<PAGE> 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.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
ITEM 1. FINANCIAL STATEMENTS PAGE
----
<S> <C>
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
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Third Quarter Ended Nine Months Ended
September 30, September 30,
------------------- --------------------
(In millions, except for per share data) (Unaudited) 1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
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
</TABLE>
(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
<PAGE> 4
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In millions, except for share data) 1998 1997
------------- ------------
(Unaudited)
<S> <C> <C>
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
--------- ---------
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
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
------- ------- ------- -------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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)
------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
(In millions) (Unaudited) EARNINGS EQUITY
-------- -------------
<S> <C> <C>
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
------- -------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
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
------- ------- ------- --------- ----------- -----------
<S> <C> <C> <C> <C> <C> <C>
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)
------- ------- ------- ------- ------- -------
</TABLE>
<TABLE>
<CAPTION>
TOTAL
RETAINED STOCKHOLDERS'
(In millions) (Unaudited) EARNINGS EQUITY
-------- -------------
<S> <C> <C>
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
------- -------
</TABLE>
(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.
5
<PAGE> 6
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
-----------------------
(In millions) (Unaudited) 1998 1997
------- --------
<S> <C> <C>
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
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
6
<PAGE> 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
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.
7
<PAGE> 8
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.
<TABLE>
<CAPTION>
For the Third Quarter Ended For the Nine Months Ended
------------------------------------ ----------------------------------
SEPTEMBER 30, 1998 Income Shares Per Share Amount Income Shares Per Share Amount
------ ------ ---------------- ------ ------ ----------------
<S> <C> <C> <C> <C> <C> <C>
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
----- ----- ----- ----- ----- -----
</TABLE>
8
<PAGE> 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 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
<PAGE> 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
<TABLE>
<S> <C>
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
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
<TABLE>
<CAPTION>
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $1,287 $1,058 $3,846 $3,155
Expenses 1,187 975 3,568 2,936
------ ------ ------ ------
NET INCOME $ 100 $ 83 $ 278 $ 219
------ ------ ------ ------
</TABLE>
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:
10
<PAGE> 11
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.
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- ------------------
1998 1997 1998 1997
----- ----- ----- -----
<S> <C> <C> <C> <C>
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
----- ----- ----- -----
</TABLE>
The sections that follow analyze each segment's results. Specific topics such as
investment results are discussed separately following the segment overviews.
11
<PAGE> 12
ANNUITY
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $ 412 $ 336 $1,212 $ 926
Expenses 345 283 1,018 781
------ ------ ------ ------
NET INCOME $ 67 $ 53 $ 194 $ 145
------ ------ ------ ------
</TABLE>
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
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $145 $129 $421 $376
Expenses 128 114 376 338
---- ---- ---- ----
NET INCOME $ 17 $ 15 $ 45 $ 38
---- ---- ---- ----
</TABLE>
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.
12
<PAGE> 13
EMPLOYEE BENEFITS
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -------------------
1998 1997 1998 1997
------ ------ ------ ------
<S> <C> <C> <C> <C>
Revenues $ 664 $ 522 $2,045 $1,641
Expenses 640 499 1,981 1,576
------ ------ ------ ------
NET INCOME $ 24 $ 23 $ 64 $ 65
------ ------ ------ ------
</TABLE>
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
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- -----------------
1998 1997 1998 1997
---- ---- ---- ----
<S> <C> <C> <C> <C>
Revenues $ 35 $ 62 $125 $196
Expenses 35 62 125 196
---- ---- ---- ----
NET INCOME $ -- $ -- $ -- $ --
---- ---- ---- ----
</TABLE>
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.
13
<PAGE> 14
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
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
---------------------- ----------------------
TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
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%
------- ----- ------- -----
</TABLE>
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------- --------------------
(before-tax) 1998 1997 1998 1997
---- ---- ------ ------
<S> <C> <C> <C> <C>
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 -- --
---- ---- ------ ------
</TABLE>
(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
<PAGE> 15
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
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
---------------------- -----------------------
FAIR VALUE PERCENT FAIR VALUE PERCENT
---------- ------- ---------- -------
<S> <C> <C> <C> <C>
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%
------- ----- ------- -----
</TABLE>
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.
15
<PAGE> 16
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:
<TABLE>
<CAPTION>
SEPTEMBER 30, 1998 DECEMBER 31, 1997
------------------ -----------------
<S> <C> <C>
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%
------ ------
</TABLE>
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.
16
<PAGE> 17
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
<TABLE>
<CAPTION>
NINE MONTHS ENDED
SEPTEMBER 30,
------------------
1998 1997
----- -----
<S> <C> <C>
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
----- -----
</TABLE>
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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<PAGE> 18
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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<PAGE> 19
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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<PAGE> 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/ Mary Jane Fortin
-----------------------------
Mary Jane Fortin
Chief Accounting Officer and
Assistant Vice President
NOVEMBER 13, 1998
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<PAGE> 21
HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-Q
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
--------- -----------
<S> <C>
10.01 1997 Hartford Life, Inc. Incentive Stock Plan, as amended, is filed herewith.
27 Financial Data Schedule is filed herewith.
</TABLE>
21
<PAGE> 1
1997 HARTFORD LIFE, INC. INCENTIVE STOCK PLAN
1. PURPOSE
The purpose of the 1997 Hartford Life, Inc. Incentive Stock Plan is to motivate
and reward superior performance on the part of employees of Hartford Life, Inc.
and its subsidiaries and Participating Companies and to thereby attract and
retain employees of superior ability. In addition, the Plan is intended to
further opportunities for stock ownership by such employees in order to increase
their proprietary interest in the Company, and, as a result, their interest in
the success of the Company. Awards will be made, in the discretion of the
Committee, to Key Employees (including officers and directors who are also
employees) whose responsibilities and decisions directly affect the performance
of any Participating Company and its subsidiaries. Such incentive awards may
consist of stock options, stock appreciation rights payable in stock or cash,
performance shares, restricted stock or any combination of the foregoing, as the
Committee may determine.
