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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended June 30, 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 August 13, 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.
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1
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Independent Accountants' Review Report 3
Consolidated Statements of Income - Second Quarter and
Six Months Ended June 30, 2002 and 2001 4
Consolidated Balance Sheets - June 30, 2002 and December 31, 2001 5
Consolidated Statements of Changes in Stockholder's Equity -
Six Months Ended June 30, 2002 and 2001 6
Consolidated Statements of Cash Flows - Six Months
Ended June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 21
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 21
Signature 23
Exhibits Index 24
2
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholder
Hartford Life, Inc.
Hartford, CT
We have reviewed the accompanying consolidated balance sheet of Hartford Life,
Inc and subsidiaries (the "Company") as of June 30, 2002, and the related
consolidated statements of income for the three-month and six-month periods then
ended, and changes in stockholder's equity, and cash flows for the six months
then ended. These consolidated financial statements are the responsibility of
the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial information as of December 31, 2001, and
for the three-month and six-month periods ended June 30, 2001, were not audited
or reviewed by us and, accordingly, we do not express an opinion or any other
form of assurance on them.
Deloitte & Touche LLP
Hartford, CT
August 12, 2002
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
(In millions) (Unaudited) 2002 2001 2002 2001
- ---------------------------------------------------------------------------------------------------
REVENUES
Fee income $ 672 $ 686 $1,334 $1,288
Earned premiums and other 589 583 1,170 1,141
Net investment income 450 443 898 873
Net realized capital losses (120) (17) (135) (17)
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TOTAL REVENUES 1,591 1,695 3,267 3,285
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BENEFITS, CLAIMS AND EXPENSES
Benefits and claims 921 930 1,818 1,800
Insurance expenses and other 346 335 717 645
Amortization of deferred policy acquisition costs and
present value of future profits 171 164 323 318
Dividends to policyholders 16 3 22 15
Goodwill amortization -- 7 -- 9
Interest expense 28 28 56 48
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TOTAL BENEFITS, CLAIMS AND EXPENSES 1,482 1,467 2,936 2,835
- ---------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE AND CUMULATIVE
EFFECT OF ACCOUNTING CHANGE 109 228 331 450
Income tax expense 8 63 60 124
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INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING CHANGE 101 165 271 326
Cumulative effect of accounting change, net of tax -- (3) -- (26)
- ---------------------------------------------------------------------------------------------------
NET INCOME $ 101 $ 162 $ 271 $ 300
- ---------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In millions, except for share data) 2002 2001
- ----------------------------------------------------------------------------------------------------------
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$25,075 and $23,010) $ 25,549 $ 23,301
Equity securities, at fair value 416 428
Policy loans, at outstanding balance 3,204 3,317
Other investments 1,227 1,331
- ----------------------------------------------------------------------------------------------------------
Total investments 30,396 28,377
Cash 118 167
Premiums receivable and agents' balances 208 229
Reinsurance recoverables 706 648
Deferred policy acquisition costs and present value of future profits 5,801 5,572
Deferred income tax (204) (16)
Goodwill 799 799
Other assets 1,208 1,116
Separate account assets 110,177 114,720
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TOTAL ASSETS $ 149,209 $ 151,612
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LIABILITIES
Future policy benefits $ 9,189 $ 8,842
Other policyholder funds 20,519 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 2,869 2,583
Separate account liabilities 110,177 114,720
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TOTAL LIABILITIES 144,254 147,002
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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 303 196
Retained earnings 2,757 2,519
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TOTAL STOCKHOLDER'S EQUITY 4,955 4,610
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TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 149,209 $ 151,612
- ----------------------------------------------------------------------------------------------------------
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 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 271 271
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Other comprehensive income, net of tax(1)
Unrealized gain on securities(3) 103 103
Net gain on cash flow hedging
Instruments 13 13
Cumulative translation adjustments (9) (9)
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Total other comprehensive income 107
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Total comprehensive income 378
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Dividends declared (33) (33)
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BALANCE, JUNE 30, 2002 $ -- $ 1,895 $ 266 $ 75 $ (38) $ 2,757 $ 4,955
- ---------------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED JUNE 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 300 300
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Other comprehensive income, net of tax(1)
Cumulative effect of accounting change(2) 3 20 23
Unrealized gain on securities (3) 25 25
Net gain on cash flow hedging instruments 6 6
Cumulative translation adjustments (8) (8)
Total other comprehensive income 46
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Total comprehensive income 346
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Dividends declared (33) (33)
Capital contribution from parent 615 615
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BALANCE, JUNE 30, 2001 $ -- $ 1,895 $ 68 $ 26 $ (21) $ 2,167 $ 4,135
- ---------------------------------------------------------------------------------------------------------------------------------
(1) Unrealized gain on securities is reflected net of tax provision of $55 and
$13 for the six months ended June 30, 2002 and 2001, respectively.
Cumulative effect of accounting change is net of tax benefit of $12 for the
six months ended June 30, 2001. Net gain on cash flow hedging instruments
is net of tax provision of $7 and $3 for the six months ended June 30, 2002
and 2001, respectively. 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 for the six months ended June 30, 2001.
