid monthly and are limited to a portion, generally 50-70%, of the employee's
earned income up to a specified maximum benefit.
Group Life -- Group term life insurance provides term coverage to employees and
their dependents for a specified period and has no accumulation of cash values.
The Company offers options for its basic group life insurance coverage,
including portability of coverage and a living benefit option, whereby
terminally ill policyholders can receive death benefits prior to their deaths.
In addition, the Company offers premium waivers and accidental death and
dismemberment coverage to employee groups.
Other -- Hartford Life provides excess of loss medical coverage (known as stop
loss insurance) to employers who self-fund their medical plans and pay claims
using the services of a third-party administrator. The Company provides Medicare
Supplement, travel accident, hospital indemnity and other coverages (including
group life and group disability) primarily to individual members of various
associations as well as employee groups.
Marketing and Distribution
Hartford Life uses an experienced group of Company employees, managed through a
regional sales office system, to distribute its group insurance products and
services through a variety of distribution outlets. The Company expanded its
sales office system during 1999, by increasing the sales force and the number of
sales offices by about 25% and 15%, respectively. The Company will continue to
expand the system over the coming years in areas that have the highest growth
potential. The Company will also continue to develop alternative distribution
channels to sell its products, such as sales to employers through brokers,
consultants and third-party administrators as well as to multiple employer
groups through its relationships with trade associations. In keeping with its
strategy of developing multiple distribution channels, the Company signed an
agreement in January 2001 with Wausau Benefits, Inc., the country's tenth
largest third-party administrator, to sell its group life and group disability
products.
Competition
Competitive factors primarily affecting Group Benefits are the variety and
quality of products offered, the price quoted for coverage and services, the
Company's relationships with its third-party distributors and the quality of
customer service. Group Benefits competes with numerous other insurance
companies and other financial intermediaries marketing insurance products.
However, many of these businesses have relatively high barriers to entry and
there have been very few new entrants over the past few years, while other major
carriers have exited the market.
CORPORATE OWNED LIFE INSURANCE (COLI)
Hartford Life is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
or a trust sponsored by the company named as the beneficiary under the policy.
Until the Health Insurance Portability Act of 1996 (HIPA Act of 1996), the
Company sold two principal types of COLI, leveraged and variable products.
Leveraged COLI is a fixed premium life insurance policy owned by a company or a
trust sponsored by a company. The HIPA Act of 1996 phased out the deductibility
of interest on policy loans under leveraged COLI at the end of 1998, virtually
eliminating all future sales of leveraged COLI. Variable COLI continues to be a
product used by employers to fund non-qualified benefits or other postemployment
benefit liabilities. Variable COLI account values were $15.9 billion and $12.4
billion as of December 31, 2000 and 1999, respectively.
Leveraged COLI account values decreased to $5.0 billion as of December 31, 2000
from $5.7 billion as of December 31, 1999, primarily due to the HIPA Act of
1996. Although COLI revenues decreased in 2000 to $767 from $831 in 1999, COLI
net income increased 13%, to $34 in 2000.
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OTHER MATTERS
RESERVES
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of Hartford Life establish and carry as
liabilities actuarially determined reserves which are calculated to meet their
future obligations. Reserves for life insurance and disability contracts are
based on actuarially recognized methods using prescribed morbidity and mortality
tables in general use in the United States, which are modified to reflect
Hartford Life's actual experience when appropriate. These reserves are computed
at amounts that, with additions from estimated premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet Hartford Life'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 in a manner that
is comparable to direct insurance reserves. Additional information may be found
in the Reserves section of the MD&A.
REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory
and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency that must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Most states have enacted legislation that regulates insurance holding company
systems such as Hartford Life. 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.
REINSURANCE
In accordance with normal industry practice, Hartford Life is involved in both
the cession and assumption of insurance with other insurance and reinsurance
companies. As of December 31, 2000, the maximum amount of life insurance
retained on any one life by any one of the life operations was approximately
$2.5.
INVESTMENT OPERATIONS
The Company's investment operations are managed by its investment strategy group
which reports directly to senior management of the Company. Hartford Life's
investments have been separated into specific portfolios which support specific
classes of product liabilities. The investment strategy group works closely with
the product lines to develop investment guidelines, including duration targets,
asset allocation and convexity constraints, asset/liability mismatch tolerances
and return objectives, to ensure that the product line's individual risk and
return objectives are met. The Company's primary investment objective for its
general account and guaranteed separate accounts is to maximize after-tax
returns consistent with acceptable risk parameters, including the management of
the interest rate sensitivity of invested assets to that of policyholder
obligations.
For further discussion of Hartford Life's approach to managing risks, see the
Investments and Capital Markets Risk Management sections of the MD&A, as well as
Note 4 of Notes to Consolidated Financial Statements.
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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 AND REGULATORY INITIATIVES
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Legislative and Regulatory Initiatives".
INSOLVENCY FUND
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Guaranty Fund".
NAIC PROPOSALS
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "NAIC Proposals".
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Dependence on Certain Third Party Relationships".
EMPLOYEES
Hartford Life had approximately 5,600 employees at February 28, 2001.
ITEM 2. PROPERTIES
Hartford Life's principal executive offices are located in Simsbury,
Connecticut. The Company's home office complex consists of approximately 655
thousand square feet, and is leased from a third party by Hartford Fire
Insurance Company (Hartford Fire), an indirect subsidiary of The Hartford. This
lease expires in the year 2009. Expenses associated with these offices are
allocated on a direct basis to Hartford Life by Hartford Fire. The Company
believes its properties and facilities are suitable and adequate for current
operations.
ITEM 3. LEGAL PROCEEDINGS
Hartford Life is involved or may become involved in various legal actions, in
the normal course of its business, in which claims for alleged economic and
punitive damages have been or may be asserted. Some of the pending litigation
has been filed as purported class actions and some actions have been filed in
certain jurisdictions that permit punitive damage awards that are
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 potential, pending or threatened legal actions,
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.
PART II
ITEM 5. MARKET FOR HARTFORD LIFE'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are ultimately owned by The Hartford. As
of March 28, 2001 the Company had issued and outstanding 1,000 shares of Common
Stock at $0.01 par value per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life, Inc. and
its subsidiaries ("Hartford Life" or the "Company") as of December 31, 2000,
compared with December 31, 1999, and its results of operations for the years
ended December 31, 2000 and 1999. 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 or in Part I of the Company's Form
10-K, 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 Hartford Life's control and have been made based upon
management's expectations and beliefs concerning future developments and their
potential effect on 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 and business conditions that are less favorable than
anticipated, legislative developments, changes in interest rates or the stock
markets, stronger than anticipated competitive activity and those factors
described in such forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
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Consolidated Results of Operations 12
Investment Products 14
Individual Life 15
Group Benefits 16
Corporate Owned Life Insurance (COLI) 17
Reserves 17
Investments 18
Capital Markets Risk Management 20
Capital Resources and Liquidity 27
Regulatory Matters and Contingencies 30
Effect of Inflation 31
Accounting Standards 31
CONSOLIDATED RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Hartford Life provides investment and retirement products such as variable and
fixed annuities, mutual funds and retirement plan services; individual and
corporate owned life insurance; and, group benefit products such as group life
and group disability insurance.
Hartford Life derives its revenues principally from: (a) fee income, including
asset management fees on separate account and mutual fund assets and mortality
and expense fees, as well as cost of insurance charges; (b) fully insured
premiums; (c) certain other fees; and (d) net investment income on general
account assets. Asset management fees and mortality and expense fees are
primarily generated from separate account assets, which are deposited with the
Company through the sale of variable annuity and variable life products, and
mutual funds. Cost of insurance charges are assessed on the net amount at risk
for investment oriented life insurance products. Premium revenues are derived
primarily from the sale of group life and group disability insurance products.
Hartford Life's expenses essentially consist of interest credited to
policyholders on general account liabilities, insurance benefits provided,
dividends to policyholders, costs of selling and servicing the various products
offered by the Company, and other general business expenses.
Hartford Life's profitability depends largely on the amount of assets under
management, the level of fully insured premiums, the adequacy of product pricing
and underwriting discipline, claims management and operating efficiencies, and
its ability to earn target spreads between earned investment rates on general
account assets and credited rates to customers.
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OPERATING SUMMARY
2000 1999
- --------------------------------------------------------------------------------
Fee income $ 2,484 $ 2,105
Earned premiums and other 2,002 1,874
Net investment income 1,592 1,562
Net realized capital losses (88) (5)
- --------------------------------------------------------------------------------
TOTAL REVENUES 5,990 5,536
- --------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 3,162 3,054
Insurance expenses and other 1,236 1,057
Amortization of deferred policy acquisition costs 671 568
Dividends to policyholders 67 104
Interest expense 66 67
- --------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 5,202 4,850
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 788 686
Income tax expense 213 219
- --------------------------------------------------------------------------------
NET INCOME $ 575 $ 467
- --------------------------------------------------------------------------------
Hartford Life has the following reportable operating segments: Investment
Products, Individual Life, Group Benefits (formerly 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, which are primarily located in Latin America
and the Far East, in an "Other" category. For information regarding the
Company's reportable segments, see Note 17 of Notes to Consolidated Financial
Statements.
On June 27, 2000, The Hartford Financial Services Group, Inc. ("The Hartford")
acquired all of the outstanding shares of Hartford Life that it did not already
own. (For additional information, see the Capital Resources and Liquidity
section under "Common Stock Acquired by The Hartford".)
On January 25, 2001, The Hartford, through Hartford Life, agreed to acquire the
U.S. individual life insurance, annuity and mutual fund businesses of Fortis,
Inc. (operating as Fortis Financial Group and referred to as "Fortis"). This
transaction is expected to be completed in the second quarter of 2001. (For
additional information, see the Capital Resources and Liquidity section under
"Subsequent Event".)
Revenues increased $454, or 8%, primarily related to the growth across each of
Hartford Life's primary operating segments, particularly the Investment Products
and Group Benefits segments, where revenues increased $339, or 17%, and $183, or
9%, respectively. The revenue growth in the Investment Products segment was
primarily due to higher fee income in the individual annuity and retail mutual
fund operations as related average assets under management in 2000 were higher
than 1999. The Group Benefits segment experienced higher earned premiums due to
strong sales and persistency. The Individual Life segment also contributed to
the revenue increase as a result of strong sales and favorable persistency.
Partially offsetting the growth in revenues was the decrease in COLI revenues
primarily related to the declining block of leveraged COLI business.
Benefits, claims and expenses increased $352, or 7%, primarily related to the
growth in Hartford Life's principal operating segments described above. Net
income increased $108, or 23%, led by the Investment Products segment where net
income increased $94, or 28%. Additionally, net income related to each of the
remaining three operating segments increased 10% or more. Hartford Life also
recorded a benefit related to the settlement of certain federal tax matters of
$24 in 2000 (see Note 16 (c) of Notes to Consolidated Financial Statements).
This benefit, along with an $8 benefit related to state income taxes, resulted
in $32 of tax benefits for the year ended December 31, 2000. Additionally, net
realized capital losses increased due to portfolio rebalancing. Excluding the
tax items and net realized capital losses, earnings increased $133, or 28%.
OUTLOOK
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader within the financial services
industry, to continue the Company's growth in assets under management and fully
insured premium growth and to maximize shareholder value. Hartford Life is well
positioned to assist individuals in meeting their financial goals as they
increasingly save and plan for retirement, protect themselves and their families
against disability or death and prepare their estates for an efficient transfer
of wealth between generations. Hartford Life's strong market position in its
primary businesses, which align with these growing markets, will provide
opportunities to increase sales of the Company's products and services.
Certain proposed legislative initiatives which could impact Hartford Life are
discussed in the Regulatory Matters and Contingencies section.
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SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
2000 1999
- --------------------------------------------------------------------------------
Investment Products $ 424 $ 330
Individual Life 79 71
Group Benefits 90 79
Corporate Owned Life Insurance 34 30
Other (52) (43)
- --------------------------------------------------------------------------------
NET INCOME $ 575 $ 467
- --------------------------------------------------------------------------------
A description of each segment as well as an analysis of the operating results
summarized above is included on the following pages. Reserves and Investments
are discussed in separate sections.
INVESTMENT PRODUCTS
OPERATING SUMMARY
2000 1999
- --------------------------------------------------------------------------------
Fee income and other $ 1,639 $ 1,333
Net investment income 741 708
- --------------------------------------------------------------------------------
TOTAL REVENUES 2,380 2,041
- --------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 700 668
Insurance expenses and other 551 440
Amortization of deferred policy acquisition costs 516 430
- --------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,767 1,538
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 613 503
Income tax expense 189 173
- --------------------------------------------------------------------------------
NET INCOME $ 424 $ 330
- --------------------------------------------------------------------------------
Individual variable annuity account values $ 78,174 $ 80,588
Other individual annuity account values 9,059 8,383
Other investment products account values 17,376 16,352
- --------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 104,609 105,323
Mutual fund assets under management 11,432 6,374
- --------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $116,041 $111,697
- --------------------------------------------------------------------------------
The Investment Products segment 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 variable and fixed annuities,
mutual funds, retirement plan services and other investment products. The
Company was ranked the number one writer of individual variable annuities in the
United States for 2000 according to Variable Annuity and Research Data Service
(VARDS) and the number one seller of individual variable annuities through
banks, according to Kenneth Kehrer Associates (a leading consultant to banks).
In addition, The Hartford Mutual Funds, Inc. reached $10 billion in assets
faster than any other retail-oriented mutual fund family in history, according
to Strategic Insight. Also, eight of the fourteen retail mutual funds have
Morningstar ratings and, as of December 31, 2000, all eight have three-, four-
or five-star ratings.
Revenues increased $339, or 17%, primarily due to higher fee income in the
individual annuity and retail mutual fund operations. Fee income generated by
individual annuities increased $227, or 20%, while related average account
values grew $8.2 billion, or 10%, to $88.1 billion. The growth in average
account values was due, in part, to strong sales of $10.7 billion in 2000, and
the significant equity market performance in 1999, partially offset by
surrenders. Although average individual annuity account values in 2000 were
higher than 1999, account values at December 31, 2000 declined $1.7 billion, or
2%, as compared to December 31, 1999, as strong sales were not sufficient to
offset surrenders and the impact of the retreating equity markets. In addition,
fee income from other investment products increased $99, or 54%, primarily
driven by the Company's retail mutual fund operation, where related assets under
management increased $4.0 billion, or 63%. This substantial increase in the
retail mutual fund operation was due to sales of $5.2 billion in 2000, which was
partially offset by redemptions.
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Due to the continued growth in this segment, particularly the individual annuity
and retail mutual fund operations, total benefits, claims and expenses increased
$229, or 15%. This increase was driven by amortization of deferred policy
acquisition costs and operating expenses, which grew $86, or 20%, and $43, or
15%, respectively, primarily related to growth in the individual annuity
operation. Additionally, non-deferred commissions increased $83, or 59%,
principally related to growth in the retail mutual fund operation.
Net income increased $94, or 28%, primarily due to the growth in revenues
discussed above. Additionally, the Investment Products segment continued to
maintain its profit margins related to its primary businesses, thus contributing
to the segment's earnings growth. In particular, its individual annuity
operation's operating expenses as a percentage of average individual annuity
account values remained consistent with the prior year at 21 basis points.
OUTLOOK
The market for retirement products continues to expand as individuals
increasingly save and plan for retirement. Demographic trends suggest that as
the "baby boom" generation matures, a significant portion of the United States
population will allocate a greater percentage of their disposable incomes to
saving for their retirement years due to uncertainty surrounding the Social
Security system and increases in average life expectancy. As this market grows,
particularly for variable annuities and mutual funds, new companies are
continually entering the market, aggressively seeking distribution channels and
pursuing market share. This trend is not expected to subside, particularly in
light of the Gramm-Leach-Bliley Act of 1999 (the Financial Services
Modernization Act), which permits affiliations among banks, insurance companies
and securities firms.
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader in the financial services industry.
INDIVIDUAL LIFE
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999
- --------------------------------------------------------------------------------
Fee income and other $ 459 $ 412
Net investment income 181 172
- --------------------------------------------------------------------------------
TOTAL REVENUES 640 584
- --------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 274 258
Amortization of deferred policy acquisition costs 145 129
Insurance expenses and other 103 88
- --------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 522 475
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INCOME BEFORE INCOME TAX EXPENSE 118 109
Income tax expense 39 38
- --------------------------------------------------------------------------------
NET INCOME $ 79 $ 71
- --------------------------------------------------------------------------------
Variable life account values $ 2,947 $ 2,595
Total account values $ 5,849 $ 5,419
- --------------------------------------------------------------------------------
Variable life insurance in force $33,460 $23,854
Total life insurance in force $75,113 $66,690
- --------------------------------------------------------------------------------
The Individual Life segment sells a variety of life insurance products,
including variable life, universal life, interest sensitive whole life and term
life insurance primarily to the high end estate and business planning markets.
Revenues increased $56, or 10%, resulting primarily from fee income associated
with the growing block of variable life insurance. Fee income increased $59, or
15%, as variable life account values increased $352, or 14%, and variable life
insurance in force increased $9.6 billion, or 40%.
Benefits, claims and expenses increased $47, or 10%, primarily due to a $16, or
6%, increase in benefits, claims and claim adjustment expenses and a $16, or
12%, increase in amortization of deferred policy acquisition costs mostly
associated with the growth in this segment's variable business. Additionally,
insurance expenses and other increased $15, or 17%, directly associated with the
growth in this segment as previously described. Net income increased $8, or 11%,
primarily due to higher fee income as mortality experience (death claims as a
percentage of net amount at risk) was consistent with prior year.
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OUTLOOK
Management believes that the Company's strong market position will provide
opportunities for growth in this segment as individuals increasingly focus on
estate planning. The Hartford's agreement, through Hartford Life, to acquire the
U.S. individual life insurance business of Fortis is expected to increase the
Company's scale in the individual life insurance business while broadening its
distribution capabilities through the addition of a retail broker-dealer. It is
expected that the consummation of this transaction will enhance the Company's
goal of broadening its reach in the emerging affluent market.
GROUP BENEFITS
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999
- --------------------------------------------------------------------------------
Earned premiums and other $1,981 $1,829
Net investment income 226 195
- --------------------------------------------------------------------------------
TOTAL REVENUES 2,207 2,024
- --------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 1,643 1,507
Insurance expenses and other 450 415
- --------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,093 1,922
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 114 102
Income tax expense 24 23
- --------------------------------------------------------------------------------
NET INCOME $ 90 $ 79
- --------------------------------------------------------------------------------
The Group Benefits segment 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, accidental death and dismemberment,
travel accident and other special risk coverages to employers and associations.
The Company also offers disability underwriting, administration, claims
processing services and reinsurance to other insurers and self-funded employer
plans. According to the latest results published by the Life Insurance Marketing
and Research Association (LIMRA), the Company was the third largest provider of
group disability insurance and the fourth largest writer of group term life
insurance, based on sales, in the United States for the nine months ended
September 30, 2000.
Revenues increased $183, or 9%, driven primarily by growth in fully insured
premiums, excluding buyouts, which increased $182, or 10%, principally due to
favorable persistency of the in force block of business, as well as new sales.
Also contributing to the revenue growth was an increase in net investment income
of $31, or 16%.
