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 June 30, 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 July 31, 1998, there were outstanding 26,008,858 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.
================================================================================
2
INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Condensed Consolidated Statements of Income - Second Quarter and
Six Months Ended June 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets - June 30, 1998
and December 31, 1997 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
Six Months Ended June 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows - Six Months
Ended June 30, 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 10
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT
MARKET RISK 18
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 18
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 18
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
Signature 20
2
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Second Quarter Ended Six Months Ended
June 30, June 30,
-------------------- --------------------
(In millions, except for per share data) 1998 1997 1998 1997
------- ------- ------- -------
(Unaudited) (Unaudited)
REVENUES
Premiums and other considerations $ 763 $ 682 $ 1,767 $ 1,361
Net investment income 392 362 792 737
Net realized capital losses -- (2) -- (1)
------- ------- ------- -------
TOTAL REVENUES 1,155 1,042 2,559 2,097
------- ------- ------- -------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 658 612 1,429 1,271
Amortization of deferred policy acquisition costs 117 94 214 177
Dividends to policyholders 10 18 117 72
Interest expense 12 16 25 32
Other insurance expenses 216 195 503 338
------- ------- ------- -------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,013 935 2,288 1,890
------- ------- ------- -------
INCOME BEFORE INCOME TAX EXPENSE 142 107 271 207
Income tax expense 48 34 93 71
------- ------- ------- -------
NET INCOME $ 94 $ 73 $ 178 $ 136
------- ------- ------- -------
BASIC EARNINGS PER SHARE (1) $ .67 $ .56 $ 1.27 $ 1.06
DILUTED EARNINGS PER SHARE (1) $ .67 $ .56 $ 1.27 $ 1.06
------- ------- ------- -------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (1) 140 131 140 128
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING AND
DILUTIVE POTENTIAL COMMON SHARES (1) 140 131 140 128
------- ------- ------- -------
CASH DIVIDENDS DECLARED PER SHARE SUBSEQUENT TO THE
INITIAL PUBLIC OFFERING (2) $ .09 $ -- $ .18 $ --
(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.
3
4
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
June 30, 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) $ 17,505 $ 16,848
Equity securities, at fair value 118 181
Policy loans, at outstanding balance 3,770 3,759
Other investments, at cost 402 182
--------- ---------
Total investments 21,795 20,970
Cash 58 88
Premiums and amounts receivable 146 147
Reinsurance recoverable 5,623 5,765
Deferred policy acquisition costs 3,626 3,361
Deferred income tax 424 397
Other assets 785 890
Separate account assets 81,013 69,362
--------- ---------
TOTAL ASSETS $ 113,470 $ 100,980
--------- ---------
LIABILITIES
Future policy benefits $ 5,305 $ 4,939
Other policyholder funds 21,070 21,139
Short-term debt -- 50
Long-term debt 650 650
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures 250 --
Other liabilities 2,805 2,696
Separate account liabilities 81,013 69,362
--------- ---------
TOTAL LIABILITIES 111,093 98,836
--------- ---------
STOCKHOLDERS' EQUITY
Class A common stock - authorized 600,000,000 shares;
issued 26,069,123 and 26,061,837 shares, par value $0.01 -- --
Class B common stock - authorized 600,000,000 shares;
issued and outstanding 114,000,000 shares, par value $0.01 1 1
Capital surplus 1,282 1,283
Treasury stock, at cost - 11,280 and 35,684 shares -- (1)
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax 317 237
Cumulative translation adjustments (4) (4)
--------- ---------
Total accumulated other comprehensive income 313 233
--------- ---------
Retained earnings 781 628
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,377 2,144
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 113,470 $ 100,980
--------- ---------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
5
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1998
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------
NET
UNREALIZED
CAPITAL
CLASS A CLASS B TREASURY GAINS 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 -- -- -- -- -- -- 178 178
-------
Other comprehensive income,
net of tax (1):
Changes in unrealized
capital gains
on securities (2) -- -- -- -- 80 -- -- 80
-------
Total other comprehensive income 80
-------
Total comprehensive income 258
-------
Dividends -- -- -- -- -- -- (25) (25)
-------
Unearned compensation -- -- (1) 1 -- -- -- --
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, JUNE 30, 1998 $ -- $ 1 $ 1,282 $ -- $ 317 $ (4) $ 781 $ 2,377
======= ======= ======= ======= ======= ======= ======= =======
SIX MONTHS ENDED JUNE 30, 1997
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------
NET
UNREALIZED
CAPITAL
CLASS A CLASS B TREASURY GAINS 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 -- -- -- -- -- -- 136 136
-------
Other comprehensive income,
net of tax (1):
Changes in unrealized
capital gains on
securities (2) -- -- -- -- 13 -- -- 13
-------
Total other comprehensive income 13
-------
Total comprehensive income 149
-------
Issuance of Class A common stock -- -- 687 -- -- -- -- 687
Conversion to Class B common stock -- 1 (1) -- -- -- -- --
Capital contribution -- -- 12 -- -- -- -- 12
Dividends -- -- -- -- -- -- (316) (316)
------- ------- ------- ------- ------- ------- ------- -------
BALANCE, JUNE 30, 1997 $ -- $ 1 $ 1,283 $ -- $ 42 $ (3) $ 483 $ 1,806
======= ======= ======= ======= ======= ======= ======= =======
(1) Net unrealized capital gains on securities is reflected net of tax of $171
and $23 for June 30, 1998 and 1997, respectively. There is no tax effect
on cumulative translation adjustments.