(3) There were reclassification adjustments for after-tax losses realized in
net income of $(83) and $(11) for the six months ended June 30, 2002 and
2001, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
---------------------
(In millions) (Unaudited) 2002 2001
- -----------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 271 $ 300
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital losses 135 17
Cumulative effect of change in accounting, net of tax -- 26
Amortization of deferred policy acquisition costs and present value of future profits 323 318
Additions to deferred policy acquisition costs and present value of future profits (552) (542)
Depreciation and amortization 18 (2)
Decrease in premiums receivable and agents' balances 21 --
Decrease in other liabilities (156) (176)
Change in receivables, payables and accruals -- (54)
Increase (decrease) in accrued tax 109 (79)
Decrease in deferred income tax 116 100
Increase in future policy benefits 347 527
Increase in reinsurance recoverables (17) (2)
Other, net (101) (46)
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 514 387
- -----------------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investments (5,892) (5,710)
Sales of investments 3,257 3,064
Maturities and principal paydowns of fixed maturity investments 1,037 1,108
Acquisition of Fortis Financial Group -- (1,105)
Capital expenditures and other (45) (26)
- -----------------------------------------------------------------------------------------------------------------
NET CASH USED FOR INVESTING ACTIVITIES (1,643) (2,669)
- -----------------------------------------------------------------------------------------------------------------
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 (33) (31)
Net receipts from investment and universal life-type contracts charged against
policyholder accounts 1,111 1,157
- -----------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,078 2,341
- -----------------------------------------------------------------------------------------------------------------
Net (decrease) increase in cash (51) 59
Impact of foreign exchange 2 (4)
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Cash -- beginning of period 167 106
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CASH -- END OF PERIOD $ 118 $ 161
- -----------------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID (RECEIVED) DURING THE PERIOD FOR
Income taxes $ 34 $ 34
Interest $ 55 $ 34
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
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 its consolidated subsidiaries ("Hartford Life" or the "Company") have
been prepared on the basis of accounting principles generally accepted in the
United States of America, 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 of America, 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.
In the opinion of management these statements include all normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. (For a description of
accounting policies, see Note 2 of Notes to Consolidated Financial Statements
included in Hartford Life's 2001 Form 10-K Annual Report)
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
(b) ADOPTION OF NEW ACCOUNTING STANDARDS
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". Under historical guidance all gains and losses resulting
from the extinguishment of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. SFAS No.
145 rescinds that guidance and requires that gains and losses from
extinguishment of debt be classified as extraordinary items only if they are
both unusual and infrequent in occurrence. Statement 145 also amends SFAS No.
13, "Accounting for Leases" for the required accounting treatment of certain
lease modifications that have economic effects similar to sale-leaseback
transactions. SFAS No. 145 requires that those lease modifications be accounted
for in the same manner as sale-leaseback transactions. The provisions of
Statement 145 related to the rescission of SFAS No. 4 are applicable in fiscal
years beginning after May 15, 2002 and will be effective for Hartford Life
January 1, 2003. The provisions of Statement 145 related to SFAS No. 13 are
effective for transactions occurring after May 15, 2002. Adoption of the
provisions of SFAS No. 145 related to SFAS No. 13 did not have a material impact
on the Company's financial condition or results of operations.
In August 2001, the 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
consolidated financial condition or results of operations.
8
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
recoverability is periodically (at least annually) reviewed and tested for
impairment.
Goodwill must be tested at the reporting unit level 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 also requires that useful lives for intangibles other than goodwill
be reassessed and remaining amortization periods be adjusted accordingly.
During the second quarter of 2002, the Company completed the review and analysis
of its goodwill asset in accordance with the provisions of SFAS No. 142. The
result of the analysis indicated that each reporting unit's fair value exceeded
its carrying amount, including goodwill. As a result, goodwill for each
reporting unit was not considered impaired. 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 and six months ended June
30, 2001 adjusted for goodwill amortization occurring in that period.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -------------------
NET INCOME 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes $ 101 $ 165 $ 271 $ 326
Goodwill amortization, net of tax -- 7 -- 9
- --------------------------------------------------------------------------------------------------------------
Adjusted income before cumulative effect of accounting changes 101 172 271 335
Cumulative effect of accounting changes -- (3) -- (26)
- --------------------------------------------------------------------------------------------------------------
Adjusted net income $ 101 $ 169 $ 271 $ 309
==============================================================================================================
The following table shows the Company's acquired intangible assets that continue
to be subject to amortization and aggregate amortization expense. Except for
goodwill, the Company has no intangible assets with indefinite useful lives.
AS OF JUNE 30, 2002
-----------------------
GROSS ACCUMULATED
CARRYING NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION
- --------------------------------------------------------------------------------
Present value of future profits $ 549 $ 56
- --------------------------------------------------------------------------------
Total $ 549 $ 56
- --------------------------------------------------------------------------------
Net amortization expense for the quarter and six months ended June 30, 2002 was
$11 and $19, respectively.
