SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended March 31, 2002
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 May 15, 2002 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 - Three Months
Ended March 31, 2002 and 2001 3
Consolidated Balance Sheets - March 31, 2002 and December 31, 2001 4
Consolidated Statements of Changes in Stockholder's Equity
Three Months Ended March 31, 2002 and 2001 5
Consolidated Statements of Cash Flows - Three Month
Ended March 31, 2002 and 2001 6
Notes to Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 11
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 17
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 17
Signature 18
2
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS
ENDED
MARCH 31,
(In millions) (Unaudited) 2002 2001
- ---------------------------------------------------------------------------------------------------
REVENUES
Fee income $ 662 $ 602
Earned premiums and other 581 558
Net investment income 448 430
Net realized capital losses (15) --
- ---------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,676 1,590
- ---------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits and claims 897 870
Insurance expenses and other 371 312
Amortization of deferred policy acquisition costs and present
value of future profits 152 154
Dividends to policyholders 6 12
Interest expense 28 20
- ---------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,454 1,368
- ---------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 222 222
Income tax expense 52 61
- ---------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE
170 161
Cumulative effect of accounting change, net of tax -- (23)
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 170 $ 138
- ---------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
MARCH 31, DECEMBER 31,
(In millions, except for share data) 2002 2001
- -----------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value
(amortized cost of $23,517 and $23,010) $ 23,558 $ 23,301
Equity securities, at fair value 412 428
Policy loans, at outstanding balance 3,288 3,317
Other investments 1,346 1,331
- ---------------------------------------------------------------------------------------------------
Total investments 28,604 28,377
Cash 142 167
Premiums receivable and agents' balances 270 229
Reinsurance recoverables 672 648
Deferred policy acquisition costs and present value of
future profits 5,693 5,572
Deferred income tax (12) (16)
Goodwill 799 799
Other assets 1,230 1,116
Separate account assets 117,689 114,720
- ---------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 155,087 $ 151,612
- ---------------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits $ 9,050 $ 8,842
Other policyholder funds 19,773 19,357
Long-term debt 1,050 1,050
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely parent
junior subordinated debentures 450 450
Other liabilities 2,491 2,583
Separate account liabilities 117,689 114,720
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 150,503 147,002
- ---------------------------------------------------------------------------------------------------
STOCKHOLDER'S EQUITY
Common Stock - 1,000 shares authorized, issued and outstanding;
par value $0.01 -- --
Capital surplus 1,895 1,895
Accumulated other comprehensive income 16 196
Retained earnings 2,673 2,519
- ---------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 4,584 4,610
- ---------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 155,087 $ 151,612
- ---------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
THREE MONTHS ENDED MARCH 31, 2002
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, 2001 $ -- $ 1,895 $163 $62 $(29) $2,519 $ 4,610
Comprehensive income
Net income 170 170
--------
Other comprehensive income, net of
tax (1)
Unrealized loss on securities (3) (159) (159)
Net gain on cash flow hedging
instruments (17) (17)
Cumulative translation adjustments (4) (4)
--------
Total other comprehensive income (180)
--------
Total comprehensive income (10)
--------
Dividends declared (16) (16)
- --------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2002 $ -- $ 1,895 $ 4 $45 $(33) $2,673 $ 4,584
- --------------------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED MARCH 31, 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 138 138
--------
Other comprehensive income, net of
tax (1)
Cumulative effect of accounting 3 20 23
change (2)
Unrealized gain on securities (3) 125 125
Net gain on cash flow hedging
instruments 21 21
Cumulative translation adjustments (6) (6)
--------
Total other comprehensive income 163
--------
Total comprehensive income 301
--------
Dividends declared (17) (17)
Capital contribution from parent 615 615
- ---------------------------------------------------------------------------------------------------------------------------------
BALANCE, MARCH 31, 2001 $ -- $ 1,895 $ 168 $ 41 $ (19) $ 2,021 $ 4,106
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Unrealized (loss) gain on securities is reflected net of tax (benefit)
provision of $(86) and $67 for the three months ended March 31, 2002
and 2001, respectively. Cumulative effect of accounting change is net
of tax benefit of $12 for the first quarter ended March 31, 2001. Net
(loss) gain on cash flow hedging instruments is net of tax (benefit)
provision of $(9) and $11 for the first three months ended March 31,
2002 and 2001. There is no tax effect on cumulative translation
adjustments.
(2) Unrealized (loss) 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 for the first three months ended March
31, 2001.
