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 September 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 October 30, 1998, there were outstanding 25,879,451 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 - Third Quarter and
Nine Months Ended September 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets - September 30, 1998
and December 31, 1997 4
Condensed Consolidated Statements of Changes in Stockholders' Equity -
Nine Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows - Nine Months
Ended September 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 19
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
Signature 20
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PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
Third Quarter Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
(In millions, except for per share data) (Unaudited) 1998 1997 1998 1997
------ ------ ------ ------
REVENUES
Premiums and other considerations $ 894 $ 697 $2,661 $2,058
Net investment income 393 360 1,185 1,097
Net realized capital gains -- 1 -- --
------ ------ ------ ------
TOTAL REVENUES 1,287 1,058 3,846 3,155
------ ------ ------ ------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 679 596 2,108 1,867
Amortization of deferred policy acquisition costs 122 83 336 260
Dividends to policyholders 60 48 177 120
Interest expense 17 13 42 45
Other insurance expenses 257 185 760 523
------ ------ ------ ------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,135 925 3,423 2,815
------ ------ ------ ------
INCOME BEFORE INCOME TAX EXPENSE 152 133 423 340
Income tax expense 52 50 145 121
------ ------ ------ ------
NET INCOME $ 100 $ 83 $ 278 $ 219
------ ------ ------ ------
BASIC EARNINGS PER SHARE (1) $ 0.71 $ 0.59 $ 1.98 $ 1.66
DILUTED EARNINGS PER SHARE (1) $ 0.71 $ 0.59 $ 1.98 $ 1.66
------ ------ ------ ------
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING (1) 140.0 140.0 140.0 131.9
WEIGHTED AVERAGE COMMON SHARES OUTSTANDING AND
DILUTIVE POTENTIAL COMMON SHARES (1) 140.2 140.1 140.2 132.0
------ ------ ------ ------
CASH DIVIDENDS DECLARED PER SHARE SUBSEQUENT TO THE
INITIAL PUBLIC OFFERING (2) $ 0.09 $ 0.09 $ 0.27 $ 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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4
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
September 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
$16,582 and $16,475) $ 17,112 $ 16,848
Equity securities, at fair value 124 181
Policy loans, at outstanding balance 3,745 3,759
Other investments, at cost 451 182
--------- ---------
Total investments 21,432 20,970
Cash 87 88
Premiums and amounts receivable 152 147
Reinsurance recoverables 5,588 5,765
Deferred policy acquisition costs 3,723 3,361
Deferred income tax 399 397
Other assets 1,184 890
Separate account assets 77,078 69,362
--------- ---------
TOTAL ASSETS $ 109,643 $ 100,980
--------- ---------
LIABILITIES
Future policy benefits $ 5,460 $ 4,939
Other policyholder funds 20,812 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 2,880 2,696
Separate account liabilities 77,078 69,362
--------- ---------
TOTAL LIABILITIES 107,130 98,836
--------- ---------
STOCKHOLDERS' EQUITY
Class A common stock - authorized 600,000,000 shares;
issued 26,071,849 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 1,281 1,283
Treasury stock, at cost - 192,652 and 35,684 shares (10) (1)
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax 379 237
Cumulative translation adjustments (7) (4)
Total accumulated other comprehensive income 372 233
--------- ---------
Retained earnings 869 628
--------- ---------
TOTAL STOCKHOLDERS' EQUITY 2,513 2,144
--------- ---------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 109,643 $ 100,980
--------- ---------
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
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5
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
ACCUMULATED OTHER
COMPREHENSIVE INCOME
-------------------------
NET
UNREALIZED
CAPITAL
CLASS A CLASS B TREASURY GAINS ON CUMULATIVE
COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION
(In millions) (Unaudited) STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS
------- ------- ------- -------- ----------- -----------
BALANCE, DECEMBER 31, 1997 $ -- $ 1 $ 1,283 $ (1) $ 237 $ (4)
Comprehensive income
Net income -- -- -- -- -- --
Other comprehensive income, net of tax (1):
Changes in net unrealized
capital gains