(2) There was no reclassification adjustment for after-tax gains (losses)
realized in net income for June 30, 1998 and 1997, respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
6
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Six Months Ended June 30,
-------------------------
(In millions)(Unaudited) 1998 1997
------- -------
OPERATING ACTIVITIES
Net income $ 178 $ 136
ADJUSTMENTS TO NET INCOME:
Depreciation and amortization 11 9
Net realized capital losses -- 1
Decrease in premiums receivable 2 --
(Decrease) increase in other liabilities (98) 238
Change in receivables, payables, and accruals 65 (67)
(Decrease) increase in accrued taxes (46) 36
Increase in deferred income taxes (68) (4)
Increase in deferred policy acquisition costs (265) (232)
Increase in liability for future policy benefits 368 323
Increase in reinsurance recoverables and other related assets (28) (47)
------- -------
CASH PROVIDED BY OPERATING ACTIVITIES 119 393
------- -------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (3,969) (4,590)
Sales of fixed maturity investments 2,411 2,702
Maturities and principal paydowns of fixed maturity investments 1,067 1,474
Purchases of other investments (459) (53)
Sales of other investments 246 209
Net sales of short-term investments 285 109
Additions to property, plant and equipment (17) (10)
------- -------
CASH USED FOR INVESTING ACTIVITIES (436) (159)
------- -------
FINANCING ACTIVITIES
(Decrease) increase in short-term debt (50) 50
Increase in long-term debt -- 650
Decrease in allocated advances from parent -- (893)
Proceeds from issuance of company obligated mandatorily redeemable
preferred securities of subsidiary trust holding solely parent junior
subordinated debentures 250 --
Dividends paid (12) (304)
Net receipts from (disbursements for) investment and universal life-type
contracts credited to (charged against) policyholder accounts 99 (419)
Net proceeds from the sale of common stock -- 687
------- -------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 287 (229)
------- -------
(Decrease) increase in cash (30) 5
Cash - beginning of period 88 72
------- -------
CASH - END OF PERIOD $ 58 $ 77
------- -------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
NET CASH PAID DURING THE PERIOD FOR:
Income taxes $ 134 $ 16
Interest $ 25 $ 30
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Capital contribution $ -- $ 12
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
7
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. and subsidiaries ("Hartford Life" or the "Company") have
been prepared pursuant to the rules and regulations of the Securities and
Exchange Commission. Certain information and note disclosures which are normally
included in financial statements prepared 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 June 1998, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards ("SFAS") No. 133, "Accounting for Derivative
Instruments and Hedging Activities". The new standard establishes accounting and
reporting guidance for derivative instruments, including certain derivative
instruments embedded in other contracts. The standard requires, among other
things, that all derivatives be carried on the balance sheet at fair value. The
standard also specifies hedge accounting criteria under which a derivative can
qualify for special accounting. In order to receive special accounting, the
derivative instrument must qualify as either a hedge of the fair value or the
variability of the cash flow of a qualified asset or liability. Special
accounting for qualifying hedges provides for matching the timing of gain or
loss recognition on the hedging instrument with the recognition of the
corresponding changes in value of the hedged item. SFAS No. 133 will be
effective for fiscal years beginning after June 15, 1999. Initial application
for Hartford Life will begin for the first quarter of the year 2000.
Hartford Life is currently in the process of quantifying the impact of SFAS No.
133.
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 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 Statement 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.
7
8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INITIAL PUBLIC OFFERING ("IPO") (CONTINUED)
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 June 30, 1998 and
December 31, 1997.
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
11 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 1996 earnings and the Allocated
Advances).
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 Second Quarter Ended For the Six Months Ended
------------------------------------ ----------------------------------
JUNE 30, 1998 Income Shares Per Share Amount Income Shares Per Share Amount
- ----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 94 140.0 $ 0.67 $178 140.0 $ 1.27
-------- --------
DILUTED EARNINGS PER SHARE
Impact of options and contingently issuable shares -- 0.3 -- 0.2
---- ----- ---- -----
Amounts available to common shareholders
plus assumed conversions $ 94 140.3 $ 0.67 $178 140.2 $ 1.27
- -------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1997
- -------------------------------------------------------------------------------------------------------------------------------
PRO FORMA BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 73 130.6 $ 0.56 $136 127.8 $ 1.06
-------- --------
PRO FORMA DILUTED EARNINGS PER SHARE
Impact of options and contingently issuable shares -- 0.1 -- 0.1
---- ----- ---- -----
Amounts available to common shareholders
plus assumed conversions $ 73 130.7 $ 0.56 $136 127.9 $ 1.06
- -------------------------------------------------------------------------------------------------------------------------------
8
9
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 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 which was repaid in the second quarter of 1998. 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.
