1
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, 1998
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) 843-7716
(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 April 30, 1998, there were outstanding 26,028,179 shares of Class A Common
Stock, $0.01 par value per share, and 114,000,000 shares of Class B Common
Stock, $0.01 par value per share, of the registrant.
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INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
Condensed Consolidated Statements of Income - Three Months Ended
March 31, 1998 and 1997 3
Condensed Consolidated Balance Sheets - March 31, 1998 and
December 31, 1997 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
Three Months Ended March 31, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows - Three Months
Ended March 31, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 9
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 16
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 16
Signature 17
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Three Months Ended
March 31,
-------------------
(In millions, except for per share data) 1998 1997
------ ------
(Unaudited)
REVENUES
Premiums and other considerations $1,004 $ 679
Net investment income 400 375
Net realized capital gains -- 1
------ ------
TOTAL REVENUES 1,404 1,055
====== ======
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 771 659
Amortization of deferred policy acquisition costs 97 83
Dividends to policyholders 107 54
Interest expense 13 16
Other insurance expenses 287 143
------ ------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,275 955
====== ======
INCOME BEFORE INCOME TAX EXPENSE 129 100
Income tax expense 45 37
------ ------
NET INCOME $ 84 $ 63
====== ======
BASIC EARNINGS PER SHARE (1) $ 0.60 $ 0.51
DILUTED EARNINGS PER SHARE (1) 0.60 0.51
------ ------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (1) 140 127
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING AND
DILUTIVE POTENTIAL COMMON SHARES (1) 140 127
------ ------
CASH DIVIDENDS DECLARED PER SHARE SUBSEQUENT TO THE
INITIAL PUBLIC OFFERING (2) $ 0.09 $ --
(1) Pro forma in 1997, see Note 3 of Notes to Condensed Consolidated Financial
Statements for further explanation.
(2) Cash dividends declared exclude amounts paid to the Company's parent prior
to the Company's Initial Public Offering (May 22, 1997).
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, December 31,
(In millions, except for share data) 1998 1997
--------- ---------
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$17,028 and $16,475) $ 17,384 $ 16,848
Equity securities, available for sale, at fair value 188 181
Policy loans, at outstanding balance 3,764 3,759
Other investments, at cost 374 182
--------- ---------
Total investments 21,710 20,970
Cash 50 88
Premiums and amounts receivable 175 147
Reinsurance recoverable 5,498 5,765
Deferred policy acquisition costs 3,482 3,361
Deferred income tax 486 397
Other assets 850 890
Separate account assets 77,783 69,362
--------- ---------
TOTAL ASSETS $ 110,034 $ 100,980
========= =========
LIABILITIES
Future policy benefits $ 5,090 $ 4,939
Other policyholder funds 21,095 21,139
Short-term debt 50 50
Long-term debt 650 650
Other liabilities 3,150 2,696
Separate account liabilities 77,783 69,362
--------- ---------
TOTAL LIABILITIES 107,818 98,836
========= =========
STOCKHOLDERS' EQUITY
Class A common stock - authorized 600,000,000;
issued 26,068,014 and 0 shares, par value $0.01 -- --
Class B common stock - authorized 600,000,000;
issued and outstanding 114,000,000 shares, par value $0.01 1 1
Capital surplus 1,282 1,283
Treasury stock, at cost - 39,772 and 0 shares (2) (1)
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax 238 237
Cumulative translation adjustments (3) (4)
--------- ---------
Total accumulated other comprehensive income 235 233
--------- ---------
Retained earnings 700 628
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,216 2,144
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 110,034 $ 100,980
========= =========
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
THREE MONTHS ENDED MARCH 31, 1998
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------
NET
UNREALIZED
CAPITAL
GAINS
CLASS A CLASS B TREASURY (LOSSES) ON CUMULATIVE TOTAL
COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION RETAINED STOCKHOLDERS'
(In millions) (Unaudited) STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS EARNINGS EQUITY
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1997 $ -- $ 1 $ 1,283 $ (1) $ 237 $ (4) $ 628 $ 2,144
Comprehensive income
Net income -- -- -- -- -- -- 84 84
-------
Other comprehensive income, net of tax (1):
Changes in unrealized capital gains
on securities (2) -- -- -- -- 1 -- -- 1
Cumulative translation adjustments -- -- -- -- -- 1 -- 1
-------
Total other comprehensive income 2
-------
Total comprehensive income 86
-------
Dividends -- -- -- -- -- -- (12) (12)
Unearned compensation -- -- (1) 1 -- -- -- --
Net treasury stock activity -- -- -- (2) -- -- -- (2)
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, MARCH 31, 1998 $ -- $ 1 $ 1,282 $ (2) $ 238 $ (3) $ 700 $ 2,216
======= ======= ======= ======= ======= ======= ======= =======
THREE MONTHS ENDED MARCH 31, 1997
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------
NET
UNREALIZED
CAPITAL
GAINS
CLASS A CLASS B TREASURY (LOSSES) ON CUMULATIVE TOTAL
COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION RETAINED STOCKHOLDERS'
(In millions) (Unaudited) STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS EARNINGS EQUITY
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, DECEMBER 31, 1996 $ -- $ -- $ 585 $ -- $ 29 $ (3) $ 663 $ 1,274
Comprehensive income
Net income -- -- -- -- -- -- 63 63
--------
Other comprehensive income, net of tax (1):
Changes in unrealized capital gains (losses)
on securities (2) -- -- -- -- (122) -- -- (122)
--------
Total other comprehensive income (122)
--------
Total comprehensive income (59)
--------
Dividends -- -- -- -- -- -- (291) (291)
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE, MARCH 31, 1997 $ -- $ -- $ 585 $ -- $ (93) $ (3) $ 435 $ 924
======== ======== ======== ======== ======== ======== ======== ========
(1) Net unrealized capital gains (losses) on securities is net of tax
(benefit) of $131 and $(50) for March 31, 1998 and 1997, respectively.