Total benefits, claims and expenses increased $171, or 9%, primarily due to
higher benefits, claims and claim adjustment expenses which, excluding buyouts,
increased $168, or 12%, directly related to revenue growth in this segment. The
segment's combined ratio (ratio of total benefits, claims and expenses as a
percentage of earned premiums and other) was consistent with the prior year. As
such, net income increased $11, or 14%, primarily driven by the increased
revenues described above.
OUTLOOK
As employers continue to offer benefit plans in order to attract and retain
valued employees, management expects that the need for group life and group
disability insurance will continue to expand and believes the Company is well
positioned to take advantage of this growth potential.
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CORPORATE OWNED LIFE INSURANCE (COLI)
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999
- --------------------------------------------------------------------------------
Fee income and other $ 401 $ 400
Net investment income 366 431
- --------------------------------------------------------------------------------
TOTAL REVENUES 767 831
- --------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 545 621
Insurance expenses and other 102 59
Dividends to policyholders 67 104
- --------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 714 784
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 53 47
Income tax expense 19 17
- --------------------------------------------------------------------------------
NET INCOME $ 34 $ 30
- --------------------------------------------------------------------------------
Variable COLI account values $15,937 $12,386
Leveraged COLI account values 4,978 5,729
- --------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $20,915 $18,115
- --------------------------------------------------------------------------------
Hartford Life is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
or a trust sponsored by the company named as beneficiary under the policy. Until
the Health Insurance Portability and Accountability Act of 1996 (HIPA Act of
1996), the Company sold two principal types of COLI business, leveraged and
variable products. Leveraged COLI is a fixed premium life insurance policy owned
by a company or a trust sponsored by a company. The HIPA Act of 1996 phased out
the deductibility of interest on policy loans under leveraged COLI through the
end of 1998, virtually eliminating all future sales of this product. Variable
COLI continues to be a product used by employers to fund non-qualified benefits
or other postemployment benefit liabilities.
Revenues in the COLI segment decreased $64, or 8%, primarily due to a decline in
net investment income of $65, or 15%. This decline was principally due to the
leveraged COLI block of business, as related account values decreased $751, or
13%, as a result of the continued downsizing caused by the HIPA Act of 1996.
Total benefits, claims and expenses decreased $70, or 9%, primarily due to the
factor described above. Net income increased $4, or 13%, principally due to the
variable COLI business where related account values increased $3.6 billion, or
29%, as well as earnings associated with a block of leveraged COLI business
recaptured in 1998. For additional information on this recaptured business, see
Note 12 of Notes to Consolidated Financial Statements.
OUTLOOK
The focus of this segment is variable COLI, which continues to be a product
generally used by employers to fund non-qualified benefits or other
postemployment benefit liabilities. The leveraged COLI product has been an
important contributor to Hartford Life's profitability in recent years and will
continue to contribute to the profitability of Hartford Life in the future,
although the level of profit from leveraged COLI is expected to decline. COLI is
subject to a changing legislative and regulatory environment that could have a
material adverse effect on its business.
RESERVES
- --------------------------------------------------------------------------------
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet their
future obligations. Reserves for life insurance and disability contracts are
based on actuarially recognized methods using prescribed morbidity and mortality
tables in general use in the United States, which are modified to reflect
Hartford Life's actual experience when appropriate. These reserves are computed
at amounts that, with additions from estimated premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet Hartford Life'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 in a manner that
is comparable to direct insurance reserves.
The liability for policy benefits for universal life-type contracts and
interest-sensitive whole life policies is equal to the balance that accrues to
the benefit of policyholders, including credited interest, amounts that have
been assessed to compensate the Company for services to be performed over future
periods, and any amounts previously assessed against policyholders that are
refundable on termination of the contract. For investment contracts,
policyholder liabilities are equal to the accumulated policy account values,
which consist of an accumulation of deposit payments plus credited interest,
less withdrawals and amounts assessed through the end
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of the period. 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 levels.
The persistency of Hartford Life'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 either the accumulation value
or considerations received, which varies by product, and generally decreases
gradually during the penalty period. Surrender charges are set at levels to
protect Hartford Life 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.
INVESTMENTS
- --------------------------------------------------------------------------------
Hartford Life's investments are managed by its investment strategy group, which
consists of a risk management unit and a portfolio management unit and reports
directly to senior management of the Company. The risk management unit is
responsible for monitoring and managing the Company's asset/liability profile
and establishing investment objectives and guidelines. The portfolio management
unit is responsible for determining, within specified risk tolerances and
investment guidelines, the appropriate asset allocation, duration, and convexity
characteristics of the Company's general account and guaranteed separate account
investment portfolios. Hartford Investment Management Company, a wholly-owned
subsidiary of The Hartford Financial Services Group, Inc., executes the
investment plan of the investment strategy group, including the identification
and purchase of securities that fulfill the objectives of the strategy group.
The primary investment objective of the Company'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) as discussed in the Capital Markets Risk Management
section under "Market Risk - Interest Rate Risk".
The Company's general account consists of a diversified portfolio of
investments. Although all the assets of the general account support the
Company's general account liabilities, the Company's investment strategy group
has developed separate investment portfolios for specific classes of product
liabilities within the general account. The strategy group works closely with
the business lines to develop specific investment guidelines, including duration
targets, asset allocation and convexity constraints, asset/liability mismatch
tolerances and return objectives for each product line in order to achieve each
product line's individual risk and return objectives.
Invested assets in the Company's general account totaled $22.9 billion as of
December 31, 2000 and were comprised of $18.2 billion of fixed maturities, $3.6
billion of policy loans, equity securities of $171 and other investments of
$910. 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. The
decrease in policy loans was primarily due to the decline in leveraged COLI
business (as discussed in the COLI section). 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. The
increase in other investments primarily reflects an increase in limited
partnership investments.
The following table sets forth by type the fixed maturity securities held in the
Company's general account as of December 31, 2000 and 1999.
2000 1999
-------------------------------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- --------------------------------------------------------------------------------------
Corporate $ 7,663 42.0% $ 7,737 45.4%
Asset backed securities 3,070 16.8% 2,508 14.7%
Commercial mortgage backed securities 2,776 15.2% 2,112 12.4%
Municipal - tax-exempt 1,390 7.6% 1,108 6.5%
Collateralized mortgage obligations 928 5.1% 592 3.5%
Mortgage backed securities - agency 602 3.3% 853 5.0%
Government/Government agencies - Foreign 321 1.8% 339 2.0%
Government/Government agencies - U.S. 244 1.3% 229 1.3%
Municipal - taxable 83 0.5% 165 1.0%
Short-term 975 5.3% 1,346 7.9%
Redeemable preferred stock 196 1.1% 46 0.3%
- --------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $18,248 100.0% $17,035 100.0%
- --------------------------------------------------------------------------------------
During 2000, the Company continued its investment strategy of increasing its
allocation to municipal tax-exempt securities with the objective of increasing
after-tax yield. Short-term and corporate securities declined primarily as a
result of the funding of scheduled
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liability maturities and reallocation into other asset sectors, particularly
asset backed securities and commercial mortgage backed securities. Additionally,
investments were shifted from mortgage backed securities - agency to
collateralized mortgage obligations to increase the prepayment protection of the
portfolio.
As of December 31, 2000 and December 31, 1999, approximately 22.3% and 21.5%,
respectively, of the Company's fixed maturity portfolio was invested in private
placement securities (including 13% and 12% of Rule 144A offerings as of
December 31, 2000 and December 31, 1999, respectively). Private placement
securities are generally less liquid than public securities. However, private
placements generally have covenants designed to compensate for liquidity risk.
Most of the private placement securities in the Company's portfolio are rated by
nationally recognized rating agencies. For further discussion of the Company's
investment credit policies, see the Capital Markets Risk Management section
under "Credit Risk".
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
(Before-tax) 2000 1999
- --------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 1,284 $ 1,171
Policy loan income 308 391
- --------------------------------------------------------------------------------
Net investment income - total $ 1,592 $ 1,562
- --------------------------------------------------------------------------------
Yield on average invested assets (1) 7.0% 6.7%
- --------------------------------------------------------------------------------
Net realized capital losses $ (88) $ (5)
- --------------------------------------------------------------------------------
(1) Represents net investment income (excluding net realized capital losses)
divided by average invested assets at cost (fixed maturities at amortized
cost).
Net investment income, excluding policy loan income, increased $113, or 10%. The
increase was primarily due to higher yields earned on the investment cash flow
from operations and reinvestment of proceeds from sales and maturities of fixed
maturity securities in a higher interest rate environment. Policy loan income
decreased $83, or 21%, due to the decrease in leveraged COLI business.
Net realized capital losses increased $83 primarily as a result of portfolio
rebalancing in a higher interest rate environment.
SEPARATE ACCOUNT PRODUCTS
Separate account products are those for which a separate investment and
liability account is maintained on behalf of the policyholder. Separate accounts
reflect two categories of risk assumption: non-guaranteed separate accounts
totaling $104.2 billion and $101.8 billion as of December 31, 2000 and 1999,
respectively, wherein the policyholder assumes substantially all the investment
risk and reward, and guaranteed separate accounts totaling $9.8 billion and $8.9
billion as of December 31, 2000 and 1999, respectively, wherein Hartford Life
contractually guarantees either a minimum return or account value to the
policyholder. The primary investment objective of the Company's guaranteed
separate 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) as discussed in
the Capital Markets Risk Management section under "Market Risk - Interest Rate
Risk."
Investment objectives for non-guaranteed separate accounts vary by fund type, as
outlined in the applicable fund prospectus or separate account plan of
operations. Non-guaranteed separate account products include variable annuities,
variable life insurance contracts and variable COLI. Guaranteed separate account
products primarily consist of modified guaranteed individual annuities and
modified guaranteed life insurance and generally include market value adjustment
features and surrender charges to mitigate the risk of disintermediation.
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CAPITAL MARKETS RISK MANAGEMENT
- --------------------------------------------------------------------------------
Hartford Life is exposed to two primary sources of investment risk and
asset/liability management risk: credit risk, relating to the uncertainty
associated with an obligor's continued ability to make timely payment of
principal and/or interest, and market risk, relating to the market price and/or
cash flow variability associated with changes in interest rates, security
prices, market indices, yield curves or currency exchange rates. The Company
does not hold any financial instruments purchased for trading purposes. The
following discussion identifies the Company's policies and procedures for
managing these risks and monitoring the results of the Company's risk management
activities.
CREDIT RISK
Hartford Life has established investment credit policies that focus on the
credit quality of obligors and counterparties, limit credit concentrations,
encourage diversification and require frequent creditworthiness reviews.
Investment activity, including setting of policy and defining acceptable risk
levels, is subject to regular review and approval by senior management and
reported to The Hartford's Finance Committee.
The Company invests primarily in securities which are rated investment grade and
has established exposure limits, diversification standards and review procedures
for all credit risks including borrower, issuer and 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 on a regular interval.
Hartford Life is not exposed to any significant credit concentration risk of a
single issuer.
The following table identifies fixed maturity securities, including guaranteed
separate accounts, for the Company's operations by credit quality. The ratings
referenced in the tables are based on the ratings of nationally recognized
rating organizations or, if not rated, assigned based on the Company's internal
analysis of such securities.
As of December 31, 2000 and 1999, over 97% of the fixed maturity portfolio,
including guaranteed separate accounts, was invested in investment grade
securities.
2000 1999
-------------------------------------------
FIXED MATURITIES BY CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- ---------------------------------------------------------------------------------
U.S. Government/Government agencies $ 2,329 8.4% $ 2,404 9.3%
AAA 4,896 17.6% 3,535 13.6%
AA 3,546 12.7% 3,199 12.3%
A 9,675 34.7% 8,731 33.6%
BBB 5,633 20.2% 5,816 22.4%
BB & below 708 2.5% 559 2.1%
Short-term 1,085 3.9% 1,728 6.7%
- ---------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $27,872 100.0% $25,972 100.0%
- ---------------------------------------------------------------------------------
The Company also maintains credit policies regarding the financial stability and
credit standing of its major derivatives' counterparties and typically requires
credit enhancement provisions to further reduce its credit risk. Credit risk for
derivatives contracts is limited to the amounts calculated to be due to the
Company on such contracts based on current market conditions and potential
payment obligations between the Company and its counterparties. Credit exposures
are generally quantified weekly and netted. Collateral is pledged to and held
by, or on behalf of, the Company to the extent the current value of derivatives
exceeds exposure policy thresholds.
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MARKET RISK
Hartford Life's general and guaranteed separate account exposure to market risk
relates to the market price and/or cash flow variability associated with changes
in market interest rates. The following discussion focuses on the Company's
exposure to interest rate risk, asset/liability management strategies utilized
to manage this risk, and characteristics of the Company's insurance liabilities
and their sensitivity to movements in interest rates.
Downward movement in market interest rates during 2000 resulted in a significant
increase in the unrealized appreciation of the fixed income security portfolio
from 1999. However, Hartford Life's asset allocation and its exposure to market
risk have not changed materially from its position at December 31, 1999.
INTEREST RATE RISK
Changes in interest rates can potentially impact Hartford Life's profitability.
Under certain circumstances of interest rate volatility, the Company could be
exposed to disintermediation risk and reduction in net interest rate spread or
profit margins. The Company analyzes interest rate risk using various models,
including multi-scenario cash flow projection models that forecast cash flows of
the liabilities and their supporting investments, including derivative
instruments. For non-guaranteed separate accounts, the Company's exposure is not
significant, as the policyholder assumes substantially all the investment risk.
The Company's general account and guaranteed separate account investment
portfolios primarily consist of investment grade, fixed maturity securities,
including corporate bonds, asset backed securities, commercial mortgage backed
securities, tax-exempt municipal securities and collateralized mortgage
obligations. The fair value of these and the Company's other invested assets
fluctuates depending on the interest rate environment and other general economic
conditions. During periods of declining interest rates, paydowns on mortgage
backed securities and collateralized mortgage obligations increase as the
underlying mortgages are prepaid. During such periods, the Company generally
will not be able to reinvest the proceeds of any such prepayments at comparable
yields. Conversely, during periods of rising interest rates, the rate of
prepayments generally declines, exposing the Company to the possibility of
asset/liability cash flow and yield mismatch. For a discussion of the Company's
risk management techniques to manage this market risk, see "Asset/Liability
Management Strategies Used to Manage Market Risk" below.
As described above, the Company holds a significant fixed maturity portfolio,
which includes both fixed and variable rate features. The following table
reflects the principal amounts of the general and guaranteed separate account
fixed and variable rate fixed maturity portfolios, along with the respective
weighted average coupons by estimated maturity year as of December 31, 2000.
Comparative totals are included for December 31, 1999. Expected maturities
differ from contractual maturities due to call or prepayment provisions. The
weighted average coupon on variable rate securities is based on spot rates as of
December 31, 2000 and 1999, and is primarily based on the London Interbank
Offered Rate (LIBOR). Callable bonds and notes are distributed to either call
dates or maturity, depending on which date produces the most conservative yield.
Asset backed securities, collateralized mortgage obligations and mortgage backed
securities are distributed based on estimates of the rate of future prepayments
of principal over the remaining life of the securities. These estimates are
developed using prepayment speeds provided in broker consensus data. Such
estimates are derived from prepayment speeds previously experienced at the
interest rate levels projected for the underlying collateral. Actual prepayment
experience may vary from these estimates. Financial instruments with certain
leverage features have been included in each of the fixed maturity categories.
These instruments have not been separately displayed because they were
immaterial to the Company's investment portfolio.
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2000 1999
2001 2002 2003 2004 2005 Thereafter TOTAL Total
- --------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES - CALLABLE
Fixed Rate
Par value $ 5 $ 50 $ 14 $ 27 $ 7 $ 1,355 $ 1,458 $ 1,076
Weighted average coupon 7.0% 6.4% 6.4% 4.6% 6.1% 5.5% 5.5% 5.6%
Fair value $ 1,439 $ 1,016
Variable Rate
Par value $ 1 $ 11 $ 22 $ 38 $ 1 $ 1,085 $ 1,158 $ 1,363
Weighted average coupon 7.4% 7.5% 6.6% 7.3% 7.3% 7.1% 7.1% 6.6%
Fair value $ 1,075 $ 1,256
BONDS AND NOTES - OTHER
Fixed Rate
Par value $ 724 $ 1,580 $ 1,286 $ 1,162 $ 1,154 $ 8,793 $14,699 $15,724
Weighted average coupon 7.3% 6.2% 7.2% 6.9% 6.2% 5.7% 6.1% 6.2%
Fair value $13,409 $14,044
Variable Rate
Par value $ 2 $ 116 $ 158 $ 166 $ 87 $ 706 $ 1,235 $ 920
Weighted average coupon 4.8% 6.5% 7.0% 7.2% 6.5% 7.8% 7.4% 5.7%
Fair value $ 1,108 $ 827
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 731 $ 433 $ 305 $ 261 $ 178 $ 435 $ 2,343 $ 2,199
Weighted average coupon 6.7% 6.3% 6.9% 7.0% 7.2% 7.6% 6.9% 6.8%
Fair value $ 2,342 $ 2,045
Variable Rate
Par value $ 214 $ 300 $ 298 $ 218 $ 335 $ 759 $ 2,124 $ 1,677
Weighted average coupon 7.3% 7.2% 7.3% 7.1% 7.2% 7.4% 7.3% 6.6%
Fair value $ 2,099 $ 1,540
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 157 $ 133 $ 113 $ 99 $ 111 $ 485 $ 1,098 $ 1,138
Weighted average coupon 6.4% 6.5% 6.4% 6.5% 6.3% 6.4% 6.4% 6.5%
Fair value $ 1,087 $ 1,022
Variable Rate
Par value $ 4 $ 2 $ 1 $ 2 $ 1 $ 102 $ 112 $ 128
Weighted average coupon 9.4% 11.6% 12.7% 8.9% 10.4% 4.8% 5.3% 5.8%
Fair value $ 101 $ 117
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 50 $ 79 $ 52 $ 100 $ 54 $ 2,271 $ 2,606 $ 2,096
Weighted average coupon 7.3% 7.1% 7.1% 7.2% 7.1% 7.3% 7.3% 7.2%
Fair value $ 2,674 $ 1,922
Variable Rate
Par value $ 323 $ 266 $ 268 $ 240 $ 89 $ 544 $ 1,730 $ 1,433
Weighted average coupon 7.8% 7.7% 7.9% 7.7% 7.9% 8.0% 7.9% 7.5%
Fair value $ 1,738 $ 1,228
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 72 $ 80 $ 80 $ 71 $ 63 $ 426 $ 792 $ 1,288
Weighted average coupon 7.2% 7.3% 7.2% 7.2% 7.2% 7.2% 7.2% 7.5%
Fair value $ 800 $ 994
Variable Rate
Par value $ 1 $ 1 $ -- $ -- $ -- $ 1 $ 3 $ 4
Weighted average coupon 7.2% 7.2% -- -- -- 6.9% 7.0% 6.4%
Fair value $ 3 $ 4
- --------------------------------------------------------------------------------------------------------------------------------
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The table below provides information as of December 31, 2000 and 1999 on debt
obligations and reflects principal cash flows and related weighted average
effective interest rate by maturity year.
