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 September 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 November 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.
1
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Consolidated Statements of Income - Third Quarter and
Nine Months Ended September 30, 2001 and 2000 3
Consolidated Balance Sheets - September 30, 2001 and December 31, 2000 4
Consolidated Statements of Changes in Stockholder's Equity
Nine Months Ended September 30, 2001 and 2000 5
Consolidated Statements of Cash Flows - Nine Months
Ended September 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
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THIRD QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(In millions) (Unaudited) 2001 2000 2001 2000
- ------------------------- ---- ---- ---- ----
REVENUES
Fee income $ 654 $ 680 $ 1,942 $ 1,869
Earned premiums and other 554 499 1,695 1,474
Net investment income 447 408 1,320 1,174
Net realized capital losses (50) -- (67) (43)
------- ------- ------- -------
TOTAL REVENUES 1,605 1,587 4,890 4,474
------- ------- ------- -------
BENEFITS, CLAIMS AND EXPENSES
Benefits and claims 928 812 2,728 2,333
Insurance expenses and other 339 351 984 917
Amortization of deferred policy acquisition costs and
present value of future profits 154 179 472 512
Dividends to policyholders 13 7 28 53
Goodwill amortization 7 2 16 4
Interest expense 28 17 76 50
------- ------- ------- -------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,469 1,368 4,304 3,869
------- ------- ------- -------
INCOME BEFORE INCOME TAX (BENEFIT) EXPENSE AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGES 136 219 586 605
Income tax (benefit) expense (114) 67 10 157
------- ------- ------- -------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGES 250 152 576 448
Cumulative effect of accounting changes, net of tax -- -- (26) --
------- ------- ------- -------
NET INCOME $ 250 $ 152 $ 550 $ 448
======= ======= ======= =======
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 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
$21,941 and $18,171) $ 22,505 $ 18,248
Equity securities, at fair value 412 171
Policy loans, at outstanding balance 3,715 3,610
Other investments 1,341 910
-------- --------
Total investments 27,973 22,939
Cash 139 106
Premiums receivable and agents' balances 231 216
Reinsurance recoverables 627 542
Deferred policy acquisition costs and present value of future profits 5,456 4,527
Deferred income tax -- 223
Goodwill 780 244
Other assets 1,108 830
Separate account assets 105,487 113,994
-------- --------
TOTAL ASSETS $141,801 $143,621
-------- --------
LIABILITIES
Future policy benefits $ 7,955 $ 7,074
Other policyholder funds 19,545 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
Deferred income tax 130 --
Other liabilities 2,495 2,597
Separate account liabilities 105,487 113,994
-------- --------
TOTAL LIABILITIES 137,112 140,414
-------- --------
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 394 27
Retained earnings 2,400 1,900
-------- --------
TOTAL STOCKHOLDER'S EQUITY 4,689 3,207
======== ========
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $141,801 $143,621
======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 2001
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
NET GAIN ON
UNREALIZED CASH FLOW
GAIN ON HEDGING CUMULATIVE TOTAL
COMMON CAPITAL SECURITIES, INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS NET OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
------------------------- ----- ------- ---------- ---------- ----------- -------- ------
Balance, December 31, 2000 $ -- $ 1,280 $ 40 $ -- $ (13) $ 1,900 $ 3,207
Comprehensive income
Net income 550 550
------------
Other comprehensive income, net of
tax (1)
Cumulative effect of accounting 3 20
change (2)
23
Net unrealized capital gain on 284 284
securities (3)
Net gain on cash flow hedging
instruments 70 70
Cumulative translation adjustments (10) (10)
------------
Total other comprehensive income 367
Total comprehensive income 917
------------
Dividends declared (50) (50)
Capital contribution from parent 615 615
------ ------- ------- ----------- ---------- ---------- ------------
BALANCE, SEPTEMBER 30, 2001 $ -- $ 1,895 $ 327 $ 90 $ (23) $ 2,400 $ 4,689
====== ======= ======= =========== ========== ========== ============
NINE MONTHS ENDED SEPTEMBER 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 448 448
-------
Other comprehensive income
(loss), net of tax (1)
Net unrealized capital
gains on securities (3) 141 141
Cumulative translation
adjustments 1 1
-------
Total other comprehensive
income (loss) 142
Total comprehensive
income (loss) 590
-------
Dividends declared (42) (42)
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, SEPTEMBER 30, 2000 $ -- -- $ -- $ 1,280 $ -- $ (195) $ (11) $ 1,787 $ 2,861
====== ====== ====== ======= ====== ======== ======= ======= =======
(1) Unrealized gain on securities is reflected net of tax provision of $153 and
$76 for the nine months ended September 30, 2001 and 2000, respectively.
