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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended June 30, 2001
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)
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 August 14, 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 H (1) (a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
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INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Statements of Income - Second Quarter and
Six Months Ended June 30, 2001 and 2000 3
Consolidated Balance Sheets - June 30, 2001 and December 31, 2000 4
Consolidated Statements of Changes in Stockholder's Equity
Six Months Ended June 30, 2001 and 2000 5
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2001 and 2000 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 12
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
Signature 20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------------- ----------
(In millions) (Unaudited) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------
REVENUES
Fee income $ 686 $ 598 $ 1,288 $ 1,189
Earned premiums and other 583 502 1,141 975
Net investment income 443 384 873 766
Net realized capital losses (17) (43) (17) (43)
----- ----- ----- -----
TOTAL REVENUES 1,695 1,441 3,285 2,887
===== ===== ===== =====
BENEFITS, CLAIMS AND EXPENSES
Benefits and claims 930 792 1,800 1,521
Insurance expenses and other 335 300 645 566
Amortization of deferred policy acquisition costs and
present value of future profits 164 161 318 333
Dividends to policyholders 3 5 15 46
Goodwill amortization 7 1 9 2
Interest expense 28 16 48 33
----- ----- ----- -----
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,467 1,275 2,835 2,501
INCOME BEFORE INCOME TAX EXPENSE
AND CUMULATIVE EFFECT OF ACCOUNTING CHANGES
228 166 450 386
Income tax expense 63 20 124 90
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGES
165 146 326 296
Cumulative effect of accounting changes, net of tax (3) -- (26) --
----- ----- ----- -----
NET INCOME $ 162 $ 146 $ 300 $ 296
======= ======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In millions, except for share data) 2001 2000
- --------------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$21,221 and $18,171) $ 21,335 $ 18,248
Equity securities, at fair value 380 171
Policy loans, at outstanding balance 3,728 3,610
Other investments 1,214 910
- --------------------------------------------------------------------------------------------------------------
Total investments 26,657 22,939
Cash 161 106
Premiums receivable and agents' balances 216 216
Reinsurance recoverables 548 542
Deferred policy acquisition costs and present value of future profits 5,356 4,527
Deferred income tax (17) 223
Goodwill 787 244
Other assets 1,070 830
Separate account assets 114,943 113,994
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 149,721 $143,621
==============================================================================================================
LIABILITIES
Future policy benefits $ 7,952 $ 7,074
Other policyholder funds 18,664 15,849
Long-term debt 1,050 650
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures 450 250
Other liabilities 2,527 2,597
Separate account liabilities 114,943 113,994
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 145,586 140,414
==============================================================================================================
STOCKHOLDER'S EQUITY
Common Stock - 1,000 shares authorized, issued and outstanding;
par value $0.01 -- --
Capital surplus 1,895 1,280
Accumulated other comprehensive income 73 27
Retained earnings 2,167 1,900
TOTAL STOCKHOLDER'S EQUITY 4,135 3,207
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 149,721 $143,621
==============================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2001
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
UNREALIZED NET
GAIN ON GAIN ON
SECURITIES, CASH FLOW
NET HEDGING CUMULATIVE TOTAL
COMMON CAPITAL OF INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ - $ 1,280 $40 $ - $(13) $1,900 $3,207
Comprehensive income
Net income 300 300
--------
Other comprehensive income,
net of tax (1)
Cumulative effect of accounting
change (2) 3 20 23
Net unrealized capital gain
on securities (3) 25 25
Net gain on cash flow hedging
instruments 6 6
Cumulative translation adjustments (8) (8)
--------
Total other comprehensive income 46
Total comprehensive income 346
--------
Dividends declared (33) (33)
Capital contribution from parent 615 615
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2001 $- $ 1,895 $68 $26 $(21) $2,167 $4,135
- ------------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 30, 2000
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
---------------------------
NET
UNREALIZED
CAPITAL
GAINS
CLASS A CLASS B TREASURY (LOSSES) ON CUMULATIVE TOTAL
COMMON COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 1999 $- - $1 $1,282 $(10) $(336) $(12) $1,381 $2,306
Comprehensive income (loss)
Net income 296 296
Other comprehensive income
(loss), net of tax (1)
Net unrealized capital
gains on securities (3) 30 30
Cumulative translation
adjustments 2 2
Total other comprehensive
income (loss) 32
Total comprehensive
income (loss) 328
Dividends declared (28) (28)
Issuance of shares under
incentive and
stock purchase plans 1 8 9
Treasury stock acquired (2) (2)
Treasury stock cancelled
and retired (4) 4 -
Class B Common
Stock converted to Class A 1 (1) -
Class A Common Stock
canceled and retired (1) 1 -
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 2000 $- - $- $1,280 $- $(306) $(10) $1,649 $2,613
- ------------------------------------------------------------------------------------------------------------------------------------
(1) Unrealized gain on securities is reflected net of tax provision of $13 and
$16 for the six months ended June 30, 2001 and 2000, respectively. Cumulative
effect of accounting change is net of tax benefit of $12 for the six months
ended June 30, 2001. Net gain on cash flow hedging instruments is net of tax
provision of $3 for the six months ended June 30, 2001. There is no tax effect
on cumulative translation adjustments.
(2) Unrealized gain on securities, net of tax, includes cumulative effect of
accounting change of $(23) to net income and $20 to net gain on cash flow
hedging instruments.