2. DEFINITIONS
When used herein, the following terms shall have the following meanings:
"ACT" means the Securities Exchange Act of 1934.
"ANNUAL LIMIT" means the maximum number of shares of Stock for which
Awards may be granted under the Plan in each Plan Year as provided in Section 3
of the Plan.
"AWARD" means an award granted to any Key Employee in accordance with
the provisions of the Plan in the form of Options, Rights, Performance Shares or
Restricted Stock, or any combination of the foregoing.
"AWARD AGREEMENT" means the written agreement evidencing each Award
granted to a Key Employee under the Plan.
"BENEFICIAL OWNER" means any Person who, directly or indirectly, has
the right to vote or dispose of or has "beneficial ownership" (within the
meaning of Rule 13d-3 under the Act) of any securities of a company, including
any such right pursuant to any agreement, arrangement or understanding (whether
or not in writing), provided that: (i) a Person shall not be deemed the
Beneficial Owner of any security as a result of an agreement, arrangement or
understanding to vote such security (A) arising solely from a revocable proxy or
consent given in response to a public proxy or consent solicitation made
pursuant to, and in accordance with, the Act and the applicable rules and
regulations thereunder, or (B) made in connection with, or to otherwise
participate in, a proxy or consent solicitation made, or to be made, pursuant
to, and in accordance with, the applicable provisions of the Act and the
applicable rules and regulations thereunder, in
<PAGE> 2
either case described in clause (A) or (B) above, whether or not such agreement,
arrangement or understanding is also then reportable by such Person on Schedule
13D under the Act (or any comparable or successor report); and (ii) a Person
engaged in business as an underwriter of securities shall not be deemed to be
the Beneficial Owner of any security acquired through such Person's
participation in good faith in a firm commitment underwriting until the
expiration of forty days after the date of such acquisition.
"BENEFICIARY" means the beneficiary or beneficiaries designated
pursuant to Section 10 to receive the amount, if any, payable under the Plan
upon the death of a Key Employee.
"BOARD" means the Board of Directors of the Company.
"CHANGE OF CONTROL" means the occurrence of an event defined in Section
9 of the Plan.
"CODE" means the Internal Revenue Code of 1986, as now in effect or as
hereafter amended. (All citations to sections of the Code are to such sections
as they may from time to time be amended or renumbered.)
"COMMITTEE" means the Compensation and Personnel Committee of the Board
or such other committee as may be designated by the Board to administer the
Plan.
"COMPANY" means Hartford Life, Inc. and its successors and assigns.
"FAIR MARKET VALUE," unless otherwise indicated in the provisions of
this Plan, means, as of any date, the composite closing price for one share of
Stock on the New York Stock Exchange or, if no sales of Stock have taken place
on such date, the composite closing price on the most recent date on which
selling prices were quoted, the determination to be made in the discretion of
the Committee.
"INCENTIVE STOCK OPTION" means a stock option qualified under Section
422 of the Code.
"KEY EMPLOYEE" means an employee (including any officer or director who
is also an employee) of any Participating Company whose responsibilities and
decisions, in the judgment of the Committee, directly affect the performance of
the Company and its subsidiaries.
"LIMITED STOCK APPRECIATION RIGHT" means a stock appreciation right
which shall become exercisable automatically upon the occurrence of a Change of
Control as described in Section 9 of the Plan.
"OPTION" means an option awarded under Section 5 of the Plan to
purchase Stock of the Company, which option may be an Incentive Stock Option or
a non-qualified Stock option.
"PARTICIPATING COMPANY" means the Company or any subsidiary or other
affiliate of the Company; provided, however, for Incentive Stock Options only,
"Participating Company" means
2
<PAGE> 3
the Company or any corporation which at the time such Option is granted
qualifies as a "subsidiary" of the Company under Section 424(f) of the Code.
"PERFORMANCE SHARE" means a performance share awarded under Section 6
of the Plan.
"PERSON" has the meaning ascribed to such term in Section 3(a)(9) of
the Act, as supplemented by Section 13(d)(3) of the Act; provided, however, that
Person shall not include (i) The Hartford, the Company, any subsidiary of the
Company or any other Person controlled by the Company, (ii) any trustee or other
fiduciary holding securities under any employee benefit plan of The Hartford,
the Company or of any subsidiary of the Company, or (iii) a corporation owned,
directly or indirectly, by the stockholders of the Company in substantially the
same proportions as their ownership of securities of the Company.
"PLAN" means the 1997 Hartford Life, Inc. Incentive Stock Plan, as the
same may be amended, administered or interpreted from time to time.
"PLAN YEAR" means the calendar year.
"RETIREMENT" means eligibility to receive immediate retirement benefits
under a Participating Company pension plan.
"RESTRICTED STOCK" means Stock awarded under Section 7 of the Plan
subject to such restrictions as the Committee deems appropriate or desirable.
"RIGHT" means a stock appreciation right awarded in connection with an
Option under Section 5 of the Plan.
"STOCK" means the Class A Common Stock ($.01 par value) of the Company.
"THE HARTFORD" means The Hartford Financial Services Group, Inc. and
its successors and assigns.