There is no tax effect on cumulative translation adjustments.
(2) Net of reclassification adjustment for gains realized in net income of
$0 and $1 for March 31, 1998 and 1997, respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended
March 31,
-----------------
(In millions) 1998 1997
------- -------
(Unaudited)
OPERATING ACTIVITIES
Net income $ 84 $ 63
ADJUSTMENTS TO NET INCOME:
Depreciation and amortization 5 7
Net realized capital gains -- (1)
(Increase) decrease in premiums receivable (27) 8
Increase in other liabilities 64 199
Change in receivables, payables, and accruals 35 (36)
Increase (decrease) in accrued taxes 35 (9)
(Increase) decrease in deferred income taxes (88) 23
Increase in deferred policy acquisition costs (121) (131)
Increase in liability for future policy benefits 157 200
Decrease (increase) in reinsurance recoverables and other related assets 5 (90)
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES 149 233
------- -------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (2,393) (1,935)
Sales of fixed maturity investments 1,455 1,177
Maturities and principal paydowns of fixed maturity investments 521 764
Purchases of other investments (231) (45)
Sales of other investments 109 164
Net sales of short-term investments 145 69
------- -------
CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (394) 194
------- -------
FINANCING ACTIVITIES
Increase in short-term debt -- 1,084
Decrease in allocated advances from parent -- (893)
Dividends paid (12) (191)
Net receipts from (disbursements for) investment and universal life-type
contracts credited to (charged against) policyholder accounts 220 (417)
Acquisition of treasury stock (1) --
------- -------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 207 (417)
------- -------
(Decrease) increase in cash (38) 10
Cash - beginning of period 88 72
------- -------
CASH - END OF PERIOD $ 50 $ 82
======= =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
NET CASH PAID DURING THE PERIOD FOR:
Income taxes $ 56 $ 11
Interest $ 1 $ 16
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Dividends $ -- $ 100
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT FOR SHARE DATA UNLESS OTHERWISE STATED)
(UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Hartford Life, Inc. (the "Company") have been prepared pursuant to the rules and
regulations of the Securities and Exchange Commission. Certain information and
note disclosures which are normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations, although the Company believes
that the disclosures made are adequate to make the information presented not
misleading. In the opinion of management, these statements include all
adjustments which were normal recurring adjustments necessary to present fairly
the financial position, results of operations and cash flows for the periods
presented.
For a description of accounting policies, see Note 2 of Notes to Consolidated
Financial Statements in the Company's 1997 Form 10-K Annual Report.
Certain reclassifications have been made to prior year financial information to
conform to the current year classification of transactions and accounts.
(b) CHANGES IN ACCOUNTING PRINCIPLES
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position ("SOP") No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP provides guidance on
accounting for the costs of internal use software and in determining whether the
software is for internal use. The SOP defines internal use software as software
that is acquired, internally developed, or modified solely to meet internal
needs and identifies stages of software development and accounting for the
related costs incurred during the stages. This statement is effective for fiscal
years beginning after December 15, 1998 and is not expected to have a material
impact on the Company's financial condition or results of operations.
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards ("SFAS") No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. The objective of this
statement is to report a measure of all changes in equity of an enterprise that
result from transactions and other economic events of the period other than
transactions with owners. Comprehensive income is the total of net income and
all other nonowner changes in equity. Accordingly, the Company has reported
comprehensive income in the Condensed Consolidated Statements of Changes in
Stockholders' Equity.
NOTE 2. INITIAL PUBLIC OFFERING ("IPO")
On February 10, 1997, the Company filed a registration statement, as amended,
with the Securities and Exchange Commission relating to the IPO of the Company's
Class A Common Stock. Pursuant to the IPO on May 22, 1997, the Company sold to
the public 26 million shares at $28.25 per share and received proceeds, net of
offering expenses, of $687. Of the proceeds, $527 was used to retire debt
related to the Company's promissory notes outstanding and the line of credit
discussed in Note 4 and the remaining $160 was contributed to the Company's
insurance subsidiaries to be used for growth in the Company's core businesses.