(3) There were reclassification adjustments for after-tax losses in the
amount of $7 realized in net income for the three months ended March
31, 2002. There were no reclassification adjustments for after-tax
gains (losses) realized in net income for the three months ended March
31, 2001.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
------------------------
(In millions) (Unaudited) 2002 2001
- ---------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 170 $ 138
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH
PROVIDED BY OPERATING ACTIVITIES
Cumulative effect of change in accounting, net of tax -- 23
Amortization of deferred policy acquisition costs and
present value of future profits
152 154
Additions to deferred policy acquisition costs and
present value of future profits (273) (267)
Depreciation and amortization 7 (1)
(Increase) decrease in premiums receivable and agents' balances (41) 20
Decrease in other liabilities (89) (209)
Change in receivables, payables and accruals (64) (8)
Decrease in accrued tax (29) (109)
Decrease in deferred income tax 87 115
Increase in future policy benefits 208 336
Decrease in reinsurance recoverables 12 --
Other, net (54) (73)
Net realized capital losses 15 --
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 101 119
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investments (2,694) (3,648)
Sales of investments 1,819 1,405
Maturities and principal paydowns of fixed maturity investments 395 474
Capital expenditures and other (17) (15)
- --------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (497) (1,784)
- --------------------------------------------------------------------------------------------------------
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 (16) (14)
Net disbursements for investment and universal
life-type contracts charged against
policyholder accounts 389 469
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 373 1,670
- --------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (23) 5
Impact of foreign exchange (2) (2)
- --------------------------------------------------------------------------------------------------------
Cash - beginning of period 167 106
- --------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 142 $ 109
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID (RECEIVED) DURING THE PERIOD FOR
Income taxes $ -- $ (79)
Interest $ 23 $ 5
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 consolidated financial statements have been prepared on the basis of
accounting principles generally accepted in the United States, which differ
materially from the accounting prescribed by various insurance regulatory
authorities. All material intercompany transactions and balances between
Hartford Life, its subsidiaries and affiliates have been eliminated.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining deferred policy
acquisition costs, the liability for future policy benefits and other
policyholder funds, and investment values. Although some variability is inherent
in these estimates, management believes the amounts provided are adequate.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
(b) ADOPTION OF NEW ACCOUNTING STANDARDS
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 did 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 requiring all business combinations to be accounted for under the
purchase method. Accordingly, net assets acquired are recorded at fair value
with any excess of cost over net assets assigned to 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 did 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 SFAS No. 142, amortization of goodwill is precluded; however, its
fair value is periodically (at least annually) reviewed and tested for
impairment.
Goodwill must be tested for impairment in the year of adoption, including an
initial test performed within six months of adoption. If the initial test
indicates a potential impairment, then a more detailed analysis to determine the
extent of impairment must be completed within twelve months of adoption.
SFAS No. 142 requires that useful lives for intangibles other than goodwill be
reassessed and remaining amortization periods be adjusted accordingly.
The Company is in the process of testing its goodwill asset for recoverability.
Adoption of all other provisions of SFAS No. 142 did not have a material impact
on the Company's financial condition or results of operations.
(For further discussion of the impact of SFAS No. 142, see Note 2.)
2. GOODWILL
Effective January 1, 2002, the Company adopted SFAS No. 142 and accordingly
ceased all amortization.
The following table shows net income for the quarter ended March 31, 2001
adjusted for goodwill amortization occurring in that quarter.
7
FIRST QUARTER ENDED
MARCH 31,
-------------------
NET INCOME 2002 2001
- ---------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes $170 $ 161
Goodwill amortization, net of tax -- 1
- ---------------------------------------------------------------------------------------
Adjusted income before cumulative effect of accounting changes 170 162
Cumulative effect of accounting changes -- (23)
- ---------------------------------------------------------------------------------------
Adjusted net income $170 $ 139
- ---------------------------------------------------------------------------------------
The following table shows the Company's intangible assets that continue to be
subject to amortization and aggregate amortization expense. Except for goodwill,
the Company has no intangible assets that are not subject to amortization.
<Table>
<Caption>
AS OF MARCH 31, 2002
--------------------------
GROSS
CARRYING ACCUMULATED
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION
- -----------------------------------------------------------------------------------------
Present value of future profits $560 $45
Total $560 $45
- -----------------------------------------------------------------------------------------
</Table>
Amortization expense for the quarter ended March 31, 2002 was $8.
Estimated future amortization expense is as follows:
<Table>
<Caption>
For the year ended December 31,
- ------------------------------------------------------
2002 $44
2003 $41
2004 $39
2005 $36
2006 $34
- ------------------------------------------------------
</Table>
The carrying amount of goodwill as of March 31, 2002 and December 31, 2001,
respectively is $799. The Company is in the process of completing its
allocation of goodwill to the reporting segment and unit levels.