"TOTAL DISABILITY" means the complete and permanent inability of a Key
Employee to perform all of his or her duties under the terms of his or her
employment with any Participating Company, as determined by the Committee upon
the basis of such evidence, including independent medical reports and data, as
the Committee deems appropriate or necessary.
"TRANSFEREE" means any person or entity to whom or to which a
non-qualified stock option has been transferred and assigned in accordance with
Section 5(h) of the Plan.
3. SHARES SUBJECT TO THE PLAN
3
<PAGE> 4
The aggregate number of shares of Stock which may be awarded under the
Plan in any Plan Year shall be subject to an annual limit. The maximum number of
shares of Stock for which Awards may be granted under the Plan in each Plan Year
shall be 1.5 percent (1.5%) of the total of the issued and outstanding shares of
Class A Common Stock and Class B Common Stock and Class A treasury Stock and
Class B treasury Stock as reported in the Annual Report on Form 10-K of the
Company for the fiscal year ending immediately prior to any Plan Year, except
that for the Plan year that includes the initial public offering of Stock of the
Company, such maximum number shall be 1.5% of the issued and outstanding shares
of Class A Common Stock and Class B Common Stock of the Company immediately
following such offering (excluding shares issued by virtue of underwriters'
over-allotments). Any unused portion of the Annual Limit for any Plan Year shall
be carried forward and be made available for awards in succeeding Plan Years.
In addition to the foregoing, in no event shall more than five million
(5,000,000) shares of Stock be cumulatively available for Awards of Incentive
Stock Options under the Plan, and provided further, that no more than twenty
percent (20%) of the total number of shares on a cumulative basis shall be
available for Restricted Stock and Performance Share Awards. For any Plan Year,
no individual employee may receive an Award of Options for more than the lesser
of (i) ten percent (10%) of the Annual Limit on available shares applicable to
that Plan Year or (ii) 500,000 shares; except that, for the Plan Year that
follows the initial public offering of Stock of the Company, each individual
employee may receive in addition to the foregoing limit that number of
substitute Options and Restricted Stock equitably determined by the Committee to
be required to replace stock options and restricted stock granted by The
Hartford and surrendered by such employee in connection with such offering.
Subject to the above limitations, shares of Stock to be issued under
the Plan may be made available from the authorized but unissued shares, or
shares held by the Company in treasury or from shares purchased in the open
market.
Notwithstanding anything herein to the contrary, and to the extent
permitted by applicable law, no award of shares of Stock shall be made under the
Plan, and the Company shall have no obligation to issue any shares of Stock
under the Plan, if such award would cause the direct or indirect percentage
ownership of The Hartford of the combined voting power or the value of the
capital stock of the Company to fall below 80%.
4
<PAGE> 5
For the purpose of computing the total number of shares of Stock
available for Awards under the Plan and in applying the limitation in the
preceding paragraph, there shall be counted against the foregoing limitations
the number of shares of Stock subject to issuance upon exercise or settlement of
Awards and the number of shares of Stock which equal the value of performance
share Awards, in each case determined as at the dates on which such Awards are
granted. If any Awards under the Plan are forfeited, terminated, expire
unexercised, are settled in cash in lieu of Stock or are exchanged for other
Awards, the shares of Stock which were theretofore subject to such Awards shall
again be available for Awards under the Plan to the extent of such forfeiture,
termination, cash settlement or exchange of such Awards. Further, any shares
that are exchanged (either actually or constructively) by optionees as full or
partial payment to the Company of the purchase price of shares being acquired
through the exercise of a Stock option granted under the Plan may be available
for subsequent Awards.
4. GRANT OF AWARDS AND AWARD AGREEMENTS
(a) Subject to the provisions of the Plan, the Committee shall (i)
determine and designate from time to time those Key Employees or groups of Key
Employees to whom Awards are to be granted; (ii) determine the form or forms of
Award to be granted to any Key Employee; (iii) determine the amount or number of
shares of Stock subject to each Award; and (iv) determine the terms and
conditions of each Award.
(b) Each Award granted under the Plan shall be evidenced by a written
Award Agreement. Such agreement shall be subject to and incorporate the express
terms and conditions, if any, required under the Plan or required by the
Committee.
5. STOCK OPTIONS AND RIGHTS
(a) With respect to Options and Rights, the Committee shall (i)
authorize the granting of Incentive Stock Options, non-qualified Stock options,
or a combination of Incentive Stock Options and non-qualified Stock options;
(ii) authorize the granting of Rights which may be granted in connection with
all or part of any Option granted under this Plan, either concurrently with the
grant of the Option or at any time thereafter during the term of the Option;
(iii) determine the number of shares of Stock subject to each Option or the
number of shares of Stock that shall be used to determine the value of a Right;
and (iv) determine the time or times when and the manner in which each Option or
Right shall be exercisable and the duration of the exercise period.
(b) Any option issued hereunder which is intended to qualify as an
Incentive Stock Option shall be subject to such limitations or requirements as
may be necessary for the purposes of Section 422 of the Code or any regulations
and rulings thereunder to the extent and in such form as determined by the
Committee in its discretion.
(c) The exercise period for a non-qualified Stock option and any
related Right shall not exceed ten years and two days from the date of grant,
and the exercise period for an Incentive Stock Option and any related Right
shall not exceed ten years from the date of grant.
5
<PAGE> 6
(d) The Option price per share shall be determined by the Committee at
the time any Option is granted and shall be not less than the Fair Market Value
of one share of Stock on the date the Option is granted.