On June 8, 1998, the Company filed an omnibus registration statement with the
Securities and Exchange Commission for the issuance of up to $1.0 billion of
debt and equity securities, including up to $350 of previously registered but
unsold securities. After the issuance of the Company Obligated Mandatorily
Redeemable Preferred Securities of Subsidiary Trust Holding Solely Parent Junior
Subordinated Debentures on June 29, 1998 discussed below, Hartford Life had $750
remaining on this shelf registration on June 30, 1998.
NOTE 5. COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES
On June 29, 1998, Hartford Life Capital I, a special purpose Delaware trust
formed by Hartford Life, issued 10,000,000, 7.2% Trust Preferred Securities,
Series A ("Series A Preferred Securities"). The proceeds from the sale of the
Series A Preferred Securities were used to acquire $250 of 7.2% Series A Junior
Subordinated Deferrable Interest Debentures ("Junior Subordinated Debentures")
issued by Hartford Life. Hartford Life used the proceeds from the offering to
retire $50 of its outstanding commercial paper and will use the remainder for
general corporate purposes, which may include funding working capital,
investments in or loans to subsidiaries, or potential strategic acquisitions.
The Series A Preferred Securities represent undivided beneficial interests in
Hartford Life Capital I's assets, which consist solely of the Junior
Subordinated Debentures. Hartford Life owns all of the beneficial interests
represented by Series A Common Securities of Hartford Life Capital I. Holders of
Series A Preferred Securities are entitled to receive cumulative cash
distributions accruing from June 29, 1998, the date of issuance, and payable
quarterly in arrears commencing July 15, 1998 at the annual rate of 7.2% of the
stated liquidation amount of $25.00 per Series A Preferred Security. The Series
A Preferred Securities are subject to mandatory redemption upon repayment of the
Junior Subordinate Debentures at maturity or upon earlier redemption. Hartford
Life has the right to redeem the Series A Junior Subordinated Debt Securities on
or after June 30, 2003 or earlier upon the occurrence of certain events.
Holders of Series A Preferred Securities generally have no voting rights.
The Junior Subordinated Debentures bear interest at the annual rate of 7.2% of
the principal amount, payable quarterly in arrears commencing June 29, 1998, and
mature on June 30, 2038. The 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 liabilities of its subsidiaries.
Hartford Life has the right at any time, and from time to time, to defer
payments of interest on the 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 Hartford Life 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 pari passu with or junior to the Junior
Subordinated Debentures. The Company will have the right at any time to dissolve
the Trust and cause the Series A Junior Subordinated Debt Securities to be
distributed to the holders of the Series A Preferred Securities and the Series A
Common Securities. Hartford Life has guaranteed, on a subordinated basis, all of
the Hartford Life Capital I obligations under the Series A Preferred Securities
including payment of the redemption price and any accumulated and unpaid
distributions upon dissolution, wind up or liquidation to the extent funds are
available.
9
10
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 6. 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 June
30, 1998, compared with December 31, 1997, and its results of operations for the
second quarter and six months ended June 30, 1998 compared with the equivalent
periods in 1997. This discussion should be read in conjunction with the MD&A
included 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 10
Annuity 12
Individual Life Insurance 12
Employee Benefits 13
Guaranteed Investment Contracts 13
Investments 14
Capital Markets Risk Management 14
Capital Resources and Liquidity 15
Regulatory Initiatives and Contingencies 17
Accounting Standards 18
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
REVENUES $1,155 $1,042 $2,559 $2,097
EXPENSES 1,061 969 2,381 1,961
------ ------ ------ ------
NET INCOME $ 94 $ 73 $ 178 $ 136
====== ====== ====== ======
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 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
10
11
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 $113, or 11%, and $462, or 22%, for the second quarter and
six months ended June 30 1998, respectively, compared to the equivalent 1997
periods. This increase was primarily driven by the Annuity segment whose
revenues increased $110, or 36%, and $210, or 36%, for the second quarter and
six months ended June 30, 1998, respectively, compared to the same prior year
periods. This increase was due to higher fee income earned on growing annuity
account values where the average account value grew $16.8 billion, or 30%, to
$72.1 billion at June 30, 1998 from $55.3 billion at June 30, 1997 due to market
appreciation and new sales. Group Insurance revenues increased $21, or 5%, and
$111, or 14%, for the second quarter and six months ended June 30, 1998,
respectively, as compared to the same periods in 1997. This increase was due to
strong sales of fully insured premiums as of June 30, 1998 of $250, an increase
of $49, or 24%, compared to prior year. Also, Individual Life Insurance revenues
increased $13, or 10%, and $29, or 12%, for the second quarter and six months
ended June 30, 1998, respectively, as compared to the same prior year periods
due to increased cost of insurance charges and other fee income on the Company's
growing block of variable life business. COLI revenues increased $154 for the
six months ended June 30, 1998, primarily driven by first quarter 1998 activity,
which was a result of renewal premium on leveraged COLI and increased fees
associated with variable COLI sales, while revenues were consistent in the
second quarter of 1998 with the prior year. Excluding COLI, revenues increased
$120, or 13%, and $308, or 17%, for the second quarter and six months ended June
30, 1998, respectively, compared to the equivalent 1997 periods. Partially
offsetting the increases discussed above was a decline of Closed Book GRC
revenues of $24 and $44 for the second quarter and six months ended June 30,
1998, respectively, as compared to the same periods in 1997.