Cumulative effect of accounting change is net of tax benefit of $12 for the
nine months ended September 30, 2001. Net gain on cash flow hedging
instruments is net of tax provision of $38 for the nine months ended
September 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 ($18) and ($28) for the nine months ended
September 30, 2001 and 2000, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
(In millions) (Unaudited) 2001 2000
- ------------------------- ---- ----
OPERATING ACTIVITIES
Net income $ 550 $ 448
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital losses 67 43
Cumulative effect of accounting changes, net of tax 26 --
Amortization of deferred policy acquisition costs and present value of future profits 472 512
Additions to deferred policy acquisition costs and present value of future profits (797) (749)
Depreciation and amortization 13 7
(Increase) decrease in premiums receivable and agents' balances (15) 8
(Decrease) increase in other liabilities (62) 166
Change in receivables, payables and accruals (40) 69
(Decrease) increase in accrued tax (10) 243
Change in deferred income tax 32 (46)
Increase in future policy benefits 530 537
Increase in reinsurance recoverables (92) (50)
Other, net (140) 65
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES 534 1,253
------- -------
INVESTING ACTIVITIES
Purchases of investments (8,461) (5,208)
Sales of investments 4,057 4,096
Maturities and principal paydowns of fixed maturity investments 1,858 1,234
Acquisition of Fortis Financial Group (1,105) --
Capital expenditures and other (44) (99)
------- -------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (3,695) 23
------- -------
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 (47) (41)
Net receipts from (disbursements for) investment and universal life-type
contracts charged against policyholder accounts 2,027 (1,187)
Proceeds from parent to retire common stock -- 226
Payments to retire common stock -- (226)
Net issuance of common stock -- 6
------- -------
NET CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 3,195 (1,222)
------- -------
Net increase in cash 34 54
Impact of foreign exchange (1) --
------- -------
Cash -- beginning of period 106 89
------- -------
CASH -- END OF PERIOD $ 139 $ 143
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID DURING THE PERIOD FOR
Income taxes $ 34 $ 60
Interest $ 57 $ 37
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
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 Financial Group Acquisition,
see Note 4.)
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 nine months ended September 30, 2001 see Note 3, 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
7
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.
Effective September 2001, the Company adopted EITF Issue 01-10 "Accounting for
the Impact of the Terrorist Attacks of September 11, 2001". Under the consensus,
costs related to the terrorist acts should be reported as part of income from
continuing operations and not as an extraordinary item. The Company has
recognized and classified all direct and indirect costs associated with the
attack of September 11 in accordance with the consensus. (For a discussion of
the impact of the September 11 terrorist attack, see Note 2.)
(c) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In August 2001, the Financial Accounting Standards Board ("FASB") issued SFAS
No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS
No. 144 establishes an accounting model for long-lived assets to be disposed of
by sale that applies to all long-lived assets, including discontinued
operations. SFAS No. 144 requires that those long-lived assets be measured at
the lower of carrying amount or fair value less cost to sell, whether reported
in continuing operations or in discontinued operations. The provisions of
Statement 144 are effective for financial statements issued for fiscal years
beginning after December 15, 2001. Adoption of SFAS No. 144 will not have a
material impact on the Company's financial condition or results of operations.