(e) No part of any Option or Right may be exercised until the Key
Employee who has been granted the Award shall have remained in the employ of a
Participating Company for such period after the date of grant as the Committee
may specify, if any, and the Committee may further require exercisability in
installments.
(f) The purchase price of the shares as to which an Option shall be
exercised shall be paid to the Company at the time of exercise either in cash or
Stock already owned by the optionee having a total Fair Market Value equal to
the purchase price, or a combination of cash and Stock having a total fair
market value, as so determined, equal to the purchase price. The Committee shall
determine acceptable methods for tendering Stock as payment upon exercise of an
Option and may impose such limitations and prohibitions on the use of Stock to
exercise an Option as it deems appropriate.
(g) In case of termination of employment, the following provisions
shall apply:
(A) If a Key Employee who has been granted an Option
shall die before such Option has expired, his or her Option may be exercised in
full by (i) the person or persons to whom the Key Employee's rights under the
Option pass by will, or if no such person has such right, by his or her
executors or administrators; (ii) his or her Transferee(s) (with respect to
non-qualified stock options); or (iii) his or her Beneficiary designated
pursuant to Section 10, at any time, or from time to time, within five years
after the date of the Key Employee's death or within such other period, and
subject to such terms and conditions as the Committee may specify, but not later
than the expiration date specified in Section 5(c) above.
(B) If the Key Employee's employment by any Participating
Company terminates because of his or her Retirement or Total Disability, he or
she may exercise his or her Options in full at any time, or from time to time,
within five years after the date of the termination of his or her employment or
within such other period, and subject to such terms and conditions as the
Committee may specify, but not later than the expiration date specified in
Section 5(c) above. Any such Options not fully exercisable immediately prior to
such optionee's retirement shall become fully exercisable upon such retirement
unless the Committee, in its sole discretion, shall otherwise determine.
(C) Except as provided in Section 9, if the Key Employee
shall voluntarily resign before eligibility for Retirement or he or she is
terminated for cause as determined by the Committee, the Options or Rights shall
be canceled coincident with the effective date of the termination of employment.
(D) If the Key Employee's employment terminates for any
other reason, he or she may exercise his or her Options, to the extent that he
or she shall have been entitled to do so
6
<PAGE> 7
at the date of the termination of his or her employment, at any time, or from
time to time, within three months after the date of the termination of his or
her employment or within such other period, and subject to such terms and
conditions as the Committee may specify, but not later than the expiration date
specified in Section 5(c) above.
(h) Except as provided in this Section 5(h), no Option or Right granted
under the Plan shall be transferable other than by will or by the laws of
descent and distribution. During the lifetime of the optionee, an Option or
Right shall be exercisable only by the Key Employee to whom the Option or Right
is granted (or his or her estate or designated Beneficiary). Notwithstanding the
foregoing, all or a portion of a non-qualified stock option may be transferred
and assigned by such persons designated by the Committee, to such persons
designated by the Committee and upon such terms and conditions as the Committee
may from time to time authorize and determine in its sole discretion.
(i) With respect to an Incentive Stock Option, the Committee shall
specify such terms and provisions as the Committee may determine to be necessary
or desirable in order to qualify such Option as an "incentive stock option"
within the meaning of Section 422 of the Code.
(j) With respect to the exercisability and settlement of Rights:
(i) Upon exercise of a Right, the Key Employee shall
be entitled, subject to such terms and conditions the
Committee may specify, to receive upon exercise thereof all or
a portion of the excess of (A) the Fair Market Value of a
specified number of shares of Stock at the time of exercise,
as determined by the Committee, over (B) a specified amount
which shall not, subject to Section 5(d), be less than the
Fair Market Value of such specified number of shares of Stock
at the time the Right is granted. Upon exercise of a Right,
payment of such excess shall be made as the Committee shall
specify in cash, the issuance or transfer to the Key Employee
of whole shares of Stock with a Fair Market Value at such time
equal to any excess, or a combination of cash and shares of
Stock with a combined Fair Market Value at such time equal to
any such excess, all as determined by the Committee. The
Company will not issue a fractional share of Stock and, if a
fractional share would otherwise be issuable, the Company
shall pay cash equal to the Fair Market Value of the
fractional share of Stock at such time.
(ii) In the event of the exercise of such Right, the
Company's obligation in respect of any related Option or such
portion thereof will be discharged by payment of the Right so
exercised.
6. PERFORMANCE SHARES
(a) Subject to the provisions of the Plan, the Committee shall (i)
determine and designate from time to time those Key Employees or groups of Key
Employees to whom Awards of Performance Shares are to be made, (ii) determine
the Performance Period (the "Performance
7
<PAGE> 8
Period") and Performance Objectives (the "Performance Objectives") applicable to
such Awards, (iii) determine the form of settlement of a Performance Share and
(iv) generally determine the terms and conditions of each such Award. At any
date, each Performance Share shall have a value equal to the Fair Market Value
of one share of Stock at such date; provided that the Committee may limit the
aggregate amount payable upon the settlement of any Award. The maximum award for
any individual employee in any given year shall be 100,000 Performance Shares.
(b) The Committee shall determine a Performance Period of not less than
two nor more than five years. Performance Periods may overlap and Key Employees
may participate simultaneously with respect to Performance Shares for which
different Performance Periods are prescribed.