(3) There were reclassification adjustments for after-tax gains (losses)
realized in net income of $2 and $(28) for the six months ended June 30, 2001
and 2000, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
----------------
(In millions) (Unaudited) 2001 2000
- -----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 300 $ 296
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital losses 17 28
Cumulative effect of accounting changes, net of tax 26 --
Amortization of deferred policy acquisition costs and present value of future profits 318 333
Additions to deferred policy acquisition costs and present value of future profits (542) (496)
Depreciation and amortization (2) 9
Decrease in premiums receivable and agents' balances -- 17
Decrease in other liabilities (176) (96)
Change in receivables, payables and accruals (54) 70
(Decrease) increase in accrued tax (79) 156
Change in deferred income tax 100 35
Increase in future policy benefits 527 320
(Increase) decrease in reinsurance recoverables (2) 2
Other, net (46) 65
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NET CASH PROVIDED BY OPERATING ACTIVITIES 387 739
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INVESTING ACTIVITIES
Purchases of investments (5,710) (3,401)
Sales of investments 3,064 2,983
Maturities and principal paydowns of fixed maturity investments 1,108 846
Acquisition of Fortis Financial Group (1,105) --
Capital expenditures and other (26) (42)
- -----------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (2,669) 386
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FINANCING ACTIVITIES
Capital contribution from parent 615 --
Proceeds from issuance of long-term debt 400 --
Proceeds from issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely
parent junior subordinated debentures 200 --
Dividends paid (31) (27)
Net receipts from (disbursements for) investment and universal life-type
contracts charged against policyholder accounts
1,157 (1,329)
Proceeds from parent to retire common stock -- 226
Net issuance of common stock -- 6
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 2,341 (1,124)
- -----------------------------------------------------------------------------------------------------------------
Net increase in cash 59 1
Impact of foreign exchange (4) --
- -----------------------------------------------------------------------------------------------------------------
Cash - beginning of period 106 89
- -----------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 161 $ 90
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID (RECEIVED) DURING THE PERIOD FOR
Income taxes $ 34 $ (74)
Interest $ 34 $ 33
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, unless otherwise stated)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(A) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hartford Life,
Inc. and subsidiaries ("Hartford Life" or the "Company") have been prepared
pursuant to the rules and regulations of the Securities and Exchange Commission.
Certain information and note disclosures which are normally included in
financial statements prepared on the basis of accounting principles generally
accepted in the United States have been condensed or omitted pursuant to those
rules and regulations, although the Company believes that the disclosures made
are adequate to make the information presented not misleading. In the opinion of
management, these statements include all adjustments which were normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. For a description of
significant accounting policies, see Note 2 of Notes to Consolidated Financial
Statements in Hartford Life's 2000 Form 10-K Annual Report.
On April 2, 2001, Hartford Life acquired the U.S. individual life insurance,
annuity and mutual fund businesses of Fortis, Inc. (operating as "Fortis
Financial Group", or "Fortis"). The acquisition was accounted for as a purchase
transaction and, as such, the revenues and expenses generated by this business
from April 2, 2001 forward are included in the Company's Consolidated Statements
of Income. (For a further discussion of the Fortis Acquisition, see Note 3.)
Certain reclassifications have been made to prior year financial information to
conform to the current year classification of transactions and accounts.
(B) ADOPTION OF NEW ACCOUNTING STANDARDS
Effective January 1, 2001, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 133, "Accounting for Derivative Instruments and Hedging
Activities", as amended by SFAS Nos. 137 and 138. The standard requires, among
other things, that all derivatives be carried on the balance sheet at fair
value. The standard also specifies hedge accounting criteria under which a
derivative can qualify for special accounting. In order to receive special
accounting, the derivative instrument must qualify as a hedge of either the fair
value or the variability of the cash flow of a qualified asset or liability, or
forecasted transaction. Special accounting for qualifying hedges provides for
matching the timing of gain or loss recognition on the hedging instrument with
the recognition of the corresponding changes in value of the hedged item. The
Company's policy prior to adopting SFAS No. 133 was to carry its derivative
instruments on the balance sheet in a manner similar to the hedged item(s).
Upon adoption of SFAS No. 133, the Company recorded a $23 charge in net income
as a net of tax cumulative effect of accounting change. The transition
adjustment was primarily comprised of gains and losses on derivatives that had
been previously deferred and not adjusted to the carrying amount of the hedged
item. Also included in the transition adjustment were offsetting gains and
losses related to recognizing at fair value all derivatives that are designated
as fair-value hedging instruments offset by the difference between the book
values and fair values of related hedged items attributable to the hedged risks.
The entire transition amount was previously recorded in Accumulated Other
Comprehensive Income ("OCI") - Unrealized Gain/Loss on Securities in accordance
with SFAS No. 115. Gains and losses on derivatives that were previously deferred
as adjustments to the carrying amount of hedged items were not affected by the
implementation of SFAS No. 133.
Upon adoption, the Company also reclassified $20, net of tax, to Accumulated OCI
- - Net Gain on Cash Flow Hedging Instruments from Accumulated OCI - Unrealized
Gain/Loss on Securities. This reclassification reflects the January 1, 2001 net
unrealized gain of all derivatives that are designated as cash-flow hedging
instruments.
For a further discussion of the Company's accounting policies for derivative
instruments, see Note 2 of Notes to Consolidated Financial Statements included
in Hartford Life's March 31, 2001 Form 10-Q.
For a further discussion of Hartford Life's derivative results by hedge category
for the quarter and six months ended June 30, 2001 see Note 2, Derivatives and
Hedging Activities below.