Estimated future amortization expense for the succeeding five years is as
follows:
For the year ending December 31,
-------------------------------------------------
2002 $ 44
2003 $ 41
2004 $ 39
2005 $ 36
2006 $ 34
-------------------------------------------------
The carrying amount of goodwill is $799 as of June 30, 2002 and December 31,
2001.
9
3. DERIVATIVES AND HEDGING ACTIVITIES
The Company utilizes a variety of derivative instruments in the ordinary course
of business, including swaps, caps, floors, forwards and exchange traded futures
and options, to manage risk through one of four Company approved risk management
strategies: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or to control transaction costs or to
enter into income enhancement and replication transactions. All of the Company's
derivative transactions are permitted uses of derivatives under the derivatives
use plan filed and/or approved, as applicable, by the State of Connecticut and
State of New York insurance departments.
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 Annual Report.
As of June 30, 2002, the Company reported $163 of derivative assets in other
investments and $132 of derivative liabilities in other liabilities.
Cash-Flow Hedges
For the second quarter and six months ended June 30, 2002, the Company's gross
gains and losses representing the total ineffectiveness of all cash-flow hedges
were immaterial, 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 other
comprehensive income to current period earnings are included in the line item in
the statement of income in which the hedged item is recorded. As of June 30,
2002, approximately $3 of after-tax deferred net gains on derivative instruments
accumulated in other comprehensive income are expected to be reclassified to
earnings during the next twelve months. This expectation is based on the
anticipated interest payments on hedged investments in fixed maturity securities
that will occur over the next twelve months, at which time the Company will
recognize the deferred net gains/losses as an adjustment to interest income over
the term of the investment cash flows. The maximum term over which the Company
is hedging its exposure to the variability of future cash flows (for all
forecasted transactions, excluding interest payments on variable-rate debt) is
twelve months. As of June 30, 2002, the Company held approximately $2.7 billion
in derivative notional value related to strategies categorized as cash-flow
hedges. There was a $1 reclassification from other comprehensive income to
earnings resulting from the discontinuance of cash-flow hedges during the six
months ended June 30, 2002. There were no reclassifications from other
comprehensive income to earnings resulting from the discontinuance of cash-flow
hedges during the second quarter of 2002. There were no reclassifications from
other comprehensive income to earnings resulting from the discontinuance of
cash-flow hedges during the quarter and six months ended June 30, 2001.
Fair-Value Hedges
For the second quarter and six months ended June 30, 2002, the Company's gross
gains and losses representing the total ineffectiveness of all fair-value hedges
were immaterial, with the net impact reported as realized capital gains or
losses. All components of each derivative's gain or loss are included in the
assessment of hedge effectiveness. As of June 30, 2002, the Company held
approximately $363 in derivative notional value related to strategies
categorized as fair-value hedges.
Other Risk Management Activities
The Company's other risk management activities primarily relate to strategies
used to reduce economic risk or enhance income and do not receive hedge
accounting treatment. Swap agreements, interest rate cap and floor agreements
and option contracts are used to reduce economic risk. Income enhancement and
replication transactions include the use of written covered call options which
offset embedded equity call options, total return swaps and synthetic
replication of cash market instrument. The 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 June 30, 2002, the
Company held approximately $4.1 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
10
recorded 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 June 30, 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 CONTINGENCIES
(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
11
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.
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, among other things, 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.
The Company is involved in arbitration with one of its primary reinsurers
relating to policies with death benefit guarantees written from 1994 to 1999.
The arbitration involves alleged breaches under the reinsurance treaties.
Although the Company believes that its position in this pending arbitration is
strong, an adverse outcome could result in a decrease to the Company's statutory
surplus and capital and potentially increase the death benefit costs incurred by
the Company in the future. The arbitration hearing currently is set to begin in
October 2002.
(b) TAX MATTERS
The Company's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). Management believes that adequate provision has been
made in the accompanying consolidated financial statements for any potential
assessments that may result from tax examinations and other tax related matters
for all open tax years.
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 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.
Investment Individual Group
JUNE 30, 2002 Products Life Benefits COLI Other Total
- ------------------------------------------------------------------------------------------------------
SECOND QUARTER ENDED
Total revenues $ 659 $ 249 $ 654 $ 146 $ (117) $1,591
Net income (loss) 118 35 30 10 (92) 101
SIX MONTHS ENDED
Total revenues $1,309 $ 481 $1,298 306 (127) $3,267
Net income (loss) 235 66 58 10 (98) 271
Investment Individual Group
JUNE 30, 2001 Products Life Benefits COLI Other Total
- ------------------------------------------------------------------------------------------------------
SECOND QUARTER ENDED
Total revenues $ 643 $ 240 $ 641 $ 181 $ (10) $1,695
Net income (loss) 117 36 27 10 (28) 162
SIX MONTHS ENDED
Total revenues $1,247 $ 403 $1,254 365 16 $3,285
Net income (loss) 228 56 50 19 (53) 300
12
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 June 30, 2002,
compared with December 31, 2001, and its results of operations for the second
quarter and six months ended June 30, 2002 compared with the equivalent periods
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 13
Investment Products 15
Individual Life 15
Group Benefits 16
Corporate Owned Life Insurance (COLI) 17
Investments 17
Capital Markets Risk Management 18
Capital Resources and Liquidity 19
Regulatory Initiatives and Contingencies 21
Accounting Standards 21
CONSOLIDATED RESULTS OF OPERATIONS
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------
Revenues $ 1,591 $ 1,695 $ 3,267 $ 3,285
Expenses 1,490 1,530 2,996 2,959
Cumulative effect of accounting changes, net of tax [1] -- (3) -- (26)
- -----------------------------------------------------------------------------------------------------------------------
NET INCOME 101 162 271 300
Less: Cumulative effect of accounting changes, net of tax [1] -- (3) -- (26)
Net realized capital losses, after-tax (76) (11) (83) (11)
- -----------------------------------------------------------------------------------------------------------------------
OPERATING INCOME $ 177 $ 176 $ 354 $ 337
- -----------------------------------------------------------------------------------------------------------------------
[1] For the quarter ended June 30, 2001, represents the cumulative impact of the
Company's adoption of EITF Issue 99-20. For the six months ended June 30,
2001 represents the cumulative impact of the Company's adoption of EITF
Issue 99-20 and SFAS No. 133.
