<PAGE> 1
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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended June 30, 1999
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) 525-8555
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
As of July 30, 1999, there were outstanding 25,951,015 shares of Class A Common
Stock, $0.01 par value per share, and 114,000,000 shares of Class B Common
Stock, $0.01 par value per share, of the registrant.
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<PAGE> 2
INDEX
<TABLE>
<CAPTION>
PART I. FINANCIAL INFORMATION
PAGE
----
ITEM 1. FINANCIAL STATEMENTS
<S> <C>
Consolidated Statements of Income - Second Quarter
and Six Months Ended June 30, 1999 and 1998 3
Consolidated Balance Sheets - June 30, 1999 and December 31, 1998 4
Consolidated Statements of Changes in Stockholders' Equity - Six
Months Ended June 30, 1999 and 1998 5
Consolidated Statements of Cash Flows - Six
Months
Ended June 30, 1999 and 1998 6
Notes to 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 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS 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
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
- -----------------------------------------------------------------------------------------------------------------------------
(In millions, except for per share data) (Unaudited) 1999 1998 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums and other considerations $ 976 $ 763 $1,910 $1,767
Net investment income 381 392 782 792
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,357 1,155 2,692 2,559
- -----------------------------------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 782 658 1,537 1,429
Amortization of deferred policy acquisition costs 143 117 267 214
Dividends to policyholders 10 10 27 117
Interest expense 16 12 33 25
Other expenses 236 216 501 503
- -----------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,187 1,013 2,365 2,288
- -----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 170 142 327 271
Income tax expense 56 48 107 93
- -----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 114 $ 94 $ 220 $ 178
- -----------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.81 $ 0.67 $ 1.57 $ 1.27
Diluted earnings per share $ 0.81 $ 0.67 $ 1.57 $ 1.27
- -----------------------------------------------------------------------------------------------------------------------------
Weighted average common shares outstanding 139.9 140.0 139.9 140.0
Weighted average common shares outstanding and
dilutive potential common shares 140.2 140.3 140.2 140.2
- -----------------------------------------------------------------------------------------------------------------------------
Cash dividends declared per share $ 0.09 $ 0.09 $ 0.18 $ 0.18
- -----------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
AS OF AS OF
JUNE 30, DECEMBER 31,
(In millions, except for share data) 1999 1998
- --------------------------------------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of
$17,236 and $17,271) $ 17,058 $ 17,692
Equity securities, at fair value 154 140
Policy loans, at outstanding balance 4,529 6,687
Other investments 333 363
- --------------------------------------------------------------------------------------------------------------------------
Total investments 22,074 24,882
Cash 96 36
Premiums receivable and agents' balances 220 166
Reinsurance recoverables 544 900
Deferred policy acquisition costs 4,038 3,842
Deferred income tax 519 456
Other assets 1,208 1,112
Separate account assets 100,343 90,628
- --------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 129,042 $ 122,022
- --------------------------------------------------------------------------------------------------------------------------
LIABILITIES
Future policy benefits $ 5,816 $ 5,717
Other policyholder funds 17,066 19,767
Long-term debt 650 650
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures 250 250
Other liabilities 2,599 2,517
Separate account liabilities 100,343 90,628
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 126,724 119,529
- --------------------------------------------------------------------------------------------------------------------------
STOCKHOLDERS' EQUITY
Class A common stock - 600,000,000 shares authorized;
26,100,918 and 26,077,320 shares issued, par value $0.01 -- --
Class B common stock - 600,000,000 shares authorized;
114,000,000 shares issued and outstanding, par value $0.01 1 1
Capital surplus 1,283 1,281
Treasury stock, at cost - 131,582 and 161,984 shares (7) (9)
Accumulated other comprehensive income
Net unrealized capital gains (losses) on securities, net of tax (104) 263
Cumulative translation adjustments (14) (7)
---------------------------------
Total accumulated other comprehensive income (118) 256
---------------------------------
Retained earnings 1,159 964
- --------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,318 2,493
- --------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 129,042 $ 122,022