Effective April 1, 2001, the Company adopted Emerging Issues Task Force ("EITF")
Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and
Retained Beneficial Interests in Securitized Financial Assets". Under the
consensus, investors in certain asset-backed securities are required to record
changes in their estimated yield on a prospective basis and to evaluate these
securities for an other than temporary decline in value. If the fair value of
the asset-backed security has declined below its carrying amount and the
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decline is determined to be other than temporary, the security is written down
to fair value. Upon adoption of EITF 99-20, the Company recorded a $3 charge to
net income as a net of tax cumulative effect of accounting change.
(C) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In June 2001, the Financial Accounting Standards Board ("FASB") issued SFAS No.
141, "Business Combinations". SFAS No. 141 eliminates the pooling-of-interests
method of accounting for business combinations and requires that all business
combinations be accounted for under the purchase method. The purchase method of
accounting requires that net assets acquired that constitute a business be
recorded at their fair value with any excess cost over the amounts assigned to
net assets acquired recorded as goodwill. SFAS No. 141 also requires that
certain intangible assets acquired in a business combination be recognized apart
from goodwill.
The provisions of SFAS No. 141 apply to all business combinations initiated
after June 30, 2001. Use of the pooling-of-interests method of accounting for
those transactions is prohibited. Adoption of SFAS No. 141 will not have a
material impact on the Company's financial condition or results of operations.
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". Under current accounting guidance, goodwill resulting from a business
combination is amortized against income over its estimated useful life. Under
SFAS No. 142, goodwill is no longer amortized as an expense but instead is
reviewed and tested for impairment under a fair value approach. Goodwill will be
tested for impairment at least annually or more frequently as a result of an
event or change in circumstances that would indicate an impairment may be
necessary.
Goodwill must be tested for impairment in the year of adoption with an initial
test to determine potential impairment to be performed within six months of
adoption. If the initial test indicates potential impairment, then a more
detailed analysis to determine the extent of the impairment related to goodwill
must be completed within twelve months of adoption.
SFAS No. 142 also requires that the useful lives of previously recognized
intangible assets other than goodwill be reassessed and the remaining
amortization periods adjusted accordingly. The reassessment must be completed
prior to the end of the first quarter of 2002.
All of the provisions of SFAS No. 142 will be applied beginning January 1, 2002
to all goodwill and other intangible assets, regardless of when those assets
were initially recognized. Adoption of SFAS No. 142 will result in the
elimination of goodwill amortization. The Company expects goodwill amortization
to approximate $16, after-tax, in 2001 and to have approximated $20, after-tax
in 2002. The Company is in the process of assessing the impacts from the
implementation of the other provisions of SFAS No.142.
2. DERIVATIVES AND HEDGING ACTIVITIES
Overview
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, 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.
For a detailed discussion of the Company's use of derivative instruments see
Note 2 of Notes to Consolidated Financial Statements included in Hartford Life's
March 31, 2001 Form 10-Q.
As of June 30, 2001, the Company reported $94 of derivative assets in other
investments and $141 of derivative liabilities in other liabilities.
Cash-Flow Hedges
For the period ended June 30, 2001, the Company's gross gains and losses
representing the total ineffectiveness of all cash-flow hedges essentially
offset, with the net impact reported as realized capital gains or losses. All
components of each derivative's gain or loss are included in the assessment of
hedge effectiveness.
Gains and losses on derivative contracts that are reclassified from OCI to
current period earnings are included in the line item in the statement of income
in which the hedged item is recorded. As of June 30, 2001, approximately $5 of
after-tax deferred net gains on derivative instruments accumulated in OCI are
expected to be reclassified to earnings during the next twelve months. This
expectation is based on the anticipated interest payments on hedged investments
in fixed maturity securities that will occur over the next twelve months, at
which time the Company will recognize the deferred net gains/losses as an
adjustment to interest income over the term of the investment cash flows. The
maximum term over which the Company is hedging its exposure to the variability
of future cash flows (for all forecasted transactions, excluding interest
payments on variable-rate debt) is twelve months. As of June 30, 2001, the
Company held approximately $2.1 billion in derivative notional value related to
strategies categorized as cash-flow hedges. There were no reclassifications from
OCI to earnings resulting from the discontinuance of cash-flow hedges during the
six months ended June 30, 2001.
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Fair-Value Hedges
For the six months ended June 30, 2001, the Company's gross gains and losses
representing the total ineffectiveness of all fair-value hedges essentially
offset, with the net impact reported as realized capital gains or losses. All
components of each derivative's gain or loss are included in the assessment of
hedge effectiveness. As of June 30, 2001, the Company held approximately $360 in
derivative notional value related to strategies categorized as fair-value
hedges.
Other Risk Management Activities
In general, the Company's other risk management activities relate to strategies
used to meet the previously mentioned Company-approved objectives. Swap
agreements, interest rate cap and floor agreements and option contracts are used
to meet these objectives. Changes in the value of all derivatives held for other
risk management purposes are reported in current period earnings as realized
capital gains and losses. As of June 30, 2001 the Company held approximately
$4.0 billion in derivative notional value related to strategies categorized as
Other Risk Management Activities.
3. FORTIS ACQUISITION
On April 2, 2001, The Hartford Financial Services Group, Inc. ("The Hartford"),
through Hartford Life, acquired Fortis Financial Group for $1.12 billion in
cash. The Company effected the acquisition through several reinsurance
agreements with subsidiaries of Fortis and the purchase of 100% of the stock of
Fortis Advisers, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of
Fortis, Inc. The acquisition was accounted for as a purchase transaction and, as
such, the revenues and expenses generated by this business from April 2, 2001
forward are included in the Company's Consolidated Statements of Income.