"Operating income" is defined as after-tax operational results excluding, as
applicable, net realized capital gains or losses, the cumulative effect of
accounting changes and certain other items. Management believes that this
performance measure delineates the results of operations of the Company's
ongoing businesses in a manner that allows for a better understanding of the
underlying trends in the Company's current business. However, operating income
should only be analyzed in conjunction with, and not in lieu of, net income and
may not be comparable to other performance measures used by the Company's
competitors.
Hartford Life has the following reportable operating segments: Investment
Products, Individual Life, Group Benefits and COLI. In addition, the Company
includes in an "Other" category 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 Japan and Latin
America.
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).
13
Revenues decreased $104, or 6%, and $18, or 1% for the second quarter and six
months ended June 30, 2002, respectively, as compared to the equivalent periods
in 2001. The decreases were primarily driven by net realized capital losses,
which were $120 and $135 for the second quarter and six months ended June 30,
2002, respectively. (See the Investments section of the MD&A for further
discussion of investment results and related net realized capital losses). In
addition, COLI experienced a decline in revenues as a result of the decrease in
leveraged COLI account values as compared to a year ago. However, the Company
experienced revenue growth across its other operating segments. Revenues related
to the Investment Products segment increased as a result of continued growth
related to its institutional investment products business, which offset the
decline in revenues within the individual annuity operation. The individual
annuity operation was impacted by lower assets under management due to the
decline in the equity markets. In addition, the Group Benefits segment continued
to experience an increase in revenues as a result of strong sales to new
customers and steady persistency within the in-force block of business.
Expenses decreased $40, or 3%, for the second quarter primarily due to a $44 tax
benefit related to the net realized capital losses recognized in the second
quarter. Expenses for the six months ended June 30, 2002 increased $37, or 1% as
compared to the equivalent prior year period, which is primarily driven by the
Fortis acquisition and the Investment Products segment, principally related to
the growth in the institutional investment product business and an increase in
death benefits related to the individual annuity operation, as a result of the
lower equity markets. In addition, expenses for the six months ended June 30,
2002 include $11, after-tax, of accrued expenses recorded within the COLI
segment related to the Bancorp litigation, which 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. (For a
discussion of the Bancorp litigation, see "Item 1. Legal Proceedings").
Operating income increased $1, or 1%, and $17, or 5% for the second quarter and
six months ended June 30, 2002, respectively. For the second quarter, two of the
Company's reportable operating segments experienced earnings growth, led by
Group Benefits whose earnings increased $3, or 11% driven principally by ongoing
premium growth and stable loss and expense ratios. Earnings for the Investment
Products segment were up $1 as compared to the equivalent prior year period as
growth in the other investment products businesses, particularly institutional
investment products, offset the decline in revenues in the individual annuity
operation, which was negatively impacted by the lower equity markets. Individual
Life earnings declined $1 in the second quarter as a result of lower fee income
related to variable life account values, which was also driven by the lower
equity markets, while the "Other" operation experienced lower net investment
income in the second quarter as compared to the comparable prior year period.
For the six months ended June 30, 2002, the increase in operating income is
principally driven by Individual Life, which is directly related to the Fortis
acquisition, Group Benefits, which continued to benefit from an increase in
premium revenue and stable loss costs, and the Investment Products segment,
which experienced growth in earnings related to its institutional investment
products business which offset the decline in individual annuity earnings
resulting from the lower equity markets. Operating income was negatively
impacted by a decrease of $9, or 47% in operating income in the COLI segment for
the six months ended June 30, 2002, primarily due to the $11 after-tax expense
related to the Bancorp litigation.
SEGMENT RESULTS
Below is a summary of net income by segment.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------------------
Investment Products $ 118 $ 117 $ 235 $ 228
Individual Life 35 36 66 56
Group Benefits 30 27 58 50
Corporate Owned Life Insurance (COLI) 10 10 10 19
Other(1)(2) (92) (28) (98) (53)
- --------------------------------------------------------------------------------------------
NET INCOME $ 101 $ 162 $ 271 $ 300
- --------------------------------------------------------------------------------------------
(1) For the quarter ended June 30, 2001, represents the cumulative impact of the
Company's adoption of EITF Issue 99-20. For the six months ended June 30,
2001 represents the cumulative impact of the Company's adoption of EITF
Issue 99-20 and SFAS No. 133.