- --------------------------------------------------------------------------------------------------------------------------
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
SIX MONTHS ENDED JUNE 30, 1999
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------
NET
UNREALIZED
CAPITAL
GAINS
(LOSSES)
CLASS A CLASS B TREASURY ON CUMULATIVE TOTAL
COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION RETAINED STOCKHOLDERS'
(In millions) (Unaudited) STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1998 $ - $ 1 $ 1,281 $ (9) $ 263 $ (7) $ 964 $ 2,493
Comprehensive income
Net income 220 220
-------------
Other comprehensive income, net of
tax (1)
Net unrealized capital losses on
securities (2) (367) (367)
Cumulative translation adjustments (7) (7)
-------------
Total other comprehensive income (374)
-------------
Total comprehensive income (154)
-------------
Dividends declared (25) (25)
Issuance of shares under incentive
and stock purchase plans 2 5 7
Treasury stock acquired (3) (3)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1999 $ - $ 1 $ 1,283 $ (7) $ (104) $ (14) $1,159 $ 2,318
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
SIX MONTHS ENDED JUNE 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME
------------------------
NET
UNREALIZED
CAPITAL
GAINS
CLASS A CLASS B TREASURY ON CUMULATIVE TOTAL
COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION RETAINED STOCKHOLDERS'
(In millions) (Unaudited) STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, December 31, 1997 $ - $ 1 $ 1,283 $ (1) $ 237 $ (4) $ 628 $ 2,144
Comprehensive income
Net income 178 178
---------
Other comprehensive income, net of
tax (1)
Net unrealized capital gains on
securities (2) 80 80
---------
Total other comprehensive income 80
---------
Total comprehensive income 258
---------
Dividends declared (25) (25)
Issuance of shares under incentive
and stock purchase plans (1) 4 3
Treasury stock acquired (3) (3)
- ----------------------------------------------------------------------------------------------------------------------------------
BALANCE, JUNE 30, 1998 $ - $ 1 $ 1,282 $ - $ 317 $ (4) $ 781 $ 2,377
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net unrealized capital gains (losses) on securities is reflected net of
tax (benefit) provision of $(197) and $43 for the six months ended June
30, 1999 and 1998, respectively. There is no tax effect on cumulative
translation adjustments.
(2) There were no reclassification adjustments for after-tax gains (losses)
realized in net income for the six months ended June 30, 1999 and 1998,
respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
----------------------------
(In millions) (Unaudited) 1999 1998
- --------------------------------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 220 $ 178
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY
OPERATING ACTIVITIES
Depreciation and amortization 8 4
(Increase) decrease in premiums receivable and agents' balances (54) 2
Decrease in other liabilities (42) (98)
Change in receivables, payables and accruals 124 (20)
Decrease in accrued tax (193) (46)
Decrease (increase) in deferred income tax 134 (68)
Increase in deferred policy acquisition costs (196) (265)
Increase in future policy benefits 99 368
Decrease in reinsurance recoverables and other assets 87 64
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 187 119
- --------------------------------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of investments (4,665) (4,428)
Sales of investments 5,928 2,942
Maturities and principal paydowns of fixed maturity investments 1,051 1,067
Other (16) (17)
- --------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 2,298 (436)
- --------------------------------------------------------------------------------------------------------
FINANCING ACTIVITIES
Decrease in short-term debt -- (50)
Proceeds from issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trust holding solely
parent junior subordinated debentures -- 250
Dividends paid (25) (12)
Net (disbursements for) receipts from investment and universal
life-type contracts (charged against) credited to
policyholder accounts (2,402) 99
Net issuance of common stock 2 --
- --------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (2,425) 287
- --------------------------------------------------------------------------------------------------------
Net increase (decrease) in cash 60 (30)
Cash - beginning of period 36 88
- --------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 96 $ 58
- --------------------------------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID DURING THE PERIOD FOR
Income taxes $ 108 $ 134
Interest $ 33 $ 25
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Dollar
amounts in millions, except for per share data, unless otherwise stated)
(Unaudited)
1. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hartford Life,
Inc. and 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 Hartford Life's 1998 Form 10-K Annual Report.