2000 1999
2001 2002 2003 2004 2005 Thereafter TOTAL Total
- --------------------------------------------------------------------------------------------------------------------
LONG -TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ 200 $ -- $ 450 $ 650 $ 650
Weighted average effective interest rate -- -- -- 7.0% -- 7.5% 7.4% 7.4%
Fair value $ 658 $ 633
TruPS(1)
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 250 $ 250 $ 250
Weighted average effective interest rate -- -- -- -- -- 7.4% 7.4% 7.4%
Fair value $ 245 $ 203
- --------------------------------------------------------------------------------------------------------------------
(1) Represents company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely parent junior subordinated debentures.
ASSET/LIABILITY MANAGEMENT STRATEGIES USED TO MANAGE 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.
Derivatives play an important role in facilitating the management of interest
rate risk, creating opportunities to efficiently fund obligations, hedge against
risks that affect the value of certain liabilities and adjust broad investment
risk characteristics as a result of any significant changes in market risks. As
an end user of derivatives, the Company uses a variety of derivatives, including
swaps, caps, floors, forwards and exchange traded financial futures and options,
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's derivative program is monitored by an internal compliance
unit and is reviewed frequently by senior management and reported to The
Hartford's Finance Committee. The notional amounts of derivative contracts,
which represent the basis upon which pay or receive amounts are calculated and
are not reflective of credit risk, totaled $8.5 billion as of December 31, 2000
($6.5 billion related to insurance investments and $2.0 billion related to life
insurance liabilities). As of December 31, 1999, the notional amounts pertaining
to derivatives totaled $9.6 billion ($6.3 billion related to insurance
investments and $3.3 billion related to life insurance liabilities).
The company uses derivative instruments in its management of market risk
consistent with the four risk management strategies described below.
Anticipatory Hedging -- For certain liabilities, the Company commits to the
price of the product prior to receipt of the associated premium or deposit.
Anticipatory hedges are executed to offset the impact of changes in asset prices
arising from interest rate changes pending the receipt of premium or deposit and
the subsequent purchase of an asset. These hedges involve taking a long position
in interest rate futures or entering into an interest rate swap with duration
characteristics equivalent to the associated liabilities or anticipated
investments. The notional amounts of anticipatory hedges as of December 31, 2000
and 1999 were $144 and $314, respectively.
Liability Hedging -- Several products obligate the Company to credit a return to
the contractholder which is indexed to a market rate. To hedge risks associated
with these products, the Company enters into various derivative contracts.
Interest rate swaps are used to convert the contract rate into a rate that
trades in a more liquid and efficient market. This hedging strategy enables the
Company to customize contract terms and conditions to customer objectives and
satisfies Hartford Life's asset/liability matching policy. Interest rate swaps
are also used to convert certain fixed contract rates into floating rates,
thereby allowing them to be appropriately matched against floating rate assets.
Additionally, interest rate caps are used to hedge against the risk of
contractholder disintermediation in a rising interest rate environment. The
notional amounts of derivatives used for liability hedges as of December 31,
2000 and 1999 were $2.0 billion and $3.3 billion, respectively.
Asset Hedging -- To meet the various policyholder obligations and to provide
cost effective prudent investment risk diversification, the Company may combine
two or more financial instruments to achieve the investment characteristics of a
fixed maturity security or that match an associated liability. The use of
derivative instruments in this regard effectively transfers unwanted investment
risks or attributes to others. The selection of the appropriate derivative
instruments depends on the investment risk, the liquidity and efficiency of the
market, and the asset and liability characteristics. The notional amounts of
asset hedges as of December 31, 2000 and 1999 were $5.4 billion and $4.8
billion, respectively.
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Portfolio Hedging -- The Company periodically compares the duration and
convexity of its portfolios of assets to its corresponding liabilities and
enters into portfolio hedges to reduce any difference to desired levels.
Portfolio hedges reduce the mismatch between assets and liabilities and offset
the potential impact to cash flows caused by changes in interest rates. The
notional amounts of portfolio hedges as of December 31, 2000 and 1999 were $1.0
billion and $1.2 billion, respectively.
The following tables provide information as of December 31, 2000, with
comparative totals for December 31, 1999, on derivative instruments used in
accordance with the aforementioned hedging strategies. For interest rate swaps,
caps and floors, the tables present notional amounts with weighted average pay
and receive rates for swaps and weighted average strike rates for caps and
floors by maturity year. For interest rate futures, the table presents contract
amount and weighted average settlement price by expected maturity year.
2000 1999
INTEREST RATE SWAPS(1) 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- ---------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable
Notional value $ 65 $ 95 $ 98 $ 35 $ 126 $ 612 $1,031 $1,694
Weighted average pay rate 6.0% 4.4% 5.9% 6.1% 7.5% 6.9% 6.6% 5.8%
Weighted average receive rate 6.7% 7.0% 6.9% 6.8% 6.8% 6.8% 6.8% 6.2%
Fair value $ (43) $ 76
Pay Variable/Receive Fixed
Notional value $ 336 $ 372 $ 645 $1,198 $ 964 $1,371 $4,886 $4,763
Weighted average pay rate 6.7% 6.7% 6.6% 6.7% 8.1% 6.7% 7.0% 6.2%
Weighted average receive rate 7.0% 6.5% 5.8% 6.1% 7.6% 6.7% 6.6% 6.2%
Fair value $ 78 $ (160)
Pay Variable/Receive Different Variable
Notional value $ 85 $ 28 $ 4 $ 85 $ 30 $ 46 $ 278 $ 442
Weighted average pay rate 6.7% 6.8% 7.0% 6.2% 6.9% 7.2% 6.6% 6.2%
Weighted average receive rate 7.8% 6.6% 6.7% 4.7% (6.6)% 7.2% 4.9% 6.0%
Fair value $ (1) $ 1
- ---------------------------------------------------------------------------------------------------------------------------
(1) Negative weighted average receive rate in 2005 results when payments are
required on both sides of an index swap.
2000 1999
INTEREST RATE CAPS - LIBOR BASED(2) 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ 10 $ 54 $ -- $ 77 $ 30 $ 171 $ 171
Weighted average strike rate (8.0 - 9.9%) -- 8.9% 8.5% -- 8.4% 8.3% 8.5% 8.5%
Fair value $ 1 $ 2
Notional value $ -- $ 19 $ -- $ -- $ -- $ -- $ 19 $ 31
Weighted average strike rate (10.0 - 11.9%) -- 10.1% -- -- -- -- 10.1% 10.6%
Fair value $ -- $ --
- -------------------------------------------------------------------------------------------------------------------------------
(2) LIBOR represents the London Interbank Offered Rate.
2000 1999
INTEREST RATE CAPS - CMT BASED(3) 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 494
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 7.7%
Fair value $ -- $ 1
Notional value $ -- $ -- $ 250 $ -- $ 250 $ -- $ 500 $ 850
Weighted average strike rate (8.0 - 9.9%) -- -- 8.7% -- 8.7% -- 8.7% 8.8%
Fair value $ -- $ 4
Issued
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 244
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 7.7%
Fair value $ -- $ --
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 100
Weighted average strike rate (8.0 - 9.9%) -- -- -- -- -- -- -- 9.5%
Fair value $ -- $ --
- -------------------------------------------------------------------------------------------------------------------------------
(3) CMT represents the Constant Maturity Treasury Rate.
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25
2000 1999
INTEREST RATE FLOORS - LIBOR BASED 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- --------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ -- $ -- $ 27 $ -- $ -- $ 27 $ 27
Weighted average strike rate (6.0 - 7.9%) -- -- -- 7.9% -- -- 7.9% 7.9%
Fair value $ 2 $ 2
Issued
Notional value $ -- $ 28 $ 54 $ 34 $ 77 $ -- $ 193 $ 206
Weighted average strike rate (4.0 - 5.9%) -- 5.3% 5.4% 5.3% 5.3% -- 5.3% 5.3%
Fair value $ (2) $ (1)
Notional value $ -- $ -- $ -- $ 27 $ -- $ -- $ 27 $ 27
Weighted average strike rate (6.0 - 7.9%) -- -- -- 7.8% -- -- 7.8% 7.8%
Fair value $ (2) $ (2)
2000 1999
INTEREST RATE FLOORS - CMT BASED 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ -- $ 150 $ -- $ -- $ -- $ 150 $ 250
Weighted average strike rate (4.0 - 5.9%) -- -- 5.5% -- -- -- 5.5% 5.6%
Fair value $ 3 $ 1
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 10
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 6.0%
Fair value $ -- $ --
- -------------------------------------------------------------------------------------------------------------------------------
2000 1999
INTEREST RATE FUTURES 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -------------------------------------------------------------------------------------------------------------------------------
Long
Contract amount/notional $ 198 $ -- $ -- $ -- $ -- $ -- $ 198 $ 27
Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 97
Short
Contract amount/notional $ 59 $ -- $ -- $ -- $ -- $ -- $ 59 $ 51
Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 93
- -------------------------------------------------------------------------------------------------------------------------------
Note: Fair value is not applicable.
Option Contracts -- The Company uses option contracts to hedge debt instruments
that totaled $951 and $254 in notional amounts and $(34) and $(50) in carrying
value as of December 31, 2000 and 1999, respectively.
LIFE INSURANCE LIABILITY CHARACTERISTICS
Hartford Life's insurance liabilities, other than non-guaranteed separate
accounts, include accumulation vehicles such as fixed and variable annuities,
other investment and universal life-type contracts, and other insurance products
such as long-term disability and term life insurance.
Asset Accumulation Vehicles
While interest rate risk associated with these insurance products has been
reduced through the use of market value adjustment features and surrender
charges, the primary risk associated with asset accumulation products is that
the spread between investment return and credited rate may not be sufficient to
earn targeted returns.
Fixed Rate -- Products in this category require the Company to pay a fixed rate
for a certain period of time. The cash flows are not interest sensitive because
the products are written with a market value adjustment feature and the
liabilities have protection against the early withdrawal of funds through
surrender charges. Product examples include fixed rate annuities with a market
value adjustment and fixed rate guaranteed investment contracts. Contract
duration is dependent on the policyholder's choice of guarantee period.
25
26
Indexed -- Products in this category are similar to the fixed rate asset
accumulation vehicles but require the Company to pay a rate that is determined
by an external index. The amount and/or timing of cash flows will therefore vary
based on the level of the particular index. The primary risks inherent in these
products are similar to the fixed rate asset accumulation vehicles, with the
additional risk that changes in the index may adversely affect profitability.
Product examples include indexed guaranteed investment contracts with an
estimated duration of up to two years.
Interest Credited -- Products in this category credit interest to policyholders,
subject to market conditions and minimum guarantees. Policyholders may surrender
at book value but are subject to surrender charges for an initial period.
Product examples include universal life contracts and the general account
portion of the Company's variable annuity products. Liability duration is short
to intermediate term.
Other Insurance Products
Long-Term Pay Out Liabilities -- Products in this category are long term in
nature and may contain significant actuarial (including mortality and morbidity)
pricing and cash flow risks. The cash flows associated with these policy
liabilities are not interest rate sensitive but do vary based on the timing and
amount of benefit payments. The primary risks associated with these products are
that the benefits will exceed expected actuarial pricing and/or that the actual
timing of the cash flows will differ from those anticipated resulting in an
investment return lower than that assumed in pricing. Product examples include
structured settlement contracts, on-benefit annuities (i.e., the annuitant is
currently receiving benefits thereon) and long-term disability contracts.
Contract duration is generally five to ten years.
Short-Term Pay Out Liabilities -- These liabilities are short term in nature
with a duration of less than one year. The primary risks associated with these
products are determined by the non-investment contingencies such as mortality or
morbidity and the variability in the timing of the expected cash flows.
Liquidity is of greater concern than for the long-term pay out liabilities.
Products include individual and group term life insurance contracts and
short-term disability contracts.
Management of the duration of investments with respective policyholder
obligations is an explicit objective of the Company's management strategy. The
estimated cash flows of insurance policy liabilities based upon internal
actuarial assumptions as of December 31, 2000 are reflected in the table below
by expected maturity year. Comparative totals are included for December 31,
1999.
(Dollars in billions)
2000 1999
DESCRIPTION(1) 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -------------------------------------------------------------------------------------------------------------------------------
Fixed rate asset accumulation vehicles $ 1.3 $ 0.8 $ 0.9 $ 2.7 $ 2.0 $ 2.7 $ 10.4 $ 9.7
Weighted average credited rate 6.5% 6.5% 5.6% 6.8% 6.9% 6.9% 6.7% 6.6%
Indexed asset accumulation vehicles $ 0.6 $ 0.1 $ -- $ -- $ -- $ -- $ 0.7 $ 0.6
Weighted average credited rate 6.3% 6.2% -- -- -- -- 6.3% 6.2%
Interest credited asset accumulation vehicles $ 4.1 $ 0.6 $ 0.6 $ 0.3 $ 0.3 $ 4.2 $ 10.1 $ 10.6
Weighted average credited rate 6.4% 5.4% 5.4% 5.6% 5.6% 5.6% 5.9% 5.7%
Long-term pay out liabilities $ 0.8 $ 0.7 $ 0.6 $ 0.5 $ 0.4 $ 3.5 $ 6.5 $ 5.6
Short-term pay out liabilities $ 0.9 $ -- $ -- $ -- $ -- $ -- $ 0.9 $ 0.8
- -------------------------------------------------------------------------------------------------------------------------------
(1) As of December 31, 2000 and 1999, the fair value of the Company's investment
contracts, including guaranteed separate accounts, were $21.4 billion and
$20.9 billion, respectively.
CURRENCY EXCHANGE RISK
As of December 31, 2000, Hartford Life had immaterial currency exposures
resulting from its international operations.
26
27
SENSITIVITY TO CHANGES IN INTEREST RATES
For liabilities whose cash flows are not substantially affected by changes in
interest rates (fixed liabilities) and where investment experience is
substantially absorbed by the Company, the sensitivity of the net economic value
(discounted present value of asset cash flows less the discounted present value
of liability cash flows) of those portfolios to 100 basis point shifts in
interest rates is shown in the table below. These fixed liabilities represented
approximately 60% and 55% of the Company's general and guaranteed separate
account liabilities at December 31, 2000 and 1999, respectively. The remaining
liabilities generally allow the Company significant flexibility to adjust
credited rates to reflect actual investment experience and thereby pass through
a substantial portion of actual investment experience to the policyholder. The
fixed liability portfolios are managed and monitored relative to defined
objectives and are analyzed regularly by management for internal risk management
purposes using scenario simulation techniques, and are evaluated annually in
compliance with regulatory requirements.
CHANGE IN NET ECONOMIC VALUE
--------------------------------------------
2000 1999
- -----------------------------------------------------------------------------
Basis point shift - 100 + 100 - 100 + 100
- -----------------------------------------------------------------------------
Amount $ (15) $ (27) $ (4) $ (5)
Percent of liability value (0.09)% (0.16)% (0.03)% (0.03)%
CAPITAL RESOURCES AND LIQUIDITY
- --------------------------------------------------------------------------------
Capital resources and liquidity represent the overall financial strength of
Hartford Life and its ability to generate strong 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
$1.1 billion and $1.4 billion as of December 31, 2000 and 1999, respectively.
The capital structure of Hartford Life consists of debt and equity, and is
summarized as follows:
2000 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 gains (losses) on securities, net of tax $ 3,167 $ 2,642
Net unrealized capital gains (losses) on securities, net of tax 40 (336)
- ------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 3,207 $ 2,306
- ------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION(1) $ 4,067 $ 3,542
- ------------------------------------------------------------------------------------------------------
Debt to equity(1)(2) 28% 34%
Debt to capitalization(1)(2) 22% 25%
- ------------------------------------------------------------------------------------------------------
(1) Excludes net unrealized capital gains (losses) on securities, net of tax.
(2) Excluding TruPS from debt, the debt to equity ratios were 21% and 25%, and
the debt to capitalization ratios were 16% and 18% as of December 31, 2000
and 1999, respectively.
CAPITALIZATION
The Company's total capitalization, excluding net unrealized capital gains
(losses) on securities, net of tax, increased $525, or 15%, in 2000. The
increase was primarily the result of net income of $575 partially offset by
dividends declared of $56. As a result, both the debt to equity and debt to
capitalization ratios (both exclude net unrealized capital gains (losses) on
securities, net of tax) decreased to 28% and 22% as of December 31, 2000,
respectively, from 34% and 25% as of December 31, 1999, respectively. Net
unrealized capital gains (losses) on securities, net of tax, increased $376 as
December 31, 2000, as compared to December 31, 1999, primarily due to the impact
of decreased interest rates on the Company's fixed maturity portfolio.
27
28
COMMON STOCK ACQUIRED BY THE HARTFORD
On June 27, 2000, The Hartford acquired all of the outstanding shares of Class A
common stock of Hartford Life which The Hartford did not already own (The
Hartford Acquisition). The Hartford Acquisition was accomplished through an
offer to all Hartford Life shareholders to tender their shares to The Hartford
for cash consideration of $50.50 per share. Subsequent to the tender offer, a
newly formed wholly owned subsidiary of The Hartford was merged into Hartford
Life, as a result of which Hartford Life became an indirect wholly owned
subsidiary of The Hartford. Those shareholders who had not tendered their shares
in the tender offer also received $50.50 in cash in exchange for their shares in
the subsequent merger.
DEBT
For a discussion of Debt, see Note 7 of Notes to Consolidated Financial
Statements.
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES
For a discussion of Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Parent Junior Subordinated
Debentures, see Note 8 of Notes to Consolidated Financial Statements.
DIVIDENDS
Hartford Life declared $28 in dividends for 2000 to Hartford Fire Insurance
Company. Prior to The Hartford Acquisition, Hartford Life declared $28 in
dividends for the six months ended June 30, 2000 to holders of Class A and Class
B Common Stock (owned by The Hartford). 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 discussed in Liquidity Requirements below.
As a holding company, Hartford Life, Inc. has no significant business operations
of its own and, therefore, relies mainly on the dividends from its insurance
company subsidiaries, which are primarily domiciled in Connecticut, as the
principal source of cash to meet its obligations (predominantly debt
obligations) and pay stockholder dividends. The Company's direct regulated life
insurance subsidiary, Hartford Life and Accident Insurance Company, declared and
paid to the Company dividends of $121 in 2000. Statutory net income and
statutory capital and surplus, key determinants in the amount of dividend
capacity available in the insurance company subsidiaries, has grown
significantly over the past several years. Statutory net income in 2000 was
$399, an 81% increase over 1999, however, excluding realized losses on certain
securities recorded in 1999, statutory net income increased 38%. Statutory
capital and surplus as of December 31, 2000 was $2.4 billion, a 9% increase over
December 31, 1999.
TREASURY STOCK
During the first six months ended June 30, 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 were carried at cost and reflected as a
reduction to stockholders' equity. Treasury shares reissued were reduced from
treasury stock on a weighted average cost basis.
As a result of The Hartford Acquisition during the second quarter of 2000, the
Company canceled the remaining 80,152 treasury shares with a cost basis of $4.