Expenses increased $92, or 9%, and $420, or 21% for the second quarter and six
months ended June 30, 1998, respectively, compared to the same periods of the
prior year. Annuity expenses grew $93, or 36%, and $175, or 35%, for the second
quarter and six months ended June 30, 1998 as compared to the same prior year
periods primarily due to higher benefits, claims, and claim adjustment expenses
as well as increased 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 $19 and $10 for the
second quarter of 1998 and increased $105 and $24 for the six months ended June
30, 1998, respectively, primarily due to higher benefits, claims, and claim
adjustment expenses, which is also consistent with the growth in these blocks of
business. COLI expenses, primarily driven by first quarter 1998 activity,
increased $154 for the six months ended June 30, 1998 as a result of increased
operating expenses associated with significant renewal premium and variable COLI
sales while expenses were consistent in the second quarter of 1998 with the
prior year. Excluding COLI, expenses increased $98, or 12%, and $266, or 16%,
for the second quarter and six months ended June 30, 1998, respectively,
compared to the same periods in 1997. Partially offsetting the increases
discussed above was a decline of Closed Book GRC expenses of $24 and $44 for the
second quarter and six months ended June 30, 1998, respectively, compared to the
equivalent 1997 periods.
Net income increased $21, or 29%, and $42, or 31%, for the second quarter and
six months ended June 30, 1998, respectively, as compared to the same periods in
1997 primarily due to growth in the Annuity and Individual Life Insurance
segments and the Group Insurance operation of the Employee Benefits segment.
Annuity earnings increased $17, or 35%, and $35, or 38%, for the second quarter
and six months ended June 30, 1998, respectively, as compared to the same prior
year periods due to higher fee income earned on increasing account values
resulting from stock market appreciation and new sales, particularly in
Individual Annuity. Individual Life Insurance earnings increased $3, or 25%, and
$5, or 22%, for the second quarter and six months ended June 30, 1998,
respectively, as compared to the same 1997 periods as a result of strong sales
and increased account values. Group Insurance earnings increased $2, or 13%, and
$6, or 23%, for the second quarter and six months ended June 30, 1998,
respectively, as compared to the same prior year periods due to increased
premium revenue. The Specialty Insurance Operation of the Employee Benefits
segment earnings were impacted by losses of $(2) and $(4) for the second quarter
and six months ended June 30, 1998, respectively, related to the Company's
international operations which was offset by COLI earnings of $6 and $12 for the
second quarter and six months ended June 30, 1998. Guaranteed Investment
Contracts had no net income for the second quarter or the six months ended June
30, 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.
11
12
Below is a summary of net income (loss) by segment.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- -----------------
1998 1997 1998 1997
----- ----- ----- -----
ANNUITY $ 66 $ 49 $ 127 $ 92
INDIVIDUAL LIFE INSURANCE 15 12 28 23
EMPLOYEE BENEFITS 21 24 40 42
GUARANTEED INVESTMENT CONTRACTS -- -- -- --
CORPORATE OPERATION (8) (12) (17) (21)
----- ----- ----- -----
NET INCOME $ 94 $ 73 $ 178 $ 136
===== ===== ===== =====
The sections that follow analyze each segment's results. Specific topics such as
investment results are discussed separately following the segment overviews.
ANNUITY
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES $418 $308 $800 $590
EXPENSES 352 259 673 498
---- ---- ---- ----
NET INCOME $ 66 $ 49 $127 $ 92
==== ==== ==== ====
Revenues for the second quarter and six months ended June 30, 1998 increased
$110, or 36%, and $210, or 36%, respectively, compared to the equivalent prior
year periods. This increase was driven by Individual Annuity revenues which
increased $95, or 45%, and $184, or 47%, for the second quarter and six months
ended June 30, 1998, respectively, as compared to the same periods in 1997
primarily due to higher fee income earned on growth in individual variable
annuity account values. Average individual variable annuity account values grew
$15.3 billion, or 42%, to $51.7 billion as of June 30, 1998 from $36.4 billion
as of June 30, 1997. This growth was the result of continued market appreciation
as well as strong variable annuity sales of $2.8 billion and $5.1 billion for
the second quarter and six months ended June 30, 1998, respectively, compared to
sales of $2.3 billion and $4.7 billion for the second quarter and six months
ended June 30, 1997, respectively. In addition, Group Annuity revenues increased
$15, or 15%, and $26, or 13%, for the second quarter and six months ended June
30, 1998 primarily due to higher net investment income resulting from growth in
assets under management. Group Annuity average total account values grew $1.7
billion, or 18%, to $11.3 billion as of June 30, 1998 from $9.6 billion as of
June 30, 1997 due to market appreciation and new deposits.