In June 2001, the 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. SEPTEMBER 11 TERRORIST ATTACK
As a result of the September 11 terrorist attack, the Company recorded an
estimated loss amounting to $20, net of taxes and reinsurance, in the third
quarter of 2001. The Company based the loss estimate upon a review of insured
exposures using a variety of assumptions and actuarial techniques, including
estimated amounts for unknown and unreported policyholder losses. Also included
was an estimate of amounts recoverable under the Company's ceded reinsurance
programs, including the cost of additional reinsurance premiums. As a result of
the uncertainties involved in the estimation process, final claims settlement
may vary from present estimates.
3. DERIVATIVES AND HEDGING ACTIVITIES
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.
8
As of September 30, 2001, the Company reported $183 of derivative assets in
other investments and $131 of derivative liabilities in other liabilities.
Cash-Flow Hedges
For the period ended September 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 September 30, 2001, approximately $4
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 September 30, 2001, the
Company held approximately $2.2 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
nine months ended September 30, 2001.
Fair-Value Hedges
For the nine months ended September 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 September 30, 2001, the Company held
approximately $362 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 September 30, 2001 the Company held
approximately $4.0 billion in derivative notional value related to strategies
categorized as Other Risk Management Activities.
4. FORTIS ACQUISITION
On April 2, 2001, 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 and nine months ended September 30,
2001, amortization of PVP amounted to $10 and $23, respectively. 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.
9
5. SALE OF SUDAMERICANA HOLDING S.A.
On September 7, 2001, Hartford Life completed the sale of its ownership interest
in an Argentine subsidiary, Sudamericana Holding S.A. The company recognized an
after-tax net realized capital loss of $21 related to the sale.
6. DEBT
On March 1, 2001, Hartford Life 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 4, 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 included $150 of Hartford Life securities remaining
under the shelf registration filed by the Company with the SEC in June of 1998.
As of September 30, 2001, Hartford Life had $1.0 billion remaining on its shelf.
7. 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 4, 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 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 mature on February 15, 2050 and bear
interest at the annual rate of 7.625% of the principal amount, payable quarterly
in arrears commencing April 15, 2001. 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.
8. 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.
10
(b) TAX MATTERS
Hartford Life's federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). In August 2001, the Company recorded a $130 benefit
primarily the result of the favorable treatment of certain tax matters related
to separate account investment activity arising during the 1996-2000 tax years.
During 2000, the Company recorded a $24 tax benefit as a result of a settlement
with the IRS with respect to certain similar tax matters for the 1993-1995 tax
years.
Management believes that adequate provisions have been made in the financial
statements for any potential assessments that may result from tax examination
and other tax related matters for all open tax years.
9. 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.
Investment Individual Group
SEPTEMBER 30, 2001 Products Life Benefits COLI Other Total
- ------------------ -------- ---- -------- ---- ----- -----
THIRD QUARTER ENDED
Total revenues $ 622 $ 236 $ 617 $ 171 $ (41) $ 1,605
Net income 116 30 26 8 70 250
-------- -------- -------- -------- ------ -------
NINE MONTHS ENDED
Total revenues $ 1,869 $ 639 $ 1,871 $ 536 $ (25) $ 4,890
Net income 344 86 76 27 17 550
-------- -------- -------- -------- ------ -------
Investment Individual Group
SEPTEMBER 30, 2000 Products Life Benefits COLI Other Total
- ------------------ -------- ---- -------- ---- ----- -----
THIRD QUARTER ENDED
Total revenues $ 605 $ 164 $ 553 $ 239 $ 26 $ 1,587
Net income (loss) 105 19 23 9 (4) 152
-------- -------- -------- -------- -------- --------
NINE MONTHS ENDED
Total revenues $ 1,777 $ 475 $ 1,630 $ 574 $ 18 $ 4,474
Net income (loss) 317 57 63 25 (14) 448
-------- -------- -------- -------- -------- --------
11
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 September 30, 2001,
compared with December 31, 2000, and its results of operations for the third
quarter and nine months ended September 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 made herein, other than statements of historical fact, are
forward-looking statements. These forward-looking statements are made pursuant
to the safe harbor provisions of the Private Securities Litigation Reform Act of
1995 and include estimates and assumptions related to economic, competitive and
legislative developments. These forward-looking statements are subject to change
and uncertainty, which are, in many instances, beyond the Company's control and
have been made based upon management's expectations and beliefs concerning
future developments and their potential effects upon the Company. There can be
no assurance that future developments will be in accordance with management's
expectations or that the effect of future developments on the Company will be
those anticipated by management. Actual results could differ materially from
those expected by the Company, depending on the outcome of various factors.