The 26 million shares sold in the IPO represent approximately 18.6% of the
equity ownership in the Company and approximately 4.4% of the combined voting
power of the Company's Class A and Class B Common Stock. The Hartford Financial
Services Group, Inc. ("The Hartford"), an indirect parent of the Company, owns
all of the 114 million outstanding shares of Class B Common Stock of the
Company, representing approximately 81.4% of the equity ownership in the Company
and approximately 95.6% of the combined voting power of the Company's Class A
and Class B Common Stock. Holders of Class A Common Stock generally have
identical rights to the holders of Class B Common Stock except that the holders
of Class A Common Stock are entitled to one vote per share while holders of
Class B Common Stock are entitled to five votes per share on all matters
submitted to a vote of the Company's stockholders.
The Company also has 50 million shares of preferred stock, authorized ($0.01 par
value) of which no shares were issued or outstanding as of March 31, 1998 and
December 31, 1997.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 3. EARNINGS PER SHARE
The Company adopted SFAS No. 128, "Earnings per Share", effective December 15,
1997. Basic earnings per share are computed based upon the weighted average
number of shares outstanding during the year. Diluted earnings per share include
the dilutive effect of outstanding options, using the treasury stock method, and
also contingently issuable shares. Under the treasury stock method, it is
assumed that options are exercised and the proceeds are used to purchase common
stock at the average market price for the period. The difference between the
number of shares assumed issued and number of shares purchased represents the
dilutive shares. Contingently issuable shares are included upon satisfaction of
certain conditions related to contingency.
Pro forma earnings per share amounts, on a basic and diluted basis, have been
calculated based upon the weighted average common shares deemed to be
outstanding during the respective periods. For periods prior to the closing of
the Company's IPO (May 22, 1997), outstanding shares are based upon 114 million
shares of Class B Common Stock owned by The Hartford plus an assumed issuance of
8.67 million shares of Class A Common Stock (the number of shares that, based
upon the IPO price and the underwriting discounts and expenses payable by the
Company, would result in net proceeds equal to the excess of the amount of the
February and April 1997 dividends over the earnings for the year ended December
31, 1996 and the three months ended March 31, 1997 and the Allocated Advances
from parent) and an additional assumed issuance of 4.47 million shares of Class
A Common Stock (the number of shares which, based upon the IPO price and the
underwriting discounts and expenses payable by the Company, would result in a
reduction of the Pre-IPO indebtedness and Allocated Advances from parent). In
addition, for the period prior to the IPO, amounts available to common
shareholders in regards to pro forma earnings per share is affected by an
assumed decline in interest expense of $1 related to the assumed reduction in
Pre-IPO indebtedness described above.
Pro forma effect has also been given for all periods presented for the
conversion of 1,000 shares of common stock, par value $0.01 per share, into 114
million shares of Class B Common Stock, par value $0.01 per share, which
occurred on April 3, 1997.
For the three months ended March 31, 1998
-----------------------------------------
Income Shares Per Share Amount
----- ----- -----
BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 84 140.0 $0.60
=====
Impact of options and contingently issuable shares -- 0.1
----- -----
DILUTED EARNINGS PER SHARE
Amounts available to common shareholders plus assumed conversions $ 84 140.1 $0.60
===== ===== =====
For the three months ended March 31, 1997
-----------------------------------------
Income Shares Per Share Amount
----- ----- -----
PRO FORMA BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 63 127.1 $0.51
=====
Impact of options and contingently issuable shares -- --
----- -----
PRO FORMA DILUTED EARNINGS PER SHARE
Amounts available to common shareholders plus assumed conversions $ 63 127.1 $0.51
===== ===== =====
If earnings per share was calculated based upon 140 million weighted average
shares outstanding for all periods presented (representing the weighted average
shares outstanding at the time of the IPO, May 22, 1997) earnings per share
would have been $0.60 and $0.45 for the three months ended March 31, 1998 and
1997, respectively.
NOTE 4. DEBT
On February 7, 1997, the Company declared a dividend of $1,184 payable to its
direct parent, Hartford Accident and Indemnity Company ("HA&I"). The Company
borrowed $1,084 on February 18, 1997, pursuant to a $1,300 line of credit, with
interest payable at the two-month Eurodollar rate plus 15 basis points, which,
together with a promissory note in the amount of $100, was paid as a dividend to
HA&I on February 20, 1997. Of the $1,184 dividend, $893 constituted a repayment
of the portion of the Company's third party indebtedness internally allocated,
for financial reporting purposes, to the Company's life insurance subsidiaries
(the "Allocated Advances"). In addition, on April 4, 1997, the Company declared
and paid a dividend of $25 to its parent in the form of a promissory note.
Subsequently, $12 of this note was forgiven and treated as a capital
contribution from HA&I.