(c) The Committee shall determine the Performance Objectives for Awards
of Performance Shares. Performance Objectives may vary from Key Employee to Key
Employee and between groups of Key Employees and shall be based upon one or more
of the following objective criteria, as the Committee deems appropriate, which
may be (i) determined solely by reference to the performance of the Company, any
subsidiary or affiliate of the Company or any division or unit of any of the
foregoing, or (ii) based on comparative performance of any one or more of the
following relative to other entities: (A) earnings per share, (B) return on
equity, (C) cash flow, (D) return on total capital, (E) return on assets, (F)
economic value added, (G) increase in surplus, (H) reductions in operating
expenses, (I) increases in operating margins (J) earnings before income taxes
and depreciation, (K) total shareholder return (L) return on invested capital,
(M) cost reductions and savings, (N) earnings before interest, taxes,
depreciation and amortization ("EBITDA"), (O) pre-tax operating income (P)
productivity improvements, or (Q) a Key Employee's attainment of personal
objectives with respect to any of the foregoing criteria or other criteria such
as growth and profitability, customer satisfaction, leadership effectiveness,
business development, negotiating transactions and sales or developing long term
business goals. If during the course of a Performance Period there shall occur
significant events which the Committee expects to have a substantial effect on
the applicable Performance Objectives during such period, the Committee may
revise such Performance Objectives.
(d) At the beginning of a Performance Period, the Committee shall
determine for each Key Employee or group of Key Employees the number of
Performance Shares or the percentage of Performance Shares which shall be paid
to the Key Employee or member of the group of Key Employees if the applicable
Performance Objectives are met in whole or in part.
(e) If a Key Employee terminates service with all Participating
Companies during a Performance Period because of death, Total Disability,
Retirement, or under other circumstances where the Committee in its sole
discretion finds that a waiver would be in the best interests of the Company,
that Key Employee may, as determined by the Committee, be entitled to payment in
settlement of such Performance Shares at the end of the Performance Period based
upon the extent to which the Performance Objectives were satisfied at the end of
such period and prorated for the portion of the Performance Period during which
the Key Employee was employed by any
8
<PAGE> 9
Participating Company; provided, however, the Committee may provide for an
earlier payment in settlement of such Performance Shares in such amount and
under such terms and conditions as the Committee deems appropriate or desirable.
If a Key Employee terminates service with all Participating Companies during a
Performance Period for any other reason, then such Key Employee shall not be
entitled to any Award with respect to that Performance Period unless the
Committee shall otherwise determine.
(f) Each Award of a Performance Share shall be paid in whole shares of
Stock, or cash, or a combination of Stock and cash either as a lump sum payment
or in annual installments, all as the Committee shall determine, with payment to
commence as soon as practicable after the end of the relevant Performance
Period.
7. RESTRICTED STOCK
(a) Restricted Stock shall be subject to a restriction period (after
which restrictions will lapse) which shall mean a period commencing on the date
the Award is granted and ending on such date as the Committee shall determine
(the "Restriction Period"). The Committee may provide for the lapse of
restrictions in installments where deemed appropriate and it may also require
the achievement of predetermined performance objectives in order for such shares
to vest.
(b) Except when the Committee determines otherwise pursuant to Section
7(d), if a Key Employee terminates employment with all Participating Companies
for any reason before the expiration of the Restriction Period, all shares of
Restricted Stock still subject to restriction shall be forfeited by the Key
Employee and shall be reacquired by the Company.
(c) Except as otherwise provided in this Section 7, no shares of
Restricted Stock received by a Key Employee shall be sold, exchanged,
transferred, pledged, hypothecated or otherwise disposed of during the
Restriction Period.
(d) In cases of death, Total Disability or Retirement or in cases of
special circumstances, the Committee may, in its sole discretion when it finds
that a waiver would be in the best interests of the Company, elect to waive any
or all remaining restrictions with respect to such Key Employee's Restricted
Stock.
(e) The Committee may require, under such terms and conditions as it
deems appropriate or desirable, that the certificates for Stock delivered under
the Plan may be held in custody by a bank or other institution, or that the
Company may itself hold such shares in custody until the Restriction Period
expires or until restrictions thereon otherwise lapse, and may require, as a
condition of any Award of Restricted Stock that the Key Employee shall have
delivered a stock power endorsed in blank relating to the Restricted Stock.
(f) Nothing in this Section 7 shall preclude a Key Employee from
exchanging any shares of Restricted Stock subject to the restrictions contained
herein for any other shares of Stock that are similarly restricted.
9
<PAGE> 10
(g) Subject to Section 7(e) and Section 8, each Key Employee entitled
to receive Restricted Stock under the Plan shall be issued a certificate for the
shares of Stock. Such certificate shall be registered in the name of the Key
Employee, and shall bear an appropriate legend reciting the terms, conditions
and restrictions, if any, applicable to such Award and shall be subject to
appropriate stop-transfer orders.
8. CERTIFICATES FOR AWARDS OF STOCK
(a) The Company shall not be required to issue or deliver any
certificates for shares of Stock prior to (i) the listing of such shares on any
stock exchange on which the Stock may then be listed and (ii) the completion of
any registration or qualification of such shares under any federal or state law,
or any ruling or regulation of any government body which the Company shall, in
its sole discretion, determine to be necessary or advisable.
(b) All certificates for shares of Stock delivered under the Plan shall
also be subject to such stop-transfer orders and other restrictions as the
Committee may deem advisable under the rules, regulations, and other
requirements of the Securities and Exchange Commission, any stock exchange upon
which the Stock is then listed and any applicable federal or state securities
laws, and the Committee may cause a legend or legends to be placed on any such
certificates to make appropriate reference to such restrictions. In making such
determination, the Committee may rely upon an opinion of counsel for the
Company.