Expenses increased $93, or 36%, and $175, or 35%, for the second quarter and six
months ended June 30, 1998, respectively, as compared to the same prior year
periods. Benefits, claims and claim adjustment expenses increased $50 and $63
for the second quarter and six months ended June 30, 1998, respectively,
compared to the comparable prior year periods primarily due to increased
interest credited on Individual Annuity general account values. Average
Individual Annuity general account values increased $1.2 billion, or 40%, to
$4.2 billion at June 30, 1998 from $3.0 billion at June 30, 1997. Amortization
of deferred policy acquisition costs increased $17 and $37 for the second
quarter and six months ended June 30, 1998, respectively, compared to the same
periods in 1997 as prior and current year sales remained strong. In addition,
for the second quarter and six months ended June 30, 1998, other business
expenses increased $16 and $55, respectively, as a result of the continued
growth in this segment. Annuity net income increased $17, or 35%, and $35, or
38%, for the second quarter and six months ended June 30, 1998, respectively, as
compared to the same prior year periods as a result of growing average account
values and continued operating expense efficiencies.
INDIVIDUAL LIFE INSURANCE
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES $142 $129 $276 $247
EXPENSES 127 117 248 224
---- ---- ---- ----
NET INCOME $ 15 $ 12 $ 28 $ 23
==== ==== ==== ====
Revenues for the second quarter and six months ended June 30, 1998 increased
$13, or 10%, and $29, or 12%, respectively, as compared to the equivalent
periods in 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 $516, or 72%, to
$1.2 billion as of
12
13
June 30, 1998 from $719 as of June 30, 1997 due to market appreciation and
strong sales. Variable life product sales constituted $54, or 76%, of total
Individual Life Insurance new sales as of June 30, 1998, an increase of $16, or
42%, compared to the same period in 1997.
Expenses increased $10, or 9%, and $24, or 11%, for the second quarter and six
months ended June 30, 1998, respectively, as compared to the equivalent period
in 1997. This increase was primarily the result of higher benefits, claims, and
claim adjustment expenses of $4 and $23 for the second quarter and six months
ended June 30, 1998, respectively, compared to the same prior year periods due
to the growth in this segment as well as increased mortality experience during
1998.
Net income increased $3, or 25%, and $5, or 22%, for the second quarter and six
months ended June 30, 1998, respectively, as compared to the same period in 1997
as a result of strong sales and growing account values.
EMPLOYEE BENEFITS
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- --------------------
1998 1997 1998 1997
------ ------ ------ ------
REVENUES $ 550 $ 541 $1,381 $1,119
EXPENSES 529 517 1,341 1,077
------ ------ ------ ------
NET INCOME $ 21 $ 24 $ 40 $ 42
====== ====== ====== ======
Revenues for the second quarter and six months ended June 30, 1998 increased $9,
or 2%, and $262, or 23%, respectively, over the comparable prior year period.
Specialty Insurance revenues increased $151 for the six months ended June 30,
1998 as compared to the same period in 1997. This increase was due to renewal
premium on leveraged COLI as well as increased fee income related to new sales
of variable COLI, primarily driven by first quarter 1998 activity, while
revenues were consistent in the second quarter of 1998 as compared to the
equivalent prior year period. Group Insurance revenues increased $21, or 5%, and
$111, or 14% for the second quarter and six months ended June 30, 1998, compared
to prior year. This increase was due to strong sales of fully insured premiums
of $250 for the six months ended June 30, 1998, an increase of $49, or 24%,
compared to prior year. This growth in new sales was driven by group life and
group disability business whose sales grew 25% and 22%, respectively, compared
to the same periods in 1997.
Expenses increased $12, or 2%, and $264, or 25%, for the second quarter and six
months ended June 30, 1998, respectively, as compared to the same prior year
periods. Specialty Insurance expenses increased $159 for the six months ended
June 30, 1998 primarily due to higher expenses associated with increased
variable COLI sales and leveraged COLI renewal premium in the first quarter of
1998, while expenses were consistent in the second quarter of 1998 as compared
to prior year. Group Insurance expenses increased $19, or 5%, and $105, or 14%,
for the second quarter and six months ended June 30, 1998, respectively, as
compared to the same prior year periods primarily due to higher benefits,
claims, and claim adjustment expenses associated with this growing block of
business.