Certain reclassifications have been made to prior year financial information to
conform to the current year classification of transactions and accounts.
(b) CHANGES IN ACCOUNTING PRINCIPLES
In June 1999, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 137, "Accounting for Derivative
Instruments and Hedging Activities - Deferral of the Effective Date of FASB
Statement No. 133". This statement amends SFAS No. 133 to defer its effective
date for one year, to fiscal years beginning after June 15, 2000. Initial
application for Hartford Life will begin for the first quarter of 2001.
Effective January 1, 1999, Hartford Life adopted Statement of Position (SOP) No.
98-1, "Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". This SOP provides guidance on accounting for costs of internal
use software and in determining whether 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. Adoption of this SOP did not have a material impact on the Company's
financial condition or results of operations.
Effective January 1, 1999, Hartford Life adopted SOP No. 97-3, "Accounting by
Insurance and Other Enterprises for Insurance-Related Assessments". This SOP
addresses accounting by insurance and other enterprises for assessments related
to insurance activities, including recognition, measurement and disclosure of
guaranty fund or other assessments. Adoption of this SOP did not have a material
impact on the Company's financial condition or results of operations.
2. EARNINGS PER SHARE
Basic earnings per share are computed based upon the weighted average number of
shares outstanding during the respective periods. 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 assumed to be 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
assumed purchased represents the dilutive shares. Contingently issuable shares
are included upon satisfaction of certain conditions related to contingency.
7
<PAGE> 8
The following tables present a reconciliation of income and shares used in
calculating basic earnings per share to those used in calculating diluted
earnings per share.
<TABLE>
<CAPTION>
FOR THE SECOND QUARTER ENDED SIX MONTHS ENDED
------------------------------------- -------------------------------
PER SHARE PER SHARE
JUNE 30, 1999 INCOME SHARES AMOUNT INCOME SHARES AMOUNT
- -----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 114 139.9 $ 0.81 $ 220 139.9 $ 1.57
--------- ----------
DILUTED EARNINGS PER SHARE
Impact of options and contingently issuable shares - 0.3 - 0.3
-------------------- ----------------
Amounts available to common shareholders
plus assumed conversions $ 114 140.2 $ 0.81 $ 220 140.2 $ 1.57
- -----------------------------------------------------------------------------------------------------------------------------------
JUNE 30, 1998
- -----------------------------------------------------------------------------------------------------------------------------------
BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 94 140.0 $ 0.67 $ 178 140.0 $ 1.27
--------- ----------
DILUTED EARNINGS PER SHARE
Impact of options and contingently issuable shares - 0.3 - 0.2
-------------------- ----------------
Amounts available to common shareholders
plus assumed conversions $ 94 140.3 $ 0.67 $ 178 140.2 $ 1.27
- -----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
3. SEGMENT INFORMATION
Hartford Life adopted SFAS No. 131, "Disclosures about Segments of an Enterprise
and Related Information", during the fourth quarter of 1998. This statement
replaces SFAS No. 14, "Financial Reporting for Segments of a Business
Enterprise", and establishes new standards for reporting information about
operating segments in annual financial statements and in interim financial
reports issued to shareholders. It also establishes standards for related
disclosures about products and services, geographic areas and major customers.
This statement requires that the reportable operating segments be based on the
Company's internal operations. On this basis, Hartford Life's segments represent
strategic operations which offer different products and services as well as
serve different markets.