(c) Except for the restrictions on Restricted Stock under Section 7,
each Key Employee who receives Stock in settlement of an Award of Stock, shall
have all of the rights of a shareholder with respect to such shares, including
the right to vote the shares and receive dividends and other distributions. No
Key Employee awarded an Option, a Right or Performance Share shall have any
right as a shareholder with respect to any shares covered by his or her Option,
Right or Performance Share prior to the date of issuance to him or her of a
certificate or certificates for such shares.
9. CHANGE OF CONTROL
(a) For purposes of this Plan, a Change of Control shall occur if:
(i) a report on Schedule 13D shall be filed with the
Securities and Exchange Commission pursuant to
Section 13(d) of the Act disclosing that any Person,
other than the Company or The Hartford or a
subsidiary of either of the foregoing or any employee
benefit plan sponsored by the Company or The Hartford
or a subsidiary of either of the foregoing, is the
Beneficial Owner of the greater of (A) the percentage
of the outstanding stock of the Company entitled to
vote in the election of directors of the Company
owned at such time by The Hartford, or (B) twenty
percent or more of the outstanding stock of the
Company entitled to vote in the election of directors
of the Company;
10
<PAGE> 11
(ii) any Person, other than the Company or The Hartford or
a subsidiary of either of the foregoing or any
employee benefit plan sponsored by the Company or The
Hartford or a subsidiary of either of the foregoing,
shall purchase shares pursuant to a tender offer or
exchange offer to acquire any stock of the Company
(or securities convertible into stock) for cash,
securities or any other consideration, provided that
after consummation of the offer, the Person in
question is the Beneficial Owner, directly or
indirectly, of the greater of (A) the percentage of
the outstanding stock of the Company entitled to vote
in the election of directors of the Company owned at
such time by The Hartford, or (B) fifteen percent or
more of the outstanding stock of the Company entitled
to vote in the election of directors of the Company
(calculated as provided in paragraph (d) of Rule
13d-3 under the Act in the case of rights to acquire
stock);
(iii) the stockholders of the Company shall approve (A) any
consolidation or merger of the Company in which the
Company is not the continuing or surviving
corporation or pursuant to which shares of stock of
the Company entitled to vote in the election of
directors of the Company would be converted into
cash, securities or other property, other than a
merger of the Company in which holders of such stock
of the Company immediately prior to the merger have
the same proportionate ownership of common stock
entitled to vote in the election of directors of the
surviving corporation immediately after the merger as
immediately before, or (B) any sale, lease, exchange
or other transfer (in one transaction or a series of
related transactions) of all or substantially all the
assets of the Company; or
(iv) within any 12 month period, the persons who were
directors of the Company immediately before the
beginning of such period (the "Incumbent Directors")
shall cease (for any reason other than death) to
constitute at least a majority of the Board of the
Company or the board of directors of any successor to
the Company, provided that any director who was not a
director at the beginning of such period shall be
deemed to be an Incumbent Director if such director
(A) was elected to the Board of the Company by, or on
the recommendation of or with the approval of, at
least two-thirds of the directors who then qualified
as Incumbent Directors either actually or by prior
operation of this clause (iv), and (B) was not
designated by a Person who has entered into an
agreement with the Company to effect a transaction
described in the immediately preceding clause (iii);
or
(v) a Change of Control as defined in The Hartford 1995
Incentive Stock Plan, as amended from time to time,
occurs with respect to The Hartford at a time when
The Hartford directly or indirectly owns more than
50% of the combined voting power and the value of the
capital stock of the Company;
11
<PAGE> 12
provided that a sale of all of the interest of The Hartford in the Company shall
not be considered a Change of Control for purposes of this Plan.
(b) Notwithstanding any provisions in this Plan to the contrary:
(i) Each outstanding Option granted under the Plan shall
become immediately exercisable in full for the aggregate number of shares
covered thereby and all related Rights shall also become exercisable upon the
occurrence of a Change of Control described in this Section 9 and shall continue
to be exercisable in full for cash for a period of 60 calendar days beginning on
the date that such Change of Control occurs and ending on the 60th calendar day
following that date; provided, however, that no Option or Right shall be
exercisable beyond the expiration date of its original term.
(ii) Options and Rights shall not terminate and shall
continue to be fully exercisable for a period of seven months following the
occurrence of a Change of Control in the case of an employee who is terminated
other than for just cause or who voluntarily terminates his employment because
he or she in good faith believes that as a result of such Change of Control he
is unable effectively to discharge his present duties or the duties of the
position he occupied just prior to the occurrence of such Change of Control. For
purposes of Section 9 only, termination shall be for "just cause" only if such
termination is based on fraud, misappropriation or embezzlement on the part of
the employee which results in a final conviction of a felony. Under no
circumstances, however, shall any Option or Right be exercised beyond the
expiration date of its original term.
(iii) Any Right or portion thereof may be exercised for
cash within the 60 calendar day period following the occurrence of a Change of
Control with settlement, except in the case of a Right related to an Incentive
Stock Option, based on the "Formula Price" which shall be the highest of (A) the
highest composite daily closing price of the Stock during the period beginning
on the 60th calendar day prior to the Change of Control and ending on the date
of such Change of Control, (B) the highest gross price paid for the Stock during
the same period of time, as reported in a report on Schedule 13D filed with the
Securities and Exchange Commission or (C) the highest gross price paid or to be
paid for a share of Stock (whether by way of exchange, conversion, distribution
upon merger, liquidation or otherwise) in any of the transactions set forth in
this Section 9 as constituting a Change of Control.