On February 14, 1997, the Company filed a shelf registration statement for the
issuance and sale of up to $1.0 billion in the aggregate of senior debt
securities, subordinated debt securities and preferred stock. On June 12, 1997,
the Company issued $650 of unsecured
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 4. DEBT (CONTINUED)
redeemable long-term debt in the form of notes and debentures. Of this amount,
$200 was in the form of 6.90% notes due June 15, 2004, $200 of 7.10% notes due
June 15, 2007, and $250 of 7.65% debentures due June 15, 2027. Interest on each
of the notes and debentures is payable semi-annually on June 15 and December 15,
of each year, commencing December 15, 1997. The Company also issued $50 of
short-term debt in the form of commercial paper. Of the proceeds from this
issuance, $670 was used to retire the remaining balance on the $1,300 line of
credit with the remainder being used to fund business growth. Subsequently, the
Company reduced the capacity of the line of credit from $1,300 to $250, which
will be primarily used to support the commercial paper program.
NOTE 5. COMMITMENTS AND CONTINGENCIES
LITIGATION
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, management, at the present
time, does not anticipate that the ultimate liability arising from such pending
or threatened litigation will have a material effect on the financial condition
or operating results of the Company.
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 the Company as of March
31, 1998, compared with December 31, 1997, and its results of operations for the
three months ended March 31, 1998 compared with the equivalent period in 1997.
This discussion should be read in conjunction with the MD&A in the Company's
1997 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 the
Company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect on Hartford
Life, Inc. and subsidiaries ("Hartford Life" or 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 those described in the forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year classification of transactions and accounts.
INDEX
Consolidated Results of Operations: Operating Summary 9
Annuity 11
Individual Life Insurance 11
Employee Benefits 12
Guaranteed Investment Contracts 12
Investments 12
Capital Markets Risk Management 13
Capital Resources and Liquidity 14
Regulatory Initiatives 16
Accounting Standards 16
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
OPERATING SUMMARY FIRST QUARTER ENDED
MARCH 31,
1998 1997
------ ------
REVENUES $1,404 $1,055
EXPENSES 1,320 992
------ ------
NET INCOME $ 84 $ 63
====== ======
The Company's insurance business operates in three principal segments: Annuity,
Individual Life Insurance, and Employee Benefits as well as a Guaranteed
Investments Contracts segment, which is primarily comprised of business written
prior to 1995. The Company also maintains a Corporate Operation through which it
reports items that are not directly allocable to any of its business segments.
The Annuity segment focuses on the savings and retirement needs of the growing
number of individuals who are preparing for retirement or have already retired.
This segment consists of two areas of operation: Individual Annuity and Group
Annuity. The variety of products sold within this segment reflects the diverse
nature of the market. These include, in the Individual Annuity area, individual
variable
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annuities, fixed market value adjusted ("MVA") annuities, and mutual funds; and
in the Group Annuity area, deferred compensation and retirement plan services
for municipal governments and corporations, structured settlement contracts and
other special purpose annuity contracts, and investment management contracts.
The Individual Life Insurance segment, which focuses on the high end estate and
business planning markets, sells a variety of life insurance products, including
variable life and universal life insurance. The Employee Benefits segment
consists of two areas of operation: Group Insurance and Specialty Insurance.
Through Group Insurance, the Company offers products such as group life
insurance, group short- and long-term disability and accidental death and
dismemberment. Specialty Insurance primarily consists of the Company's corporate
owned life insurance ("COLI") business and its international operations. The
Guaranteed Investment Contracts segment consists of guaranteed rate contract
("GRC") business that is supported by assets held in either the Company's
general account or a guaranteed separate account and includes a closed block of
guaranteed rate contracts ("Closed Book GRC"). The Company decided in 1995,
after a thorough review of its GRC business, that it would significantly
de-emphasize general account GRC, choosing to focus its distribution efforts on
other products sold through other divisions. Management expects no material
income or loss from the Guaranteed Investment Contracts segment in the future.
Revenues increased $349, or 33%, to $1.4 billion for the first quarter of 1998
from $1.1 billion for the comparable period in 1997. This was partially due to
COLI revenues which increased $161 due to renewal premium on leveraged COLI and
increased fees associated with variable COLI sales. Excluding COLI, revenues
increased $188, or 21%, over the first quarter of 1997. This increase was driven
by the Annuity segment whose revenues increased $100, or 35%, for the first
quarter of 1998 as compared to the first quarter of 1997. This increase was due
to higher fee income earned on growing annuity account values where the average
account value grew $18.9 billion, or 37%, to $70.6 billion at March 31, 1998
from $51.7 billion at March 31, 1997 due to market appreciation and new sales.
Group Insurance revenues increased $90, or 23%, for the first quarter of 1998 as
compared to the first quarter of 1997. This increase was due to strong sales of
$166, an increase of $28, or 20%, over the comparable period in 1997. Also,
Individual Life Insurance revenues increased $16, or 14%, for the first quarter
of 1998 as compared to the first quarter of 1997 due to increased cost of
insurance charges and other fee income on the Company's growing block of
variable life business. Partially offsetting the increases discussed above was a
$20 decline in revenues related to Closed Book GRC.