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(e) of Notes to Consolidated Financial Statements included in Hartford
Life's December 31, 2001 Form 10-K.
As of March 31, 2002, the Company reported $94 of derivative assets in other
invested assets and $109 of derivative liabilities in other liabilities.
Cash-Flow Hedges
For the quarter ended March 31, 2002, 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 March 31, 2002, approximately $3 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 March 31, 2002, the
Company held approximately $2.5 billion in derivative notional value related to
strategies categorized as cash-flow hedges. There was $1 of reclassifications
from OCI to earnings resulting from the discontinuance of cash-flow hedges
during the quarter ended March 31, 2002.
Fair-Value Hedges
For the quarter ended March 31, 2002, 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 March 31, 2002, the Company held approximately $363
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 or losses. As of March 31, 2002, 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, 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 $1.12 billion in cash. The Company affected 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. The acquisition was recorded
8
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 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 shelf registration and (3) net proceeds from the March 6, 2001
issuance of $200 of trust preferred securities under the Company's shelf
registration.
5. 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 March 31, 2002, Hartford Life had $1.0 billion remaining on its shelf.
6. 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 the Company's
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 to the extent of
available funds and upon dissolution, winding up or liquidation but only to the
extent Hartford Life Capital II has funds available to make these payments.
7. COMMITMENTS AND CONTINGENT LIABILITIES
(a) LITIGATION
Hartford Life is or may become involved in various legal actions, in the normal
course of its business, in which claims for alleged economic and punitive
damages have been or may be asserted. Some of the pending litigation has been
filed as purported class actions and some actions have been filed in certain
jurisdictions that permit punitive damage awards that are disproportionate to
the actual damages incurred. Although there can be no assurances, at the present
time, the Company does not anticipate that the ultimate liability arising from
potential, pending or threatened legal actions, after consideration of
provisions made for estimated losses and costs of defense, will have a material
adverse effect on the financial condition or operating results of the Company.
9
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company ("HLIC"), et al. in favor of Bancorp in the amount of $118.
The case involved claims of patent infringement, misappropriation of trade
secrets, and breach of contract against HLIC and its affiliate International
Corporate Marketing Group, Inc. ("ICMG"). The judge dismissed the patent
infringement claim on summary judgment. The jury's award was based on the last
two claims.
HLIC and ICMG have moved the district court for, inter alia, judgment as a
matter of law or a new trial, and intend to appeal the judgment if the district
court does not set it aside or substantially reduce it. In either event, the
Company's management, based on the opinion of its legal advisers, believes that
there is a substantial likelihood that the jury award will not survive at its
current amount. Based on the advice of legal counsel regarding the potential
outcome of this litigation, the Company recorded an $11 after-tax charge in the
first quarter of 2002 to increase litigation reserves associated with this
matter. Should HLIC and ICMG not succeed in eliminating or reducing the
judgment, a significant additional expense would be recorded in the future
related to this matter.
8. 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 fixed and variable annuities,
mutual funds, retirement plan services and other investment products. Individual
Life sells a variety of life insurance products, including variable life,
universal life, interest sensitive whole life and term life insurance. Group
Benefits sells group insurance products, including group life and group
disability insurance as well as other products, including stop loss and
supplementary medical coverage to employers and employer sponsored plans,
accidental death and dismemberment, travel accident and other special risk
coverages to employers and associations. COLI primarily offers variable products
used by employers to fund non-qualified benefits or other postemployment benefit
obligations as well as leveraged COLI. The Company includes in "Other" corporate
items not directly allocable to any of its reportable operating segments,
principally interest expense, as well as its international operations, which are
primarily located in Latin America and Japan.
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 2001 Form 10-K
Annual Report. Hartford Life evaluates performance of its segments based on
revenues, net income and the segment's return on allocated capital. The Company
charges direct operating expenses to the appropriate segment and allocates the
majority of indirect expenses to the segments based on an intercompany expense
arrangement. Intersegment revenues are not significant and primarily occur
between corporate and the operating segments. These amounts include interest
income on allocated surplus and the allocation of net realized capital gains and
losses through net investment income utilizing the duration of the segment's
investment portfolios. The following tables present summarized financial
information concerning the Company's segments.