(2) For the second quarter and six months ended June 30, 2002 include net
realized capital losses, after-tax, of $76 and $83, respectively. For the
second quarter and six months ended June 30, 2001 include net realized
capital losses, after-tax of $11.
14
The sections that follow analyze each segment's results. Investment results are
discussed separately following the segment overviews.
INVESTMENT PRODUCTS
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ----------------------
2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
Revenues $ 659 $ 643 $ 1,309 $ 1,247
Expenses 541 526 1,074 1,019
- -------------------------------------------------------------------------------------------------------
NET INCOME $ 118 $ 117 $ 235 $ 228
=======================================================================================================
Individual variable annuity account values $ 67,712 $ 78,415
Other individual annuity account values 10,413 9,228
Other investment products account values 19,511 18,101
- -------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 97,636 105,744
Mutual fund assets under management 16,216 16,180
- -------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $113,852 $121,924
=======================================================================================================
Revenues in the Investment Products segment increased $16, or 2%, and $62, or 5%
for the second quarter and six months ended June 30, 2002 respectively,
primarily driven by growth in the institutional investment products business,
where related assets under management increased $1.1 billion, or 13% to $9.5
billion as of June 30, 2002. The revenue increase described above was partially
offset by lower fee income related to the individual annuity operation as
average account values decreased from prior year levels, primarily due to the
lower equity markets.
Expenses increased $15, or 3%, and $55, or 5% for the second quarter and six
months ended June 30, 2002, respectively, primarily driven by increases in
benefits and claim expenses and operating expenses as a result of the growth in
the institutional investment products business and an increase in the death
benefit costs incurred by the individual annuity operation, as a direct result
of the lower equity markets. Partially offsetting these increases were decreases
in amortization of policy acquisition costs related to the individual annuity
business, which declined as a result of lower estimated gross profits, driven by
the decrease in fee income and the increase in death benefit costs.
Net income increased $1, or 1%, and $7, or 3% for the second quarter and six
months ended June 30, 2002, respectively as the growth in revenues related to
other investment products, particularly the institutional investment product
business, offset the decline in revenues in the individual annuity operation,
which was negatively impacted by the lower equity markets. (For discussion of
the potential future financial statement impact of continued declines in the
equity market on the Investment Products segment, see the Capital Markets Risk
Management section under "Market Risk").
INDIVIDUAL LIFE
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
2002 2001 2002 2001
- ----------------------------------------------------------------------------------
Revenues $ 249 $ 240 $ 481 $ 403
Expenses 214 204 415 347
- ----------------------------------------------------------------------------------
NET INCOME $ 35 $ 36 $ 66 $ 56
==================================================================================
Variable life account values $ 3,760 $ 3,932
Total account values $ 7,635 $ 7,744
- ----------------------------------------------------------------------------------
Variable life insurance in force $ 64,930 $ 57,677
Total life insurance in force $123,896 $116,740
==================================================================================
Revenues in the Individual Life segment increased $9, or 4%, and $78, or 19% for
the second quarter and six months ended June 30, 2002, respectively. For the
second quarter, the revenue growth was primarily driven by an increase in net
investment income related to Individual Life's general account business, for
which the income impact was offset by an increase in benefits, claims and
expenses due to an increase in interest credited to policyholders. In addition,
second quarter revenues were negatively impacted by lower variable life account
values, which decreased as a result of the lower equity markets. The revenue
growth related to the six months ended June 30, 2002 was primarily due to higher
fee income and investment income related to the Fortis transaction.
15
Expenses increased $10, or 5%, and $68, or 20% for the second quarter and six
months ended June 30, 2002, respectively. For the second quarter, the growth in
expenses is primarily driven by an increase in benefits, claims and claim
adjustment expenses. For the six months ended June 30, 2002, the increase in
expenses is primarily driven by the growth in the business resulting from the
Fortis acquisition. In addition, mortality experience (expressed as death claims
as a percentage of net amount at risk) for the six months ended June 30, 2002
was higher than the comparable prior year period primarily due to a higher than
expected occurrence of large claims during the first quarter of 2002.
Net income decreased $1, or 3% for the second quarter as compared to the prior
year, principally due to decreased revenues from the variable life business, as
a direct result of the lower equity markets. Net income for the six months ended
June 30, 2002 increased $10, or 18%, as the contribution to earnings from the
Fortis transaction more than offset the unfavorable mortality experience for the
six month period ended June 30, 2002 and the lower variable life fee income
driven by the decline in the equity markets. (For discussion of the potential
future financial statement impact of continued declines in the equity market on
the Individual Life segment, see the Capital Markets Risk Management section
under "Market Risk").