Net income decreased $3, or 13%, and $2, or 5%, for the second quarter and six
months ended June 30, 1998, respectively, as compared to the same periods in
1997. Group Insurance net income increased $2, or 13%, and $6, or 23%, for the
second quarter and six months ended June 30, 1998, respectively, as compared to
the equivalent period in 1997, as a result of increased revenues. Specialty
Insurance net income was $4 and $8 for the second quarter and six months ended
June 30, 1998, respectively, as compared to net income of $9 and $16 for the
comparable 1997 periods. The 1998 Specialty Insurance results were impacted by
operating losses of $(2) and $(4) for the second quarter and six months ended
June 30, 1998, respectively, relating to the company's international operations
while COLI earnings were consistent with prior year.
GUARANTEED INVESTMENT CONTRACTS
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------------------- ------------------
1998 1997 1998 1997
---- ---- ---- ----
REVENUES $ 38 $ 62 $ 90 $134
EXPENSES 38 62 90 134
---- ---- ---- ----
NET INCOME $-- $-- $-- $--
==== ==== ==== ====
This segment reported no net income for the second quarter and six months ended
June 30, 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.
13
14
INVESTMENTS
Invested assets, excluding separate accounts, totaled $21.8 billion at June 30,
1998 and were comprised of $17.5 billion of fixed maturities, $3.8 billion of
policy loans, and other investments of $520. Policy loans, which had a
weighted-average interest rate of 11.1% as of June 30, 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.
FIXED MATURITIES BY TYPE
- ----------------------------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997
-------------------- ----------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- ---- ---------- ------- ---------- -------
Corporate $ 7,998 45.7% $ 7,970 47.3%
ABS 3,081 17.6% 3,199 19.0%
Commercial MBS 1,903 10.9% 1,606 9.5%
CMO 961 5.5% 978 5.8%
Municipal - tax-exempt 653 3.7% 171 1.0%
Gov't/Gov't agencies - For 589 3.4% 502 3.0%
MBS - agency 561 3.2% 514 3.1%
Municipal - taxable 240 1.4% 267 1.6%
Gov't/Gov't agencies - U.S. 97 0.5% 241 1.4%
Short-term 1,417 8.1% 1,395 8.3%
Redeemable preferred stock 5 -- 5 --
------- ----- ------- -----
TOTAL FIXED MATURITIES $17,505 100.0% $16,848 100.0%
------- ----- ------- -----
INVESTMENT RESULTS
The table below summarizes the Hartford Life's investment results.
SECOND QUARTER SIX MONTHS
ENDED JUNE 30, ENDED JUNE 30,
------------------ ------------------
1998 1997 1998 1997
------ ----- ------ -----
Net investment income,
before-tax $ 392 $ 362 $ 792 $ 737
Yield on average invested
assets, before-tax [1] 7.4% 7.2% 7.6% 7.4%
Net realized capital losses,
before-tax $ -- $ (2) $ -- $ (1)
------ ----- ------ -----
[1] Represents annualized net investment income (excluding net realized
capital losses) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the quarter ended June 30, 1998, before-tax net investment income totaled
$392, compared to $362 in 1997, an increase of 8% as a result of higher average
invested assets and increased yields on average invested assets. Before-tax
yields on average invested assets increased to 7.4% for the second quarter of
1998. For the six months ended June 30, 1998, before-tax net investment income
was $792 as compared with $737 for the comparable period in 1997, an increase of
$55, or 7% as before-tax yields for the six months ended June 30, 1998 increased
to 7.6% from 7.4% in 1997. The increase in yields on average invested assets for
the second quarter and six months ended June 30, 1998 was primarily due to an
increase in allocation to assets rated BBB.
There were no net realized capital gains for the second quarter or six months
ended June 30, 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.
14
15
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.
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 June 30, 1998, approximately 99% of the fixed maturity portfolio was
invested in investment-grade securities.