THREE MONTHS ENDED Investment Individual Group
MARCH 31, 2002 Products Life Benefits COLI Other Total
- --------------------------------------------------------------------------------------------------------------------
Total revenues $ 650 $ 232 $ 644 $ 160 $ (10) $ 1,676
Net income (loss) 117 31 28 -- (6) 170
- --------------------------------------------------------------------------------------------------------------------
THREE MONTHS ENDED Investment Individual Group
MARCH 31, 2001 Products Life Benefits COLI Other Total
- --------------------------------------------------------------------------------------------------------------------
Total revenues $ 604 $ 163 $ 613 $ 184 $ 26 $ 1,590
Net income (loss) 111 20 23 9 (25) 138
- --------------------------------------------------------------------------------------------------------------------
10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life, Inc. and
its subsidiaries ("Hartford Life" or the "Company") as of March 31, 2002,
compared with December 31, 2001, and its results of operations for the three
months ended March 31, 2002 compared with the equivalent period in 2001. This
discussion should be read in conjunction with the MD&A included in the Company's
2001 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 general economic
and business conditions that are less favorable than anticipated, legislative
developments, changes in interest rates or the stock markets, stronger than
anticipated competitive activity and those factors described in such
forward-looking statements.
INDEX
Consolidated Results of Operations 11
Investment Products 12
Individual Life 13
Group Benefits 13
Corporate Owned Life Insurance (COLI) 14
Investments 14
Capital Resources and Liquidity 15
Regulatory Initiatives and Contingencies 17
Accounting Standards 17
CONSOLIDATED RESULTS OF OPERATIONS
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
-----------------------
2002 2001
- --------------------------------------------------------------------------------------------------
Revenues $ 1,676 $ 1,590
Expenses 1,506 1,429
Cumulative effect of accounting changes, net of tax [1] -- (23)
- --------------------------------------------------------------------------------------------------
NET INCOME 170 138
Less: Cumulative effect of accounting changes, net of tax [1] -- (23)
Net realized capital losses, after-tax (7) --
- --------------------------------------------------------------------------------------------------
OPERATING INCOME $ 177 $ 161
- --------------------------------------------------------------------------------------------------
[1] For the quarter ended March 31, 2001, represents the cumulative impact of
the Company's adoption of SFAS No. 133 as amended by SFAS Nos. 137 and
138.
Hartford Life has the following reportable operating segments: Investment
Products, Individual Life, Group Benefits and COLI. In addition, 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 Service 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").
Revenues increased $86, or 5%, as the Company recorded growth across its three
primary operating segments, particularly the Individual Life segment where
revenues grew $69, or 42% to $232 for the three months ended March 31, 2002,
primarily due to the acquisition of Fortis. Revenue in the Investment Products
segment grew $46, or 8% to $650 for the three months ended March 31, 2002. The
increase was primarily attributable to increased asset levels related to mutual
funds and institutional investment products. Revenues within the Group Benefits
Division, excluding buyouts, were $644 for the three months ended March 31,
2002, an increase of $63 and 11% over the comparable prior year period. The
revenue increase was attributable to higher earned premiums as a result of
strong sales and solid persistency. The increases in revenue were partially
offset by a decrease in COLI revenue of $24, or 13% as compared to the three
months ended March 31, 2001 primarily as the result of decreased net investment
income as leveraged COLI account values declined $702, or 14% as compared to a
year ago.
11
Expenses increased $77, or 5% directly related to the revenue growth described
above. Expenses for the three months ended March 31, 2002 include $11,
after-tax, of accrued expenses recorded in connection with the litigation
associated with Bancorp Services, LLC ("Bancorp") within the COLI segment. The
litigation expense accrual was partially offset by an after-tax benefit of $8,
recorded within Other, associated with favorable development related to the
Company's estimated September 11 exposure.
Operating income increased $16, or 10% as the Company's three primary reportable
operating segments experienced earnings growth, led by Individual Life whose
earnings increased $11, or 55% to $31 for the three months ended March 31, 2002.
The increase in net income in the Individual Life segment was primarily the
result of the Fortis acquisition and was partially offset by unfavorable
mortality experience in the first quarter 2002. Earnings for the Investment
Products segment were $117 for the three months ended March 31, 2002, an
increase of $6, or 5%. The increase in earnings was primarily due to growth in
the mutual funds and institutional investment products businesses. This was
partially offset by individual annuity earnings, which declined slightly to $90
as compared to $91 in the same prior year period. The decrease was primarily
related to the decline in the equity markets. Group Benefits net income was $28
and $23 for the three months ended March 31, 2002 and 2001, respectively, an
increase of $5, or 22%, driven principally by ongoing premium growth and an
improved loss ratio (defined as benefits and claims as a percentage of premiums
and other considerations excluding buyouts). The increase in net income was
partially offset by decreased net income in the COLI segment. COLI net income
decreased $9, or 100%, primarily due to the $11 after-tax expense related to the
Bancorp litigation. As mentioned above, net income was positively impacted by an
$8 benefit related to favorable development on the Company's estimated September
11 exposure.