(iv) Upon the occurrence of a Change of Control, Limited
Stock Appreciation Rights shall automatically be granted as to any Option with
respect to which Rights are not then outstanding; provided, however, that
Limited Stock Appreciation Rights shall be provided at the time of grant of any
Incentive Stock Option subject to exercisability upon the occurrence of a Change
of Control. Limited Stock Appreciation Rights shall entitle the holder thereof,
upon exercise of such rights and surrender of the related Option or any portion
thereof, to receive, without payment to the Company (except for applicable
withholding taxes), an amount in cash equal to the excess, if any, of the
Formula Price as that term is defined in Section 9 over the option price of the
Stock as provided in such Option; provided that in the case of the exercise of
any such Limited Stock Appreciation Right or portion thereof related to an
Incentive Stock Option, the Fair Market Value of the Stock at the time of such
exercise shall be substituted for the Formula Price. Each such Limited Stock
Appreciation Right shall be exercisable only during the period beginning on the
first
12
<PAGE> 13
business day following the occurrence of such Change of Control and ending on
the 60th day following such date and only to the same extent the related Option
is exercisable. Upon exercise of a Limited Stock Appreciation Right and
surrender of the related Option, or portion thereof, such Option, to the extent
surrendered, shall not thereafter be exercisable.
(v) The restrictions applicable to shares of Restricted
Stock held by Key Employees pursuant to Section 7 shall lapse upon the
occurrence of a Change of Control, and such Key Employees shall be entitled to
elect, at any time during the 60 calendar days following the Change of Control,
to receive immediately after the date the Key Employee makes such election
either of the following: (A) unrestricted certificates for all of such shares,
or (B) a lump sum cash amount equal to the number of such shares multiplied by
the Formula Price. If a Key Employee does not make any election during the
foregoing 60 day period, such Key Employee shall be deemed to have made the
election described in Section 9(b)(v)(A) as of the 60th day of such period, and
unrestricted certificates shall be issued to such Key Employee immediately
following such day as described in Section 9(b)(v)(A) hereof.
(vi) If a Change of Control occurs during the course of a
Performance Period applicable to an Award of Performance Shares pursuant to
Section 6, then a Key Employee shall be deemed to have satisfied the Performance
Objectives effective on the date of such occurrence. Such Key Employee shall be
paid, immediately following the occurrence of such Change of Control, a lump sum
cash amount equal to the number of outstanding Performance Shares awarded to
such Key Employee multiplied by the Formula Price.
(c) In the event of a Change of Control, no amendment, suspension or
termination of the Plan thereafter shall impair or reduce the rights of any
person with respect to any Award made under the Plan.
10. BENEFICIARY
(a) Each Key Employee and/or his or her Transferee may file with the
Company a written designation of one or more persons as the Beneficiary who
shall be entitled to receive the Award, if any, payable under the Plan upon his
or her death. A Key Employee or Transferee may from time to time revoke or
change his or her Beneficiary designation without the consent of any prior
Beneficiary by filing a new designation with the Company. The last such
designation received by the Company shall be controlling; provided, however,
that no designation, or change or revocation thereof, shall be effective unless
received by the Company prior to the Key Employee's or Transferee's death, as
the case may be, and in no event shall it be effective as of a date prior to
such receipt.
(b) If no such Beneficiary designation is in effect at the time of a
Key Employee's or Transferee's death, as the case may be, or if no designated
Beneficiary survives the Key Employee or Transferee, or if such designation
conflicts with law, the Key Employee's or Transferee's estate, as the case may
be, shall be entitled to receive the Award, if any, payable under the Plan upon
his or her death. If the Committee is in doubt as to the right of any person to
receive such Award, the Company may retain such Award, without liability for any
interest thereon, until the Committee determines the rights thereto, or the
Company may pay such Award into any court of appropriate
13
<PAGE> 14
jurisdiction and such payment shall be a complete discharge of the liability of
the Company therefor.
11. ADMINISTRATION OF THE PLAN
(a) Each member of the Committee shall be a member of the Board and
both a "non-employee director" within the meaning of Rule 16b-3 under the Act or
successor rule or regulation and an "outside director" for purposes of Section
162(m) of the Internal Revenue Code.
(b) All decisions, determinations or actions of the Committee made or
taken pursuant to grants of authority under the Plan shall be made or taken in
the sole discretion of the Committee and shall be final, conclusive and binding
on all persons for all purposes.
(c) The Committee shall have full power, discretion and authority to
interpret, construe and administer the Plan and any part thereof, and its
interpretations and constructions thereof and actions taken thereunder shall be,
except as otherwise determined by the Board, final, conclusive and binding on
all persons for all purposes.
(d) The Committee's decisions and determinations under the Plan need
not be uniform and may be made selectively among Key Employees, whether or not
such Key Employees are similarly situated.
(e) The Committee may, in its sole discretion, delegate such of its
powers as it deems appropriate to the chief executive officer or other members
of senior management, except that Awards to executive officers shall be made
solely by the Committee and subject to compliance with Rule 16b-3 of the Act.
(f) If a Change of Control has not occurred and if the Committee
determines that a Key Employee has taken action inimical to the best interests
of any Participating Company, the Committee may, in its sole discretion,
terminate in whole or in part such portion of any Option (including any related
Right) as has not yet become exercisable at the time of termination, terminate
any Performance Share Award for which the Performance Period has not been
completed or terminate any Award of Restricted Stock for which the Restriction
Period has not lapsed.