These factors include: the uncertain nature of damage theories and loss amounts
and the development of additional facts related to the September 11 terrorist
attack; the response of reinsurance companies under reinsurance contracts and
the impact of increasing reinsurance rates; the possibility of more unfavorable
loss experience than anticipated; the possibility of general economic and
business conditions that are less favorable than anticipated; the possibility of
less success in integrating the U.S. individual life insurance, annuity and
mutual fund businesses of Fortis, Inc than anticipated; changes in interest
rates or the stock markets; stronger than anticipated competitive activity;
unfavorable legislative, regulatory or judicial developments; and other 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 THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 1,605 $ 1,587 $ 4,890 $ 4,474
Expenses 1,355 1,435 4,314 4,026
Cumulative effect of accounting changes, net of tax (1) -- -- (26) --
-------- -------- -------- --------
NET INCOME $ 250 $ 152 $ 550 $ 448
======== ======== ======== ========
(1) For the nine months ended September 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 $18, or 1%, and $416, or 9%, for the third quarter and nine
months ended September 30, 2001, respectively, as the Company experienced growth
in its Individual Life, Group Benefits and Investment Products segments, which
were partially offset by a decrease in COLI. 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.
12
Expenses decreased $80, or 6%, for the third quarter primarily associated with
the lower levels of revenue in the COLI segment and a decrease in income tax
expense primarily due to a $130 benefit associated with a tax item related to
separate account investment activity. For the nine months ended September 30,
2001, expenses increased $288, or 7%, primarily as a result of the growth in
revenues, which was partially offset by the $130 favorable tax item and the COLI
operation, as described above.
Net income increased $98, or 64%, and $102, or 23%, for the third quarter and
nine months ended September 30, 2001, respectively. For the third quarter and
nine months ended September 30, 2001, the Company recorded after-tax net
realized capital losses of $32 and $43, while for the nine months ended
September 30, 2000, the Company recorded after-tax net realized capital losses
of $28. (See Investments section for further discussion.) Also included in the
results for the third quarter of 2001 are the $130 favorable tax item discussed
above and a $20 charge associated with the impact of the September 11th
terrorist attack. In addition, the nine months ended September 30, 2000 includes
a benefit of $32 also related to favorable tax items. Excluding these tax items,
as well as the net realized capital losses, cumulative effect of accounting
changes and the impact of the September 11th terrorist attack, net income
increased $20, or 13%, and $65, or 15%, for the third quarter and nine months
ended September 30, 2001, respectively, as each of the Company's operating
segments experienced growth from a year ago.
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Investment Products $ 116 $ 105 $ 344 $ 317
Individual Life 30 19 86 57
Group Benefits 26 23 76 63
Corporate Owned Life Insurance (COLI) 8 9 27 25
Other (1) 70 (4) 17 (14)
----- ----- ----- -----
NET INCOME $ 250 $ 152 $ 550 $ 448
===== ===== ===== =====
(1) The third quarter and nine months ended September 30, 2001, as well as the
nine months ended September 30, 2000, include after-tax benefits related to
prior year tax items. Also, the nine months ended September 30, 2001,
include 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
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 622 $ 605 $ 1,869 $ 1,777
Expenses 506 500 1,525 1,460
-------- -------- -------- --------
NET INCOME $ 116 $ 105 $ 344 $ 317
======== ======== ======== ========
Individual variable annuity account values $ 68,545 $ 83,009
Other individual annuity account values 9,421 8,955
Other investment products account values 17,638 17,368
-------- --------
TOTAL ACCOUNT VALUES 95,604 109,332
Mutual fund assets under management 14,380 9,868
-------- --------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $109,984 $119,200
======== ========
Revenues in the Investment Products segment increased $17, or 3%, and $92, or
5%, for the third quarter and nine months ended September 30, 2001,
respectively, driven primarily by the other investment products operation. Fee
income in other investment products increased $12, or 16%, and $46, or 22%, for
the third quarter and nine months ended September 30, 2001, principally due to
growth in the Company's mutual fund assets which increased $4.5 billion, or 46%,
to $14.4 billion as of September 30, 2001 due to strong sales and the business
acquired from Fortis, Inc. Net investment income in other investment products
increased $27, or 19%, and $84, or 21%, due mostly to growth in the
institutional business where related assets increased $1.2 billion, or 16%, from
a year ago. The increases in other investment products were partially offset by
individual annuity revenues, which decreased $22, or 6%, and $38, or 3% for the
third quarter and nine months ended September 30, 2001. Fee income and net
investment income from the business acquired from Fortis, Inc., helped partially
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 $14.0 billion, or 15%, from September 30, 2000.