Expenses increased $328, or 33%, to $1.3 billion for the first quarter of 1998
from $1.0 billion for the comparable period in 1997. The increase was partially
driven by COLI, whose expenses increased $160 as a result of increased operating
expenses associated with significant renewal premium and variable COLI sales for
the quarter ended March 31, 1998. Excluding COLI, expenses increased $168, or
20%, over the first quarter of 1997. Annuity expenses grew $82 primarily due to
higher amortization of deferred policy acquisition costs and operating expenses
directly related to the growth in this segment. Group Insurance and Individual
Life Insurance expenses increased $86 and $14, respectively, primarily due to
higher benefits, claims, and claim adjustment expenses, which is consistent with
the growth in these blocks of business.
Net income increased $21, or 33%, to $84 for the first quarter of 1998 from $63
for the first quarter of 1997 primarily due to growth in the Annuity segment and
the Group Insurance operation of the Employee Benefits segment. Annuity earnings
increased $18, or 42%, due to increasing account values resulting from
significant stock market appreciation and new sales, particularly in Individual
Annuity. Group Insurance earnings increased $4, or 36%, due to increased premium
revenue as well as favorable morbidity experience. Individual Life Insurance
earnings increased $2, or 18%, as a result of strong sales and growing account
values. Specialty Insurance earnings were impacted by a $2 loss related to the
Company's international operations and COLI earnings were consistent with the
prior year. Guaranteed Investment Contracts had no net income in the first
quarter of 1998 or 1997, consistent with management's expectations.
SEGMENT RESULTS
The Company's reporting segments consist of Annuity, Individual Life Insurance,
Employee Benefits, Guaranteed Investment Contracts and a Corporate Operation.
Below is a summary of net income (loss) by segment.
FIRST QUARTER ENDED
MARCH 31,
---------------------
1998 1997
---- ----
ANNUITY $ 61 $ 43
INDIVIDUAL LIFE INSURANCE 13 11
EMPLOYEE BENEFITS 19 18
GUARANTEED INVESTMENT CONTRACTS -- --
CORPORATE OPERATION (9) (9)
---- ----
NET INCOME $ 84 $ 63
==== ====
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The sections that follow analyze each segment's results. Specific topics such as
investment results are discussed separately following the segment overviews.
ANNUITY
FIRST QUARTER ENDED
MARCH 31,
-------------------------
1998 1997
---- ----
REVENUES $382 $282
EXPENSES 321 239
---- ----
NET INCOME $ 61 $ 43
==== ====
Revenues increased $100, or 35%, to $382 as of March 31, 1998 from $282 as of
March 31, 1997. Individual Annuity revenues increased $89, or 49%, over the
first quarter of 1997 primarily due to higher fee income earned on growth in
individual variable annuity account values. Average individual variable annuity
account values grew $16.9 billion, or 51%, to $50.2 billion as of March 31, 1998
from $33.3 billion as of March 31, 1997. This growth was the result of
significant market appreciation as well as strong sales of $2.4 billion in the
first quarter of 1998. Also, Group Annuity revenues increased $11, or 11%, as of
March 31, 1998 as compared to March 31, 1997 due to higher net investment income
resulting from growth in assets under management. Group Annuity average account
values grew $2.0 billion, or 22%, to $11.1 billion as March 31, 1998 from $9.1
billion as of March 31, 1997 due to market appreciation and new deposits.
Expenses increased $82, or 34%, to $321 as of March 31, 1998 from $239 as of
March 31, 1997. Benefits, claims and claim adjustment expenses increased $13
primarily due to increased interest credited on Individual Annuity general
account values, which increased $1.3 billion, or 43%, to $4.2 billion at March
31, 1998 from $2.9 billion at March 31, 1997. Amortization of DPAC increased $20
as prior and current year sales remained strong. Also, other business expenses
increased $39 as a result of the growth in this segment. However, operating
expenses as a percentage of average account value declined from 1997 levels.
Annuity net income increased $18, or 42%, to $61 as of March 31, 1998 from $43
as of March 31, 1997 as a result of growing average account values discussed
above and operating expense efficiencies.
INDIVIDUAL LIFE INSURANCE
FIRST QUARTER ENDED
MARCH 31,
-------------------------
1998 1997
---- ----
REVENUES $134 $118
EXPENSES 121 107
---- ----
NET INCOME $ 13 $ 11
==== ====
Revenues increased $16, or 14%, to $134 as of March 31, 1998 from $118 as of
March 31, 1997. This increase was primarily due to higher cost of insurance
charges and other fee income earned on the Company's growing block of variable
life insurance. Variable life average account values increased $540, or 84%, to
$1.2 billion as of March 31, 1998 from $640 as of March 31, 1997 due to market
appreciation and strong sales. Variable life product sales constituted 75%, or
$24, of total Individual Life Insurance new sales in the first quarter of 1998,
an increase of $9, or 60%, compared to the same period in 1997.
Expenses increased $14, or 13%, to $121 as of March 31, 1998 from $107 as of
March 31, 1997. This increase was primarily the result of higher benefits,
claims, and claim adjustment expenses of $19 due to the growth in this segment
as well as increased mortality experience in the first quarter of 1998. Net
income increased $2, or 18%, to $13 as of March 31, 1998 from $11 as of March
31, 1997.