The Company financed this acquisition through (1) a capital contribution from
The Hartford of $615 from its February 16, 2001 offering of common stock, (2)
net proceeds from the March 1, 2001 issuance of $400 of senior debt securities
under the Company's June 1998 shelf registration and (3) net proceeds from the
March 6, 2001 issuance of $200 of trust preferred securities also under the
Company's June 1998 shelf registration.
The assets and liabilities acquired in this transaction were recorded at values
prescribed by applicable purchase accounting rules, which generally represent
estimated fair value. In addition, an intangible asset representing the present
value of future profits ("PVP") of the acquired business was established in the
amount of $605. The PVP is amortized to expense in relation to the estimated
gross profits of the underlying insurance contracts, and interest is accreted on
the unamortized balance. For the quarter ended June 30, 2001, amortization of
PVP amounted to $13. Goodwill of $553, representing the excess of the purchase
price over the amount of net assets (including PVP) acquired, has also been
recorded and is being amortized on a straight-line basis over a 25 year period.
4. DEBT
On March 1, 2001, Hartford Life issued and sold $400 of senior debt securities
under the June 1998 shelf registration. The long-term debt was issued in the
form of 7.375% thirty-year senior notes due March 1, 2031. Interest on the notes
is payable semi-annually on March 1 and September 1, commencing on September 1,
2001. As previously discussed in Note 3, Hartford Life used the net proceeds
from the issuance of the notes to partially fund the Fortis acquisition.
On May 15, 2001, the Company filed with the SEC a shelf registration statement
for the potential offering and sale of up to $1.0 billion in debt and preferred
securities. The registration statement was declared effective on May 29, 2001.
This registration statement includes an aggregate $150 of Hartford Life
securities remaining under the shelf registration filed by the Company with the
SEC in June of 1998. As of June 30, 2001, Hartford Life had $1.0 billion
remaining on its shelf.
5. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY PARENT JUNIOR SUBORDINATED
DEBENTURES
On March 6, 2001, Hartford Life Capital II, a Delaware statutory business trust
formed by Hartford Life, issued 8,000,000, 7.625% Trust Preferred Securities,
Series B under the June 1998 shelf registration. The proceeds from the sale of
the Series B Preferred Securities were used to acquire $200 of 7.625% Series B
Junior Subordinated Debentures issued by Hartford Life. As previously discussed
in Note 3, the Company used the proceeds from the offering to partially fund the
Fortis acquisition.
The Series B Preferred Securities represent undivided beneficial interests in
Hartford Life Capital II's assets, which consist solely of the Series B Junior
Subordinated Debentures. Hartford Life owns all of the common securities of
Hartford Life Capital II. Holders of Series B Preferred Securities are entitled
to receive cumulative cash distributions accruing from March 6, 2001, the date
of issuance, and payable quarterly in arrears commencing April 15, 2001 at the
annual rate of 7.625% of the stated liquidation amount of $25.00 per Series B
Preferred Security. The Series B Preferred Securities are subject to mandatory
redemption upon repayment of the Series B
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Junior Subordinated Debentures at maturity or upon earlier redemption. Hartford
Life has the right to redeem the Series B Junior Subordinated Debentures on or
after March 6, 2006 or earlier upon the occurrence of certain events. Holders of
Series B Preferred Securities generally have no voting rights.
The Series B Junior Subordinated Debentures bear interest at the annual rate of
7.625% of the principal amount, payable quarterly in arrears commencing April
15, 2001, and mature on February 15, 2050. The Series B 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 obligations of Hartford Life
subsidiaries.
Hartford Life has the right at any time, and from time to, time, to defer
payments of interest on the Series B 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 the Company 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 equally with or junior to the Series B
Junior Subordinated Debentures. Hartford Life will have the right at any time to
dissolve the Trust and cause the Series B Junior Subordinated Debentures to be
distributed to the holders of the Series B Preferred Securities. The Company has
guaranteed, on a subordinated basis, all of the Hartford Life Capital II
obligations under the Series B Preferred Securities including payment of the
redemption price and any accumulated and unpaid distributions upon dissolution,
winding up or liquidation to the extent Hartford Life Capital II has funds
available to make these payments.
6. 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, if any, 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) TAX MATTERS
Hartford Life's federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). During 2000, the Company recorded a $24 tax benefit as
a result of a settlement with the IRS with respect to certain tax matters for
the 1993-1995 tax years. As of June 30, 2001, this same matter is under review
with the IRS as part of its audit of the Company's 1996-1997 tax returns.
Management believes that adequate provision has been made in the financial
statements for any potential assessments that may result from tax examinations
and other tax related matters for all open tax years.
7. SEGMENT INFORMATION
Hartford Life is organized into four reportable operating segments: Investment
Products, Individual Life, Group Benefits and Corporate Owned Life Insurance
("COLI"). Investment Products offers individual variable and fixed 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, which are
primarily located in Latin America and the Far East.
The accounting policies of the reportable operating segments are the same as
those described in the summary of significant accounting policies in Note 2 of
Notes to Consolidated Financial Statements in Hartford Life's 2000 Form 10-K
Annual Report. Hartford Life evaluates performance of its segments based on
revenues, net income and the segment's return on allocated capital. The Company
charges direct operating expenses to the appropriate segment and allocates the
majority of indirect expenses to the segments based on an intercompany expense
arrangement. Intersegment revenues are not significant and primarily occur
between corporate and the operating segments. These amounts include interest
income on allocated surplus and the allocation of net realized capital gains and
losses through net investment income utilizing the duration of the segment's
investment portfolios. The following tables present summarized financial
information concerning the Company's segments.