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
THREE MONTHS ENDED
MARCH 31,
--------------------
2002 2001
- -----------------------------------------------------------------
Investment Products $ 117 $ 111
Individual Life 31 20
Group Benefits 28 23
Corporate Owned Life Insurance (COLI) -- 9
Other (1) (6) (25)
- ----------------------------------------------------------------
NET INCOME $ 170 $ 138
- ----------------------------------------------------------------
(1) First quarter ended March 31, 2001, includes a $23 cumulative effect of
accounting change charge related to the Company's adoption of SFAS No.
133.
The sections that follow analyze each segment's results. Investment results are
discussed separately following the segment overviews.
INVESTMENT PRODUCTS
FIRST QUARTER ENDED
MARCH 31,
------------------------
2002 2001
- -----------------------------------------------------------------------------------
Revenues $ 650 $ 604
Expenses 533 493
- -----------------------------------------------------------------------------------
NET INCOME $ 117 $ 111
- -----------------------------------------------------------------------------------
Individual variable annuity account values $ 75,044 $ 70,649
Other individual annuity account values 10,080 8,926
Other investment products account values 19,894 16,994
- -----------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 105,018 96,569
Mutual fund assets under management 17,695 11,271
- -----------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $122,713 $107,840
- -----------------------------------------------------------------------------------
Revenues in the Investment Products segment increased $46, or 8%, primarily due
to higher net investment income and fee income related to other investment
products which was partially offset by lower fee income in individual annuity.
Fee income generated by individual annuities decreased $12, or 4%, as average
account values decreased from prior year levels, primarily due to the lower
equity markets. Net investment income related to other investment products was
$186 for the three months ended March 31, 2002, an increase of $25, or 16%. This
increase was primarily due to growth in the institutional investment business,
where related assets under management increased $1.5 billion, or 19% to $9.3
billion as of March 31, 2002. Fee income from other investment products was $100
12
as of March 31, 2002 an increase of $23, or 30%, principally driven by the
Company's retail mutual fund business. Mutual fund assets under management
increased $6.4 billion, or 57%, from a year ago. This substantial increase in
mutual fund assets was primarily due to strong sales of retail mutual funds over
the last twelve months and the addition of the mutual fund business acquired
from Fortis.
Expenses increased $40, or 8%, primarily driven by increases in benefits and
claim expenses and operating expenses as a result of the growth in the other
investment products businesses. Interest credited to policyholders related to
other investment products increased $13, or 10%, to $138 for the three months
ended March 31, 2002 primarily related to the growth in the institutional
investment business. Additionally insurance expenses and other related to other
investment products was $107 for the three months ended March 31, 2002, an
increase of $23, or 27% as compared to the same period in 2001. Benefits and
claims expense in the Individual Annuity business increased $13, or 21% driven
primarily by an increase in interest credited to policyholders. Partially
offsetting these increases was a $10, or 9%, decrease in amortization of policy
acquisition costs in the individual annuity operation which declined as a result
of lower estimated gross profits driven by the decrease in fee income.
Net income increased $6, or 5%, driven by the growth in revenues in the other
investment products businesses and the lower effective tax rate in the
individual annuity operation driven primarily by separate account investment
activity.
INDIVIDUAL LIFE
FIRST QUARTER ENDED
MARCH 31,
-----------------------
2002 2001
- ---------------------------------------------------------------
Revenues $ 232 $ 163
Expenses 201 143
- ---------------------------------------------------------------
NET INCOME $ 31 $ 20
- ---------------------------------------------------------------
Variable life account values $ 4,119 $ 2,755
Total account values $ 7,983 $ 5,681
- ---------------------------------------------------------------
Variable life insurance in force $ 63,288 $35,734
Total life insurance in force $121,935 $77,070
- ---------------------------------------------------------------
Revenues in the Individual Life segment increased $69, or 42%, resulting
primarily from higher fee and investment income due to the acquisition of
Fortis. Fee income was $167 and $115 for the three months ended March 31, 2002
and 2001 respectively, an increase of $52, or 45%, as account values increased
$2.3 billion, or 41% and life insurance in-force increased $44.9 billion, or
58%. Additionally, net investment income increased $17, or 37%, as general
account assets increased $1.1 billion, or 42% to $3.6 billion as of March 31,
2002.
Expenses increased $58, or 41%, principally due to increases in benefits, claims
and claim adjustment expenses and operating expenses. Although the increase in
these expenses was primarily driven by the growth in the business resulting from
the Fortis acquisition, mortality experience (expressed as death claims as a
percentage of net amount at risk) for the first quarter of 2002 was higher than
the comparable prior year period primarily due to a higher than expected
occurrence of large claims.