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EMPLOYEE BENEFITS
FIRST QUARTER ENDED
MARCH 31,
-------------------------
1998 1997
---- ----
REVENUES $831 $578
EXPENSES 812 560
---- ----
NET INCOME $ 19 $ 18
==== ====
Revenues increased $253, or 44%, to $831 as of March 31, 1998 from $578 as of
March 31, 1997. Specialty Insurance revenues increased $163, or 91%, for the
first quarter of 1998 as compared to the same period in 1997. This increase was
due to $80 of renewal premium on leveraged COLI as well as increased fee income
of $78 related to new sales of variable COLI. Group Insurance revenues increased
$90, or 23%, for the first quarter of 1998 as compared to the first quarter of
1997. This increase was due to strong sales of $166, an increase of $28, or 20%,
over comparable 1997 levels. This growth in new sales was driven by group
disability and group life business whose sales grew 26% and 9%, respectively,
over the comparable prior period.
Expenses increased $252, or 45%, to $812 as of March 31, 1998 from $560 as of
March 31, 1997. Specialty Insurance expenses increased $166 primarily due to
higher expenses associated with the first quarter ended March 31,1998 increased
variable COLI sales and leveraged COLI renewal premium in the first quarter
ended March 31, 1998. Group Insurance expenses increased $86 primarily due to
higher benefits, claims, and claim adjustment expenses associated with this
growing block of business.
Net income increased $1, or 6%, to $19 as of March 31, 1998 from $18 as of March
31, 1997. Group Insurance net income increased $4, or 36%, for the first quarter
of 1998 as compared to the first quarter of 1997. Specialty Insurance had net
income of $4 and $7 for the first quarter of 1998 and 1997, respectively. The
1998 results were impacted by a first quarter operating loss of $2 relating to
the company's international operations while COLI earnings were consistent with
the prior year.
GUARANTEED INVESTMENT CONTRACTS
FIRST QUARTER ENDED
MARCH 31,
-------------------
1998 1997
---- ----
REVENUES $ 52 $ 72
EXPENSES 52 72
---- ----
NET INCOME $ -- $ --
==== ====
This segment reported no net income for the first quarter of 1998 and 1997
consistent with management's expectations that net income from Closed Book GRC
in the years subsequent to 1996 will be immaterial based on the Company's
current projections for the performance of the assets and liabilities associated
with Closed Book GRC. However, no assurance can be given that, under certain
unanticipated economic circumstances which result in the Company's assumptions
being proven inaccurate, further losses in respect of Closed Book GRC will not
occur in the future.
INVESTMENTS
Invested assets, excluding separate accounts, totaled $21.7 billion at March 31,
1998 and were comprised of $17.4 billion of fixed maturities, $3.8 billion of
policy loans, and other investments of $562. Policy loans, which had a
weighted-average interest rate of 11.1% as of March 31, 1998, are secured by the
cash value of the life policy. These loans do not mature in a conventional
sense, but expire in conjunction with the related policy liabilities.
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FIXED MATURITIES BY TYPE
MARCH 31, 1998 DECEMBER 31, 1997
--------------------- ---------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
------- ------- ------- -------
Corporate $ 7,927 45.6% $ 7,970 47.3%
ABS 3,224 18.6% 3,199 19.0%
Commercial MBS 1,776 10.2% 1,606 9.5%
CMO 937 5.4% 978 5.8%
Gov't/Gov't agencies - For 619 3.6% 502 3.0%
MBS - agency 484 2.8% 514 3.1%
Municipal - tax-exempt 400 2.3% 171 1.0%
Municipal - taxable 263 1.5% 267 1.6%
Gov't/Gov't agencies - U.S. 142 0.8% 241 1.4%
Short-term 1,607 9.2% 1,395 8.3%
Redeemable preferred stock 5 -- 5 --
------- ------- ------- -------
TOTAL FIXED MATURITIES $17,384 100.0% $16,848 100.0%
======= ======= ======= =======
The Company continued its objective of managing exposure to securities that
"underperform" in a falling interest rate environment. The Company reduced
exposure to the collateralized mortgage obligations ("CMO") asset sector, and
allocated funds into various other sectors. At March 31, 1998, holdings in CMO
securities were $937, or 5%, of total invested assets excluding policy loans
compared to $978, or 6%, at December 31, 1997.
INVESTMENT RESULTS
The table below summarizes the Hartford Life's investment results.
FIRST QUARTER
ENDED MARCH 31,
----------------------
(before-tax) 1998 1997
------ ------
Net investment income $ 400 $ 375
Yield on average
invested assets [1] 7.6% 7.6%
Net realized capital gains -- $ 1
------ ------
[1] Represents annualized three months net investment income (excluding net
realized capital gains) divided by average invested assets at cost
(fixed maturities at amortized cost).
For the quarter ended March 31, 1998, before-tax net investment income totaled
$400, compared to $375 in 1997, an increase of 7% as a result of higher average
invested assets. Before-tax yields on average invested assets remained at 7.6%.
There were no net realized capital gains for the quarter ended March 31, 1998.
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life 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 the Company's operations.