10
11
Investment Individual Group
JUNE 30, 2001 Products Life Benefits COLI Other Total
- ----------------------------------------------------------------------------------------------------
SECOND QUARTER ENDED
Total revenues $ 643 $240 $ 641 $181 $(10) $1,695
Net income (loss) 117 36 27 10 (28) 162
- ----------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
Total revenues $1,247 $403 $1,254 $365 $ 16 $3,285
Net income (loss) 228 56 50 19 (53) 300
- ----------------------------------------------------------------------------------------------------
<
Investment Individual Group
JUNE 30, 2000 Products Life Benefits COLI Other Total
- ---------------------------------------------------------------------------------------------------
SECOND QUARTER ENDED
Total revenues $ 587 $154 $557 170 (27) $ 1,441
Net income (loss) 110 20 21 8 (13) 146
- ---------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
Total revenues $1,172 $311 $1,077 335 (8) $ 2,887
Net income (loss) 212 38 40 16 (10) 296
- ---------------------------------------------------------------------------------------------------
11
12
ITEM 2. 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 June 30, 2001,
compared with December 31, 2000, and its results of operations for the second
quarter and six months ended June 30, 2001 compared with the equivalent periods
in 2000. This discussion should be read in conjunction with the MD&A included in
the Company's 2000 Form 10-K Annual Report.
Certain statements contained in this discussion, other than statements of
historical fact, are forward-looking statements. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond 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 less success in
integrating the U.S. individual life insurance, annuity and mutual fund
businesses of Fortis, Inc. than anticipated, the possibility of general economic
and business conditions that are less favorable than anticipated, unfavorable
legislative or judicial developments, changes in interest rates or the stock
markets, stronger than anticipated competitive activity and those factors
described in such forward-looking statements.
INDEX
Consolidated Results of Operations 12
Investment Products 13
Individual Life 14
Group Benefits 14
Corporate Owned Life Insurance ("COLI") 15
Investments 16
Capital Resources and Liquidity 16
Regulatory Matters and Contingencies 18
Accounting Standards 18
CONSOLIDATED RESULTS OF OPERATIONS
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------------
Revenues $ 1,695 $1,441 $ 3,285 $ 2,887
Expenses 1,530 1,295 2,959 2,591
Cumulative effect of accounting changes, net of tax (1) (3) - (26) -
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 162 $ 146 $ 300 $ 296
- --------------------------------------------------------------------------------------------------------------------
(1) For the second quarter ended June 30, 2001, represents the
cumulative impact of the Company's adoption of EITF Issue 99-20. For
the six months ended June 30, 2001, represents the cumulative impact
of the Company's adoption of EITF Issue 99-20 and SFAS No. 133.
Hartford Life has the following reportable segments: Investment Products,
Individual Life, Group Benefits and Corporate Owned Life Insurance ("COLI"). The
Company reports corporate items not directly allocable to any of its segments,
principally interest expense, as well as its international operations in
"Other".
On April 2, 2001, The Hartford Financial Services Group, Inc. ("The Hartford"),
through Hartford Life, acquired the U.S. individual life insurance, annuity and
mutual fund businesses of Fortis, Inc. (operating as "Fortis Financial Group" or
"Fortis"). (For further discussion, see "Fortis Acquisition" in the Capital
Resources and Liquidity section.) This transaction was accounted for as a
purchase transaction and, as such, the revenues and expenses generated by this
business from April 2, 2001 forward are included in the Company's Consolidated
Statements of Income.
Revenues increased $254, or 18%, and $398, or 14%, for the second quarter and
six months ended June 30, 2001, respectively, as the Company experienced growth
in each of its operating segments. Most notably, Group Benefits experienced
higher earned premiums resulting from strong sales and solid persistency, and
Individual Life earned higher fee income and net investment income due primarily
to the business acquired from Fortis, Inc. In addition, Investment Products had
higher fee income and net investment income due principally to growth in the
retail mutual fund and institutional businesses, respectively.
Expenses increased $235, or 18%, and $368, or 14% for the second quarter and six
months ended June 30, 2001, respectively, associated with the revenue growth
described above. Net income increased $16, or 11%, and $4, or 1%, for the second
quarter and six
12
13
months ended June 30, 2001, respectively. For the second quarter and six months
ended June 30, 2001, the Company recorded after-tax net realized capital losses
of $11, while for the second quarter and six months ended June 30, 2000, the
Company recorded after-tax net realized capital losses of $28. In addition, for
the second quarter and six months ended June 30, 2000, the Company recorded
after-tax benefits of $24 and $32, respectively, related to favorable tax
settlements. Excluding these tax settlements, as well as the net realized
capital losses and the cumulative effect of accounting changes identified above,
net income increased $26, or 17%, and $45, or 15%, for the second quarter
and six months ended June 30, 2001, respectively, as each of the Company's
operating segments experienced growth in net income from a year ago.
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
- ---------------------------------------------------------------------------------------------
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- ---------------------------------------------------------------------------------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------
Investment Products $ 117 $ 110 $ 228 $ 212
Individual Life 36 20 56 38
Group Benefits 27 21 50 40
Corporate Owned Life Insurance (COLI) 10 8 19 16
Other (1) (28) (13) (53) (10)
- ---------------------------------------------------------------------------------------------
NET INCOME $ 162 $ 146 $300 $ 296
- ---------------------------------------------------------------------------------------------
(1) For the second quarter ended June 30, 2001, represents the cumulative impact
of the Company's adoption of EITF Issue 99-20. For the six months ended June 30,
2001, represents the cumulative impact of the Company's adoption of EITF Issue
99-20 and SFAS No. 133.