13
Expenses increased $6, or 1%, and $65, or 4%, for the third quarter and nine
months ended September 30, 2001, respectively, driven by higher interest
credited and higher insurance expenses and other in other investment products
associated with the revenue growth described above. For the respective third
quarter and nine month periods, interest credited in other investment products
operations increased $22, or 19%, and $63, or 19%, while insurance expenses and
other increased $5, or 7%, and $34, or 18%. Also, individual annuity interest
credited increased $13, or 23%, and $10, or 5%, principally due to the business
acquired from Fortis. Partially offsetting these increases were decreases in
individual annuity expenses, including amortization of deferred acquisition
costs and present value of future profits, which decreased $29, or 23%, and $47,
or 13%, for the respective periods. Additionally, individual annuity income tax
expense decreased $19, or 46%, and $35, or 28%, for the respective periods, due
to lower pre-tax operating income and the tax impact associated with separate
account investment activity.
Net income increased $11, or 10%, and $27, or 9%, for the third quarter and nine
months ended September 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, the favorable impact of the Fortis
Financial Group acquisition and the lower effective tax rate related to the
individual annuity business.
INDIVIDUAL LIFE
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 236 $ 164 $ 639 $ 475
Expenses 206 145 553 418
-------- -------- -------- --------
NET INCOME $ 30 $ 19 $ 86 $ 57
======== ======== ======== ========
Variable life account values $ 3,460 $ 3,019
Total account values $ 7,322 $ 5,879
-------- --------
Variable life insurance in force $ 59,466 $ 30,787
Total life insurance in force $118,510 $ 72,651
-------- --------
Revenues in the Individual Life segment increased $72, or 44%, and $164, or 35%,
for the third quarter and nine months ended September 30, 2001, respectively,
primarily due to the business acquired from Fortis, Inc. Fee income, including
cost of insurance charges, increased $50, or 43%, and $115, or 34%,
respectively, driven principally by growth in the variable life business.
Variable life account values increased $441, or 15%, and life insurance in force
increased $28.7 billion, or 93% from a year ago. In addition, net investment
income on general account business (universal life, interest sensitive whole
life and term life) increased $20, or 43%, and $43, or 32%, for the respective
third quarter and nine months, consistent with the growth in related account
values.
Expenses increased $61, or 42%, and $135, or 32%, for the respective third
quarter and nine month periods, 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 is favorable to full year 2000 levels.
Net income increased $11, or 58%, and $29, or 51%, for the third quarter and
nine months ended September 30, 2001, respectively. Individual Life incurred an
after-tax charge of $3 related to the September 11th terrorist attack. Excluding
this charge, net income increased $14, or 74%, and $32, or 56%, for the third
quarter and nine months ended September 30, 2001, respectively, primarily due to
the growth factors described above.