12. AMENDMENT, EXTENSION OR TERMINATION
The Board may, at any time, amend or terminate the Plan and,
specifically, may make such modifications to the Plan as it deems necessary to
avoid the application of Section 162(m) of the Code and the Treasury regulations
issued thereunder. However, no amendment applicable to Incentive Stock Options
shall, without approval by a majority of the Company's stockholders, (a) alter
the group of persons eligible to participate in the Plan, or (b) except as
provided in Section 13 increase the maximum number of shares of Stock which are
available for Awards under the Plan. If a Change of Control has occurred, no
amendment or termination shall impair the rights of any person with respect to a
prior Award.
13. ADJUSTMENTS IN EVENT OF CHANGE IN COMMON STOCK
In the event of any reorganization, merger, recapitalization,
consolidation, liquidation, Stock
14
<PAGE> 15
dividend, Stock split, reclassification, combination of shares, rights offering,
split-up or extraordinary dividend (including a spin-off) or divestiture, or any
other change in the corporate structure or shares of Stock, the Committee may
make such adjustment in the Stock subject to Awards, including Stock subject to
purchase by an Option, or the terms, conditions or restrictions on Stock or
Awards, including the price payable upon the exercise of such Option and the
number of shares subject to restricted Stock awards, as the Committee deems
equitable.
14. SUBSTITUTE AWARDS
The Committee shall be authorized to issue substitute Options and
related Rights to those Key Employees of Participating Companies who surrender
options to acquire stock in The Hartford. The Committee may make a determination
as to the exercise price and number of such substitute options as it may
determine in order equitably to preserve the economic value of the surrendered
options and related rights of The Hartford in the aggregate amount not to exceed
8,000,000 shares. Subject to this limitation, shares of Stock to be issued upon
the exercise of substitute Options may be made available from authorized but
unissued shares or from treasury or shares held by the Company or shares
purchased in the open market.
The maximum number of substitute Options and related Rights that may be
granted to an individual employee is such number as may be determined by the
Committee to be necessary to preserve the economic value of the surrendered
options and related rights of The Hartford by any such individual employee.
The terms and conditions of each substitute Stock award, including,
without limitation, the expiration date of the option, the time or times when,
and the manner in which, each substitute option shall be exercisable, the
duration of the exercise period, the method of exercise, settlement and payment,
and the rules in the event of termination, shall be the same as those of the
surrendered award granted by The Hartford.
The Committee shall also be authorized to issue substitute grants of
Restricted Stock to replace shares of restricted stock of The Hartford
surrendered by employees of Participating Companies. Such substitute shares
shall be subject to the same terms and conditions as the surrendered shares of
The Hartford restricted stock, including, without limitation, the restriction
period of such restricted shares of The Hartford.
15. MISCELLANEOUS
(a) Except as provided in Section 9, nothing in this Plan or any Award
granted hereunder shall confer upon any employee any right to continue in the
employ of any Participating Company or interfere in any way with the right of
any Participating Company to terminate his or her employment at any time. No
Award payable under the Plan shall be deemed salary or compensation for the
purpose of computing benefits under any employee benefit plan or other
arrangement of any Participating Company for the benefit of its employees unless
the Company shall determine otherwise. No Key Employee shall have any claim to
an Award until it is actually granted under the Plan. To the extent that any
person acquires a right to receive payments from the Company under this Plan,
such right shall be no greater than the right of an
15
<PAGE> 16
unsecured general creditor of the Company. All payments to be made hereunder
shall be paid from the general funds of the Company and no special or separate
fund shall be established and no segregation of assets shall be made to assure
payment of such amounts except as provided in Section 7(e) with respect to
Restricted Stock.
(b) The Committee may cause to be made, as a condition precedent to the
payment of any Award, or otherwise, appropriate arrangements with the Key
Employee or his or her Beneficiary, for the withholding of any federal, state,
local or foreign taxes.
(c) The Plan and the grant of Awards shall be subject to all applicable
federal and state laws, rules, and regulations and to such approvals by any
government or regulatory agency as may be required.
(d) The terms of the Plan shall be binding upon the Company and its
successors and assigns.
(e) Captions preceding the sections hereof are inserted solely as a
matter of convenience and in no way define or limit the scope or intent of any
provision hereof.
16. EFFECTIVE DATE, TERM OF PLAN AND SHAREHOLDER APPROVAL
The effective date of the Plan shall be May 22, 1997. No Award shall be
granted under this Plan after the Plan's termination date. The Plan's
termination date shall be December 31, 2007. The Plan will continue in effect
for existing Awards as long as any such Award is outstanding.
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<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 17,112
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 124
<MORTGAGE> 222
<REAL-ESTATE> 0
<TOTAL-INVEST> 21,432
<CASH> 87
<RECOVER-REINSURE> 5,588
<DEFERRED-ACQUISITION> 3,723
<TOTAL-ASSETS> 109,643
<POLICY-LOSSES> 5,460
<UNEARNED-PREMIUMS> 49
<POLICY-OTHER> 20,812
<POLICY-HOLDER-FUNDS> 77,078
<NOTES-PAYABLE> 650
1
250<F1>
<COMMON> 0
<OTHER-SE> 2,512
<TOTAL-LIABILITY-AND-EQUITY> 109,643
2,661
<INVESTMENT-INCOME> 1,185
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<BENEFITS> 2,108
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<UNDERWRITING-OTHER> 908
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<INCOME-TAX> 145
<INCOME-CONTINUING> 278
<DISCONTINUED> 0
<EXTRAORDINARY> 0
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<NET-INCOME> 278
<EPS-PRIMARY> 1.98
<EPS-DILUTED> 1.98
<RESERVE-OPEN> 0
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<FN>
<F1>REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
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