Derivative instruments are utilized in accordance with established Company
policy and are monitored internally and reviewed by senior management.
The Company 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 entered into for trading purposes.
Please refer to Hartford Life's 1997 Form 10-K Annual Report for a description
of the Company's objectives, policies and strategies.
CREDIT RISK
The Company invests primarily in investment grade securities and has established
exposure limits, diversification standards and review procedures for all credit
risks whether borrower, issuer or counterparty. Creditworthiness of specific
obligors is determined by an internal credit evaluation supplemented by
consideration of external determinants of creditworthiness, typically ratings
assigned by nationally recognized ratings agencies. Obligor, geographic, asset
sector and industry concentrations are subject to established limits and
monitored on a regular interval. Hartford Life is not exposed to any significant
credit concentration risk of a single issuer.
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The following table identifies fixed maturity securities for the general account
and guaranteed separate accounts, by credit quality. The ratings referenced in
the table are based on the ratings of a nationally recognized rating
organization or, if not rated, assigned based on the Company's internal analysis
of such securities.
As of March 31, 1998, over 98% of the fixed maturity portfolio was invested in
investment-grade securities.
FIXED MATURITIES BY CREDIT QUALITY
MARCH 31, 1998 DECEMBER 31, 1997
--------------------- ---------------------
FAIR VALUE PERCENT FAIR VALUE PERCENT
------- ------- ------- -------
U.S. Gov't/Gov't agencies $ 2,827 10.2% $ 2,907 10.7%
AAA 3,872 14.0% 3,974 14.6%
AA 2,599 9.4% 2,967 10.9%
A 8,873 32.0% 9,351 34.3%
BBB 7,069 25.5% 5,966 21.9%
BB & below 346 1.3% 205 0.7%
Short-term 2,105 7.6% 1,869 6.9%
------- ------- ------- -------
TOTAL FIXED MATURITIES $27,691 100.0% $27,239 100.0%
------- ------- ------- -------
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.
There have been no material changes in market risk exposures from December 31,
1997.
DERIVATIVE INSTRUMENTS
Hartford Life utilizes a variety of derivative instruments, including swaps,
caps, floors, forwards and exchange traded futures and options, in accordance
with Company policy and in order to achieve one of three Company approved
objectives: to hedge risk arising from interest rate, price or currency exchange
rate volatility; to manage liquidity; or to control transaction costs. The
Company does not make a market or trade derivatives for the express purpose of
earning trading profits.
The Company uses derivative instruments in its management of market risk
consistent with four risk management strategies: hedging anticipated
transactions, hedging liability instruments, hedging invested assets and hedging
portfolios of assets and/or liabilities.
Derivative activities are monitored by an internal compliance unit, reviewed
frequently by senior management and reported to the Company's Finance Committee.
The notional amounts of derivative contracts represent the basis upon which pay
or receive amounts are calculated and are not reflective of credit risk.
Notional amounts pertaining to derivative instruments for both general and
guaranteed separate accounts totaled $9.5 billion and $10.9 billion at March 31,
1998 and December 31, 1997, respectively.
For a further discussion of market risk exposure including derivative
instruments please refer to Hartford Life's 1997 Form 10-K Annual Report.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of the
Company and its ability to generate strong cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The Company maintained cash and short-term investments totaling $1.7
billion and $1.5 billion as of March 31, 1998 and December 31, 1997,
respectively, and believes that its investment policies combined with the terms
of its life insurance and annuity contracts are adequate to support its
liquidity needs. The capital structure of the Company consists of debt and
equity, summarized as follows:
MARCH 31, 1998 DECEMBER 31, 1997
-------------- -----------------
Short-term debt $ 50 $ 50
Long-term debt 650 650
------ ------
TOTAL DEBT $ 700 $ 700
====== ======
Equity excluding net unrealized capital gains on securities, net of tax $1,978 $1,907
Net unrealized capital gains on securities, net of tax 238 237
------ ------
TOTAL STOCKHOLDERS' EQUITY $2,216 $2,144
====== ======
TOTAL CAPITALIZATION EXCLUDING NET UNREALIZED CAPITAL GAINS ON SECURITIES, NET OF TAX $2,678 $2,607
------ ------
Debt to equity excluding net unrealized capital gains on securities, net of tax 35% 37%
Debt to capitalization excluding net unrealized capital gains on securities, net of tax 26% 27%
------ ------
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CAPITALIZATION
The Company's total capitalization, excluding net unrealized capital gains on
securities, net of tax, increased by $71, or 3%, as of March 31, 1998, as
compared to December 31, 1997. This change was primarily due to $84 of net
income partially offset by dividends of $12. As a result, both the debt to
equity and debt to capitalization ratios decreased to 35% and 26% as of March
31, 1998, respectively, from 37% and 27% as of December 31, 1997, respectively.
The Company's commercial paper and senior debt are rated by independent rating
agencies and the Company continues to maintain debt to capital ratios consistent
with these ratings.