on securities (2) -- -- -- -- 142 --
Cumulative translation -- -- -- -- -- (3)
adjustments
Total other comprehensive
income
Total comprehensive income
Dividends -- -- -- -- -- --
Issuance of shares under
incentive and
stock purchase plans -- -- (2) 6 -- --
Treasury stock acquired -- -- -- (15) -- --
------- ------- ------- ------- ------- -------
BALANCE, SEPTEMBER 30, 1998 $ -- $ 1 $ 1,281 $ (10) $ 379 $ (7)
------- ------- ------- ------- ------- -------
TOTAL
RETAINED STOCKHOLDERS'
(In millions) (Unaudited) EARNINGS EQUITY
-------- -------------
BALANCE, DECEMBER 31, 1997 $ 628 $ 2,144
Comprehensive income
Net income 278 278
-------
Other comprehensive income, net of tax (1):
Changes in net unrealized
capital gains
on securities (2) -- 142
Cumulative translation -- (3)
adjustments
-------
Total other comprehensive 139
income
-------
Total comprehensive income 417
-------
Dividends (37) (37)
Issuance of shares under
incentive and
stock purchase plans -- 4
Treasury stock acquired -- (15)
------- -------
BALANCE, SEPTEMBER 30, 1998 $ 869 $ 2,513
------- -------
NINE MONTHS ENDED SEPTEMBER 30, 1997
ACCUMULATED OTHER
COMPREHENSIVE INCOME
--------------------------
NET
UNREALIZED
CAPITAL
GAINS
CLASS A CLASS B TREASURY ON CUMULATIVE
COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION
(In millions) (Unaudited) STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS
------- ------- ------- --------- ----------- -----------
BALANCE, DECEMBER 31, 1996 $ -- $ -- $ 585 $ -- $ 29 $ (3)
Comprehensive income
Net income -- -- -- -- -- --
Other comprehensive income, net of tax (1):
Changes in net unrealized
capital gains
securities (2) -- -- -- -- 148 --
Total other comprehensive
income
Total comprehensive income
Issuance of Class A common -- -- 687 -- -- --
stock
Conversion to Class B common -- 1 (1) -- -- --
stock
Capital contribution -- -- 12 -- -- --
Dividends -- -- -- -- -- --
Issuance of shares under
incentive and
stock purchase plans -- -- -- 1 -- --
Treasury stock acquired -- -- -- (4) -- --
------- ------- ------- ------- ------- -------
BALANCE, SEPTEMBER 30, 1997 $ -- $ 1 $ 1,283 $ (3) $ 177 $ (3)
------- ------- ------- ------- ------- -------
TOTAL
RETAINED STOCKHOLDERS'
(In millions) (Unaudited) EARNINGS EQUITY
-------- -------------
BALANCE, DECEMBER 31, 1996 $ 663 $ 1,274
Comprehensive income
Net income 219 219
-------
Other comprehensive income, net of tax (1):
Changes in net unrealized
capital gains
securities (2) -- 148
-------
Total other comprehensive 148
income
-------
Total comprehensive income 367
-------
Issuance of Class A common -- 687
stock
Conversion to Class B common -- --
stock
Capital contribution -- 12
Dividends (328) (328)
Issuance of shares under
incentive and
stock purchase plans -- 1
Treasury stock acquired -- (4)
------- -------
BALANCE, SEPTEMBER 30, 1997 $ 554 $ 2,009
------- -------
(1) Net unrealized capital gains on securities is reflected net of tax of $76
and $80 as of September 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 the nine months ended September 30, 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
Nine Months Ended
September 30,
-----------------------
(In millions) (Unaudited) 1998 1997
------- --------
OPERATING ACTIVITIES
Net income $ 278 $ 219
ADJUSTMENTS TO RECONCILE NET INCOME TO CASH PROVIDED BY OPERATING ACTIVITIES:
Depreciation and amortization 20 17
(Increase) decrease in premiums and amounts receivable (5) 11
Increase in other liabilities 61 165
Change in receivables, payables, and accruals (21) (47)
(Decrease) increase in accrued taxes (60) 79
Increase in deferred income taxes (83) (16)
Increase in deferred policy acquisition costs (362) (400)
Increase in liability for future policy benefits 521 616
Increase in reinsurance recoverables and other related assets (29) (128)
------- --------
CASH PROVIDED BY OPERATING ACTIVITIES 320 516
------- --------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (5,595) (5,775)
Sales of fixed maturity investments 3,617 3,834
Maturities and principal paydowns of fixed maturity investments 1,498 1,804
Purchases of other investments (463) (126)
Sales of other investments 328 141
Net sales (purchases) of short-term investments 470 (89)
Purchase of affiliates and other (198) (18)
------- --------
CASH USED FOR INVESTING ACTIVITIES (343) (229)
------- --------
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 (25) (316)
Net disbursements for investment and universal life-type contracts charged against
policyholder accounts (142) (477)