28
29
RATINGS
The following table summarizes Hartford Life's significant U.S. member
companies' financial ratings from the major independent rating organizations as
of February 28, 2001:
STANDARD &
A.M. BEST FITCH(1) MOODY'S POOR'S
- --------------------------------------------------------------------------------
INSURANCE RATINGS
Hartford Life Insurance Company A+ AA+ Aa3 AA
Hartford Life and Accident A+ AA+ Aa3 AA
Hartford Life and Annuity A+ AA+ Aa3 AA
- --------------------------------------------------------------------------------
OTHER RATINGS
Hartford Life, Inc.
Senior debt a+ A+ A2 A
Commercial paper -- F-1 P-1 A-1
Hartford Life Capital I(2)
Trust preferred securities a- A a2 BBB+
- --------------------------------------------------------------------------------
(1) Formerly Duff & Phelps.
(2) A.M. Best ratings were adjusted to reflect the integration of A.M. Best's
debt and preferred stock scales.
Ratings are an important factor in establishing the competitive position of an
insurance company such as Hartford Life. There can be no assurance that the
Company's ratings will continue for any given period of time or that they will
not be changed. In the event that the Company's ratings are downgraded, the
level of sales or the persistency of the Company's block of in force business
may be adversely impacted.
On January 26, 2001, Moody's confirmed the insurance and debt financial ratings
of The Hartford and Hartford Life following the announcement of the Fortis
acquisition, but changed the outlook on both companies' debt ratings to negative
from stable. Moody's stated that the revision in debt ratings outlook was based
upon Moody's concerns that the Fortis acquisition, would increase The Hartford's
operating and financial leverage over the medium term and fixed charge coverage
would weaken. The revision in ratings outlook does not constitute a ratings
"downgrade", nor has Moody's placed the Company on their "watchlist" for
possible downgrade.
LIQUIDITY REQUIREMENTS
The liquidity requirements of Hartford Life have been and will continue to be
met by funds from operations as well as the issuance of commercial paper, debt
securities and bank borrowings. The principal sources of funds are premiums and
investment income as well as maturities and sales of invested assets. Hartford
Life is a holding company which receives operating cash flow in the form of
dividends from its subsidiaries, enabling it to service its debt, pay dividends
on its common stock and support its other obligations.
Dividends to Hartford Life, Inc. from its direct subsidiary, Hartford Life and
Accident Insurance Company (HLA), as an insurance company domiciled in
Connecticut, are subject to restriction as prescribed in the insurance holding
company laws of Connecticut. HLA adheres to these laws, which require notice to
and approval by the state insurance commissioner for the declaration or payment
of any dividend that, together with other dividends or distributions made within
the preceding twelve months, exceeds the greater of (i) 10% of the insurer's
policyholder surplus as of December 31 of the preceding year or (ii) net gain
from operations for the twelve month period ending on the thirty-first day of
December last preceding, in each case determined under statutory insurance
accounting policies. In addition, if any dividend of a Connecticut-domiciled
insurer exceeds the insurer's earned surplus, it requires the prior approval of
the Connecticut Insurance Commissioner. The total amount of statutory dividends
which may be paid by the insurance subsidiaries of the Company without prior
approval in 2001 is estimated to be $310.
The insurance holding company laws of the other jurisdictions in which Hartford
Life's insurance subsidiaries are incorporated or deemed commercially domiciled
generally contain similar limitations on the payment of dividends.
The primary uses of funds are to pay claims, policy benefits, operating expenses
and commissions, and to purchase new investments. Hartford Life carries a
significant short-term investment position and accordingly does not anticipate
selling intermediate- and long-term fixed maturity investments to meet any
liquidity needs. For a discussion of the Company's investment objectives and
strategies, see the Investments and Capital Markets Risk Management sections.
29
30
RISK-BASED CAPITAL
The National Association of Insurance Commissioners (NAIC) has regulations
establishing minimum capitalization requirements based on Risk-Based Capital
(RBC) formulas for life insurance companies. The requirements consist of
formulas which identify companies that are undercapitalized and require specific
regulatory actions. The RBC formula for life insurance companies establishes
capital requirements relating to insurance, business, asset and interest rate
risks. The RBC ratios for each of the life insurance subsidiaries are in excess
of 200% as of December 31, 2000, which are greater than the minimum threshold.
CASH FLOW
2000 1999
- --------------------------------------------------------------------------------
Cash provided by operating activities $ 1,701 $ 724
Cash (used for) provided by investing activities (564) 1,907
Cash used for financing activities (1,118) (2,578)
Cash - end of year 106 89
The increase in cash provided by operating activities was primarily the result
of the timing of the settlement of receivables, payables and other related
liabilities, as well as increased future policy benefits and net income
associated with growth in the business. The decrease in cash (used for) 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 1999 as compared to 2000. Operating cash flows in the periods
presented have been more than adequate to meet liquidity requirements.
SUBSEQUENT EVENT
On January 25, 2001, The Hartford, through Hartford Life, agreed to acquire the
U.S. individual life insurance, annuity and mutual fund business of Fortis for
$1.12 billion in cash. The Company will effect the acquisition through several
reinsurance agreements with subsidiaries of Fortis and the purchase of 100% of
the stock of Fortis Advisors, Inc. and Fortis Investors, Inc., wholly-owned
subsidiaries of Fortis. The Fortis transaction, which is subject to insurance
regulatory approval and other customary conditions, is expected to be completed
in the second quarter of 2001. The acquisition will be accounted for as a
purchase transaction. Hartford Life plans to finance the acquisition through (1)
a capital contribution from The Hartford of $615 from its recently completed
offering of common stock, (2) proceeds from the March 1, 2001, issuance of $400
of senior debt securities under Hartford Life's shelf registration and (3)
proceeds from the March 6, 2001, issuance of $200 of trust preferred securities,
also under Hartford Life's shelf registration (For additional information on the
shelf registration, see Notes 7 and 8 of Notes to Consolidated Financial
Statements).
REGULATORY MATTERS AND CONTINGENCIES
- --------------------------------------------------------------------------------
LEGISLATIVE AND REGULATORY INITIATIVES
The business of insurance is primarily regulated by the states and is also
affected by a range of legislative developments at the state and federal levels.
The 1999 Gramm-Leach-Bliley Act (the Financial Services Modernization Act),
which allows affiliations among banks, insurance companies and securities firms,
did not precipitate any significant changes in ownership in 2000. The provisions
of the Act requiring the development of a formal privacy policy by each
financial institution have created a number of administrative issues, but the
enforcement date has been delayed until July 1, 2001. Insurance companies are
subject to privacy regulation issued by the federal regulators and by state
regulators who will adopt and implement privacy regulations during 2001. New
medical privacy regulations expected to be issued by the Department of Health
and Human Services will also impact the Company where medical information is
used both in the application process and in the claims process.
The enactment of the Financial Services Modernization Act has focused renewed
attention on state regulation of insurance. Life insurers are working with state
insurance regulators to improve and centralize the process for agent licensing
and form filing. Both of these areas of regulation are critical to the
development of new business. In addition, Congress may consider legislation
providing for optional federal regulation of insurance in 2001. These measures,
state and federal, may lead to improved regulation and reduced transaction
costs.
Federal measures which have been previously considered by Congress and which, if
adopted, could affect the insurance business include tax law changes pertaining
to the tax treatment of insurance companies and life insurance products, as well
as changes in individual income tax rates and the estate tax, a number of which
changes could impact the relative desirability of various personal investment
vehicles. Other proposals pertain to medical testing for insurability, and the
use of gender in determining insurance and pension rates and benefits. It is too
early to determine whether any of these proposals will ultimately be enacted by
Congress. Therefore, the potential impact to the Company's financial condition
or results of operations cannot be reasonably estimated at this time.
30
31
GUARANTY FUND
Under insurance guaranty fund laws in each state, the District of Columbia and
Puerto Rico, insurers licensed to do business can be assessed by state insurance
guaranty associations for certain obligations of insolvent insurance companies
to policyholders and claimants. Part of the assessments paid by the Company's
insurance subsidiaries pursuant to these laws may be used as credits for a
portion of the Company's insurance subsidiaries' premium taxes. There were no
guaranty fund assessment payments (net of refunds) in 2000. The Company paid
guaranty fund assessments (net of refunds) of approximately $2 and $9 in 1999
and 1998, respectively, of which $1 and $4, respectively, were estimated to be
creditable against future premium taxes.
NAIC PROPOSALS
The NAIC adopted the Codification of Statutory Accounting Principles
(Codification) in March 1998. The effective date for the statutory accounting
guidance was January 1, 2001. Each of Hartford Life's domiciliary states has
adopted Codification, and the Company has made the necessary changes in its
statutory reporting required for implementation. The Company has determined that
the overall impact of applying the new guidance will result in a one-time
statutory cumulative transition benefit of approximately $75 in statutory
surplus.
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. During the first quarter of 1999, the
Company modified its contract with Putnam Mutual Funds Corp. (Putnam) to
eliminate the exclusivity provision, which will allow both parties to pursue new
market opportunities. Putnam is contractually obligated to support and service
the related annuity in force block of business and to market, support and
service new business. However, there can be no assurance that this contract
modification will not adversely impact the Company's ability to distribute
Putnam-related products.
EFFECT OF INFLATION
- --------------------------------------------------------------------------------
The rate of inflation as measured by the change in the average consumer price
index has not had a material effect on the revenues or operating results of
Hartford Life during the fiscal years presented.
ACCOUNTING STANDARDS
- --------------------------------------------------------------------------------
For a discussion of accounting standards, see Note 2 of Notes to Consolidated
Financial Statements.
31
32
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7A is set forth in the Capital Markets Risk
Management section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS. See Index to Consolidated Financial
Statements and Schedules elsewhere herein.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. See Index to Consolidated
Financial Statement and Schedules elsewhere herein.
3. EXHIBITS. See Exhibit Index elsewhere herein.
(b) Reports on Form 8-K - None.
(c) Exhibits - See Item 14(a)(3).
(d) Schedules - See Item 14(a)(2).
32
33
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page(s)
Report of Management F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the years ended December 31, 2000, 1999 and 1998 F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4
Consolidated Statements of Changes in Stockholder's Equity for the years ended
December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7-27
Schedule I -- Summary of Investments - Other Than Investments in Affiliates S-1
Schedule II -- Condensed Financial Information of Hartford Life, Inc. S-2-3
Schedule III -- Supplementary Insurance Information S-4
Schedule IV -- Reinsurance S-5
Schedule V -- Valuation and Qualifying Accounts S-6
REPORT OF MANAGEMENT
The management of Hartford Life, Inc. (Hartford Life) is responsible for the
preparation and integrity of information contained in the accompanying
Consolidated Financial Statements. The Consolidated Financial Statements are
prepared in accordance with accounting principles generally accepted in the
United States and, where necessary, include amounts that are based on
management's informed judgments and estimates. Management believes these
consolidated statements present fairly Hartford Life's financial position and
results of operations.
Management has made available Hartford Life's financial records and related data
to Arthur Andersen LLP, independent public accountants, in order for them to
perform an audit of Hartford Life's Consolidated Financial Statements. Their
report appears on page F-2.
An essential element in meeting management's financial responsibilities is
Hartford Life's system of internal controls. These controls, which include
accounting controls and the internal auditing program, are designed to provide
reasonable assurance that assets are safeguarded, and transactions are properly
authorized, executed and recorded. The controls, which are documented and
communicated to employees in the form of written codes of conduct and policies
and procedures, provide for careful selection of personnel and for appropriate
division of responsibility. Management continually monitors for compliance,
while Hartford Life's internal auditors independently assess the effectiveness
of the controls and make recommendations for improvement. Also, Arthur Andersen
LLP took into consideration Hartford Life's system of internal controls in
determining the nature, timing and extent of their audit tests.
Another important element is management's recognition of its responsibility for
fostering a strong, ethical climate, thereby ensuring that Hartford Life's
affairs are transacted according to the highest standards of personal and
professional conduct. Hartford Life has a long-standing reputation of integrity
in business conduct and utilizes communication and education to create and
fortify a strong compliance culture.
The Audit Committee of the Board of Directors of The Hartford Financial Services
Group, Inc. (the "Committee"), the Company's ultimate parent, composed of
independent directors, meets periodically with the external and internal
auditors to evaluate the effectiveness of work performed by them in discharging
their respective responsibilities and to ensure their independence and free
access to the Committee.
F-1
34
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO HARTFORD LIFE, INC.:
We have audited the accompanying Consolidated Balance Sheets of Hartford Life,
Inc. (Hartford Life) (a Delaware corporation) and subsidiaries as of December
31, 2000 and 1999, and the related Consolidated Statements of Income, Changes in
Stockholder's Equity and Cash Flows for each of the three years in the period
ended December 31, 2000. These Consolidated Financial Statements and the
schedules referred to below are the responsibility of Hartford Life's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the Consolidated Financial Statements referred to above present
fairly, in all material respects, the financial position of Hartford Life and
subsidiaries as of December 31, 2000 and 1999, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 2000 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the Index to
Consolidated Financial Statements and Schedules are presented for the purpose of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 25, 2001
(except with respect to the matters
discussed in Notes 7, 8 and 18, as to
which the date is March 6, 2001.)
F-2
35
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
(In millions) 2000 1999 1998
- ------------------------------------------------------------------------------------
REVENUES
Fee income $ 2,484 $ 2,105 $2,100
Earned premiums and other 2,002 1,874 1,733
Net investment income 1,592 1,562 1,955
Net realized capital losses (88) (5) --
- ------------------------------------------------------------------------------------
TOTAL REVENUES 5,990 5,536 5,788
- ------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 3,162 3,054 3,227
Insurance expenses and other 1,236 1,057 1,147
Amortization of deferred policy acquisition costs 671 568 441
Dividends to policyholders 67 104 330
Interest expense 66 67 58
- ------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 5,202 4,850 5,203
- ------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 788 686 585
Income tax expense 213 219 199
- ------------------------------------------------------------------------------------
NET INCOME $ 575 $ 467 $ 386
- ------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
36
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
----------------------
(In millions, except for share data) 2000 1999
- ----------------------------------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities, available for sale, at fair value
(amortized cost of $18,171 and $17,602) $ 18,248 $ 17,035
Equity securities, available for sale, at fair value 171 153
Policy loans, at outstanding balance 3,610 4,222
Other investments 910 376
- ----------------------------------------------------------------------------------------------------
Total investments 22,939 21,786
Cash 106 89
Premiums receivable and agents' balances 216 214
Reinsurance recoverables 542 449
Deferred policy acquisition costs 4,527 4,210
Deferred income tax 223 522
Other assets 1,074 1,111
Separate account assets 113,994 110,652
- ----------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 143,621 $ 139,033
- ----------------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits $ 7,074 $ 6,236
Other policyholder funds 15,849 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 2,597 2,066
Separate account liabilities 113,994 110,652
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 140,414 136,727
- ----------------------------------------------------------------------------------------------------
COMMITMENTS AND CONTINGENT LIABILITIES, NOTE 16
STOCKHOLDER'S EQUITY
Common Stock -- 1,000 and 0 shares authorized, issued and outstanding -- --
Par value $0.01
Class A common stock - 0 and 600,000,000 shares authorized;
0 and 26,122,383 shares issued, par value $0.01 -- --
Class B common stock - 0 and 600,000,000 shares authorized;
0 and 114,000,000 shares issued and outstanding, par value $0.01 -- 1
Capital surplus 1,280 1,282
Treasury stock, at cost - 0 and 208,536 shares -- (10)
Accumulated other comprehensive income (loss)
Net unrealized capital gains (losses) on securities, net of tax 40 (336)
Cumulative translation adjustments (13) (12)
Total accumulated other comprehensive income (loss) 27 (348)
Retained earnings 1,900 1,381
- ----------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 3,207 2,306
- ----------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 143,621 $ 139,033
- ----------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
37
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
ACCUMULATED OTHER
COMPREHENSIVE
INCOME (LOSS)
------------------------
NET
UNREALIZED
CAPITAL
GAINS
(LOSSES)
CLASS A CLASS B TREASURY ON CUMULATIVE TOTAL
COMMON COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) STOCK STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
2000
Balance, December 31, 1999 $ -- $ -- $ 1 $1,282 $ (10) $ (336) $ (12) $ 1,381 $ 2,306
Comprehensive income
Net income 575 575
Other comprehensive income,
net of tax(1)
Net change in unrealized capital
gains (losses) on securities(2) 376 376
Cumulative translation adjustments (1) (1)
Total other comprehensive income 375
Total comprehensive income 950
Dividends declared (56) (56)
Issuance of shares under incentive
and stock purchase plans 1 8 9
Treasury stock acquired (2) (2)
Treasury stock canceled and
retired (4) 4 --
Class B Common Stock converted
to Class A 1 (1) --
Class A Common Stock canceled
and retired (1) 1 --
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ -- $ -- $ -- $1,280 $ -- $ 40 $ (13) $ 1,900 $ 3,207
- ------------------------------------------------------------------------------------------------------------------------------------
1999
Balance, December 31, 1998 $ -- $ -- $ 1 $1,281 $ (9) $ 263 $ (7) $ 964 $ 2,493
Comprehensive income (loss)
Net income 467 467
Other comprehensive income (loss),
net of tax(1)
Net change in unrealized capital
gains (losses) on securities(2) (599) (599)
Cumulative translation adjustments (5) (5)
Total other comprehensive loss (604)
Total comprehensive income (loss) (137)
Dividends declared (50) (50)
Issuance of shares under incentive
and stock purchase plans 1 9 10
Treasury stock acquired (10) (10)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ -- $ -- $ 1 $1,282 $ (10) $ (336) $ (12) $ 1,381 $ 2,306
- ------------------------------------------------------------------------------------------------------------------------------------
1998
Balance, December 31, 1997 $ -- $ -- $ 1 $1,283 $ (1) $ 237 $ (4) $ 628 $ 2,144
Comprehensive income
Net income 386 386
Other comprehensive income,
net of tax (1)
Net change in unrealized capital
gains (losses) on securities(2) 26 26
Cumulative translation adjustments (3) (3)
Total other comprehensive income 23
Total comprehensive income 409
Dividends declared (50) (50)
Issuance of shares under incentive
and stock purchase plans (2) 7 5
Treasury stock acquired (15) (15)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ -- $ -- $ 1 $1,281 $ (9) $ 263 $ (7) $ 964 $ 2,493
====================================================================================================================================
(1) Net change in unrealized capital gains (losses) on securities is reflected
net of tax (benefit) provision of $201, $(326) and $14 for the years ended
December 31, 2000, 1999 and 1998, respectively. There is no tax effect on
cumulative translation adjustments.