The sections that follow analyze each segment's results. Investment results are
discussed separately following the segment overviews.
INVESTMENT PRODUCTS
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- ---------------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- ---------------------------------------------------------------------------------------------------------------------
Revenues $643 $587 $1,247 $1,172
Expenses 526 477 1,019 960
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME $117 $110 $ 228 $ 212
- ---------------------------------------------------------------------------------------------------------------------
Individual variable annuity account values $78,415 $82,264
Other individual annuity account values 9,228 8,624
Other investment products account values 18,101 16,862
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 105,744 107,750
Mutual fund assets under management 16,180 8,729
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $121,924 $116,479
- ---------------------------------------------------------------------------------------------------------------------
Revenues in the Investment Products segment increased $56, or 10%, and $75, or
6%, for the second quarter and six months ended June 30, 2001, respectively,
driven primarily by the other investment products operation. Fee income in other
investment products increased $25, or 37%, and $34, or 25% for the second
quarter and six month periods, respectively, principally due to growth in the
Company's retail mutual fund assets which increased $6.5 billion, or 75%, to
$15.2 billion as of June 30, 2001 due to strong sales and the Fortis
acquisition. Net investment income in other investment products increased $27,
or 20%, and $57, or 21%, due primarily to growth in the institutional business
where related assets increased $1.3 billion, or 18%, from a year ago. Individual
annuity revenues were relatively flat for the second quarter and six months
ended June 30, 2001 as compared to the prior year as fee income and net
investment income from the business acquired from Fortis, Inc. helped offset
lower revenues associated with decreased account values resulting from the lower
equity markets as compared to the prior year. Individual annuity account values
decreased $3.2 billion, or 4%, from June 30, 2000.
Expenses increased $49, or 10%, and $59, or 6%, for the second quarter and six
months ended June 30, 2001, respectively, driven by higher benefits and claims
and higher insurance expenses and other in other investment products associated
with the revenue growth described above. For the respective second quarter and
six-month periods, benefits and claims in other investment products increased
$23, or 21%, and $41, or 19%, while insurance expenses and other increased $14,
or 21%, and $29, or 24%, in this operation. Partially offsetting these
increases, were decreases in individual annuity expenses including amortization
of deferred acquisition costs and present value of future profits, which
decreased $12, or 10%, and $18, or 8%, for the respective periods. Additionally,
individual
13
14
annuity income tax expense decreased $4, or 11%, and $16, or 20%, due to the tax
impact associated with separate account investment activity.
Net income increased $7, or 6%, and $16, or 8%, for the second quarter and six
months ended June 30, 2001, respectively, as compared to the equivalent periods
in 2000. These increases were driven by the growth in revenues in other
investment products described above and the favorable impact of the Fortis
acquisition and the lower effective tax rate related to the individual annuity
business.
INDIVIDUAL LIFE
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------------------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------------------------------------
Revenues $240 $154 $ 403 $ 311
Expenses 204 134 347 273
- --------------------------------------------------------------------------------------------------------------
NET INCOME $ 36 $ 20 $ 56 $ 38
- --------------------------------------------------------------------------------------------------------------
Variable life account value $ 3,932 $ 2,848
Total account values $ 7,744 $ 5,695
- --------------------------------------------------------------------------------------------------------------
Variable life insurance in force $ 57,677 $28,503
- --------------------------------------------------------------------------------------------------------------
Total life insurance in force $116,740 $70,613
- --------------------------------------------------------------------------------------------------------------
Revenues in the Individual Life segment increased $86, or 56%, and $92, or 30%,
for the second quarter and six months ended June 30, 2001, respectively,
primarily due to the Fortis acquisition. Fee income, including cost of insurance
charges, increased $61, or 56%, and $65, or 30%, respectively, driven primarily
by growth in the variable life business where account values increased $1.1
billion, or 38%, and life insurance in force increased $29.2 billion, more than
double the amount from a year ago. In addition, net investment income on general
account business (universal life, interest sensitive whole life and term life)
increased $22, or 50%, and $23, or 26%, respectively, consistent with the growth
in related account values.
Expenses increased $70, or 52%, and $74, or 27%, respectively, due principally
to the growth in revenues described above. Year to date mortality experience
(expressed as death claims as a percentage of net amount at risk) for 2001 was
higher than the same period of the prior year, however, 2001 year to date
mortality experience was within pricing assumptions and was slightly lower than
the full year 2000 levels.
Net income increased $16, or 80%, and $18, or 47%, for the second quarter and
six months ended June 30, 2001, respectively, as compared to the equivalent
prior year periods due to the growth factors discussed above.
GROUP BENEFITS
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- --------------------------------------------------------------------------------
2001 2000 2001 2000
- --------------------------------------------------------------------------------
Revenues $ 641 $ 557 $ 1,254 $ 1,077
Expenses 614 536 1,204 1,037
- --------------------------------------------------------------------------------
NET INCOME $ 27 $ 21 $ 50 $ 40
- --------------------------------------------------------------------------------
Revenues in the Group Benefits segment increased $84, or 15%, and $177, or 16%,
and excluding buyouts, increased $74, or 14%, and $135, or 13%, for the second
quarter and six months ended June 30, 2001, respectively. These increases were
driven by growth in fully insured ongoing premiums which increased $63, or 14%,
and $112, or 13%, for the respective second quarter and six-month periods, due
to solid persistency of the in force block of business and strong sales to new
customers. Fully insured ongoing sales for the second quarter and six months
ended June 30, 2001 were $80 and $314, 18% and 21% higher, respectively, than
the equivalent 2000 periods. Additionally, net investment income increased $7,
or 13%, and $14, or 13%, for the second quarter and six-month periods,
respectively, due to the growth in the overall business described above.