Net proceeds from the sale of common stock -- 687
Acquisition of treasury stock, net (8) (3)
------- --------
CASH PROVIDED BY (USED FOR) FINANCING ACTIVITIES 25 (302)
------- --------
Increase (decrease) in cash 2 (15)
Impact of foreign exchange (3) --
------- --------
Cash - beginning of period 88 72
------- --------
CASH - END OF PERIOD $ 87 $ 57
------- --------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
NET CASH PAID DURING THE PERIOD FOR:
Income taxes $ 238 $ 63
Interest $ 26 $ 31
SUPPLEMENTAL DISCLOSURE OF NONCASH INFORMATION:
Capital contribution $ -- $ 12
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. 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
significant 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
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 Statement of Changes in
Stockholders' Equity.
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.
In June 1998, the Financial Accounting Standards Board issued 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 September 1998, the Securities and Exchange Commission stated that until the
Emerging Issues Task Force (EITF) concludes its discussion regarding the
accounting for combined structured notes, affected companies that entered into
these notes prior to September 25, 1998 are required to either restate prior
period financial statements to conform with the recently prescribed unit
accounting model or disclose the related impact on earnings for all periods
presented and cumulatively over the life of the instruments had the registrant
accounted for the structure as a unit. Included in net income for the nine
months ended September 30, 1998 was $32 of after-tax net realized capital losses
and approximately $2 of after-tax net investment income related to a combined
structured note transaction, which was accounted for in accordance with then
current generally accepted accounting principles (GAAP). Had the transaction
been accounted for as a unit, based upon recently prescribed GAAP for such types
of transactions entered into after September 24, 1998, net income would have
been approximately $2 lower for the third quarter and $30 higher for the nine
months ended September 30, 1998.
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NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
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 represented 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 September 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 the 1997 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 Third Quarter Ended For the Nine Months Ended
------------------------------------ ----------------------------------
SEPTEMBER 30, 1998 Income Shares Per Share Amount Income Shares Per Share Amount
------ ------ ---------------- ------ ------ ----------------
BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 100 140.0 $0.71 $ 278 140.0 $1.98
----- -----
DILUTED EARNINGS PER SHARE
Impact of options and contingently issuable shares -- 0.2 -- 0.2
----- ----- ----- -----
Amounts available to common shareholders
plus assumed conversions $ 100 140.2 $0.71 $ 278 140.2 $1.98
----- ----- ----- ----- ----- -----
SEPTEMBER 30, 1997
PRO FORMA BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 83 140.0 $0.59 $ 219 131.9 $1.66
----- -----
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 $ 83 140.1 $0.59 $ 219 132.0 $1.66
----- ----- ----- ----- ----- -----
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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 its 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 as of September 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 for
the retirement of its outstanding commercial paper, strategic acquisitions and
other general corporate purposes.
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
(a) 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.
(b) INVESTMENTS
As of September 30, 1998, Hartford Life held $128 of asset-backed securities
securitized and serviced by Commercial Financial Services, Inc. (CFS). In
October 1998, the Company became aware of allegations of improper activities at
CFS. CFS has engaged an independent accounting firm and outside legal counsel to
investigate these allegations. Currently, these securities are performing in
line with expectations. Based upon information available at this time, the
Company is presently unable to determine the amount of potential loss, if any,
related to the securities.