(2) There were reclassification adjustments for after-tax (losses) realized in
net income of $(57) for the year ended December 31, 2000. There were no
reclassification adjustments for after-tax gains (losses) realized in net
income for the years ended December 31, 1999 and 1998.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
38
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
---------------------------------
(In millions) 2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 575 $ 467 $ 386
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Net realized capital losses 88 5 --
Amortization of deferred policy acquisition costs 671 568 441
Additions to deferred policy acquisition costs (988) (948) (908)
Depreciation and amortization 6 7 16
Increase in premiums receivable and agents' balances (2) (48) (19)
Increase (decrease) in other liabilities 362 (297) (44)
Change in receivables, payables and accruals 88 195 108
Increase (decrease) in accrued tax 12 (159) 43
Decrease (increase) in deferred income tax 95 251 (71)
Increase in future policy benefits 838 710 778
(Increase) decrease in reinsurance recoverables (62) 74 (98)
Other, net 18 (101) 35
- ------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,701 724 667
- ------------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investments (7,218) (7,194) (7,846)
Sales of investments 5,073 7,267 6,247
Maturity and principle paydowns of fixed maturity investments 1,693 1,938 1,885
Purchases of affiliates and other (112) (104) (199)
- ------------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (564) 1,907 87
- ------------------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in short-term debt -- -- (50)
Proceeds from issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely
parent junior subordinated debentures -- -- 250
Dividends paid (55) (50) (38)
Net disbursements for investment and universal life - type contracts
charged against policyholder accounts (1,069) (2,527) (957)
Proceeds from parent to retire common stock 226 -- --
Payments to retire common stock (226) -- --
Net issuance (purchase) of common stock 6 (1) (8)
- ------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (1,118) (2,578) (803)
- ------------------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 19 53 (49)
Impact of foreign exchange (2) -- (3)
Cash - beginning of year 89 36 88
- ------------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 106 $ 89 $ 36
- ------------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
- ------------------------------------------------------------------------------------------------------------------
NET CASH PAID DURING THE YEAR FOR
Income taxes $ 197 $ 51 $ 257
Interest $ 65 $ 65 $ 54
NONCASH INVESTING ACTIVITIES
In 1998, due to the recapture of an in force block of business previously
ceded to MBL Life Assurance Co. of New Jersey, reinsurance recoverables of
$4,753 were exchanged for the fair value of assets comprised of $4,310 in
policy loans and $443 in other net assets.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
39
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hartford Life, Inc. (a Delaware corporation), together with its consolidated
subsidiaries ("Hartford Life" or the "Company"), is a leading financial services
and insurance organization which provides, primarily in the United States,
investment, retirement, estate planning and group benefits products. Hartford
Life, Inc. was formed on December 13, 1996 and capitalized on December 16, 1996
with the contribution of all the outstanding common stock of Hartford Life and
Accident Insurance Company ("HLA"), a subsidiary of The Hartford Financial
Services Group, Inc. ("The Hartford"). Pursuant to an initial public offering
(the "IPO") on May 22, 1997, Hartford Life sold to the public 26 million shares
of Class A Common Stock at $28.25 per share and received proceeds, net of
offering expenses, of $687. The 26 million shares sold in the IPO represented
approximately 18.6% of the equity ownership in Hartford Life. On June 27, 2000,
The Hartford acquired all of the outstanding common shares of Hartford Life not
already owned by The Hartford ("The Hartford Acquisition"). As a result of The
Hartford Acquisition, Hartford Life became a direct subsidiary of Hartford Fire
Insurance Company ("Hartford Fire"), a direct wholly-owned subsidiary of The
Hartford (see Note 3). Hartford Life, Inc. is a holding company and as such has
no material business of its own.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
These Consolidated Financial Statements are prepared on the basis of accounting
principles generally accepted in the United States, which differ materially from
the statutory accounting practices prescribed by various insurance regulatory
authorities. All material intercompany transactions and balances between
Hartford Life, its subsidiaries and affiliates have been eliminated.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining deferred policy
acquisition costs and the liability for future policy benefits and other
policyholder funds. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
(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.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". SAB 101 provides that if registrants have not applied the
accounting therein, they should implement the SAB and report a change in
accounting principle. SAB 101, as subsequently amended, became effective for the
Company in the fourth quarter of 2000. The adoption of SAB 101 did not have a
material impact on the Company's financial condition or results of operations.
Effective January 1, 1999, Hartford Life adopted SOP No. 98-1, "Accounting for
the Costs of Computer Software Developed or Obtained for Internal Use". This SOP
provides guidance on accounting for costs of internal use software and in
determining whether software is for internal use. The SOP defines internal use
software as software that is acquired, internally developed, or modified solely
to meet internal needs and identifies stages of software development and
accounting for the related costs incurred during the stages. Adoption of this
SOP did not have a material impact on the Company's financial condition or
results of operations.
Effective January 1, 1999, Hartford Life adopted SOP No. 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments". This SOP
addresses accounting by insurance and other enterprises for assessments related
to insurance
F-7
40
activities including recognition, measurement and disclosure of guaranty fund or
other assessments. Adoption of this SOP did not have a material impact on the
Company's financial condition or results of operations.
(c) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In October 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a Replacement of FASB Statement No. 125". SFAS No. 140 revises the criteria for
accounting for certain transfers of financial assets and the reporting and
disclosure requirements for collateral arrangements. Implementation of the
accounting provisions of SFAS No. 140 is not expected to have a material impact
on the Company's financial condition or results of operations.
In July 2000, the Emerging Issues Task Force (EITF) reached consensus on Issue
No. 99-20, "Recognition of Interest Income and Impairment on Certain
Investments". This pronouncement requires investors in certain asset-backed
securities to record changes in their estimated yield on a prospective basis and
to evaluate these securities for an other-than-temporary decline in value. This
consensus is effective for financial statements with fiscal quarters beginning
after March 15, 2001. Adoption of EITF No. 99-20 is not expected to have a
material impact on the Company's financial condition or results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amended SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
established accounting and reporting requirements for derivative instruments,
including certain derivative instruments embedded in other contracts. SFAS No.
133 requires, among other things, that all derivatives be carried on the balance
sheet at fair value. SFAS No. 133 also specifies hedge accounting criteria under
which a derivative can qualify for special accounting. SFAS No. 138 amended SFAS
No. 133 so that for interest rate hedges, a company may designate as the hedged
risk the risk of changes only in a benchmark interest rate. Also, credit risk is
newly defined as the company-specific spread over the benchmark interest rate
and may be hedged separately from, or in combination with, the benchmark
interest rate. Initial application of SFAS No. 133, as amended, for Hartford
Life began January 1, 2001. Implementation of SFAS No. 133, as amended, is
expected to result in a cumulative transition adjustment charge of $23
after-tax. However, the FASB's Derivative Implementation Group continues to
deliberate on multiple issues, the resolution of which could have a significant
impact on the Company's expectations.
(d) REVENUE RECOGNITION
Fee income for investment and universal life-type contracts consists of policy
charges for policy administration, cost of insurance charges and surrender
charges assessed against policyholders' account balances and are recognized in
the period in which services are provided. Premiums for traditional life
insurance are recognized as revenues when due from policyholders. Retrospective
and contingent commissions and other related expenses are incurred and recorded
in the same period that the retrospective premiums are recorded or other
contract provisions are met.
(e) DIVIDENDS TO POLICYHOLDERS
Policyholder dividends are accrued using an estimate of the amount to be paid
based on underlying contractual obligations under participating policies and
applicable state laws. If limitations exist on the amount of net income from
participating life insurance contracts that may be distributed to stockholders,
the policyholders' share of net income on those contracts that cannot be
distributed is excluded from stockholder's equity by a charge to operations and
a credit to a liability.
Participating life insurance in force accounted for 17%, 20% and 22% as of
December 31, 2000, 1999 and 1998, respectively, of total life insurance in
force. Dividends to policyholders were $67, $104 and $330 for the years ended
December 31, 2000, 1999 and 1998, respectively. There were no additional amounts
of income allocated to participating policyholders.
F-8
41
(f) INVESTMENTS
Hartford Life's investments in both fixed maturities, which include bonds,
redeemable preferred stock and commercial paper, and equity securities, which
include common and non-redeemable preferred stocks, are classified as "available
for sale" in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". Accordingly, these securities are carried at
fair value with the after-tax difference from cost reflected in stockholder's
equity as a component of accumulated other comprehensive income. Policy loans
are carried at outstanding balance which approximates fair value. Other invested
assets primarily consist of partnership investments, which are accounted for by
the equity method, and mortgage loans, whereby the carrying value approximates
fair value.
Net realized capital gains (losses) on security transactions associated with the
Company's immediate participation guaranteed contracts are recorded and
effectively offset by amounts owed to policyholders and were $(9), $2 and $8 for
the years ended December 31, 2000, 1999 and 1998, respectively. Under the terms
of the contracts, the realized capital gains and losses will be credited to
policyholders in future years as they are entitled to receive them. Net realized
capital gains and losses, excluding those related to immediate participation
guaranteed contracts, are reported as a component of revenue and are determined
on a specific identification basis.
The Company's accounting policy for impairment requires recognition of an other
than temporary impairment charge on a security if it is determined that the
Company is unable to recover all amounts due under the contractual obligations
of the security. In addition, for securities expected to be sold, an other than
temporary impairment charge is recognized if the Company does not expect the
fair value of a security to recover to cost or amortized cost prior to the
expected date of sale. Once an impairment charge has been recorded, the Company
then continues to review the other than temporarily impaired securities for
appropriate valuation on an ongoing basis.
(g) DERIVATIVE INSTRUMENTS
HEDGE ACCOUNTING -- Hartford Life uses a variety of derivative instruments,
including swaps, caps, floors, forwards and exchange traded futures and options
in compliance with Company policy and in order to achieve one of three Company
approved objectives: to hedge risk arising from interest rate, price or currency
exchange rate volatility; to manage liquidity; or to control transaction costs.
The Company is considered an end user of derivative instruments and as such does
not make a market or trade in these instruments for the express purpose of
earning trading profits. Hartford Life's accounting for derivative instruments
used to manage risk is in accordance with the concepts established in SFAS No.
80, "Accounting for Futures Contracts", SFAS No. 52, "Foreign Currency
Translation", American Institute of Certified Public Accountants (AICPA) Issue
Paper No. 86-2, "Accounting for Options" and various Emerging Issues Task Force
pronouncements. Written options are used, in all cases in conjunction with other
assets and derivatives, as part of the Company's asset and liability management
strategy. Derivative instruments are carried at values consistent with the asset
or liability being hedged. Derivative instruments used to hedge fixed maturities
or equity securities are carried at fair value with the after-tax difference
from cost reflected in stockholder's equity as a component of accumulated other
comprehensive income. Derivative instruments used to hedge other invested assets
or liabilities are carried at cost. For a discussion of SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities", issued in June
1998, see (c) Future Adoption of New Accounting Standards. Initial application
of SFAS No. 133, as amended, for Hartford Life began in the first quarter of
2001.
Derivative instruments must be designated at inception as a hedge and measured
for effectiveness both at inception and on an ongoing basis. Hartford Life's
correlation threshold for hedge designation is 80% to 120%. If correlation,
which is assessed monthly or quarterly and measured based on a rolling three
month average, falls outside the 80% to 120% range, hedge accounting will be
terminated. Derivative instruments used to create a synthetic asset must meet
synthetic accounting criteria, including designation at inception and
consistency of terms between the synthetic and the instrument being replicated.
Consistent with industry practice, synthetic instruments are accounted for like
the financial instrument they are intended to replicate. Derivative instruments
which fail to meet risk management criteria are marked to market with the impact
reflected in the Consolidated Statements of Income.
FUTURES -- Gains or losses on financial futures contracts entered into in
anticipation of the investment of future receipt of product cash flows are
deferred and, at the time of the ultimate investment purchase, reflected as an
adjustment to the cost basis of the purchased asset. Gains or losses on futures
used in invested asset risk management are deferred and adjusted into the cost
basis of the hedged asset when the contract futures are closed, except for
futures used in duration hedging, which are deferred and basis adjusted on a
quarterly basis. The basis adjustments are amortized into net investment income
over the remaining asset life.
FORWARD COMMITMENTS -- Open forward commitment contracts are marked to market
through stockholder's equity as a component of accumulated other comprehensive
income. Such contracts are accounted for at settlement by recording the purchase
of the specified securities at the previously committed price. Gains or losses
resulting from the termination of forward commitment contracts are recognized
immediately in the Consolidated Statements of Income as a component of net
investment income.
F-9
42
OPTIONS -- The cost of options entered into as part of a risk management
strategy are basis adjusted to the underlying asset or liability and amortized
over the remaining life of the option. Gains or losses on expiration or
termination are adjusted into the basis of the underlying asset or liability and
amortized over the remaining asset life.
INTEREST RATE SWAPS -- Interest rate swaps involve the periodic exchange of
payments without the exchange of underlying principal or notional amounts. Net
receipts or payments are accrued and recognized over the life of the swap
agreement as an adjustment to investment income. Should the swap be terminated,
the gain or loss is adjusted into the basis of the asset or liability and
amortized over the remaining life. Should the hedged asset be sold or liability
terminated without terminating the swap position, any swap gains or losses are
immediately recognized in earnings. Interest rate swaps purchased in
anticipation of an asset purchase (anticipatory transaction) are recognized
consistent with the underlying asset components such that the settlement
component is recognized in the Consolidated Statements of Income while the
change in market value is recognized as an unrealized capital gain or loss.
INTEREST RATE CAPS AND FLOORS -- Premiums paid on purchased cap or floor
agreements and the premium received on issued cap or floor agreements (used for
risk management) are adjusted into the basis of the applicable asset or
liability and amortized over the asset life or liability life. Gains or losses
on termination of such positions are adjusted into the basis of the asset or
liability and amortized over the remaining asset or liability life. Net payments
are recognized as an adjustment to income or basis adjusted and amortized
depending on the specific hedge strategy.
FORWARD EXCHANGE AND CURRENCY SWAPS CONTRACTS -- Forward exchange contracts and
foreign currency swaps are accounted for in accordance with SFAS No. 52. Changes
in the spot rate of instruments designated as hedges of the net investment in a
foreign subsidiary are reflected in stockholder's equity as a component of
accumulated other comprehensive income.
(h) SEPARATE ACCOUNTS
Hartford Life maintains separate account assets and liabilities which are
reported at fair value. Separate account assets are segregated from other
investments, and investment income and gains and losses accrue directly to the
policyholders. Separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts, wherein the policyholder assumes substantially
all the investment risk and rewards, and guaranteed separate accounts, wherein
the Company contractually guarantees either a minimum return or account value to
the policyholder.
(i) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, which include commissions and certain other expenses
associated with acquiring business, are deferred and amortized over the
estimated lives of the contracts, usually 20 years. Generally, acquisition costs
are deferred and amortized using the retrospective deposit method. Under the
retrospective deposit method, acquisition costs are amortized in proportion to
the present value of expected gross profits from investment, mortality and
expense margins and surrender charges. Actual gross profits can vary from
management's estimates, resulting in increases or decreases in the rate of
amortization. Management periodically reviews these estimates and evaluates the
recoverability of the deferred acquisition cost asset. When appropriate,
management revises its assumptions on the estimated gross profits of these
contracts and the cumulative amortization for the books of business are
re-estimated and adjusted by a cumulative charge or credit to income.
Acquisition costs and their related deferral are included in the Company's
insurance expenses and other as follows:
2000 1999 1998
---- ---- ----
Commissions $ 1,301 $ 1,152 $ 1,202
Deferred acquisition costs (988) (948) (908)
General insurance expenses and other 923 853 853
------- ------- -------
Insurance expenses and other $ 1,236 $ 1,057 $ 1,147
======= ======= =======
(j) FUTURE POLICY BENEFITS
Liabilities for future policy benefits are computed by the net level premium
method using interest rate assumptions varying from 3% to 11% and withdrawal and
mortality assumptions appropriate at the time the policies were issued. Claim
reserves, which are the result of sales of group long-term and short-term
disability, stop loss and Medicare Supplement, are stated at amounts determined
by estimates on individual cases and estimates of unreported claims based on
past experience.
F-10
43
The following table displays the development of claim reserves (included in
future policy benefits on the Consolidated Balance Sheets) resulting primarily
from group disability products as of December 31, 2000, 1999 and 1998:
2000 1999 1998
---- ---- ----
BEGINNING CLAIM RESERVES - GROSS $ 2,128 $ 1,938 $ 1,746
Less: Reinsurance recoverables 125 125 71
------- ------- -------
BEGINNING CLAIM RESERVES - NET 2,003 1,813 1,675
------- ------- -------
Incurred expenses related to:
Current year 1,093 1,013 902
Prior years (11) (33) (48)
------- ------- -------
Total incurred 1,082 980 854
------- ------- -------
Paid expenses related to:
Current year 410 360 334
Prior years 468 430 382
------- ------- -------
Total paid 878 790 716
------- ------- -------
ENDING CLAIM RESERVES - NET 2,207 2,003 1,813
Add: Reinsurance recoverables 177 125 125
------- ------- -------
ENDING CLAIM RESERVES - GROSS $ 2,384 $ 2,128 $ 1,938
======= ======= =======
(k) OTHER POLICYHOLDER FUNDS
Other policyholder funds include reserves for investment contracts without life
contingencies, corporate owned life insurance and universal life insurance
contracts. Of the amounts included in other policyholder funds, $15.6 billion
and $16.6 billion for the years ended December 31, 2000 and 1999, respectively,
represent policyholder obligations.
The liability for policy benefits for universal life-type contracts is equal to
the balance that accrues to the benefit of policyholders, including credited
interest, amounts that have been assessed to compensate the Company for services
to be performed over future periods, and any amounts previously assessed against
policyholders that are refundable on termination of the contract. For investment
contracts, policyholder liabilities are equal to the accumulated policy account
values, which consist of an accumulation of deposit payments plus credited
interest, less withdrawals and amounts assessed through the end of the period.
(l) FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in stockholder's
equity as a component of accumulated other comprehensive income. Balance sheet
accounts are translated at the exchange rates in effect at each year end and
income statement accounts are translated at the average rates of exchange
prevailing during the year. The national currencies of international operations
are generally their functional currencies.
(m) MUTUAL FUNDS
The Company maintains a retail mutual fund operation, whereby the Company,
through wholly-owned subsidiaries, provides investment administration services
to The Hartford Mutual Funds, Inc., a family of fourteen mutual funds. The
Company charges management fees to the shareholders of the mutual funds, which
are recorded as revenue by the Company. Investors can purchase "shares" in the
mutual funds, all of which are registered with the Securities and Exchange
Commission, in accordance with the Investment Company Act of 1940. The mutual
funds are owned by the shareholders of those funds and not by the Company. As
such, the mutual fund assets and liabilities as well as related investment
returns are not reflected in the Company's consolidated financial statements
since they are not assets, liabilities, and operations of the Company.
F-11
44
3. COMMON STOCK ACQUIRED BY THE HARTFORD
On May 18, 2000, the Board of Directors of Hartford Life approved a cash tender
offer from the Board of Directors of The Hartford for the acquisition of all of
the common shares of Hartford Life not already owned by The Hartford at a price
of $50.50 per share, to be followed by the merger of Hartford Life with a
wholly-owned subsidiary of The Hartford, with Hartford Life to be the surviving
corporation. The cash tender offer expired on June 21, 2000 at 12:00 midnight
(EST) and 21,596,797 shares of Hartford Life Class A Common Stock were acquired
pursuant to the tender offer. The Hartford completed the merger of Hartford Life
effective June 27, 2000. All Hartford Life stockholders who did not tender their
shares (other than The Hartford and its subsidiaries) received the same $50.50
per share in cash paid in the tender offer.
As a result of the above, all eligible participants of Hartford Life's stock
based compensation plans have been converted to The Hartford's stock based
compensation plans as described in Note 10.