HLI INITIAL PUBLIC OFFERING
On February 10, 1997, the Company filed a registration statement, as amended,
with the Securities and Exchange Commission relating to an IPO of the Company's
Class A Common Stock. Pursuant to the IPO on May 22, 1997, the Company sold to
the public 26 million shares at $28.25 per share and received net proceeds of
$687. Of the proceeds, $527 was used to retire debt related to the Company's
promissory notes outstanding and the line of credit with the remaining $160
contributed to the Company's insurance subsidiaries to support growth in its
core businesses.
DEBT
On February 7, 1997, the Company declared a dividend of $1,184 payable to its
direct parent, HA&I. As a result, the Company borrowed $1,084 on February 18,
1997, pursuant to a $1,300 line of credit, with interest payable at the
two-month Eurodollar rate plus 15 basis points, which, together with a
promissory note in the amount of $100, was paid as a dividend to HA&I on
February 20, 1997. Of the $1,184 dividend, $893 constituted a repayment of the
portion of the Company's third party indebtedness internally allocated, for
financial reporting purposes, to the Company's life insurance subsidiaries (the
"Allocated Advances"). In addition, on April 4, 1997 the Company declared and
paid a dividend of $25 to its parent in the form of a promissory note.
Subsequently, $12 of this note was forgiven in the form of a capital
contribution from HA&I.
On February 14, 1997, the Company filed a shelf registration statement for the
issuance and sale of up to $1.0 billion in the aggregate of senior debt
securities, subordinated debt securities and preferred stock. On June 12, 1997,
the Company issued $650 of unsecured redeemable long-term debt in the form of
notes and debentures. Of this amount, $200 was in the form 6.90% notes due June
15, 2004, $200 of 7.10% notes due June 15, 2007, and $250 of 7.65% debentures
due June 15, 2027. Interest on each of the notes and debentures is payable
semi-annually on June 15 and December 15, of each year, commencing December 15,
1997. The Company also issued $50 of short-term debt in the form of commercial
paper. Of the proceeds from this issuance, $670 was used to retire the remaining
balance on the $1,300 line of credit with the remainder being used for working
capital and other general corporate purposes. Subsequently, the Company reduced
the capacity of the line of credit from $1,300 to $250, which will be primarily
used to support the commercial paper program.
DIVIDENDS
Hartford Life paid $12 in dividends in the first quarter of 1998 to holders of
Class A and Class B Common Stock . See "Debt" discussion above for 1997 dividend
payments made prior to the IPO.
The Company received dividends from its regulated life insurance subsidiaries of
$13 through March 31, 1998.
TREASURY STOCK
In the first quarter of 1998, to make shares available to employees pursuant to
stock-based benefit plans, the Company repurchased 70,000 shares of its common
stock in the open market at a total cost of $3. Shares repurchased in the open
market are carried at cost and are reflected as a reduction to stockholders'
equity. Treasury shares subsequently reissued are reduced from treasury stock on
a weighted average cost basis. In the first quarter of 1998, the Company
reissued 65,912 shares of treasury stock at a cost of $2. The Company currently
intends to purchase shares of its common stock to make shares available for its
various employee stock-based benefit plans.
CASH FLOWS
THREE MONTHS ENDED
MARCH 31,
-------------------
1998 1997
----- -----
Cash provided by operating activities $ 149 $ 233
Cash (used for) provided by investing activities (394) 194
Cash provided by (used for) financing activities 207 (417)
Cash - beginning of period 88 72
----- -----
Cash - end of period $ 50 $ 82
----- -----
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16
During the first quarter of 1998, cash provided by operating activities
decreased $84 from the prior period. The change in cash used for or provided by
investing activities primarily reflects the investment of cash from operating
and financing activities. The change in cash provided by or used for financing
activities between periods was primarily due to declines in reinsurance
recoverables related to investment-type contracts. Operating cash flows in both
periods have been more than adequate to meet liquidity requirements.
REGULATORY INITIATIVES
NAIC PROPOSALS
The National Association of Insurance Commissioners ("NAIC") adopted the
Codification of Statutory Accounting Principles ("SAP") in March, 1998. The
proposed effective date for the statutory accounting guidance is January 1,
2001. It is expected that each of Hartford Life's domiciliary states will adopt
SAP and the Company will make the necessary changes required for implementation.
These changes are not anticipated to have a material impact on the statutory
financial statements of Hartford Life.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Condensed
Consolidated Financial Statements.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, management, at the present
time, does not anticipate that the ultimate liability arising from such pending
or threatened litigation will have a material effect on the financial condition
or operating results of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index
(b) Reports on Form 8-K - None
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SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hartford Life, Inc.
(Registrant)
/s/ Gregory A. Boyko
-----------------------------------
Gregory A. Boyko
Senior Vice President, Chief Financial Officer
and Treasurer
MAY 14, 1998
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HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-Q
EXHIBITS INDEX
EXHIBIT # DESCRIPTION
10.1 Amended and restated Credit Agreement dated as of February 9, 1998
among Hartford Life, Inc., the lenders named therein and Citibank, N.A.
as administrative agent is filed herewith.
27 Financial Data Schedule is filed herewith.
18