Net income increased $11, or 55%, as the contribution to earnings from the
Fortis acquisition more than offset the unfavorable mortality experience.
GROUP BENEFITS
FIRST QUARTER ENDED
MARCH 31,
-------------------
2002 2001
- --------------------------------------
Revenues $644 $613
Expenses 616 590
- --------------------------------------
NET INCOME $ 28 $ 23
- --------------------------------------
Revenues in the Group Benefits segment increased $31, or 5%, and excluding
buyouts, increased $63, or 11%. Growth in fully insured ongoing premiums, which
were $577 for the three months ended March 31, 2002, an increase of $61, or 12%
over the same period in 2001 primarily drove this increase. The growth in
premium revenues was due to solid persistency of the in-force block of business
and strong sales to new customers. Fully insured ongoing sales for the first
quarter of 2001 were $354, a $120, or 51%, increase over the same prior year
period.
13
Expenses increased $26, or 4%, and excluding buyouts, increased $58 or 10%. The
increase in expenses is primarily driven by the growth in revenues described
above. Benefits and claims expenses, excluding buyouts, were $474 for the three
months ended March 31, 2002, an increase of $38, or 9%. The segment's loss ratio
(defined as benefits and claims as a percentage of premiums and other
considerations excluding buyouts) was approximately 81.4% for the three months
ended March 31, 2002, as compared to 83.7% for the comparable prior year period.
Other insurance expenses were $135 for the first quarter 2002, an increase of
$19 or 16%, due to the revenue growth previously described and continued
investment in the service operations of this segment. The segment's expense
ratio (defined as insurance expenses as a percentage of premiums and other
considerations excluding buyouts) was 23.2% for the three months ended March 31,
2002, compared to 22.3% for the comparable period.
Net income increased $5 or 22% as higher earned premium and favorable loss costs
more than offset the increase in other insurance expenses.
CORPORATE OWNED LIFE INSURANCE (COLI)
FIRST QUARTER ENDED
MARCH 31,
----------------------
2002 2001
- -----------------------------------------------------------
Revenues $ 160 $ 184
Expenses 160 175
- -----------------------------------------------------------
NET INCOME $ -- $ 9
- -----------------------------------------------------------
Variable COLI account values $18,764 $16,207
Leveraged COLI account values 4,293 4,995
- -----------------------------------------------------------
TOTAL ACCOUNT VALUES $23,057 $21,202
- -----------------------------------------------------------
COLI revenues decreased $24, or 13%, mostly due to lower net investment and fee
income. Net investment income was $76 and $94 for the three months ended March
31, 2002 and 2001 respectively, an $18, or 19% decrease. The decrease was
primarily related to the decline in leveraged COLI account values, which
decreased $702, or 14%.
Expenses decreased $15, or 9%, consistent with the decrease in revenues
described above. However, the decrease was partially offset by $11, after-tax,
in expenses accrued in connection with litigation costs related to the Bancorp
dispute. Net income decreased $9, or 100%, primarily related to amounts accrued
in connection with the Bancorp litigation.
INVESTMENTS
Invested assets, excluding separate account assets, totaled $28.6 billion as of
March 31, 2002 and were comprised of $23.6 billion of fixed maturities, $3.3
billion of policy loans, equity securities of $412 and other investments of $1.3
billion. As of December 31, 2001, general account invested assets totaled $28.4
billion and were comprised of $23.3 billion of fixed maturities, $3.3 billion of
policy loans, equity securities of $428 and other investments of $1.3 billion.
Policy loans are secured by the cash value of the underlying life insurance
policy and do not mature in a conventional sense, but expire in conjunction with
the related policy liabilities.
Invested assets increased by approximately $200 million primarily the result of
an increase in fixed maturities. This increase in fixed maturities was driven by
increases in corporate, municipal - tax-exempt, and mortgage backed
securities-agency resulting from a re-balancing of the investment portfolio.
14
The following table identifies fixed maturities by type held in the Life general
account as of March 31, 2002 and December 31, 2001.