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS
For the years ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
(a) COMPONENTS OF NET INVESTMENT INCOME
Interest income from fixed maturities $ 1,213 $ 1,121 $ 1,129
Interest income from policy loans 308 391 789
Income from other investments 88 66 53
------- ------- -------
Gross investment income 1,609 1,578 1,971
Less: Investment expenses 17 16 16
------- ------- -------
NET INVESTMENT INCOME $ 1,592 $ 1,562 $ 1,955
======= ======= =======
(b) COMPONENTS OF NET REALIZED CAPITAL (LOSSES) GAINS
Fixed maturities $ (120) $ (11) $ (23)
Equity securities 23 12 21
Real estate and other -- (4) 10
Change in liability to policyholders for net realized capital losses (gains) 9 (2) (8)
------- ------- -------
NET REALIZED CAPITAL LOSSES $ (88) $ (5) $ --
======= ======= =======
(c) NET CHANGE IN UNREALIZED CAPITAL (LOSSES) GAINS ON EQUITY SECURITIES
Gross unrealized capital gains $ 5 $ 25 $ 17
Gross unrealized capital losses (15) (2) (1)
------- ------- -------
Net unrealized capital (losses) gains (10) 23 16
Deferred income taxes (4) 7 5
------- ------- -------
Net unrealized capital (losses) gains, net of tax (6) 16 11
Balance - beginning of year 16 11 14
------- ------- -------
NET CHANGE IN UNREALIZED CAPITAL (LOSSES) GAINS ON EQUITY SECURITIES $ (22) $ 5 $ (3)
======= ======= =======
(d) NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized capital gains $ 384 $ 70 $ 546
Gross unrealized capital losses (307) (637) (125)
Unrealized capital gains (losses) credited to policyholders (10) 24 (32)
------- ------- -------
Net unrealized capital gains (losses) 67 (543) 389
Deferred income taxes 21 (191) 137
------- ------- -------
Net unrealized capital gains (losses), net of tax 46 (352) 252
Balance - beginning of year (352) 252 223
------- ------- -------
NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES $ 398 $ (604) $ 29
======= ======= =======
F-12
45
(e) FIXED MATURITY INVESTMENTS
As of December 31, 2000
-----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 227 $ 17 $ -- $ 244
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) - asset backed 1,209 25 (9) 1,225
States, municipalities and political subdivisions 1,422 73 (22) 1,473
Foreign governments 319 10 (8) 321
Public utilities 645 5 (10) 640
All other corporate, including international 6,648 123 (195) 6,576
All other corporate - asset backed 6,072 125 (46) 6,151
Short-term investments 975 -- -- 975
Certificates of deposit 458 3 (14) 447
Redeemable preferred stock 196 3 (3) 196
------- ------- ------- -------
TOTAL FIXED MATURITIES $18,171 $ 384 $ (307) $18,248
======= ======= ======= =======
As of December 31, 1999
-----------------------
Gross Gross
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
---- ----- ------ -----
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 228 $ 5 $ (4) $ 229
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) - asset backed 1,333 5 (40) 1,298
States, municipalities and political subdivisions 1,346 2 (75) 1,273
Foreign governments 347 8 (16) 339
Public utilities 991 7 (41) 957
All other corporate, including international 6,539 36 (292) 6,283
All other corporate - asset backed 4,914 6 (153) 4,767
Short-term investments 1,346 -- -- 1,346
Certificates of deposit 510 1 (14) 497
Redeemable preferred stock 48 -- (2) 46
------- ------- ------- -------
TOTAL FIXED MATURITIES $17,602 $ 70 $ (637) $17,035
======= ======= ======= =======
The amortized cost and estimated fair value of fixed maturity investments as of
December 31, 2000 by estimated maturity year are shown below. Expected
maturities differ from contractual maturities due to call or prepayment
provisions. Asset backed securities, including mortgage backed securities and
collateralized mortgage obligations, are distributed to maturity year based on
the Company's estimates of the rate of future prepayments of principal over the
remaining lives of the securities. These estimates are developed using
prepayment speeds provided in broker consensus data. Such estimates are derived
from prepayment speeds experienced at the interest rate levels projected for the
applicable underlying collateral and can be expected to vary from actual
experience.
MATURITY Amortized Cost Fair Value
- -------- -------------- ----------
One year or less $ 1,537 $ 1,539
Over one year through five years 6,325 6,330
Over five years through ten years 5,083 5,134
Over ten years 5,226 5,245
------- -------
TOTAL $18,171 $18,248
======= =======
F-13
46
(f) SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS
Sales of fixed maturities, excluding short-term fixed maturities, for the years
ended December 31, 2000, 1999 and 1998 resulted in proceeds of $3.8 billion,
$3.8 billion and $4.4 billion, gross realized capital gains of $114, $178 and
$121, gross realized capital losses (including writedowns) of $225, $191 and
$152, respectively. Sales of equity security investments for the years ended
December 31, 2000, 1999 and 1998 resulted in proceeds of $42, $38, and $39 and
gross realized capital gains of $37, $12 and $21, respectively, and gross
realized capital losses of $14 for the year ended December 31, 2000. There were
no realized capital losses on sales of equity securities in 1999 and 1998.
(g) CONCENTRATION OF CREDIT RISK
The Company is not exposed to any concentration of credit risk in fixed
maturities of a single issuer greater than 10% of stockholder's equity.
(h) DERIVATIVE INSTRUMENTS
Hartford Life utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in compliance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or, to control transactions costs. The
Company utilizes derivative instruments to manage market risk through four
principal risk management strategies: hedging anticipated transactions, hedging
liability instruments, hedging invested assets and hedging portfolios of assets
and/or liabilities. Hartford Life is considered an end user of derivative
instruments and, as such, does not make a market or trade in these instruments
for the express purpose of earning trading profits.
The Company maintains a derivatives counterparty exposure policy which
establishes market based credit limits, favors long-term financial stability and
creditworthiness, and typically requires credit enhancement/credit risk reducing
agreements. Credit risk is measured as the amount owed to Hartford Life based on
current market conditions and potential payment obligations between the Company
and its counterparties. Credit exposures are generally quantified weekly and
netted, and collateral is pledged to or held by the Company to the extent the
current value of derivatives exceeds exposure policy thresholds.
The Company's derivative program is monitored by an internal compliance unit and
is reviewed by senior management and reported to The Hartford's Finance
Committee. Notional amounts, which represent the basis upon which pay or receive
amounts are calculated and are not reflective of credit risk, pertaining to
derivative financial instruments (excluding the Company's guaranteed separate
account derivative investments, see Note 6), totaled $5.0 billion and $7.5
billion ($4.2 billion and $5.5 billion related to the Company's investments and
$774 and $2.0 billion related to the Company's liabilities) as of December 31,
2000 and 1999, respectively.
F-14
47
The tables below provide a summary of derivative instruments held by Hartford
Life as of December 31, 2000 and 1999, segregated by major investment and
liability category:
2000 AMOUNT HEDGED (NOTIONAL AMOUNTS)
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors Rate Swaps Currency Notional
ASSETS HEDGED Value & Floors & Options Futures (1) & Forwards Swaps (2) Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Asset backed securities
(excluding anticipatory) $ 7,376 $ $ 15 $ -- $ 1,493 $ -- $ 1,508
Anticipatory (3) -- -- -- 144 -- -- 144
Other bonds and notes 9,897 139 439 -- 1,939 37 2,554
Short-term investments 975 -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 18,248 139 454 144 3,432 37 4,206
Equity securities, policy loans and
other investments 4,691 -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 22,939 139 454 144 3,432 37 4,206
OTHER POLICYHOLDER FUNDS $ 15,849 -- 650 -- 124 -- 774
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE INSTRUMENTS -
NOTIONAL VALUE $ 139 $ 1,104 $ 144 $ 3,556 $ 37 $ 4,980
===================================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS -
FAIR VALUE $ (4) $ 11 $ -- $ (8) $ -- $ (1)
===================================================================================================================================
1999 AMOUNT HEDGED (NOTIONAL AMOUNTS)
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors Rate Swaps Currency Notional
ASSETS HEDGED Value & Floors & Options Futures (1) & Forwards Swaps (2) Amount
- -----------------------------------------------------------------------------------------------------------------------------------
Asset backed securities
(excluding anticipatory) $ 6,065 $ -- $ 15 $ -- $ 931 $ -- $ 946
Anticipatory (3) -- -- -- 13 232 -- 245
Other bonds and notes 9,624 505 681 -- 3,008 83 4,277
Short-term investments 1,346 -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 17,035 505 696 13 4,171 83 5,468
Equity securities, policy loans and
other investments 4,751 -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 21,786 505 696 13 4,171 83 5,468
OTHER POLICYHOLDER FUNDS $ 16,873 -- 1,150 -- 848 -- 1,998
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE INSTRUMENTS -
NOTIONAL VALUE $ 505 $ 1,846 $ 13 $ 5,019 $ 83 $ 7,466
===================================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS -
FAIR VALUE $ (22) $ 10 $ -- $ (22) $ 2 $ (32)
===================================================================================================================================
(1) As of December 31, 2000 and 1999, 100% of the notional futures
contracts mature within one year.
(2) As of December 31, 2000, no foreign currency swaps mature within one
year. As of December 31, 1999, approximately 27% of foreign currency
swaps expire within one year. In years 2007 to 2009, 80% of the
notional value will mature.
(3) Deferred gains and losses on anticipatory transactions are included in
the carrying value of fixed maturities in the Consolidated Balance
Sheets. At the time of the ultimate purchase, they are reflected as a
basis adjustment to the purchased asset. As of December 31, 2000, the
Company had $0.2 of net deferred gains for futures contracts. Hartford
Life expects the anticipatory transaction to occur in the first quarter
of 2001 and the entire $0.2 of net deferred gains will be amortized
into income as a hedge of a forecasted transaction. As of December 31,
1999, the Company had $3.4 of net deferred losses for futures contracts
and interest rate swaps, which were basis adjusted in 2000.
F-15
48
The following is a reconciliation of notional amounts by derivative type and
strategy as of December 31, 2000 and 1999:
December 31, 1999 Maturities/ December 31, 2000
Notional Amount Additions Terminations (1) Notional Amount
--------------- --------- ---------------- ---------------
BY DERIVATIVE TYPE
Caps $1,779 $ -- $1,187 $ 592
Floors 405 100 210 295
Swaps/Forwards 5,102 2,652 4,161 3,593
Futures 13 357 226 144
Options 167 426 237 356
------ ------ ------ ------
TOTAL $7,466 $3,535 $6,021 $4,980
====== ====== ====== ======
BY STRATEGY
Liability $1,998 $ 215 $1,439 $ 774
Anticipatory 245 611 712 144
Asset 4,093 1,726 2,656 3,163
Portfolio 1,130 983 1,214 899
------ ------ ------ ------
TOTAL $7,466 $3,535 $6,021 $4,980
====== ====== ====== ======
(1) During 2000, the Company had no significant gains or losses on terminations
of hedge positions using derivative financial instruments.
(i) COLLATERAL ARRANGEMENTS
Hartford Life entered into various collateral arrangements which require both
the pledging and accepting of collateral, in connection with its derivative
instruments and repurchase agreements. As of December 31, 2000, collateral
pledged had not been separately reported in the Consolidated Balance Sheets. The
classification and carrying amounts of collateral pledged at December 31, 2000
were as follows:
Carrying
Amount
ASSETS
U.S. Government and Government agencies and
authorities (guaranteed and sponsored) $ 3
U.S. Government and Government agencies and
authorities (guaranteed and sponsored) - asset backed 31
------
TOTAL $ 34
======
At December 31, 2000, Hartford Life had accepted collateral consisting primarily
of U.S. Government securities with a fair value of $252. While Hartford Life is
permitted by contract to sell or repledge the collateral accepted, none of the
collateral had been sold or repledged at December 31, 2000. As of December 31,
2000, all collateral accepted was held in separate custodial accounts.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", requires
disclosure of fair value information of financial instruments. For certain
financial instruments where quoted market prices are not available, other
independent valuation techniques and assumptions are used. Because considerable
judgment is used, these estimates are not necessarily indicative of amounts that
could be realized in a current market exchange. SFAS No. 107 excludes certain
financial instruments from disclosure, including insurance contracts, other than
financial guarantees and investment contracts. Hartford Life uses the following
methods and assumptions in estimating the fair value of each class of financial
instrument.
Fair value for fixed maturities and marketable equity securities approximates
those quotations published by applicable stock exchanges or received from other
reliable sources.
For policy loans, carrying amounts approximate fair value.
Fair value of other investments, which primarily consist of partnership
investments, is based on external market valuations from partnership management.
Other investments also include mortgage loans, whereby the carrying value
approximates fair value.
F-16
49
Other policyholder funds fair value information is determined by estimating
future cash flows, discounted at the current market rate.
Fair value for long-term debt and TruPS (represents company obligated
mandatorily redeemable preferred securities of subsidiary trust holding solely
parent junior subordinated debentures) is based on external valuation using
discounted future cash flows at current market interest rates.
The fair value of derivative financial instruments, including swaps, caps,
floors, futures, options and forward commitments, is determined using a pricing
model which is similar to external valuation models. Derivative instruments are
reported below as a component of other investments.
The carrying amount and fair values of Hartford Life's financial instruments as
of December 31, 2000 and 1999 were as follows:
2000 1999
---- ----
Carrying Amount Fair Value Carrying Amount Fair Value
--------------- ---------- --------------- ----------
ASSETS
Fixed maturities $18,248 $18,248 $17,035 $17,035
Equity securities 171 171 153 153
Policy loans 3,610 3,610 4,222 4,222
Other investments 910 913 376 387
LIABILITIES
Other policyholder funds (1) $11,985 $11,607 $11,991 $11,416
Long-term debt 650 658 650 633
TruPS 250 245 250 203
(1) Excludes group accident and health and universal life insurance contracts,
including corporate owned life insurance.
6. SEPARATE ACCOUNTS
Hartford Life maintained separate account assets and liabilities totaling $114.0
billion and $110.7 billion as of December 31, 2000 and 1999, respectively, which
are reported at fair value. Separate account assets, which are segregated from
other investments, reflect two categories of risk assumption: non-guaranteed
separate accounts totaling $104.2 billion and $101.8 billion as of December 31,
2000 and 1999, respectively, wherein the policyholder assumes substantially all
the investment risks and rewards, and guaranteed separate accounts totaling $9.8
and $8.9 billion as of December 31, 2000 and 1999, respectively, wherein
Hartford Life contractually guarantees either a minimum return or account value
to the policyholder. Included in non-guaranteed separate account assets were
policy loans totaling $697 and $860 as of December 31, 2000 and 1999,
respectively. Net investment income (including net realized capital gains and
losses) and interest credited to policyholders on separate account assets are
not reflected in the Consolidated Statements of Income.
Separate account management fees and other revenues were $1.4 billion, $1.1
billion and $908 in 2000, 1999 and 1998, respectively. The guaranteed separate
accounts include fixed market value adjusted (MVA) individual annuity and
modified guaranteed life insurance. The average credited interest rate on these
contracts was 6.6% and 6.5% as of December 31, 2000 and 1999, respectively. The
assets that support these liabilities were comprised of $9.6 billion and $8.9
billion in fixed maturities as of December 31, 2000 and 1999, respectively, and
$0.2 billion of other invested assets as of December 31, 2000. The portfolios
are segregated from other investments and are managed to minimize liquidity and
interest rate risk. In order to minimize the risk of disintermediation
associated with early withdrawals, fixed MVA annuity and modified guaranteed
life insurance contracts carry a graded surrender charge as well as a market
value adjustment. Additional investment risk is hedged using a variety of
derivatives which totaled $3 and $(96) in carrying value and $3.5 billion and
$2.1 billion in notional amounts as of December 31, 2000 and 1999, respectively.
F-17
50
7. DEBT
2000 1999
---- ----
Weighted Average Weighted Average
Amount Interest Rate (1) Amount Interest Rate (1)
------ ----------------- ------ -----------------
LONG-TERM DEBT
6.90% notes, due June 2004 $200 7.0% $200 7.0%
7.10% notes, due June 2007 200 7.2% 200 7.2%
7.65% debentures, due June 2027 250 7.8% 250 7.8%
---- --- ---- ---
TOTAL LONG-TERM DEBT $650 7.4% $650 7.4%
==== === ==== ===
(1) Represents the weighted average effective interest rate at the end of the
year.
(A) SHORT-TERM DEBT
As of December 31, 2000, Hartford Life maintained a $250 five year revolving
credit facility comprised of four participatory banks. This facility, which
expires in 2003, is available for general corporate purposes and to provide
additional support for the Company's commercial paper program. As of December
31, 2000, there were no outstanding borrowings under the facility or commercial
paper program.
(B) LONG-TERM DEBT
Hartford Life's long-term debt securities are unsecured obligations of Hartford
Life and rank on a parity with all other unsecured and unsubordinated
indebtedness. In February 1997, the Company filed a shelf registration statement
for the issuance and sale of up to $1.0 billion in the aggregate of senior debt
securities, subordinated debt securities and preferred stock. In June 1997, the
Company issued an aggregate principal amount of $650 of unsecured redeemable
long-term debt in the form of notes and debentures, maturing between 2004 and
2027. Interest on each of the notes and debentures is payable semi-annually on
June 15 and December 15 of each year, which commenced December 15, 1997.
In June 1998, Hartford Life filed an omnibus registration statement with the
Securities and Exchange Commission for the issuance of up to $1.0 billion of
debt and equity securities, including up to $350 of previously registered but
unsold securities, described above. The Company issued $250 of Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Parent Junior Subordinated Debentures on June 29, 1998, discussed below. As of
December 31, 2000, Hartford Life had $750 remaining on this shelf registration.
Interest expense related to short- and long-term debt totaled $48 in 2000 and
$49 in 1999 and 1998.
(C) SUBSEQUENT EVENT
On March 1, 2001, the Company issued and sold $400 of senior debt securities
from its existing shelf registration in order to partially finance the Fortis,
Inc. (operating as Fortis Financial Group. or "Fortis") acquisition. For
additional information, see Note 18 (Subsequent Events).
8. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES
A) DESCRIPTION
On June 29, 1998, Hartford Life Capital I, a special purpose Delaware trust
formed by Hartford Life, issued 10,000,000, 7.2% Trust Preferred Securities,
Series A (Series A Preferred Securities). The proceeds from the sale of the
Series A Preferred Securities were used to acquire $250 of 7.2% Series A Junior
Subordinated Deferrable Interest Debentures (Junior Subordinated Debentures)
issued by Hartford Life. Hartford Life used the proceeds from the offering for
the retirement of its outstanding commercial paper, strategic acquisitions and
other general corporate purposes.
The Series A Preferred Securities represent undivided beneficial interests in
Hartford Life Capital I's assets, which consist solely of the Junior
Subordinated Debentures. Hartford Life owns all the beneficial interests
represented by Series A Common Securities of Hartford Life Capital I. Holders of
Series A Preferred Securities are entitled to receive cumulative cash
distributions accruing from June 29, 1998, the date of issuance, and payable
quarterly in arrears commencing July 15, 1998 at the annual rate of 7.2% of the
stated liquidation amount of $25.00 per Series A Preferred Security. The Series
A Preferred Securities are subject to mandatory redemption upon repayment of the
Junior Subordinate Debentures at maturity or upon earlier redemption. Hartford
Life has the right
F-18
51
to redeem the Junior Subordinated Debentures on or after June 30, 2003 or
earlier upon the occurrence of certain events. Holders of Series A Preferred
Securities generally have no voting rights.