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
September 30, 1998, compared with December 31, 1997, and its results of
operations for the third quarter and nine months ended September 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 16
Regulatory Initiatives and Contingencies 17
Accounting Standards 19
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
Revenues $1,287 $1,058 $3,846 $3,155
Expenses 1,187 975 3,568 2,936
------ ------ ------ ------
NET INCOME $ 100 $ 83 $ 278 $ 219
------ ------ ------ ------
The Company's insurance business operates in three principal segments: Annuity,
Individual Life Insurance, and Employee Benefits as well as a Guaranteed
Investment Contracts segment. 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:
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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 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 $229, or 22%, and $691, or 22%, for the third quarter and
nine months ended September 30 1998, respectively, compared to the equivalent
1997 periods. This increase was driven by higher fee income earned on growth in
separate account assets primarily related to the Annuity segment, premium growth
due to strong sales and renewals related to the Employee Benefits segment, as
well as higher net investment income, partially offset by decreasing revenues
related to the declining block of Closed Book GRC.
Expenses increased $212, or 22%, and $632, or 22%, for the third quarter and
nine months ended September 30, 1998, respectively, compared to the same prior
year periods. This increase was due to higher benefits, claims, and claim
adjustment expenses, increased amortization of deferred policy acquisition costs
and increased operating expenses primarily related to growth in the Company's
principal operating segments.
Net income increased $17, or 20%, and $59, or 27%, for the third quarter and
nine months ended September 30, 1998, respectively, as compared to the same
periods in 1997 primarily due to revenue growth in both the Annuity segment and
the Group Insurance operation within the Employee Benefits segment as well as
favorable mortality and morbidity experience. These increases were partially
offset by a decrease in COLI earnings and an operating loss in the Company's
international operations.
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.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1998 1997 1998 1997
----- ----- ----- -----
Annuity $ 67 $ 53 $ 194 $ 145
Individual Life Insurance 17 15 45 38
Employee Benefits 24 23 64 65
Guaranteed Investment Contracts -- -- -- --
Corporate Operation (8) (8) (25) (29)
----- ----- ----- -----
NET INCOME $ 100 $ 83 $ 278 $ 219
----- ----- ----- -----
The sections that follow analyze each segment's results. Specific topics such as
investment results are discussed separately following the segment overviews.
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ANNUITY
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
Revenues $ 412 $ 336 $1,212 $ 926
Expenses 345 283 1,018 781
------ ------ ------ ------
NET INCOME $ 67 $ 53 $ 194 $ 145
------ ------ ------ ------
Revenues for the third quarter and nine months ended September 30, 1998
increased $76, or 23%, and $286, or 31%, respectively, compared to the
equivalent prior year periods. This increase was driven by Individual Annuity
revenues which increased $73, or 31%, and $257, or 41%, for the third quarter
and nine months ended September 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. Despite the fact that the equity
market did not experience significant appreciation during the third quarter of
1998, the segment's assets under management have increased from prior year
levels. Average individual variable annuity account values grew $11.0 billion,
or 29%, to $49.7 billion as of September 30, 1998 from $38.7 billion as of
September 30, 1997. This growth was the result of strong individual variable
annuity sales of $2.4 billion and $7.6 billion for the third quarter and nine
months ended September 30, 1998, respectively, compared to sales of $2.5 billion
and $7.2 billion for the third quarter and nine months ended September 30, 1997,
respectively. In addition, Group Annuity revenues increased $3, or 3%, and $29,
or 10%, for the third quarter and nine months ended September 30, 1998,
respectively, over the equivalent prior periods, primarily due to higher fee
income and net investment income resulting from growth in assets under
management. Group Annuity average total account values grew $1.3 billion, or
13%, to $11.1 billion as of September 30, 1998 from $9.8 billion as of September
30, 1997 due to new deposits.
Expenses increased $62, or 22%, and $237, or 30%, for the third quarter and nine
months ended September 30, 1998, respectively, as compared to the same prior
year periods as a result of continued growth in this segment. Benefits, claims
and claim adjustment expenses increased $6 and $69 for the third quarter and
nine months ended September 30, 1998, respectively, compared to the same periods
in 1997 primarily due to increased interest credited on Individual Annuity
general account values. Average Individual Annuity general account values
increased $975, or 31%, to $4.1 billion at September 30, 1998 from $3.1 billion
at September 30, 1997. Amortization of deferred policy acquisition costs
increased $25 and $62 for the third quarter and nine months ended September 30,
1998, respectively, compared to the same periods in 1997 as prior and current
year sales remained strong. In addition, for the third quarter and nine months
ended September 30, 1998, other business expenses increased $23 and $78,
respectively, compared to prior year periods, as a result of the continued
growth in this segment.