Expenses, excluding buyouts, increased $68, or 13%, and $125, or 12%, for the
second quarter and six months ended June 30, 2001, respectively, driven
primarily by higher benefits and claims which increased $56, or 14%, and $100,
or 13%, respectively. These increases are consistent with the growth in the
business described above as the loss ratios (defined as benefits and claims as a
percentage of premiums and other considerations) have remained relatively flat
with the comparable prior year periods. In addition, expenses other
14
15
than benefits and claims increased $12, or 10%, and $25, or 11%, excluding
buyouts, for the respective second quarter and six-month periods.
Net income increased $6, or 29%, and $10, or 25%, for the second quarter and six
months ended June 30, 2001, respectively, primarily due to revenue growth,
stable loss ratios and lower expenses as a percentage of premiums and other
considerations as compared to the prior year.
The Group Benefits segment currently offers Medicare supplement insurance to
members of The Retired Officers Association, an organization consisting of
retired military officers. Congress recently passed legislation, effective in
the fourth quarter of 2001, whereby retired military officers age 65 and older
will receive full medical insurance, eliminating the need for Medicare
supplement insurance. This legislation is expected to reduce Group Benefits
annualized premium revenues by approximately $170.
CORPORATE OWNED LIFE INSURANCE (COLI)
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- ----------------------------------------------------------------------------------------
2001 2000 2001 2000
- ----------------------------------------------------------------------------------------
Revenues $ 181 $ 170 $ 365 $ 335
Expenses 171 162 346 319
- ----------------------------------------------------------------------------------------
NET INCOME $ 10 $ 8 $ 19 $ 16
- ----------------------------------------------------------------------------------------
Variable COLI account values $16,628 $ 12,925
Leveraged COLI account values 4,856 4,975
- ----------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $21,484 $ 17,900
- ----------------------------------------------------------------------------------------
COLI revenues increased $11, or 6%, and $30, or 9%, for the second quarter and
six months ended June 30, 2001, respectively, mostly due to higher fee income
and net investment income. Fee income increased $4, or 5%, and $12, or 7%, for
the second quarter and six months ended June 30, 2001, respectively, due to
growth in the variable COLI business as related account values increased $3.7
billion, or 29%, from a year ago. In addition, net investment income increased
$4, or 5%, and $12, or 7%, driven by income on policy loans related to the
leveraged COLI business.
Expenses increased $9, or 6%, and $27, or 8%, and net income increased $2, or
25%, and $3, or 19%, for the second quarter and six months ended June 30, 2001,
respectively, as compared to the equivalent 2000 periods, primarily due to the
growth in revenues described above.
15
16
INVESTMENTS
Invested assets, excluding separate account assets, totaled $26.7 billion as of
June 30, 2001 and were comprised of $21.3 billion of fixed maturities, $3.7
billion of policy loans, equity securities of $380 and other investments of $1.2
billion. As of December 31, 2000, general account invested assets totaled $22.9
billion 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. 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.
General account invested assets increased $3.8 billion, of which $3.1 billion
was due to an increase in fixed maturities. This increase in fixed maturities
was primarily due to the Fortis acquisition and new cash flow from growth in
general account business. The securities acquired as part of the Fortis
transaction were principally corporate and asset-backed securities.
JUNE 30, 2001 DECEMBER 31, 2000
- -----------------------------------------------------------------------------------------------------------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- -----------------------------------------------------------------------------------------------------------------------
Corporate $ 9,595 45.0% $ 7,663 42.0%
Asset backed securities 3,393 15.9% 3,070 16.8%
Commercial mortgage backed securities 2,855 13.4% 2,776 15.2%
Municipal - tax-exempt 1,351 6.3% 1,390 7.6%
Mortgage backed securities - agency 948 4.4% 602 3.3%
Short-term 1,371 6.5% 975 5.3%
Collateralized mortgage obligations 737 3.5% 928 5.1%
Government/Government agencies - Foreign 371 1.7% 321 1.8%
Government/Government agencies - U.S. 605 2.8% 244 1.3%
Municipal - taxable 52 0.2% 83 0.5%
Redeemable preferred stock 57 0.3% 196 1.1%
- -----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 21,335 100.0% $18,248 100.0%
- -----------------------------------------------------------------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
- -------------------------------------------------------------------------------------------------------------------
(Before-tax) 2001 2000 2001 2000
- -------------------------------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $365 312 $ 717 $620
Policy loan income 78 72 156 146
- -------------------------------------------------------------------------------------------------------------------
Net investment income - total $443 384 $ 873 $766
- -------------------------------------------------------------------------------------------------------------------
Yield on average invested assets (1) 6.9% 7.0% 7.1% 6.9%
- -------------------------------------------------------------------------------------------------------------------
Net realized capital losses $(17) (43) $ (17) $(43)
- -------------------------------------------------------------------------------------------------------------------
(1) Represents annualized net investment income (excluding net realized capital
gains or losses) divided by average invested assets at cost (fixed maturities at
amortized cost).
Net investment income, excluding policy loans, for the second quarter and six
months ended June 30, 2001 increased $53, or 17%, and $97, or 16%, respectively,
compared to the equivalent 2000 periods. The increases were primarily due to
income earned on the higher invested asset base. Yields on average invested
assets were essentially flat.