MARCH 31, 2002 DECEMBER 31, 2001
-------------- -----------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- ----------------------------------------------------------------------------------------------------
Corporate $11,472 48.7% $11,419 49.0%
Asset backed securities 3,476 14.8% 3,427 14.7%
Commercial mortgage backed securities 3,047 12.9% 3,029 13.0%
Municipal - tax-exempt 1,644 7.0% 1,565 6.7%
Mortgage backed securities - agency 1,217 5.2% 981 4.2%
Short-term 1,208 5.1% 1,245 5.3%
Collateralized mortgage obligations 671 2.8% 767 3.3%
Government/Government agencies - Foreign 397 1.7% 390 1.7%
Government/Government agencies - U.S. 325 1.4% 374 1.6%
Municipal - taxable 45 0.2% 47 0.2%
Redeemable preferred stock 56 0.2% 57 0.3%
- ----------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $23,558 100.0% $23,301 100.0%
- ----------------------------------------------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
THREE MONTHS ENDED
MARCH 31,
-------------------
(Before-tax) 2002 2001
- -------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 381 $352
Policy loan income 67 78
- -------------------------------------------------------------------------------
Net investment income - total $ 448 $430
- -------------------------------------------------------------------------------
Yield on average invested assets (1) 6.3% 7.2%
- -------------------------------------------------------------------------------
Net realized capital losses $ (15) $ --
- -------------------------------------------------------------------------------
(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).
For the first quarter ended March 31, 2002, net investment income, excluding
policy loans, increased $29 or 8% compared to the same period in 2001. The
increase was primarily due to income earned on a higher invested asset base.
Invested assets increased 14% from March 31, 2001. Yield on average invested
assets decreased as a result of lower yields on new investment purchases and
decrease in policy loan income.
Net realized capital losses for the first quarter ended March 31, 2002 increased
by $15 compared to the same period in 2001. Included in 2002 net realized
capital losses were write-downs for other than temporary impairments on fixed
maturities of $15. Additionally, a $4 realized capital loss was recognized on
the sale of a Mexican subsidiary in the first quarter of 2002.
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 $1.3 and
$1.4 billion as of March 31, 2002 and December 31, 2001, respectively. The
decrease in cash and short-term investments from December 31, 2001 is primarily
due to timing in the turnover of the investment portfolio.
15
The capital structure of the Company consists of debt and equity, and is
summarized as follows:
MARCH 31, DECEMBER 31,
2002 2001
- ----------------------------------------------------------------------------------------------------------------
Long-term debt $1,050 $1,050
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures (TruPS) 450 450
- ----------------------------------------------------------------------------------------------------------------
TOTAL DEBT $1,500 $1,500
- ----------------------------------------------------------------------------------------------------------------
Equity excluding unrealized gain on securities and other, net of tax (1) $4,536 $4,385
Unrealized gain on securities and other, net of tax (1) 48 225
- ----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $4,584 $4,610
- ----------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION (2) $6,036 $5,885
- ----------------------------------------------------------------------------------------------------------------
Debt to equity (2) (3) 33% 34%
Debt to capitalization (2) (3) 25% 25%
- ----------------------------------------------------------------------------------------------------------------
(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 23% and 24% as of March
31, 2002 and December 31, 2001, respectively, and the debt to
capitalization ratios were 17% and 18% as of March 31, 2002 and December
31, 2001.
FORTIS ACQUISITION
On April 2, 2001, The Hartford acquired the U.S. individual life insurance,
annuity and mutual fund businesses of Fortis 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. 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 shelf registration and (3) net proceeds from the March 6, 2001
issuance of $200 of trust preferred securities under the Company's shelf
registration.
CAPITALIZATION
The Company's total capitalization, excluding unrealized gain on securities and
other, net of tax, increased $151, or 3%, as of March 31, 2002, as compared to
December 31, 2001. This increase was primarily the result of earnings, partially
offset by dividends declared.
DEBT
On March 1, 2001, the Company issued and sold $400 of senior debt securities
from its existing shelf registration to partially fund the Fortis acquisition.
(For a further discussion of the debt, see Note 5 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, the Company issued and sold $200 of trust preferred securities
from its existing 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 6 of Notes to Consolidated Financial Statements.)
DIVIDENDS
The Company declared $16 in dividends for the three months ended March 31, 2002
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 the Company on a stand-alone basis and the impact of
regulatory restrictions.
The Company's direct regulated life insurance subsidiary, Hartford Life and
Accident Insurance Company, declared dividends of $31 for the three months ended
March 31, 2002.
16
CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
-----------------------
2002 2001
- ----------------------------------------------------------------------
Cash provided by operating activities $ 101 $ 119
Cash used for investing activities (497) (1,784)
Cash provided by financing activities 373 1,670
Cash - end of period 142 109
- ----------------------------------------------------------------------
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 three
months of 2002. The decrease in cash provided by financing activities primarily
relates to proceeds received by the Company to finance the Fortis acquisition in
the first quarter of 2001, which closed on April 2, 2001. The decrease in cash
used for investing activities was primarily due to the purchase of short-term
investments in 2001 with funds received from the financing activities discussed
above. Operating cash flows in both periods have been more than adequate to meet
liquidity requirements.