Annuity net income increased $14, or 26%, and $49, or 34%, for the third quarter
and nine months ended September 30, 1998, respectively, as compared to the same
prior year periods as a result of revenue growth and continued operating
efficiencies.
INDIVIDUAL LIFE INSURANCE
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $145 $129 $421 $376
Expenses 128 114 376 338
---- ---- ---- ----
NET INCOME $ 17 $ 15 $ 45 $ 38
---- ---- ---- ----
Revenues for the third quarter and nine months ended September 30, 1998
increased $16, or 12%, and $45, 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 $447, or
57%, to $1.2 billion as of September 30, 1998 from $786 as of September 30, 1997
due to strong sales. Variable life product sales constituted $82, or 75%, of
total Individual Life Insurance new sales as of September 30, 1998, an increase
of $21, or 34%, compared to the same period in 1997.
Expenses increased $14, or 12%, and $38, or 11%, for the third quarter and nine
months ended September 30, 1998, respectively, as compared to the equivalent
periods in 1997. This increase was primarily the result of higher benefits,
claims, and claim adjustment expenses and amortization of deferred acquisition
costs associated with the growth in this segment as well as increased mortality
experience during 1998.
Net income increased $2, or 13%, and $7, or 18%, for the third quarter and nine
months ended September 30, 1998, respectively, as compared to the same period in
1997 as a result of strong sales and revenue growth.
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EMPLOYEE BENEFITS
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
Revenues $ 664 $ 522 $2,045 $1,641
Expenses 640 499 1,981 1,576
------ ------ ------ ------
NET INCOME $ 24 $ 23 $ 64 $ 65
------ ------ ------ ------
Revenues for the third quarter and nine months ended September 30, 1998
increased $142, or 27%, and $404, or 25%, respectively, over the comparable
prior year period. Group Insurance revenues increased $47, or 12%, and $158, or
13%, for third quarter and nine months ended September 30, 1998, respectively,
compared to prior year periods. This increase was due to strong sales of fully
insured business, excluding buyouts, of $336 for the nine months ended September
30, 1998, an increase of $52, or 18%, compared to the prior year period. This
growth in new sales was driven by group life and group disability business whose
sales grew 18% compared to the nine months ended September 30, 1997. Specialty
Insurance revenues increased $95, or 77%, and $246, or 55%, for the third
quarter and nine months ended September 30, 1998 as compared to the same periods
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.
Expenses increased $141, or 28%, and $405, or 26%, for the third quarter and
nine months ended September 30, 1998, respectively, as compared to the same
prior year periods. Group Insurance expenses increased $44, or 11%, and $149, or
13%, for the third quarter and nine months ended September 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. Specialty Insurance expenses increased $97, or 84%, and $256,
or 61%, for the third quarter and nine months ended September 30, 1998,
respectively, compared to the same periods in 1997, primarily due to higher
expenses associated with increased variable COLI sales and leveraged
COLI renewal premium.
Net income increased $1, or 4%, and decreased $1, or 2%, for the third quarter
and nine months ended September 30, 1998, respectively, as compared to the same
periods in 1997. Group Insurance net income increased $3, or 19%, and $9, or
21%, for third quarter and nine months ended September 30, 1998, respectively,
as compared to the equivalent periods in 1997, as a result of increased premium
revenue and favorable mortality and morbidity experience. Specialty Insurance
net income was $5 and $13 for the third quarter and nine months ended September
30, 1998, respectively, as compared to net income of $7 and $23 for the
comparable 1997 periods. The 1998 Specialty Insurance results were impacted by
operating losses of $(1) and $(5) for the third quarter and nine months ended
September 30, 1998, respectively, relating to the Company's international
operations. In addition, COLI earnings decreased $1 and $2 for the third quarter
and nine months ended September 30, 1998, respectively, as compared to the
equivalent periods in 1997.