Hartford Life is organized into four reportable operating segments: Investment
Products, Individual Life, Employee Benefits and Corporate Owned Life Insurance
(COLI). Investment Products offers individual variable annuities, fixed market
value adjusted (MVA) annuities and fixed and variable immediate annuities,
mutual funds, deferred compensation and retirement plan services, structured
settlement contracts and other special purpose annuity contracts. Individual
Life sells a variety of life insurance products, including variable life,
universal life, interest-sensitive whole life and term life insurance. Employee
Benefits sells group insurance products, including group life and group
disability insurance as well as other products, including stop loss and
supplementary medical coverage to employers and employer sponsored plans,
accidental death and dismemberment, travel accident, long-term care insurance
and other special risk coverages to employers and associations. COLI primarily
offers variable products used by employers to fund non-qualified benefits or
other post-employment benefit obligations as well as leveraged COLI. The Company
includes in "Other" corporate items not directly allocable to any of its
reportable operating segments, principally interest expense, as well as its
international operations.
The accounting policies of the reportable operating segments are the same as
those described in the summary of significant accounting policies in Note 2 of
Notes to Consolidated Financial Statements in Hartford Life's 1998 Form 10-K
Annual Report. Hartford Life evaluates performance of its segments based on
revenues, net income and the segment's return on allocated capital. The Company
charges direct operating expenses to the appropriate segment and allocates the
majority of indirect expenses to the segments based on an intercompany expense
arrangement. Intersegment revenues are not significant and primarily occur
between corporate and the operating segments. These amounts include interest
income on allocated surplus and the allocation of net realized capital gains and
losses through net investment income utilizing the duration of the segment's
investment portfolios. The following tables present summarized financial
information concerning the Company's segments.
8
<PAGE> 9
<TABLE>
<CAPTION>
Investment Individual Employee
JUNE 30, 1999 Products Life Benefits COLI Other Total
- ---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECOND QUARTER ENDED
Total revenues $ 499 $ 140 $ 489 $ 215 $ 14 $ 1,357
Net income (loss) 81 17 19 8 (11) 114
- ---------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
Total revenues $ 982 $ 273 $ 964 $ 439 $ 34 $ 2,692
Net income (loss) 159 32 36 14 (21) 220
- ---------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Individual Employee
JUNE 30, 1998 Products Life Benefits COLI Other Total
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
SECOND QUARTER ENDED
Total revenues $ 456 $ 142 $ 419 $ 132 $ 6 $ 1,155
Net income (loss) 66 15 17 6 (10) 94
- ----------------------------------------------------------------------------------------------------------------------------
SIX MONTHS ENDED
Total revenues $ 890 $ 276 $ 908 $ 473 $ 12 $ 2,559
Net income (loss) 127 28 32 12 (21) 178
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
4. COMMITMENTS AND CONTINGENT LIABILITIES
(a) LITIGATION
Hartford Life 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, at the present time the
Company does not anticipate that the ultimate liability arising from such
pending or threatened litigation, after consideration of provisions made for
potential losses and costs of defense, will have a material adverse effect on
the financial condition or operating results of the Company.
(b) INVESTMENTS
In October 1998, the Company became aware of allegations of improper activities
at Commercial Financial Services, Inc. (CFS), a securitizer and servicer of
asset backed securities, and on December 11, 1998, CFS filed for protection
under Chapter 11 of the Bankruptcy Code. As a result, the Company recognized a
$29, after-tax, writedown on its asset backed securities securitized and
serviced by CFS, during the fourth quarter of 1998. (For a further discussion of
CFS, see Note 16 (e) of Notes to Consolidated Financial Statements included in
Hartford Life's 1998 Form 10-K Annual Report.)
In June 1999, CFS ceased operations and bankruptcy trustees began the process of
transitioning servicing accounts over to back up servicers. As a result, the
Company recognized a $32, after-tax, writedown related to the asset backed
securities, during the second quarter of 1999. As of June 30, 1999, Hartford
Life's amortized cost and estimated fair value of these securities was $27.
(c) TAX MATTERS
Hartford Life's federal income tax returns are routinely audited by the Internal
Revenue Service. Management believes that adequate provision has been made in
the financial statements for items that may result from tax examinations and
other tax related matters.