Net realized capital losses for the second quarter and six months ended June 30,
2001 decreased by $26 compared to the respective prior year periods. Realized
gains and losses were attributable to investment portfolio rebalancing
activities. Included in 2001 net losses were losses associated with the credit
deterioration of certain investments in which the Company has an indirect
economic interest.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of
Hartford Life and its ability to generate cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The Company maintained cash and short-term investments totaling $1.5
billion and $1.1 billion as of June 30, 2001 and December 31, 2000,
respectively.
16
17
The capital structure of the Company consists of debt and equity, and is
summarized as follows:
JUNE 30, 2001 DECEMBER 31, 2000
- ---------------------------------------------------------------------------------------------------------------
Long-term debt $1,050 $ 650
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures (TruPS) 450 250
- ---------------------------------------------------------------------------------------------------------------
TOTAL DEBT $1,500 $ 900
- ---------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities and other, net of tax (1) $4,041 $3,167
Unrealized gain on securities and other, net of tax (1) 94 40
- ---------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $4,135 $3,207
- ---------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION (2) $5,541 $4,067
- ---------------------------------------------------------------------------------------------------------------
Debt to equity (2) (3) 37% 28%
Debt to capitalization (2) (3) 27% 22%
- ---------------------------------------------------------------------------------------------------------------
(1) Other represents the net gain on cash-flow hedging instruments as a result
of the Company's adoption of SFAS No. 133.
(2) Excludes unrealized gain on securities and other, net of tax.
(3) Excluding TruPS, the debt to equity ratios were 26% and 21% as of June 30,
2001 and December 31, 2000, respectively, and the debt to capitalization ratios
were 19% and 16% as of June 30, 2001 and December 31, 2000, respectively.
FORTIS ACQUISITION
On April 2, 2001, The Hartford acquired Fortis Financial Group for $1.12 billion
in cash. The Company effected the acquisition through several reinsurance
agreements with subsidiaries of Fortis and the purchase of 100% of the stock of
Fortis Advisers, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of
Fortis, Inc. The acquisition was recorded as a purchase transaction.
The Company financed the acquisition through (1) a capital contribution from The
Hartford of $615 from its February 16, 2001 offering of common stock, (2) net
proceeds from the March 1, 2001 issuance of $400 of senior debt securities under
the Company's June 1998 shelf registration and (3) net proceeds from the March
6, 2001 issuance of $200 of trust preferred securities under the Company's June
1998 shelf registration.
CAPITALIZATION
The Company's total capitalization, excluding unrealized gain on securities and
other, net of tax, increased $1.5 billion, or 36%, as of June 30, 2001, as
compared to December 31, 2000. This increase was primarily the result of
earnings along with financing activities related to the Fortis acquisition,
partially offset by dividends declared.
DEBT
On March 1, 2001, Hartford Life issued and sold $400 of senior debt securities
from its June 1998 shelf registration to partially fund the Fortis acquisition.
(For a further discussion of the debt, see Note 4 of Notes to Consolidated
Financial Statements.)
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES
On March 6, 2001, Hartford Life issued and sold $200 of trust preferred
securities from its June 1998 shelf registration to partially fund the Fortis
acquisition. (For a further discussion of the company obligated mandatorily
redeemable preferred securities of subsidiary trusts holding solely junior
subordinated debentures, see Note 5 of Notes to Consolidated Financial
Statements.)
DIVIDENDS
Hartford Life declared $33 in dividends for the six months ended June 30, 2001
to Hartford Fire Insurance Company. 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.
Hartford Life and Accident Insurance Company, the Company's direct regulated
life insurance subsidiary, declared dividends of $40 for the six months ended
June 30, 2001 to Hartford Life.
17
18
CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
- --------------------------------------------------------------------------------
2001 2000
- --------------------------------------------------------------------------------
Cash provided by operating activities $ 387 $ 739
Cash (used for) provided by investing activities (2,669) 386
Cash provided by (used for) financing activities 2,341 (1,124)
Cash - end of period 161 90
- --------------------------------------------------------------------------------
The decrease in cash provided by operating activities was primarily the result
of the timing of the settlement of receivables and payables in the first six
months of 2001. The increase in cash provided by financing activities primarily
relates to proceeds received by the Company to finance the Fortis acquisition,
and the increase in cash used for investing activities reflects the purchase.
Operating cash flows in both periods have been more than adequate to meet
liquidity requirements.
REGULATORY MATTERS AND CONTINGENCIES
NAIC CODIFICATION
The NAIC (National Association of Insurance Commissioners) 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 accounting and reporting
required for implementation. The overall impact of applying the new guidance
resulted in a one-time statutory cumulative transition benefit of $74 in
statutory surplus for the Company.
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
Hartford Life distributes its annuity and life insurance products through a
variety of distribution channels, including broker-dealers, banks, wholesalers,
its own internal sales force and other third party marketing organizations. The
Company periodically negotiates provisions and renewals of these relationships
and there can be no assurance that such terms will remain acceptable to the
Company or such service providers. An interruption in the Company's continuing
relationship with certain of these third parties could materially affect the
Company's ability to market its products.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Consolidated
Financial Statements.
18
19
PART II. OTHER INFORMATION
ITEM 1. 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, if any, 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.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None
(b) Reports on Form 8-K -- None
19
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTFORD LIFE, INC.
/s/ Mary Jane B. Fortin
---------------------------------------
Mary Jane B. Fortin
Vice President and Chief
Accounting Officer
AUGUST 14, 2001