GUARANTEED INVESTMENT CONTRACTS
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
Revenues $ 35 $ 62 $125 $196
Expenses 35 62 125 196
---- ---- ---- ----
NET INCOME $ -- $ -- $ -- $ --
---- ---- ---- ----
This segment reported no net income for the third quarter and nine months ended
September 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.
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INVESTMENTS
Invested assets, excluding separate accounts, totaled $21.4 billion as of
September 30, 1998 and were comprised of $17.1 billion of fixed maturities, $3.7
billion of policy loans, and other investments of $575. Policy loans, which had
a weighted-average interest rate of 11.0% as of September 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
SEPTEMBER 30, 1998 DECEMBER 31, 1997
---------------------- ----------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
---------- ------- ---------- -------
Corporate $ 7,942 46.4% $ 7,970 47.3%
ABS 2,890 16.9% 3,199 19.0%
Commercial MBS 2,097 12.2% 1,606 9.5%
CMO 935 5.5% 978 5.8%
Municipal - tax-exempt 838 4.9% 171 1.0%
Government/Government agencies - Foreign 576 3.4% 502 3.0%
MBS - agency 494 2.9% 514 3.1%
Municipal - taxable 234 1.4% 267 1.6%
Government/Government agencies - U.S. 105 0.6% 241 1.4%
Short-term 996 5.8% 1,395 8.3%
Redeemable preferred stock 5 -- 5 --
------- ----- ------- -----
TOTAL FIXED MATURITIES $17,112 100.0% $16,848 100.0%
------- ----- ------- -----
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
(before-tax) 1998 1997 1998 1997
---- ---- ------ ------
Net investment income $393 $360 $1,185 $1,097
Yield on average invested assets (1) 7.5% 7.1% 7.6% 7.3%
Net realized capital gains -- $ 1 -- --
---- ---- ------ ------
(1) Represents annualized net investment income (excluding net realized capital
gains) divided by average invested assets at cost (fixed maturities at
amortized cost).
For the third quarter ended September 30, 1998, before-tax net investment income
was $393, compared to $360 in 1997, an increase of $33, or 9%, as a result of
higher average invested assets and increased yields on average invested assets.
Before-tax yields on average invested assets for the third quarter increased to
7.5% from 7.1% in 1997. For the nine months ended September 30, 1998, before-tax
net investment income was $1,185 as compared with $1,097 in 1997, an increase of
$88, or 8%. Before-tax yields for the nine month period increased to 7.6% from
7.3% in 1997. The increase in yields on average invested assets for both the
third quarter and nine months ended September 30, 1998 when compared to the
prior year periods was due to the Company's continuing objective of increasing
its investment in municipal tax-exempt securities in order to increase after-tax
yields as well as an increase in the allocation to assets rated BBB (see Capital
Markets Risk Management section below). The Company continued its objective of
increasing the allocation to municipal tax-exempt securities in order to
increase after-tax yields.
There were no net realized capital gains for the third quarter or nine months
ended September 30, 1998. During the quarter, write downs related to certain
below investment grade bonds were offset by gains from the sale of fixed
maturities and equity securities. See Note 1 (b) of Notes to Condensed
Consolidated Financial Statements for a discussion of combined structured note
transactions.
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
14
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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. For a discussion of investment
contingencies see Note 6 (b) of Notes to Condensed Consolidated Financial
Statements.
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 September 30, 1998, approximately 99% of the fixed maturity portfolio was
invested in investment-grade securities.
FIXED MATURITIES BY CREDIT QUALITY
SEPTEMBER 30, 1998 DECEMBER 31, 1997
---------------------- -----------------------
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------- ------- ---------- -------
U.S. Government/Government agencies $ 2,624 9.7% $ 2,907 10.7%
AAA 3,883 14.4% 3,974 14.6%
AA 2,872 10.6% 2,967 10.9%
A 9,043 33.4% 9,351 34.3%
BBB 7,146 26.4% 5,966 21.9%
BB and below 401 1.5% 205 0.7%
Short-term 1,094 4.0% 1,869 6.9%
------- ----- ------- -----
TOTAL FIXED MATURITIES $27,063 100.0% $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
September 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.