Hartford Life has the right to redeem the Junior Subordinated Debentures (i) in
whole or in part on or after June 30, 2003 or (ii) at any time, in whole but not
in part, in certain circumstances upon the occurrence of certain specified
events, in either case at a redemption price equal to accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption plus the principal amount thereof. In addition, prior to June 30,
2003, Hartford Life shall have the right to redeem the Junior Subordinated
Debentures at any time, in whole or in part, at a redemption price equal to the
accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to
the date fixed for redemption, plus the greater of (a) the principal amount
thereof or (b) an amount equal to the present value on the redemption date of
the interest payments that would have been paid through June 30, 2003, after
discounting that amount on a quarterly basis from the originally scheduled date
for payment, and the present value on the redemption date of principal, after
discounting that amount on a quarterly basis from June 30, 2003, at a discount
rate tied to the interest rate on Treasury securities maturing on June 30, 2003.
The Junior Subordinated Debentures bear interest at the annual rate of 7.2% of
the principal amount, payable quarterly in arrears, which commenced June 29,
1998, and mature on June 30, 2038. The Junior Subordinated Debentures are
unsecured and rank junior and subordinate in right of payment to all present and
future senior debt of Hartford Life and are effectively subordinated to all
existing and future liabilities of its subsidiaries.
Hartford Life has the right at any time, and from time to time, to defer
payments of interest on the Junior Subordinated Debentures for a period not
exceeding 20 consecutive quarters up to the debentures' maturity date. During
any such period, interest will continue to accrue and Hartford Life may not
declare or pay any cash dividends or distributions on, or purchase, Hartford
Life's capital stock, nor make any principal, interest or premium payments on or
repurchase any debt securities that rank pari passu with or junior to the Junior
Subordinated Debentures. The Company will have the right at any time to dissolve
the Trust and cause the Junior Subordinated Debentures to be distributed to the
holders of the Series A Preferred Securities and the Series A Common Stock.
Hartford Life has guaranteed, on a subordinated basis, all the Hartford Life
Capital I obligations under the Series A Preferred Securities, including payment
of the redemption price and any accumulated and unpaid distributions upon
dissolution, winding up or liquidation to the extent funds are available.
Interest expense with respect to the Series A Preferred Securities totaled
approximately $18 in both in 2000 and 1999, and $9 in 1998.
b) SUBSEQUENT EVENT
On March 6, 2001, the Company issued and sold $200 of Hartford Life trust
preferred securities from its existing shelf registration in order to partially
finance the Fortis acquisition. For additional information, see Note 18
(Subsequent Events).
9. STOCKHOLDER'S EQUITY
a) PREFERRED STOCK
Hartford Life had 50,000,000 shares of preferred stock authorized, none of which
were issued and outstanding as of December 31, 1999 and 1998. In conjunction
with The Hartford Acquisition, Hartford Life canceled its authorized preferred
stock.
b) STATUTORY RESULTS
For the years ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
Statutory net income $ 399 $ 220 $ 265
====== ====== ======
Statutory capital and surplus $2,407 $2,214 $2,010
====== ====== ======
Statutory net income of $399 in 2000 increased 81% from 1999. Excluding realized
losses on certain securities recorded in 1999, statutory net income increased
$109, or 38%.
A significant percentage of the consolidated statutory surplus is permanently
reinvested or is subject to various state regulatory restrictions which limit
the payment of dividends without prior approval. The total amount of statutory
dividends which may be paid by the insurance subsidiaries of the Company in
2001, without prior regulatory approval, is estimated to be $310.
F-19
52
The domestic insurance subsidiaries of Hartford Life prepare their statutory
financial statements in accordance with accounting practices prescribed by the
applicable state of domicile. Prescribed statutory accounting practices include
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations and general administrative rules.
The NAIC adopted the Codification of Statutory Accounting Principles
(Codification) in March 1998. The effective date for the statutory accounting
guidance is January 1, 2001. Each of Hartford Life's domiciliary states has
adopted Codification and the Company has made the necessary changes in its
statutory reporting required for implementation. The Company has determined that
the overall impact of applying the new guidance will result in a one-time
statutory cumulative transition benefit of approximately $75 in statutory
surplus.
10. STOCK COMPENSATION PLANS
Hartford Life's employees are included in The Hartford 2000 Incentive Stock Plan
and The Hartford Employee Stock Purchase Plan. Prior to The Hartford
Acquisition, eligible employees of Hartford Life were included in Hartford
Life's stock based compensation plans, the 1997 Hartford Life, Inc. Incentive
Stock Plan and the Hartford Life, Inc. Employee Stock Purchase Plan. As a result
of The Hartford Acquisition, all eligible participants of Hartford Life's stock
based compensation plans were converted to The Hartford's stock based
compensation plans.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretation in accounting for its stock based compensation plans.
Accordingly, in the measurement of compensation expense the Company utilizes
the excess of market price over exercise price, on the first date that both the
number of shares and award price are known. For the years ended December 31,
2000, 1999, and 1998, compensation expense related to the stock based
compensation plans was not material. Had compensation cost for the Incentive
Stock Plan and Employee Stock Ownership Plan been determined based on the fair
value at the grant dates for awards under those plans consistent with the method
under SFAS No. 123 the Company's net income would have been reduced to the pro
forma amounts indicated below:
2000 1999 1998
- --------------------------------------------------------------------
Net Income
As reported $ 575 $ 467 $ 386
Pro forma (1) 563 456 379
- --------------------------------------------------------------------
(1) The pro forma disclosures are not representative of the effects on net
income in future years.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 2000, 1999 and 1998; dividend yield of 1.0% for
2000, 1999 and 1998; expected price variability of 36% for 2000 and 1999, and
33% for 1998; risk free interest rates of 6.7% for the 2000 grants, 5.3% for
the 1999 grants and 4.9% for the 1998 grants; and expected lives for five years
for 2000, 1999 and 1998.
A summary of the status of non-qualified options included in the Company's
incentive stock plan as of December 31, 2000, 1999 and 1998 and changes during
the years ended December 31, 2000, 1999 and 1998 are presented below:
2000 1999 1998
------------------------ ------------------------ -----------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- -----------------------------------------------------------------------------------------------------------------------------
Outstanding at beginning of year 2,273,502 $43.99 1,766,397 $40.96 422,512 $31.54
Granted 1,894,975 36.32 621,615 51.83 1,376,375 43.74
Exercised (38,801) 38.21 (45,063) 35.88 (15,483) 31.10
Cancelled/Expired (42,264) 43.14 (69,447) 42.40 (17,007) 40.24
Conversion to options of The Hartford (4,087,412) 40.58 -- -- -- --
Company's options outstanding at ---------- --------- ---------
end of year -- -- 2,273,502 $43.99 1,766,397 $40.96
- -----------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year -- -- 903,605 $39.69 504,562 $37.72
Weighted average fair value of
options granted $14.48 $19.41 $15.13
- -----------------------------------------------------------------------------------------------------------------------------
11. POSTRETIREMENT BENEFIT AND SAVINGS PLANS
(a) PENSION PLANS
Hartford Life's employees are included in The Hartford's non-contributory
defined benefit pension and postretirement health care and life insurance
benefit plans. Defined benefit pension expense, allocated by The Hartford, was
$8, $10 and $9 in 2000, 1999 and 1998, respectively. Postretirement health care
and life insurance benefits expense, allocated by The Hartford, was not material
to the results of operations for 2000, 1999 and 1998.
(b) INVESTMENT AND SAVINGS PLAN
Substantially all U.S. employees are eligible to participate in The Hartford's
Investment and Savings Plan. The cost to Hartford Life for this plan was
approximately $8 in 2000 and $6 in both 1999 and 1998.
12. REINSURANCE
Hartford Life cedes insurance to other insurers in order to limit its maximum
losses. Such transfer does not relieve Hartford Life of its primary liability
and, as such, failure of reinsurers to honor their obligations could result in
losses to Hartford Life. Hartford Life reduces this risk by evaluating the
financial condition of reinsurers and monitoring for possible concentrations of
credit risk. As of December 31, 2000, Hartford Life had no significant
concentrations of credit risk related to reinsurance.
The Company records a receivable for reinsured benefits paid and the portion of
insurance liabilities that are reinsured. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account for
the underlying policies. Reinsurance recoveries on ceded reinsurance contracts
recognized in the Consolidated Statements of Income were $225, $168 and $119 for
the years ended December 31, 2000, 1999 and 1998, respectively. Hartford Life
also assumes insurance from other insurers.
The effect of reinsurance on fee income, earned premiums and other is summarized
as follows:
For the years ended December 31,
--------------------------------
FEE INCOME, EARNED PREMIUMS AND OTHER 2000 1999 1998
- ------------------------------------- ---- ---- ----
Gross $ 4,645 $ 4,068 $ 3,946
Reinsurance assumed 137 154 98
Reinsurance ceded (296) (243) (211)
------- ------- -------
NET $ 4,486 $ 3,979 $ 3,833
======= ======= =======
F-20
53
In 1998, the Company recaptured an in force block of Corporate Owned Life
Insurance (COLI) business previously ceded to MBL Assurance Co. of New Jersey
(MBL Life). The transaction was consummated through an assignment of a
reinsurance arrangement between Hartford Life and MBL Life to a Hartford Life
subsidiary. Hartford Life originally assumed the life insurance block in 1992
from Mutual Benefit Life, which was placed in court-supervised rehabilitation in
1991, and reinsured a portion of those policies back to MBL Life. This recapture
was effective January 1, 1998 and resulted in a decrease in ceded premiums and
other considerations of $163 in 1998. Additionally, this transaction resulted in
a decrease in reinsurance recoverables of $4.8 billion, which was exchanged for
the fair value of assets comprised of $4.3 billion in policy loans and $443 in
other assets.
13. INCOME TAX
Hartford Life and The Hartford have entered into a tax sharing agreement under
which each member in the consolidated U.S. federal income tax return will make
payments between them such that, with respect to any period, the amount of taxes
to be paid by the Company, subject to certain adjustments, generally will be
determined as though the Company were filing a separate federal income tax
return.
Beginning in 2000, the Company will be included in The Hartford's consolidated
federal income tax return. The life insurance companies filed a separate
consolidated federal income tax return for 1999 and 1998. The Company's
effective tax rate was 27%, 32% and 34% in 2000, 1999 and 1998, respectively.
Income tax expense (benefit) is as follows:
For the years ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
Current $ 115 $ (41) $ 299
Deferred 98 260 (100)
----- ----- -----
INCOME TAX EXPENSE $ 213 $ 219 $ 199
===== ===== =====
A reconciliation of the tax provision at the U.S. federal statutory rate to the
provision (benefit) for income taxes is as follows:
For the years ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
Tax provision at the U.S. federal statutory rate $ 276 $ 240 $ 205
Municipal bond and other tax-exempt income (47) (17) (9)
IRS audit settlement (see Note 16 (c)) (24) -- --
Other 8 (4) 3
----- ----- -----
TOTAL $ 213 $ 219 $ 199
===== ===== =====
Deferred tax assets (liabilities) include the following as of December 31:
2000 1999
---- ----
Tax basis deferred policy acquisition costs $ 786 $ 754
Financial statement deferred policy acquisition costs and reserves (104) 10
Employee benefits 27 25
Net unrealized capital (gains) losses on securities (17) 184
Investments and other (469) (451)
----- -----
TOTAL $ 223 $ 522
===== =====
Hartford Life had current federal income tax receivables of $105 and $40 as of
December 31, 2000 and 1999, respectively.
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax Act
of 1959 permitted the deferral from taxation of a portion of statutory income
under certain circumstances. In these situations, the deferred income was
accumulated in a "Policyholders' Surplus Account" and, based on current tax law,
will be taxable in the future only under conditions which management considers
to be remote; therefore, no federal income taxes have been provided on the
balance in this account, which for tax return purposes was $104 as of December
31, 2000.
F-21
54
14. RELATED PARTY TRANSACTIONS
Transactions of the Company with Hartford Fire and its affiliates relate
principally to tax settlements, reinsurance, insurance coverage, rental and
service fees, payment of dividends and capital contributions. In addition,
certain affiliated insurance companies purchased group annuity contracts from
the Company to fund pension costs and claim annuities to settle casualty claims.
Substantially all general insurance expenses related to the Company, including
rent and employee benefit plan expenses, are initially paid by The Hartford.
Direct expenses are allocated to the Company using specific identification, and
indirect expenses are allocated using other applicable methods. Indirect
expenses include those for corporate areas which, depending on type, are
allocated based on either a percentage of direct expenses or on utilization.
Indirect expenses allocated to the Company by The Hartford were $84 in 2000 and
$72 in both 1999 and 1998. Included in other liabilities are $22 and $15 due to
The Hartford as of December 31, 2000 and 1999, respectively.
15. HARTFORD LIFE INSURANCE COMPANY
The following information is provided for the benefit of certain policyholders
of Hartford Life Insurance Company and subsidiaries ("HLIC"), an indirect
wholly-owned subsidiary of Hartford Life. Hartford Life has entered into a
capital maintenance agreement with HLIC whereby Hartford Life is obligated to
contribute capital to HLIC if HLIC's risk based capital falls below a certain
threshold. The amount of capital that would be required to be contributed is
that amount that would restore HLIC's risk based capital above the established
threshold.
The following is a breakdown of certain consolidating financial information
related to Hartford Life:
CONDENSED CONSOLIDATING BALANCE SHEETS As of December 31, 2000
-----------------------
HLIC Other(1) Hartford Life
---- -------- -------------
ASSETS
Investments $ 18,662 $ 4,277 $22,939
Deferred policy acquisition costs 4,325 202 4,527
Separate account assets 113,744 250 113,994
Other assets 2,104 57 2,161
-------- ------- ---------
TOTAL ASSETS $138,835 $ 4,786 $ 143,621
======== ======= =========
LIABILITIES
Future policy benefits $4,828 $ 2,246 $ 7,074
Other policyholder funds 14,947 902 15,849
Separate account liabilities 113,744 250 113,994
Other liabilities 2,124 1,373 3,497
======== ======= =========
TOTAL LIABILITIES 135,643 4,771 140,414
TOTAL STOCKHOLDER'S EQUITY 3,192 15 3,207
======== ======= =========
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $138,835 $ 4,786 $ 143,621
======== ======= =========
(1) Included in Other is the financial information related to additional legal
entities owned by Hartford Life, including HLA, and the required elimination
entries to consolidate Hartford Life's financial statements.
F-22
55
CONDENSED CONSOLIDATING STATEMENTS OF INCOME For the year ended December 31, 2000
------------------------------------
HLIC Other(1) Hartford Life
---- -------- -------------
REVENUES
Fee income $ 2,109 $ 375 $ 2,484
Earned premiums and other 97 1,905 2,002
Net investment income 1,326 266 1,592
Net realized capital losses (85) (3) (88)
------- ------- -------
TOTAL REVENUES 3,447 2,543 5,990
======= ======= =======
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 1,495 1,667 3,162
Insurance expenses and other 667 702 1,369
Amortization of deferred policy acquisition costs 604 67 671
------- ------- -------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,766 2,436 5,202
INCOME BEFORE INCOME TAX EXPENSE 681 107 788
======= ======= =======
Income tax expense 194 19 213
======= ======= =======
NET INCOME $ 487 $ 88 $ 575
======= ======= =======
(1) Included in Other is the financial information related to additional legal
entities owned by Hartford Life, including HLA, and the required elimination
entries to consolidate Hartford Life's financial statements.
16. COMMITMENTS AND CONTINGENT LIABILITIES
(a) LITIGATION
Hartford Life is involved or may become involved in various legal actions, in
the normal course of its business, in which claims for alleged economic and
punitive damages have been or may be asserted. Some of the pending litigation
has been filed as purported class actions and some actions have been filed in
certain jurisdictions that permit punitive damage awards that are
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 potential, pending or threatened legal actions,
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.
(b) LEASES
The rent paid to Hartford Fire for space occupied by the Company was $25, $15
and $14 in 2000, 1999 and 1998, respectively. Future minimum rental commitments
are as follows:
2001 $ 24
2002 24
2003 22
2004 22
2005 22
Thereafter 88
----
TOTAL $202
====
Hartford Life's principal executive offices are located in Simsbury,
Connecticut. Rental expense is recognized on a level basis over the term of the
primary sublease for the facility located in Simsbury, Connecticut, which
expires on December 31, 2009, and amounted to approximately $18 in 2000 and $16
in both 1999 and 1998.
(c) TAX MATTERS
Hartford Life's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS). The Company's 1996-1997 federal income tax returns are
currently under audit by the IRS. Management believes that adequate provision
has been made in the
F-23
56
financial statements for any potential assessments that may result from tax
examinations and other tax related matters for all open tax years.
During the second quarter of 2000, the Company reached a settlement with the IRS
with respect to certain tax matters for the 1993-1995 tax years. This settlement
resulted in a $24 tax benefit recorded in the Company's second quarter results
of operations. This same matter is currently under review with the IRS for the
1996-1997 tax years.
(d) UNFUNDED COMMITMENTS
At December 31, 2000, Hartford Life has outstanding commitments to fund limited
partnership investments totaling $191. These capital commitments can be called
by the partnerships during the five-year commitment period to fund working
capital needs or the purchase of new investments. If the commitment period
expires and the commitment has not been fully funded, Hartford Life is not
required to fund the remaining unfunded commitment.
17. SEGMENT INFORMATION
Hartford Life is organized into four reportable operating segments: Investment
Products, Individual Life, Group Benefits (formerly 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. Group 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 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.
The accounting policies of the reportable operating segments are the same as
those described in the summary of significant accounting policies in Note 2.
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 Company's revenues are primarily derived from customers within the United
States. The Company's long-lived assets primarily consist of deferred policy
acquisition costs and deferred tax assets from within the United States. The
following tables present summarized financial information concerning the
Company's segments as well as the Company's revenues by product.