GROUP BENEFITS
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 617 $ 553 $1,871 $1,630
Expenses 591 530 1,795 1,567
------ ------ ------ ------
NET INCOME $ 26 $ 23 $ 76 $ 63
====== ====== ====== ======
Revenues in the Group Benefits segment increased $64, or 12%, and $241, or 15%,
and excluding buyouts, increased $68, or 12%, and $203, or 13%, for the third
quarter and nine months ended September 30, 2001, respectively. These increases
were driven by growth in
14
premiums which, excluding buyouts, increased $62, or 13%, and $183, or 13%, for
the respective third quarter and nine 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 third quarter and nine months ended September 30, 2001
were $110 and $424, 4% and 16% higher, respectively, than the equivalent 2000
periods. Additionally, net investment income increased $6, or 11%, and $20, or
12%, for the third quarter and nine-month periods, respectively, due to the
growth in the overall business described above.
Expenses, excluding buyouts, increased $65, or 12%, and $190, or 12%, for the
third quarter and nine months ended September 30, 2001, respectively, driven
primarily by higher benefits and claims which increased $48, or 12%, and $148,
or 12%, 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 than
benefits and claims increased $17, or 14%, and $42, or 12%, excluding buyouts,
for the respective third quarter and nine month periods.
Net income increased $3, or 13%, and $13, or 21%, for the third quarter and nine
months ended September 30, 2001, respectively. Group Benefits incurred an
after-tax charge of $2 related to the September 11th terrorist attack. Excluding
this charge, net income increased $5, or 22%, and $15, or 24%, for the third
quarter and nine months ended September 30, 2001, respectively, principally due
to the revenue growth described above as the segment's loss and expense ratios
have remained relatively consistent with 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 $169.
CORPORATE OWNED LIFE INSURANCE (COLI)
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
2001 2000 2001 2000
---- ---- ---- ----
Revenues $ 171 $ 239 $ 536 $ 574
Expenses 163 230 509 549
------- ------- ------- -------
NET INCOME $ 8 $ 9 $ 27 $ 25
------- ------- ------- -------
Variable COLI account values $16,915 $15,497
Leveraged COLI account values 4,835 4,998
------- -------
TOTAL ACCOUNT VALUES $21,750 $20,495
======= =======
COLI revenues decreased $68, or 28%, and $38, or 7%, for the third quarter and
nine months ended September 30, 2001, respectively, mostly due to lower fee
income and net investment income. Fee income decreased $59, or 42%, and $47, or
16%, for the third quarter and nine month periods, due to a decline in variable
COLI sales from the respective prior year periods. In addition, net investment
income decreased $12, or 12% for the third quarter due primarily to lower
interest rates, as well as a slight decline in leveraged COLI account values.
Year-to-date net investment income was consistent with 2000 levels.
Expenses decreased $67, or 29%, and $40, or 7%, associated with the decreased
revenue discussed above. Net income decreased $1, or 11%, and increased $2, or
8%, for the third quarter and nine months ended September 30, 2001. COLI
incurred an after-tax charge of $2 related to the September 11th terrorist
attack. Excluding this charge, net income increased $1, or 11%, and $4, or 16%,
for the third quarter and nine months ended September 30, 2001, respectively,
due principally to a $1.4 billion, or 9%, increase in variable COLI account
values.
15
INVESTMENTS
Invested assets, excluding separate account assets, totaled $28.0 billion as of
September 30, 2001 and were comprised of $22.5 billion of fixed maturities, $3.7
billion of policy loans, equity securities of $412 and other investments of $1.4
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 $5.1 billion from year end, of which
$4.3 billion was due to an increase in fixed maturities. This increase in fixed
maturities was primarily due to the Fortis Financial Group acquisition, new cash
flow from growth in general account business and an increase in fair value due
to a lower interest rate environment. The securities acquired as part of the
Fortis transaction were principally corporate and asset-backed securities.