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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 $1.1
billion and $1.5 billion as of September 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:
SEPTEMBER 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 $2,134 $1,907
Net unrealized capital gains on securities, net of tax 379 237
------ ------
TOTAL STOCKHOLDERS' EQUITY $2,513 $2,144
------ ------
TOTAL CAPITALIZATION EXCLUDING NET UNREALIZED CAPITAL GAINS ON SECURITIES, NET OF TAX $3,034 $2,607
------ ------
Debt to equity excluding net unrealized capital gains on securities, net of tax 42% 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 $427, or 16%, as of September 30, 1998, as
compared to December 31, 1997. This change was primarily due to the issuance of
$250 of TruPS as well as $278 of net income partially offset by the retirement
of $50 in commercial paper, the repurchase of treasury stock, net of
reissuances, of $9 and dividends declared of $37. 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 42% and 30% as of September 30,
1998, respectively, from 37% and 27% as of December 31, 1997, respectively.
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 $37 in dividends for the nine month period ended
September 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
$57 through September 30, 1998.
TREASURY STOCK
During the first nine months of 1998, to make shares available to employees
pursuant to stock-based benefit plans, the Company repurchased 285,000 shares of
its common stock in the open market at a total cost of $15. 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 nine months of
1998, the Company reissued 128,032 shares of treasury stock at a cost of $6. The
Company currently intends to purchase additional shares of its common stock to
make shares available for its various employee stock-based benefit plans.
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RATINGS
As of October 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.
CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
----- -----
Cash provided by operating activities $ 320 $ 516
Cash used for investing activities $(343) $(229)
Cash provided by (used for) financing activities $ 25 $(302)
Cash - end of period $ 87 $ 57
----- -----
The change in cash provided by operating activities was primarily the result of
timing in the settlement of receivables and payables as well as an increase in
income taxes paid. The increase in cash provided by financing activities was
primarily due to increases in investment-type contracts, changes in debt and
dividends and proceeds from the TruPs offering, which were partially offset by
proceeds from the IPO in May 1997. The change in cash used for investing
activities primarily reflects the investment of cash from operating and
financing activities. Operating cash flows in both periods have been more than
adequate to meet liquidity requirements.
PLANCO
On August 26, 1998, the Company completed the purchase of all outstanding shares
of 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. The acquisition has been accounted for
as a purchase and accordingly, the results of PLANCO's operations have been
included in the Company's consolidated financial statements from the closing
date of the transaction.
SUBSEQUENT EVENT
On November 10, 1998, the Company recaptured an in-force block of COLI business
from MBL Life Assurance Co. of New Jersey (MBL Life), as well as purchased the
outstanding interest in International Corporate Marketing Group (ICMG), which
was previously 40% owned by MBL Life. The transaction was 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.
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
IN GENERAL
The Year 2000 issue relates to the ability or inability of computer hardware,
software and other information technology (IT) systems, as well as non-IT
systems, such as equipment and machinery with imbedded chips and
microprocessors, to properly process information and data containing or related
to dates beginning with the year 2000 and beyond. The Year 2000 issue exists
because, historically, many IT and non-IT systems that are in use today were
developed years ago when a year was identified using a two-digit date field
rather than a four-digit date field. As information and data containing or
related to the century date are introduced to date sensitive systems, these
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systems may recognize the year 2000 as "1900", or not at all, which may result
in systems processing information incorrectly. This, in turn, may significantly
and adversely affect the integrity and reliability of information databases of
IT systems, may cause the malfunctioning of certain non-IT systems, 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, distributors and others, may also adversely
affect any given company.
The integrity and reliability of Hartford Life's IT systems, as well as the
reliability of its non-IT systems, are integral aspects of Hartford Life's
business. Hartford Life has thousands of individual and business customers that
have insurance policies, annuities, mutual funds and other financial products of
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, various IT systems support communications and other
systems that integrate Hartford Life's various business segments and field
offices, including Hartford Life's foreign operations. Hartford Life also 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, many of which
provide date sensitive data to Hartford Life, and whose operations are important
to Hartford Life's business.