REGULATORY INITIATIVES AND CONTINGENCIES
NAIC CODIFICATION
The NAIC adopted the Codification of Statutory Accounting Principles
(Codification) in March 1998. The effective date for the statutory accounting
guidance was January 1, 2001. Each of Hartford Life's domiciliary states has
adopted Codification, and the Company has made the necessary changes in its
statutory 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.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
Hartford Life is or may become involved in various legal actions, some of which
involve claims for substantial amounts. In the opinion of management, the
ultimate liability, if any, with respect to such actual and potential lawsuits,
after consideration of provisions made for potential losses and costs of
defense, is not expected to be material to the consolidated financial condition,
results of operations or cash flows of the Company.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company ("HLIC"), et al. in favor of Bancorp in the amount of $118.
The case involved claims of patent infringement, misappropriation of trade
secrets, and breach of contract against HLIC and its affiliate International
Corporate Marketing Group, Inc. ("ICMG"). The judge dismissed the patent
infringement claim on summary judgment. The jury's award was based on the last
two claims.
HLIC and ICMG have moved the district court for, inter alia, judgment as a
matter of law or a new trial, and intend to appeal the judgment if the district
court does not set it aside or substantially reduce it. In either event, the
Company's management, based on the opinion of its legal advisers, believes that
there is a substantial likelihood that the jury award will not survive at its
current amount. Based on the advice of legal counsel regarding the potential
outcome of this litigation, the Company recorded an $11 after-tax charge in the
first quarter of 2002 to increase litigation reserves associated with this
matter. Should HLIC and ICMG not succeed in eliminating or reducing the
judgment, a significant additional expense would be recorded in the future
related to this matter.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See exhibits index.
(b) Reports on Form 8-K:
The Company filed a Form 8-K Current Report on March 20, 2002, Item 5, Other
Events, to report a verdict by a jury in the U.S. District Court for the Eastern
District of Missouri in Bancorp Services, LLC v. Hartford Life Insurance
Company, et al in favor of Bancorp.
17
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
Senior Vice President and
Chief Accounting Officer
MAY 15, 2002
18
HARTFORD LIFE, INC.
FORM 10-Q
EXHIBITS INDEX
Exhibit #
3.01 Certificate of Amendment of Restated Certificate of Incorporation of
Hartford Life, Inc. was filed as Exhibit 3.01 to Hartford Life's
Form 10-Q for the quarter ended March 31, 2001 and is incorporated
by reference.
4.01 Restated Certificate of Incorporation of Hartford Life, Inc., as
amended, was filed as Exhibit 4.01 to Hartford Life's Form 10-Q for
the quarter ended March 31, 2001 and is incorporated by reference.
4.02 Form of Subordinated Indenture between Hartford Life and Wilmington
Trust Company, as Trustee, dated as of June 1, 1998, was filed as
Exhibit 4.03 to Hartford Life's Form 10-K for the year ended
December 31, 1998 and is incorporated herein by reference.
4.03 Second Supplemental Indenture between Hartford Life and Wilmington
Trust Company, as Trustee, dated as of March 6, 2001 was filed as
Exhibit 4.02 to Hartford Life's Form 8-A dated March 13, 2001.
4.04 Form of 7.625% Junior Subordinated Deferrable Interest Debenture,
Series A, due 2050, included as Exhibit A to Exhibit 4.03 filed
herein by reference.
4.05 Declaration of Trust of Hartford Life Capital II, dated as of June
3, 1998, between Hartford Life, as Sponsor, and Wilmington Trust
Company, as Trustee, was filed as Exhibit 4.13 to Hartford Life's
Registration Statement on Form S-3 (Registration No. 333-56283)
filed with the Securities and Exchange Commission on June 18, 1998
by Hartford Life, Inc., Hartford Life Capital I, Hartford Life
Capital II and Hartford Life Capital III, as amended (the
"Registration Statement"), and is incorporated herein by reference.
4.06 Form of Amended and Restated Declaration of Trust of Hartford Life
Capital II between Hartford Life, as Sponsor, and Wilmington Trust
Company, as Indenture Trustee and Delaware Trustee, was filed as
Exhibit 4.19 to the Registration Statement and is incorporated
herein by reference.
4.07 Form of Guarantee Agreement between Hartford Life, as Guarantor, and
Wilmington Trust Company, as Guarantee Trustee, was filed as Exhibit
4.21 to the Registration Statement and is incorporated herein by
reference.
4.08 Form of Preferred Security Certificate for Hartford Life Capital II
was filed as Exhibit 4.20 to the Registration Statement and is
incorporated herein by reference.
4.09 Form of Hartford Life's 7.375% Senior Notes due March 1, 2031 was
filed as Exhibit 3 to Hartford Life's Form 8-A dated February 26,
2001.
19