FIXED MATURITIES BY CREDIT QUALITY
- ---------------------------------------------------------------------------
JUNE 30, 1998 DECEMBER 31, 1997
---------------------- ---------------------
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------- ------- ---------- -------
U.S. Gov't/Gov't agencies $ 2,747 9.9% $ 2,907 10.7%
AAA 3,987 14.4% 3,974 14.6%
AA 2,741 9.9% 2,967 10.9%
A 9,058 32.6% 9,351 34.3%
BBB 6,982 25.2% 5,966 21.9%
BB & below 307 1.1% 205 0.7%
Short-term 1,911 6.9% 1,869 6.9%
--------- ----- -------- -----
TOTAL FIXED MATURITIES $ 27,733 100.0% $ 27,239 100.0%
--------- ----- -------- -----
MARKET RISK
Hartford Life has material exposure to both interest rate and equity market
risk. The Company employs several risk management tools to quantify and manage
market risk arising from its investments and interest sensitive liabilities. For
certain portfolios, management monitors the changes in present value between
assets and liabilities resulting from various interest rate scenarios using
integrated asset/liability measurement systems and a proprietary system that
simulates the impacts of parallel and non-parallel yield curve shifts. Based on
this current and prospective information, management implements risk reducing
techniques to improve the match between assets and liabilities. 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 $11.4 billion and $10.9 billion at June 30,
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 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 and $1.5 billion as of June 30, 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:
15
16
JUNE 30, 1998 DECEMBER 31, 1997
------------- -----------------
Short-term debt $ -- $ 50
Long-term debt 650 650
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures ("TruPS") 250 --
------ ------
TOTAL DEBT $ 900 $ 700
------ ------
Equity excluding net unrealized capital gains on securities, net of tax $2,060 $1,907
Net unrealized capital gains on securities, net of tax 317 237
------ ------
TOTAL STOCKHOLDERS' EQUITY $2,377 $2,144
------ ------
TOTAL CAPITALIZATION EXCLUDING NET UNREALIZED CAPITAL GAINS ON SECURITIES, NET OF TAX $2,960 $2,607
------ ------
Debt to equity excluding net unrealized capital gains on securities, net of tax 44% 37%
Debt to capitalization excluding net unrealized capital gains on securities, net of tax 30% 27%
CAPITALIZATION
The Company's total capitalization, excluding net unrealized capital gains on
securities, net of tax, increased by $353 or 14%, as of June 30, 1998, as
compared to December 31, 1997. This change was primarily due to the issuance of
$250 of TruPS as well as $178 of net income offset by the retirement of $50 in
commercial paper and dividends of $25. As a result, both the debt to equity and
debt to capitalization ratios (both excluding net unrealized capital gains on
securities, net of tax) increased to 44% and 30% as of June 30, 1998,
respectively, from 37% and 27% as of December 31, 1997, respectively. The
Company's debt is rated by independent rating organizations and the Company
continues to maintain debt to capital ratios consistent with these ratings.
HLI INITIAL PUBLIC OFFERING ("IPO")
For a discussion of Hartford Life's IPO, see Note 2 of Notes to Condensed
Consolidated Financial Statements.
DEBT
For a discussion of Debt, see Note 4 of Notes to Condensed Consolidated
Financial Statements.
COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF SUBSIDIARY
TRUST HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES
For a discussion of Company Obligated Mandatorily Redeemable Preferred
Securities of Subsidiary Trust Holding Solely Parent Junior Subordinated
Debentures, see Note 5 of Notes to Condensed Consolidated Financial Statements.
DIVIDENDS
Hartford Life declared $25 in dividends for the period ended June 30, 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
$40 through June 30, 1998.
TREASURY STOCK
During the first six months of 1998, to make shares available to employees
pursuant to stock-based benefit plans, the Company had 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. During the first six months of
1998, the Company reissued 94,404 shares of treasury stock at a cost of $4. The
Company currently intends to purchase additional shares of its common stock to
make shares available for its various employee stock-based benefit plans.
RATINGS
As of July 1998, the financial ratings for Hartford Life Capital I's trust
preferred securities from the major independent rating organizations were A from
Duff & Phelps, a2 from Moody's and A- from Standard & Poor's.
16
17
CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
---------------------
1998 1997
------- -------
Cash provided by operating activities $ 119 $ 393
Cash used for investing activities (436) (159)
Cash provided by (used for) financing activities 287 (229)
Cash - beginning of period 88 72
------- -------
Cash - end of period $ 58 $ 77
------- -------
Cash provided by operating activities decreased $274 from the prior period. The
$436 of cash used for investing activities primarily reflects the investment of
cash from operating and financing activities. The $516 change in cash provided
by or used for financing activities between periods is primarily due to the
run-off of the Closed Book GRC block of business offset by growth in general
account variable annuity business. Operating cash flows in both periods have
been more than adequate to meet liquidity requirements.
SUBSEQUENT EVENTS
On July 7, 1998, the Company announced that it will recapture an in-force block
of COLI business from MBL Life Assurance Co. of New Jersey ("MBL Life"), as well
as purchase the outstanding interest in International Corporate Marketing Group
("ICMG"), which is currently 60% owned by Hartford Life. The transaction is
expected to close by early in the fourth quarter of 1998, subject to court
approval. The transaction is being consummated through the assignment of a
reinsurance arrangement between Hartford Life and MBL Life to a Hartford Life
subsidiary. Hartford Life originally assumed the life insurance block in 1992
from Mutual Benefit Life Insurance Company ("Mutual Benefit Life"), which was
placed in court-supervised rehabilitation in 1991, and reinsured a portion of
those polices back to MBL Life. MBL Life, previously a Mutual Benefit Life
subsidiary, operates under the Rehabilitation Plan for Mutual Benefit Life.
Hartford Life is now recapturing the reinsured portion of these policies ceded
to MBL Life.
On July 30, 1998, the Company announced that it will acquire PLANCO Financial
Services Inc. and its affiliate, PLANCO Incorporated (collectively, "PLANCO").
PLANCO, a primary distributor of the Company's annuity and investment products,
is the nation's largest wholesaler of individual annuities and has played a
significant role in Hartford Life's growth over the past decade. As a
wholesaler, PLANCO distributes Hartford Life's annuity and investment products,
including fixed and variable annuities, mutual funds and single premium variable
life insurance, as well as providing sales support to registered
representatives, financial planners and broker-dealers at brokerage firms and
banks across the United States. It is anticipated that the closing of the
transaction, which is subject to regulatory approval, will take place during the
third quarter of 1998.