INTERNAL YEAR 2000 EFFORTS AND TIMETABLE
Beginning in 1990, Hartford Life began working on making its IT systems Year
2000 ready, either through installing new programs or replacing systems. Since
January 1998, Hartford Life's Year 2000 efforts have focused on the remaining
Year 2000 issues related to IT and non-IT systems in all of Hartford Life's
business segments. These Year 2000 efforts include the following five main
initiatives: (1) identifying and assessing Year 2000 issues; (2) taking actions
to remediate IT and non-IT systems so that they are Year 2000 ready; (3) testing
and certifying IT and non-IT systems as Year 2000 ready; (4) deploying such
remediated and tested systems back into their respective production
environments; and (5) conducting internal and external integrated testing of
such systems. Hartford Life currently anticipates that initiatives (1) through
(4) of its internal Year 2000 efforts will be substantially complete by the end
of 1998, and that initiative (5) testing will begin in early 1999 and continue
through the end of 1999.
THIRD PARTY YEAR 2000 EFFORTS AND TIMETABLE
Hartford Life's Year 2000 efforts include assessing the potential impact on
Hartford Life of third parties' Year 2000 readiness. Hartford Life's third party
Year 2000 efforts include the following three main initiatives: (1) identifying
third parties which have significant business relationships with Hartford Life
and inquiring of such third parties regarding their Year 2000 readiness; (2)
evaluating such third parties' responses to Hartford Life's inquiries; and (3)
based on the evaluation of third party responses and the significance of the
business relationship, conducting additional activities with third parties as
determined to be necessary in each case, which activities may include integrated
IT systems testing. Hartford Life has completed the first third party initiative
and is in the process of evaluating third party responses received. Hartford
Life currently anticipates that it will substantially complete the response
evaluation in early 1999 and that it will conduct the additional activities
described in initiative (3) beginning in early 1999 and continue through the end
of 1999 as necessary. However, notwithstanding these third party Year 2000
efforts, 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 theses third parties to
adequately address their Year 2000 issues.
YEAR 2000 COSTS
The costs of Hartford Life's Year 2000 program that have been incurred through
the year ended December 31, 1997 have not been material to Hartford Life's
financial condition or results of operations. Management estimates that
after-tax costs related to the Year 2000 program to be incurred in 1998 and 1999
will be $5 in total, of which approximately $2 has been incurred as of September
30, 1998. These costs are being expensed as incurred and have not had, and are
not currently expected to have, a material impact on Hartford Life's financial
condition or results of operations.
RISKS AND CONTINGENCY PLANS
If significant Year 2000 problems arise, including problems arising with third
parties, failures of IT and non-IT systems could occur, which in turn could
result in substantial interruptions in Hartford Life's business. Given the
uncertain nature of Year 2000 problems that may arise, especially those related
to the readiness of third parties discussed above, Hartford Life cannot
determine at this time whether the consequences of Year 2000 related problems
that could arise will have a material impact on Hartford Life's financial
condition or results of operations.
Hartford Life is in the process of developing certain contingency plans so that
if, despite its Year 2000 efforts, Year 2000 problems ultimately arise, the
impact of such problems may be minimized. These contingency plans are being
developed based on, among other things, known or reasonably anticipated
circumstances and potential vulnerabilities. The contingency planning also
includes assessing
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the dependency of Hartford Life's business on third parties and their Year 2000
readiness. Hartford Life currently anticipates that internal and external
contingency plans will be substantially complete by the end of the second
quarter of 1999. However, in many contexts, Year 2000 issues are dynamic, and
ongoing assessments of business functions, vulnerabilities and risks must be
made. As such, new contingency plans may be needed in the future and/or existing
plans may need to be modified as circumstances warrant.
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 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/ Mary Jane Fortin
-----------------------------
Mary Jane Fortin
Chief Accounting Officer and
Assistant Vice President
NOVEMBER 13, 1998
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HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-Q
EXHIBITS INDEX
EXHIBIT # DESCRIPTION
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10.01 1997 Hartford Life, Inc. Incentive Stock Plan, as amended, is filed herewith.
27 Financial Data Schedule is filed herewith.
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