GROUP BENEFITS
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Revenues $ 654 $ 641 $ 1,298 $ 1,254
Expenses 624 614 1,240 1,204
- --------------------------------------------------------------------------------
NET INCOME $ 30 $ 27 $ 58 $ 50
================================================================================
Revenues in the Group Benefits segment increased $13, or 2%, and $44, or 4% and
excluding buyouts, increased $41, or 7%, and $104, or 9% for the second quarter
and six months ended June 30, 2002, respectively. These increases were driven by
growth in fully insured ongoing premiums, which increased $83, or 17%, and $185,
or 19% for the second quarter and six months ended June 30, 2002, respectively.
The growth in premium revenues was due to steady persistency and pricing actions
on the in-force block of business and strong sales to new customers. Offsetting
these increases were decreases in military Medicare supplement premiums of $43
and $84 for the second quarter and six months ended June 30, 2002, respectively,
resulting from federal legislation effective in the fourth quarter of 2001. This
legislation provides retired military officers age 65 and older with full
medical insurance paid for by the government, eliminating the need for Medicare
supplement insurance. Fully insured ongoing sales for the six months ended June
30, 2002 were $444, an increase of $130, or 41%, as compared to the equivalent
prior year period.
Expenses increased $10, or 2%, and $36, or 3% and excluding buyouts, increased
$38 or 6%, and $96 or 8% for the second quarter and six months ended June 30,
2002, respectively. The increase in expenses is consistent with the growth in
revenues described above. Benefits and claims expenses, excluding buyouts,
increased $32, or 7% and $70, or 8% for the second quarter and six months ended
June 30, 2002, respectively. The segment's loss ratio (defined as benefits and
claims as a percentage of premiums and other considerations excluding buyouts)
was approximately 82% for both the second quarter and six months ended June 30,
2002, as compared to 83% for both of the respective prior year periods. Other
insurance expenses increased $6 or 5%, and $25, or 10% for the second quarter
and six months ended June 30, 2002, respectively due to the revenue growth
previously described and continued investments in the business. The segment's
expense ratio (defined as insurance expenses as a percentage of premiums and
other considerations excluding buyouts) was 22% and 23% for the second quarter
and six months ended June 30, 2002, respectively, and was essentially consistent
with the prior year periods.
Net income increased $3 or 11% and $8, or 16% for the second quarter and six
months ended June 30, 2002, respectively due to the increase in premium revenue
and the continued focus on maintaining loss costs and other expenses as
described above.
16
CORPORATE OWNED LIFE INSURANCE (COLI)
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
--------------------- ---------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------
Revenues $ 146 $ 181 $ 306 $ 365
Expenses 136 171 296 346
- -----------------------------------------------------------------------------------------------
NET INCOME $ 10 $ 10 $ 10 $ 19
===============================================================================================
Variable COLI account values $ 19,076 $ 16,628
Leveraged COLI account values 4,119 4,856
- -----------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 23,195 $ 21,484
===============================================================================================
COLI revenues decreased $35, or 19%, and $59, or 16% for the second quarter and
six months ended June 30, 2002, respectively, primarily related to lower net
investment and fee income related to the declining block of leveraged COLI,
where related account values declined by $737 or 15%. Net investment income
decreased $20, or 22%, and $38, or 21% for the second quarter and six months
ended June 30, 2002, respectively. Fee income decreased $15, or 17% and $20, or
11%, for the second quarter and six months ended June 30, 2002, primarily driven
by the decrease in leveraged COLI business which was partially offset by the
increase in fee income from variable COLI business, where related account values
increased approximately $2.4 billion from June 30, 2001.
Expenses decreased $35, or 20%, and $50, or 14% for the second quarter and six
months ended June 30, 2002, respectively, consistent with the decrease in
revenues described above. However, the decrease for the six months ended June
30, 2002 was partially offset by $11, after-tax, in accrued litigation expenses
related to the Bancorp dispute. (For a discussion of the Bancorp litigation, see
"Item 1. Legal Proceedings").
Net income in the second quarter was consistent with the prior year as the
decline in leveraged COLI revenues was directly offset with lower benefits
claims and expenses. Net income for the six months ended June 30, 2002 decreased
$9, or 47%, primarily related to the $11, after-tax expense accrued in
connection with the Bancorp litigation.
INVESTMENTS
Invested assets, excluding separate account assets, totaled $30.4 billion as of
June 30, 2002 and were comprised of $25.5 billion of fixed maturities, $3.2
billion of policy loans, equity securities of $416 and other investments of $1.2
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 $2.0 billion. The increase was primarily due to an
increase in fixed maturities as a result of the investment of increased general
account operating cash flow.
The following table identifies fixed maturities by type held in the Company's
general account as of June 30, 2002 and December 31, 2001.