REGULATORY INITIATIVES AND CONTINGENCIES
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.
YEAR 2000
The Year 2000 issue relates to the ability or inability of computer systems to
properly process information and data containing or related to dates beginning
with the year 2000 and beyond. The Year 2000 issue exists because many computer
systems that are in use today were developed years ago when a year was
identified using a two-digit field rather than a four-digit field. As
information and data containing or related to the century date are introduced to
computer hardware, software and other systems, date sensitive systems may
recognize the year 2000 as 1900, or not at all, which may result in computer
systems processing information incorrectly. This, in turn, may significantly and
adversely affect the integrity and reliability of information databases and may
result in a wide variety of adverse consequences to a company. In addition, Year
2000 problems that occur with third parties with which a company does business,
such as suppliers, computer vendors and others, may also adversely affect any
given company.
As an insurance and financial services company, Hartford Life has thousands of
individual and business customers that have insurance policies, annuities,
mutual funds and other financial products from Hartford Life. Nearly all of
these policies and products contain date sensitive data, such as policy
expiration dates, birth dates, premium payment dates, and the like. In addition,
Hartford Life has business relationships with numerous third parties that affect
virtually all aspects of Hartford Life's business, including, without
limitation, suppliers, computer hardware and software vendors, insurance agents
and brokers, securities broker-dealers and other distributors of financial
products.
17
18
Beginning in 1990, Hartford Life began working on making its computer systems
Year 2000 ready, either by installing new programs or by replacing systems. In
January 1998, Hartford Life commenced a company-wide program to further
identify, assess and remediate the impact of Year 2000 problems in all of
Hartford Life's business segments. Hartford Life currently anticipates that this
internal program will be substantially completed by the end of 1998, and testing
of computer systems will continue through 1999. The costs of addressing the Year
2000 issue that have been incurred by Hartford Life through the six months ended
June 30, 1998 have not been material to Hartford Life's financial condition or
results of operations. The Company will continue to incur costs related to its
Year 2000 efforts and does not anticipate that the costs to be incurred will be
material to the Company's financial condition or results of operations.
In addition, as part of its Year 2000 program, Hartford Life is identifying
third parties with which it has significant business relations in order to
attempt to assess the potential impact on Hartford Life of their Year 2000
issues and remediation plans. Hartford Life currently anticipates that it will
substantially complete this evaluation by the end of 1998, and will conduct
systems testing with certain third parties through 1999. Hartford Life does not
have control over these third parties and, as a result, Hartford Life cannot
currently determine to what extent future operating results may be adversely
affected by the failure of these third parties to successfully address their
Year 2000 issues.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Condensed
Consolidated Financial Statements.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Reference is made to the Capital Markets Risk Management section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations.
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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 21, 1998, Hartford Life held its annual meeting of stockholders. The
following matters was considered and voted upon: (1) to elect three nominees to
the Board of Directors to hold office until the 2001 annual meeting of
shareholders and until their successors are elected and qualified; and (2) to
ratify the appointment of Arthur Andersen LLP as independent auditors of the
Company for the fiscal year ending December 31, 1998.
Each of the nominees for election as directors were elected to the Board of
Directors, and the appointment of Arthur Andersen LLP was approved. The Hartford
Financial Services Group, Inc. ("The Hartford"), an indirect parent of the
Company, owns all of the Class B Common Stock of the Company, representing 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 Hartford voted in favor on each matter submitted to
a vote. Set forth is the vote tabulation of holders of Class A Common Stock
relating to the election of directors and the appointment of Arthur Andersen
LLP:
(1) Board of Directors
CLASS A
NAME OF DIRECTOR NOMINEES SHARES FOR SHARES WITHHELD*
- ------------------------- ---------- ----------------
Paul G. Kirk, Jr. 22,272,118 45,845
Gordon I. Ulmer 22,270,544 47,419
David K. Zwiener 22,274,390 43,573
* Shares withheld include broker non-votes and abstentions.
18
19
(2) Ratification of the appointment of Arthur Andersen LLP
Class A shares for 22,213,535
Class A shares against 62,250
Class A share abstained 42,178
Shareholders of record on March 24, 1998 were entitled to vote at the annual
meeting. As of that date, there were 25,991,295 shares of the Company's Class A
Common Stock and 114,000,000 of Class B Common Stock outstanding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index
(b) Reports on Form 8-K - On June 24, 1998 Hartford Life filed a Form 8-K,
reporting under Item 5, Other Events, pertaining to an Underwriting Agreement
related to the Trust Preferred Securities and Item 7 (c), Exhibits, pertaining
to the same Underwriting Agreement.
19
20
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
AUGUST 13, 1998
20
21
HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-Q
EXHIBITS INDEX
EXHIBIT # DESCRIPTION
--------- -----------
27 Financial Data Schedule is filed herewith.
21