SEPTEMBER 30, 2001 DECEMBER 31, 2000
------------------ -----------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- ------------------------ ---------- ------- ---------- -------
Corporate $10,512 46.7% $ 7,663 42.0%
Asset backed securities 3,436 15.3% 3,070 16.8%
Commercial mortgage backed securities 2,919 13.0% 2,776 15.2%
Municipal - tax-exempt 1,514 6.7% 1,390 7.6%
Short-term 1,394 6.2% 975 5.3%
Mortgage backed securities - agency 974 4.3% 602 3.3%
Collateralized mortgage obligations 782 3.5% 928 5.1%
Government/Government agencies -- U.S. 482 2.1% 244 1.3%
Government/Government agencies -- Foreign 386 1.7% 321 1.8%
Redeemable preferred stock 59 0.3% 196 1.1%
Municipal - taxable 47 0.2% 83 0.5%
------- ---- ------- ----
TOTAL FIXED MATURITIES $22,505 100.0% $18,248 100.0%
======= ===== ======= =====
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------- -------------
(Before-tax) 2001 2000 2001 2000
- ------------ ---- ---- ---- ----
Net investment income - excluding policy loan income $ 368 $ 324 $ 1,085 $ 944
Policy loan income 79 84 235 230
------- ----- ------- -------
Net investment income - total $ 447 $ 408 $ 1,320 $ 1,174
------- ----- ------- -------
Yield on average invested assets (1) 6.7% 7.4% 7.0% 7.0%
------- ----- ------- -------
Net realized capital losses $ (50) -- $ (67) $ (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 third quarter and nine
months ended September 30, 2001 increased $44, or 14%, and $141, or 15%,
respectively, compared to the equivalent 2000 periods. The increases were
primarily due to income earned on the previously discussed increase in fixed
maturity investments from the Fortis acquisition partially offset by lower
yields in the third quarter ended September 30, 2001. Yields on average invested
assets for the third quarter ended September 30, 2001 decreased to 6.7% compared
to 7.4% in the prior year period. Yields on average invested assets for the nine
months ended September 30, 2001 and September 30, 2000 were essentially
consistent.
Net realized capital losses for the third quarter and nine months ended
September 30, 2001 increased by $50 and $24 compared to the respective prior
year periods. Included in net realized capital losses for the third quarter
ended September 30, 2001 was a $35 loss recognized on the sale of the Company's
interest in an Argentine insurance joint venture. Also, included in 2001 net
realized capital losses were losses associated with the credit deterioration of
certain investment 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 September 30, 2001 and December 31, 2000,
respectively.
16
The capital structure of the Company consists of debt and equity, and is
summarized as follows:
SEPTEMBER 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) $4,272 $3,167
Unrealized gain on securities and other, net of tax (1) 417 40
------ ------
TOTAL STOCKHOLDER'S EQUITY $4,689 $3,207
------ ------
TOTAL CAPITALIZATION (2) $5,772 $4,067
------ ------
Debt to equity (2) (3) 35% 28%
Debt to capitalization (2) (3) 26% 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 25% and 21% as of September
30, 2001 and December 31, 2000, respectively, and the debt to capitalization
ratios were 18% and 16% as of September 30, 2001 and December 31, 2000,
respectively.
FORTIS ACQUISITION
On April 2, 2001, 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, Inc., 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.
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 $1.7 billion, or 42%, as of September 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 6 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 7 of Notes to Consolidated Financial
Statements.)
DIVIDENDS
Hartford Life declared $50 in dividends to Hartford Fire Insurance Company for
the nine months ended September 30, 2001. 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 $89 to Hartford Life for the
nine months ended September 30, 2001.
17
CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-------------
2001 2000
---- ----
Cash provided by operating activities $ 534 $ 1,253
Cash (used for) provided by investing activities (3,695) 23
Cash provided by (used for) financing activities 3,195 (1,222)
Cash -- end of period 139 143
------- -------
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 nine
months of 2001. The increase in cash provided by financing activities primarily
relates to proceeds received by the Company to finance the Fortis Financial
Group acquisition, and the increase in cash used for investing activities
reflects the related purchase of Fortis Financial Group. In addition, the
increased cash provided by financing activities and higher cash used for
investing activities reflect increased deposits from general account business
and the subsequent investment of these deposits. 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.
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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
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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
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Mary Jane B. Fortin
Vice President and Chief Accounting Officer
NOVEMBER 14, 2001
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