JUNE 30, 2002 DECEMBER 31, 2001
-------------------- --------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- ----------------------------------------------------------------------------------------------
Corporate $ 12,367 48.4% $ 11,419 49.0%
Asset-backed securities (ABS) 3,696 14.5% 3,427 14.7%
Commercial mortgage-backed securities (CMBS) 3,339 13.1% 3,029 13.0%
Municipal - tax-exempt 1,843 7.2% 1,565 6.7%
Mortgage-backed securities (MBS) - agency 1,458 5.7% 981 4.2%
Collateralized mortgage obligations (CMO) 642 2.5% 767 3.3%
Government/Government agencies - United States 466 1.8% 374 1.6%
Government/Government agencies - Foreign 434 1.7% 390 1.7%
Municipal - taxable 32 0.1% 47 0.2%
Short-term 1,240 4.9% 1,245 5.3%
Redeemable preferred stock 32 0.1% 57 0.3%
- ----------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 25,549 100.0% $ 23,301 100.0%
- ----------------------------------------------------------------------------------------------
17
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
(Before-tax) 2002 2001 2002 2001
- -------------------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 382 $ 365 $ 763 $ 717
Policy loan income 68 78 135 156
- -------------------------------------------------------------------------------------------------------
Net investment income - total $ 450 $ 443 $ 898 $ 873
- -------------------------------------------------------------------------------------------------------
Yield on average invested assets (1) 6.2% 6.9% 6.2% 7.1%
- -------------------------------------------------------------------------------------------------------
Net realized capital losses $ (120) $ (17) $ (135) $ (17)
- -------------------------------------------------------------------------------------------------------
(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 second quarter and six months ended June 30, 2002, net investment
income, excluding policy loans, increased $17 or 5% and $46 or 6%, respectively,
compared to the respective prior year periods. The increase was primarily due to
income earned on a higher invested asset base partially offset by lower
investment yields. Invested assets increased 7% from December 31, 2001 primarily
due to operating cash flows. Yields on average invested assets decreased as a
result of lower rates on new investment purchases and decreased policy loan
income.
Net realized capital losses for the second quarter and six months ended June 30,
2002 increased $103 and $118, compared to the respective prior year periods.
Included in the second quarter and six months ended June 30, 2002 were
write-downs for other than temporary impairments on fixed maturities of $144 and
$159, respectively, including a $74 before-tax loss related to securities issued
by WorldCom taken in the second quarter ended June 30, 2002. Net realized
capital losses for the second quarter ended June 30, 2001 were attributable to
portfolio rebalancing activities. Included in both 2002 and 2001 net losses were
losses associated with the credit deterioration of certain investments in which
the Company has an indirect economic interest.
CAPITAL MARKETS RISK MANAGEMENT
The Company has a disciplined approach to managing risks associated with its
capital markets and asset/liability management activities. Investment portfolio
management is organized to focus investment management expertise on specific
classes of investments, while asset/liability management is the responsibility
of separate and distinct risk management units supporting Hartford Life's
operations. Derivative instruments are utilized in compliance with established
Company policy and regulatory requirements and are monitored internally and
reviewed by senior management.
Hartford Life is exposed to two primary sources of investment and
asset/liability management risk: credit risk, relating to the uncertainty
associated with the ability of an obligor or counterparty to make timely
payments of principal and/or interest, and market risk, relating to the market
price and/or cash flow variability associated with changes in interest rates,
securities prices, market indices, yield curves or currency exchange rates. The
Company does not hold any financial instruments purchased for trading purposes.
Please refer to the Capital Markets Risk Management section of the MD&A in
Hartford Life's 2001 Form 10-K Annual Report for further discussion, including a
description of the Company's objectives, policies and strategies.
Credit Risk
The Company invests primarily in securities which are rated investment grade and
has established exposure limits, diversification standards and review procedures
for all credit risks including borrower, issuer or counterparty.
Creditworthiness of specific obligors is determined by an internal credit
assessment and ratings assigned by nationally recognized ratings agencies.
Obligor, asset sector and industry concentrations are subject to established
limits and are monitored at regular intervals. The Company is not exposed to any
credit concentration risk of a single issuer greater than 10% of the Company's
stockholders' equity.
As of June 30, 2002 and December 31, 2001, over 95% and 96%, respectively, of
the fixed maturity portfolio was invested in securities rated investment grade.
While the overall credit quality of the fixed maturity portfolio has remained
essentially unchanged, the percentages of BBB and BB & below holdings have
increased due to downgraded credit ratings primarily in public corporate bonds.
18
Market Risk
Hartford Life has material exposure to both interest rate and equity market
risk. The Company analyzes interest rate risk using various models including
multi-scenario cash flow projection models that forecast cash flows of the
liabilities and their supporting investments, including derivative instruments.
Equity Markets
Hartford Life's operations are significantly influenced by changes in the equity
markets. The Company's profitability depends largely on the amount of assets
under management, which is primarily driven by the level of sales, equity market
appreciation and depreciation, and the persistency of the in-force block of
business. A prolonged and precipitous decline in the equity markets, as has been
experienced of late, can have a significant impact on the Company's operations,
as sales of variable products may decline and surrender activity may increase as
customer sentiment towards the equity market turns negative. The lower assets
under management will have a negative impact on the Company's financial results,
primarily due to lower fee income related to the Investment Products and
Individual Life segments, where a heavy concentration of equity linked products
are administered and sold. Furthermore, the Company may experience a reduction
in profit margins if a significant portion of the assets held in the variable
annuity separate accounts move to the general account and the Company is unable
to earn an acceptable investment spread, particularly in light of the low
interest rate environment and the presence of contractually guaranteed minimum
interest credited rates, which for the most part are at a 3% rate. For further
discussion of the Company's exposure to interest rate risk, please refer to the
Capital Markets Risk Management section of the MD&A in Hartford Life's 2001 Form
10-K Annual Report.