F-24
57
For the years ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
TOTAL REVENUES
Investment Products $ 2,380 $ 2,041 $ 1,784
Individual Life 640 584 567
Group Benefits 2,207 2,024 1,809
COLI 767 831 1,567
Other (4) 56 61
--------- --------- ---------
TOTAL REVENUES $ 5,990 $ 5,536 $ 5,788
========= ========= =========
NET INVESTMENT INCOME
Investment Products $ 741 $ 708 $ 739
Individual Life 181 172 189
Group Benefits 226 195 180
COLI 366 431 793
Other 78 56 54
--------- --------- ---------
TOTAL NET INVESTMENT INCOME $ 1,592 $ 1,562 $ 1,955
========= ========= =========
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS
Investment Products $ 516 $ 430 $ 326
Individual Life 145 129 108
Group Benefits 10 9 7
COLI -- -- --
Other -- -- --
--------- --------- ---------
TOTAL AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS $ 671 $ 568 $ 441
========= ========= =========
INCOME TAX EXPENSE (BENEFIT)
Investment Products $ 189 $ 173 $ 145
Individual Life 39 38 36
Group Benefits 24 23 27
COLI 19 17 12
Other (58) (32) (21)
--------- --------- ---------
TOTAL INCOME TAX EXPENSE $ 213 $ 219 $ 199
========= ========= =========
NET INCOME (LOSS)
Investment Products $ 424 $ 330 $ 266
Individual Life 79 71 65
Group Benefits 90 79 71
COLI 34 30 24
Other (52) (43) (40)
--------- --------- ---------
TOTAL NET INCOME $ 575 $ 467 $ 386
========= ========= =========
ASSETS
Investment Products $ 107,467 $ 107,256 $ 87,706
Individual Life 7,270 6,629 5,404
Group Benefits 4,111 3,640 3,068
COLI 23,390 20,158 22,631
Other 1,383 1,350 3,213
--------- --------- ---------
TOTAL ASSETS $ 143,621 $ 139,033 $ 122,022
========= ========= =========
F-25
58
For the years ended December 31,
--------------------------------
REVENUES BY PRODUCT 2000 1999 1998
- ------------------- ---- ---- ----
Investment Products
Individual Annuities $1,538 $1,354 $1,137
Other 842 687 647
------ ------ ------
Total Investment Products 2,380 2,041 1,784
Individual Life 640 584 567
Group Benefits 2,207 2,024 1,809
COLI 767 831 1,567
====== ====== ======
18. SUBSEQUENT EVENT
On January 25, 2001, The Hartford, through Hartford Life, agreed to acquire the
U.S. individual life insurance, annuity and mutual fund business of Fortis, Inc.
(operating as Fortis Financial Group and referred to as "Fortis") for $1.12
billion in cash. The Company will effect the acquisition through several
reinsurance agreements with subsidiaries of Fortis and the purchase of 100% of
the stock of Fortis Advisors, Inc. and Fortis Investors, Inc., wholly-owned
subsidiaries of Fortis. The Fortis transaction, which is subject to insurance
regulatory approval and other customary conditions, is expected to be completed
in the second quarter of 2001. The acquisition will be accounted for as a
purchase transaction.
Hartford Life plans to finance the acquisition through (1) a capital
contribution from The Hartford of $615 from its recently completed offering of
common stock, (2) proceeds from the March 1, 2001, issuance of $400 of senior
debt securities under the Company's shelf registration and (3) proceeds from the
March 6, 2001, issuance of $200 of trust preferred securities, also under
Hartford Life's shelf registration. (For additional information on the shelf
registration, see Notes 7 and 8.)
19. QUARTERLY RESULTS FOR 2000 AND 1999 (UNAUDITED)
Three Months Ended
------------------
March 31, June 30, September 30, December 31,
--------- -------- ------------- ------------
2000 1999 2000 1999 2000 1999 2000 1999
---- ---- ---- ---- ---- ---- ---- ----
Revenues $ 1,446 $ 1,335 $ 1,441 $ 1,357 $ 1,587 $ 1,420 $ 1,516 $ 1,424
Benefits, claims and expenses 1,226 1,178 1,275 1,187 1,368 1,253 1,333 1,232
Net income 150 106 146 114 152 119 127 128
F-26
59
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
(In millions) As of December 31, 2000
-----------------------
Amount at which
shown on Balance
Type of Investment Cost Fair Value Sheet
------------------ ---- ---------- -----
FIXED MATURITIES
Bonds and Notes
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 227 $ 244 $ 244
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) - asset backed 1,209 1,225 1,225
States, municipalities and political subdivisions 1,422 1,473 1,473
Foreign governments 319 321 321
Public utilities 645 640 640
All other corporate, including international 6,648 6,576 6,576
All other corporate - asset backed 6,072 6,151 6,151
Short-term investments 975 975 975
Certificates of deposit 458 447 447
Redeemable preferred stock 196 196 196
------- ------- -------
TOTAL FIXED MATURITIES 18,171 18,248 18,248
------- ------- -------
EQUITY SECURITIES
Common Stocks
Banks, trusts and insurance companies 171 161 161
Industrial and miscellaneous 10 10 10
------- ------- -------
TOTAL EQUITY SECURITIES 181 171 171
------- ------- -------
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 18,352 18,419 18,419
------- ------- -------
POLICY LOANS 3,610 3,610 3,610
------- ------- -------
OTHER INVESTMENTS
Mortgage loans on real estate 237 237 237
Investment in partnerships 645 668 668
Other invested assets 5 8 5
------- ------- -------
TOTAL OTHER INVESTMENTS 887 913 910
------- ------- -------
TOTAL INVESTMENTS $22,849 $22,942 $22,939
======= ======= =======
S-1
60
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF HARTFORD LIFE, INC.
(REGISTRANT)
(In millions) As of December 31,
------------------
CONDENSED BALANCE SHEETS 2000 1999
- ------------------------ ---- ----
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost of $1 and $1) $ 1 $ 1
Investment in subsidiaries 4,110 3,209
Other assets 15 17
------ ------
TOTAL ASSETS 4,126 3,227
------ ------
LIABILITIES AND STOCKHOLDER'S EQUITY
Long-term debt 650 650
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely parent
junior subordinated debentures 250 250
Other liabilities 19 21
------ ------
TOTAL LIABILITIES 919 921
TOTAL STOCKHOLDER'S EQUITY 3,207 2,306
------ ------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $4,126 $3,227
====== ======
(In millions)
For the years ended December 31,
--------------------------------
CONDENSED STATEMENTS OF INCOME 2000 1999 1998
- ------------------------------ ---- ---- ----
Earnings of subsidiaries $854 $753 $643
Interest expense 66 67 58
---- ---- ----
INCOME BEFORE INCOME TAX EXPENSE 788 686 585
Income tax expense 213 219 199
---- ---- ----
NET INCOME $575 $467 $386
==== ==== ====
The financial information of Hartford Life, Inc. (parent company of Hartford
Life) should be read in conjunction with the Consolidated Financial Statements
and Notes to Consolidated Financial Statements.
S-2
61
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF HARTFORD LIFE, INC. (CONTINUED)
(REGISTRANT)
(In millions)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
--------------------------------
2000 1999 1998
---- ---- ----
OPERATING ACTIVITIES
Net income $ 575 $ 467 $ 386
Undistributed earnings of subsidiaries (526) (420) (348)
Change in other assets and liabilities -- 3 --
----- ----- -----
CASH PROVIDED BY OPERATING ACTIVITIES 49 50 38
----- ----- -----
INVESTING ACTIVITIES
Sales (purchases) of investments -- 1 (2)
Capital contribution to subsidiary -- -- (190)
----- ----- -----
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES -- 1 (192)
----- ----- -----
FINANCING ACTIVITIES
Decrease in short-term debt -- -- (50)
Proceeds from issuance of company obligated mandatorily
Redeemable preferred securities of subsidiary trust holding
solely parent junior subordinated debentures -- -- 250
Dividends paid (55) (50) (38)
Proceeds from parent to retire common stock 226 -- --
Payments to retire common stock (226) -- --
Net issuance (purchase) of common stock 6 (1) (8)
----- ----- -----
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (49) (51) 154
----- ----- -----
Net change in cash -- -- --
Cash - beginning of year -- -- --
----- ----- -----
CASH - END OF YEAR $ -- $ -- $ --
----- ----- -----
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH ACTIVITY DURING THE YEAR FOR:
Interest expense paid $ 65 $ 65 $ 54
Tax refund received $ 20 $ 24 $ 20
S-3
62
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In millions)
Benefits,
Deferred Other Earned Net Claims and
Policy Future Policy- Premiums Net Realized Claim
Acquisition Policy holder Policy and Investment Capital Adjustment
Segment Costs Benefits Funds Fees Other Income Losses Expenses
2000
Investment Products $ 3,377 $ 3,486 $ 8,417 $ 1,621 $ 18 $ 741 $ -- $ 700
Individual Life 1,114 332 2,523 454 5 181 -- 274
Group Benefits 36 2,969 235 17 1,964 226 -- 1,643
Corporate Owned Life
Insurance -- 283 4,645 392 9 366 -- 545
Other -- 4 29 -- 6 78 (88) --
------- ------- ------- ------- ------- ------- ------- -------
CONSOLIDATED OPERATIONS $ 4,527 $ 7,074 $15,849 $ 2,484 $ 2,002 $ 1,592 $ (88) $ 3,162
------- ------- ------- ------- ------- ------- ------- -------
1999
Investment Products $ 3,165 $ 2,882 $ 8,987 $ 1,295 $ 38 $ 708 $ -- $ 668
Individual Life 1,013 331 2,415 395 17 172 -- 258
Group Benefits 32 2,698 207 15 1,814 195 -- 1,507
Corporate Owned Life
Insurance -- 321 5,244 400 -- 431 -- 621
Other -- 4 20 -- 5 56 (5) --
------- ------- ------- ------- ------- ------- ------- -------
CONSOLIDATED OPERATIONS $ 4,210 $ 6,236 $16,873 $ 2,105 $ 1,874 $ 1,562 $ (5) $ 3,054
------- ------- ------- ------- ------- ------- ------- -------
1998
Investment Products $ 2,860 $ 2,470 $ 9,226 979 66 $ 739 $ -- $ 671
Individual Life 958 567 2,307 336 42 189 -- 269
Group Benefits 24 2,455 114 11 1,618 180 -- 1,335
Corporate Owned Life
Insurance -- 225 8,097 774 -- 793 -- 924
Other -- -- 23 -- 7 54 -- 28
------- ------- ------- ------- ------- ------- ------- -------
CONSOLIDATED OPERATIONS $ 3,842 $ 5,717 $19,767 $ 2,100 $ 1,733 $ 1,955 $ -- $ 3,227
------- ------- ------- ------- ------- ------- ------- -------
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(In millions)
Amortization
of Deferred
Insurance Policy Dividends
Expenses Acquisition to Policy- Interest
Segment and other Costs holders Expense
2000
Investment Products $ 551 $ 516 $ -- $ --
Individual Life 103 145 -- --
Group Benefits 440 10 -- --
Corporate Owned Life
Insurance 102 -- 67 --
Other 40 -- -- 66
------- ------- ------- -------
CONSOLIDATED OPERATIONS $ 1,236 $ 671 $ 67 $ 66
------- ------- ------- -------
1999
Investment Products $ 440 $ 430 $ -- $ --
Individual Life 88 129 -- --
Group Benefits 406 9 -- --
Corporate Owned Life
Insurance 59 -- 104 --
Other 64 -- -- 67
------- ------- ------- -------
CONSOLIDATED OPERATIONS $ 1,057 $ 568 $ 104 $ 67
------- ------- ------- -------
1998
Investment Products $ 376 $ 326 $ -- $ --
Individual Life 88 108 1 --
Group Benefits 369 7 -- --
Corporate Owned Life
Insurance 278 -- 329 --
Other 36 -- -- 58
------- ------- ------- -------
CONSOLIDATED OPERATIONS $ 1,147 $ 441 $ 330 $ 58
------- ------- ------- -------
S-4
63
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
Ceded to Assumed Percentage of
Other From Other Amount Assumed
(In millions) Gross Amount Companies Companies Net Amount to Net
- ------------- ------------ --------- --------- ---------- ------
FOR THE YEAR ENDED DECEMBER 31, 2000
Life insurance in force $555,963 $109,393 $ 18,364 $464,934 3.9%
======== ======== ======== ======== ===
FEE INCOME, EARNED PREMIUMS AND OTHER
Life insurance and annuities $ 3,306 $ 190 $ 64 $ 3,180 2.0%
Accident and health insurance 1,339 106 73 1,306 5.6%
-------- -------- -------- -------- ---
TOTAL FEE INCOME, EARNED PREMIUMS AND OTHER $ 4,645 $ 296 $ 137 $ 4,486 3.1%
======== ======== ======== ======== ===
FOR THE YEAR ENDED DECEMBER 31, 1999
Life insurance in force $515,119 $126,909 $ 14,903 $403,113 3.7%
======== ======== ======== ======== ===
FEE INCOME, EARNED PREMIUMS AND OTHER
Life insurance and annuities $ 2,902 $ 167 $ 54 $ 2,789 1.9%
Accident and health insurance 1,166 76 100 1,190 8.4%
-------- -------- -------- -------- ---
TOTAL FEE INCOME, EARNED PREMIUMS AND OTHER $ 4,068 $ 243 $ 154 $ 3,979 3.9%
======== ======== ======== ======== ===
FOR THE YEAR ENDED DECEMBER 31, 1998
Life insurance in force $515,688 $194,092 $ 11,659 $333,255 3.5%
======== ======== ======== ======== ===
FEE INCOME, EARNED PREMIUMS AND OTHER
Life insurance and annuities $ 2,839 $ 151 $ 62 $ 2,750 2.3%
Accident and health insurance 1,107 60 36 1,083 3.3%
-------- -------- -------- -------- ---
TOTAL FEE INCOME, EARNED PREMIUMS AND OTHER $ 3,946 $ 211 $ 98 $ 3,833 2.6%
======== ======== ======== ======== ===
S-5
64
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
Additions Deductions
--------- ----------
Charged to
Balance Costs and Translation Write-offs/ Balance
(In millions) January 1, Expenses Adjustment Payments/Other December 31,
- ------------- ---------- -------- ---------- -------------- ------------
2000
Accumulated depreciation of plant,
property and equipment $154 $27 $-- $(8) $ 173
1999
Accumulated depreciation of plant,
property and equipment $137 $19 $-- $(2) $ 154
1998
Accumulated depreciation of plant,
property and equipment $112 $34 $-- $(9) $ 137
S-6
65
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Mary Jane B. Fortin
-------------------------------------------
Mary Jane B. Fortin
Vice President and Chief Accounting Officer
Date: March 28, 2001
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ Ramani Ayer Chairman and Director March 28, 2001
- -----------------------------------
Ramani Ayer
/s/ Lowndes A. Smith President, Chief Executive Officer March 28, 2001
- -----------------------------------
Lowndes A. Smith and Director
/s/ Thomas M. Marra Chief Operating Officer March 28, 2001
- -----------------------------------
Thomas M. Marra and Director
/s/ David T. Foy Senior Vice President March 28, 2001
- -----------------------------------
David T. Foy and Chief Financial Officer
/s/ Mary Jane B. Fortin Vice President March 28, 2001
- -----------------------------------
Mary Jane B. Fortin and Chief Accounting Officer
/s/ David K. Zwiener Director March 28, 2001
- -----------------------------------
David K. Zwiener
II-1
66
HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
EXHIBITS INDEX
EXHIBIT #
3.01 Restated Certificate of Incorporation of Hartford Life, Inc.
("Hartford Life" or the "Company"), was filed as Exhibit 3.01
to the Company's Form 10-Q filed for the second quarter ended
June 30, 2000 and is incorporated herein by reference.
3.02 Amended and Restated By-Laws of the Company, effective June
27, 2000 were filed as Exhibit 3.02 to the Company's Form 10-Q
filed for the second quarter ended June 30, 2000 and is
incorporated herein by reference.
4.01 Amended and Restated Certificate of Incorporation and By-Laws
of the Company (included as Exhibits 3.01 and 3.02,
respectively).
4.02 Senior Indenture, dated as of May 19, 1997, between the
Company and Citibank, N.A., as trustee, with respect to the
Company's 6.90% Notes due June 15, 2004, 7.10% Notes due June
15, 2007, and 7.65% Debentures due June 15, 2027, was filed as
Exhibit 4.3 to the Company's Registration Statement on Form
S-3 (Amendment No. 2) dated May 23, 1997, and is incorporated
herein by reference.
4.03 Subordinated Indenture between Hartford Life and Wilmington
Trust Company, as Trustee, dated as of June 1, 1998, was filed
as Exhibit 4.03 to the Company's Form 10-K for the fiscal year
ended December 31, 1998 and is incorporated herein by
reference.
4.04 First Supplemental Indenture, dated as of June 29, 1998
between Hartford Life, as Issuer, and Wilmington Trust
Company, as Trustee, with respect to 7.2% Junior Subordinated
Deferrable Interest Debentures, due 2038, was filed as Exhibit
4.04 to the Company's Form 10-K for the fiscal year ended
December 31, 1998 and is incorporated herein by reference.
4.05 Form of Junior Subordinated Deferrable Interest Debenture,
Series A, due 2038, included as Exhibit A to Exhibit 4.04
filed herein by reference.
4.06 Declaration of Trust of Hartford Life Capital I, dated as of
June 3, 1998 between the Company, as Sponsor, and Wilmington
Trust Company, as Trustee, was filed as Exhibit 4.06 to the
Company's Form 10-K for the fiscal year ended December 31,
1998 and is incorporated herein by reference.
4.07 Amended and Restated Declaration of Trust of Hartford Life
Capital I, dated as of June 29, 1998 between the Trustee and
the Sponsor, relating to the 7.2% Junior Subordinated
Deferrable Interest Debentures, Series A, due 2038, was filed
as Exhibit 4.07 to the Company's Form 10-K for the fiscal year
ended December 31, 1998 and is incorporated herein by
reference.
4.08 Form of Preferred Security Certificate for Hartford Capital I,
included as Exhibit A-1 to Exhibit 4.07 filed herein by
reference.
4.09 Preferred Securities Guarantee Agreement, dated as of June 29,
1998 between Hartford Life, as Guarantor, and Wilmington Trust
Company, as Preferred Guarantee Trustee, relating to Hartford
Life Capital I, was filed as Exhibit 4.09 to the Company's
Form 10-K for the fiscal year ended December 31, 1998 and is
incorporated herein by reference.
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67
10.01 Master Intercompany Agreement among the Company, The Hartford
Financial Services Group, Inc. (formerly known as ITT Hartford
Group, Inc.) (The Hartford) and with respect to Articles VI
and XII, Hartford Fire Insurance Company, was filed as Exhibit
10.1 to the Company's Form 10-Q filed for the quarterly period
ended June 30, 1997 and is incorporated herein by reference.
10.02 Tax Sharing Agreement among The Hartford and its subsidiaries,
including the Company, was filed as Exhibit 10.2 to the
Company's Form 10-Q filed for the quarterly period ended June
30, 1997 and is incorporated herein by reference.
10.03 Management Agreement among Hartford Life Insurance Company and
Hartford Investment Management Company, was filed as Exhibit
10.3 to the Company's Form 10-Q filed for the quarterly period
ended June 30, 1997 and is incorporated herein by reference.
10.04 Management Agreement among certain subsidiaries of the Company
and Hartford Investment Services, Inc., was filed as Exhibit
10.4 to the Company's Form 10-Q filed for the quarterly period
ended June 30, 1997 and is incorporated herein by reference.
10.05 Sublease Agreement between Hartford Fire Insurance Company and
the Company, was filed as Exhibit 10.5 to the Company's Form
10-Q filed for the quarterly period ended June 30, 1997 and is
incorporated herein by reference.
10.06 Amended and restated Credit Agreement dated as of February 9,
1998 among Hartford Life, Inc., the lenders named therein and
Citibank, N.A. as administrative agent was filed as Exhibit
10.1 to the Company's Form 10-Q filed for the quarterly period
ended March 31, 1998 and is incorporated herein by reference.
12 Computation of Ratio of Earnings to Fixed Charges is filed
herewith.
23 Consent of Arthur Andersen LLP to the incorporation by
reference into the Company's Registration Statements on Form
S-8 and Form S-3 of the Report of Arthur Andersen LLP
contained in this Form 10-K regarding the audited financial
statements is filed herewith.
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