In addition, prolonged declines in the equity market may also decrease the
Company's expectations of future gross profits, which are utilized to determine
the amount of deferred policy acquisition costs (DAC) to be amortized in a given
financial statement period. A significant decrease in the Company's expected
gross profits would require the Company to accelerate the amount of DAC
amortization in a given period, potentially causing a material adverse deviation
in that period's net income. Although an acceleration of DAC amortization would
have a negative impact on the Company's earnings, it would not affect the
Company's cash flow or liquidity position.
Additionally, the Investment Products segment sells variable annuity contracts
that offer various guaranteed death benefits. For certain guaranteed death
benefits, the Company pays the greater of (1) the account value at death; (2)
the sum of all premium payments less prior withdrawals; or (3) the maximum
anniversary value of the contract, plus any premium payments since the contract
anniversary, minus any withdrawals following the contract anniversary. Hartford
Life currently reinsures a significant portion of these death benefit guarantees
associated with its in-force block of business. The Company currently records
the death benefit costs, net of reinsurance, as they are incurred. Declines in
the equity market may increase the Company's net exposure to death benefits
under these contracts. Furthermore, the Company is involved in arbitration with
one of its primary reinsurers relating to policies with such death benefit
guarantees written from 1994 to 1999. The arbitration involves alleged breaches
under the reinsurance treaties. Although the Company believes that its position
in this pending arbitration is strong, an adverse outcome could result in a
decrease to the Company's statutory surplus and capital and potentially increase
the death benefit costs incurred by the Company in the future. The arbitration
hearing currently is set to begin in October 2002.
Derivative Instruments
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, in compliance with
Company policy and regulatory requirements in order to achieve one of four
Company-approved risk management strategies: to hedge risk arising from interest
rate, price or currency exchange rate volatility; to manage liquidity; to
control transaction costs; or to enter into income enhancement and replication
transactions. The Company does not make a market or trade derivatives for the
express purpose of earning trading profits. (For further discussion on The
Company's use of derivative instruments, refer to Note 3 of Notes to
Consolidated Financial Statements.)
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 $1.4
billion as of both June 30, 2002 and December 31, 2001.
The capital structure of the Company consists of debt and equity, and is
summarized as follows:
JUNE 30, 2002 DECEMBER 31, 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) $ 4,614 $ 4,385
Unrealized gain on securities and other, net of tax (1) 341 225
- ----------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY $ 4,955 $ 4,610
- ----------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION (2) $ 6,114 $ 5,885
- ----------------------------------------------------------------------------------------------------------------
Debt to equity (2) (3) 33% 34%
Debt to capitalization (2) (3) 25% 25%
- ----------------------------------------------------------------------------------------------------------------
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(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 June 30,
2002 and December 31, 2001, respectively, and the debt to capitalization
ratios were 17% and 18% as of June 30, 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 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 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 $229, or 4%, as of June 30, 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 $33 in dividends for the six months ended June 30, 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 $72 for the six months ended
June 30, 2002.
Cash Flows
SIX MONTHS ENDED
JUNE 30,
------------------------
2002 2001
- --------------------------------------------------------------------------------
Cash provided by operating activities $ 514 $ 387
Cash used for investing activities (1,643) (2,669)
Cash provided by financing activities 1,078 2,341
Cash -- end of period 118 161
- --------------------------------------------------------------------------------
The increase in cash provided by operating activities was primarily the result
of the timing of the settlement of receivables and payables in the first six
months of 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
20
above. Operating cash flows in both periods have been more than adequate to meet
liquidity requirements.
Equity Markets
For a discussion of equity markets impact to capital and liquidity, see Capital
Markets Risk Management under "Market Risk".
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
may 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, among other things, 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.
Hartford Life also is involved in arbitration with one of its primary reinsurers
relating to variable annuity contracts with death benefit guarantees. The
arbitration is discussed more fully in the MD&A under the caption "Capital
Markets Risk Management - Market Risk".
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/A (Amendment No. 2) Current Report on May 17, 2002,
Item 4, Changes in Registrant's Certifying Accountants, to report the dismissal
by The Hartford Financial Services Group, Inc. ("The Hartford"), the ultimate
parent company of Hartford Life, Inc. (the "Company"), of Arthur Andersen LLP as
The Hartford's independent auditor.
The Company filed a Form 8-K Current Report on April 23, 2002, Item 4, Changes
in Registrant's Certifying Accountants, to report that the Board of Directors of
The Hartford Financial Services Group, Inc. ("The Hartford"), the ultimate
parent company of Hartford
21
Life, Inc. (the "Company"), engaged Deloitte & Touche LLP as The Hartford's
independent auditors for the fiscal year 2002.
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.
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTFORD LIFE, INC.
/s/ Mary Jane B. Fortin
--------------------------------------------------
Mary Jane B. Fortin
Senior Vice President and Chief Accounting Officer
AUGUST 13, 2002
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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.
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