9
<PAGE> 10
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, except for per share data, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) addresses the financial condition of the Company as of June
30, 1999, compared with December 31, 1998, and its results of operations for the
second quarter and six months ended June 30, 1999 compared with the equivalent
periods in 1998. This discussion should be read in conjunction with the MD&A
included in the Company's 1998 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.
INDEX
<TABLE>
<S> <C>
Consolidated Results of Operations 10
Investment Products 11
Individual Life 12
Employee Benefits 12
Corporate Owned Life Insurance (COLI) 13
Investments 13
Capital Markets Risk Management 14
Capital Resources and Liquidity 15
Regulatory Initiatives and Contingencies 17
Accounting Standards 19
</TABLE>
CONSOLIDATED RESULTS OF OPERATIONS
OPERATING SUMMARY
<TABLE>
<CAPTION>
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
------------------------- -----------------------------
1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 1,357 $ 1,155 $ 2,692 $ 2,559
Expenses 1,243 1,061 2,472 2,381
- -------------------------------------------------------------------------------------------------
NET INCOME $ 114 $ 94 $ 220 $ 178
- -------------------------------------------------------------------------------------------------
</TABLE>
Hartford Life has the following reportable segments: Investment Products,
Individual Life, Employee Benefits and Corporate Owned Life Insurance (COLI).
The Company reports corporate items not directly allocable to any of its
segments, principally interest expense, as well as its international operations
in "Other".
Revenues increased $202, or 17%, and $133, or 5%, for the second quarter and six
months ended June 30, 1999, respectively, as compared to the equivalent 1998
periods. This increase was driven primarily by higher fee income in the
individual annuity and mutual fund operations of the Investment Products
segment. The increased fees are a result of higher assets under management which
increased due to strong net cash flow (new sales less surrenders) and equity
market appreciation. Also contributing to the increase in revenues are premium
growth in the Employee Benefits segment due to strong sales and persistency, as
well as increased COLI revenues primarily relating to cost of insurance charges
associated with the MBL business which was recaptured in November 1998. (For a
discussion of the MBL Recapture, see "Purchases of Affiliates and Other" under
the Capital Resources and Liquidity section in Hartford Life's 1998 Form 10-K
Annual Report.)
Expenses increased $182, or 17%, and $91, or 4%, for the second quarter and six
months ended June 30, 1999, respectively, as compared to the equivalent 1998
periods, consistent with the revenue growth described above. Net income
increased $20, or 21%, and $42, or 24%, for the second quarter and six months
ended June 30, 1999, respectively, as compared to the equivalent 1998 periods.
This earnings growth was primarily driven by the Company's increased revenues
associated with higher assets under management across its operating segments.
10
<PAGE> 11
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS ENDED
ENDED
JUNE 30, JUNE 30,
-----------------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Investment Products $ 81 $ 66 $ 159 $ 127
Individual Life 17 15 32 28
Employee Benefits 19 17 36 32
Corporate Owned Life Insurance (COLI) 8 6 14 12
Other (11) (10) (21) (21)
- ---------------------------------------------------------------------------------------------
NET INCOME $ 114 $ 94 $ 220 $ 178
- ---------------------------------------------------------------------------------------------
</TABLE>
The sections that follow analyze each segment's results. Investment results are
discussed separately following the segment overviews.
INVESTMENT PRODUCTS
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
----------------- --------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 499 $ 456 $ 982 $ 890
Expenses 418 390 823 763
- ---------------------------------------------------------------------------------------------
NET INCOME $ 81 $ 66 $ 159 $ 127
- ---------------------------------------------------------------------------------------------
</TABLE>
Revenues in the Investment Products segment increased $43, or 9%, and $92, or
10%, for the second quarter and six months ended June 30, 1999, respectively, as
compared to the equivalent prior year periods. This increase was primarily
driven by higher fee income in the individual annuity and retail mutual fund
operations. Fees generated by individual variable annuities increased $53 and
$108 for the respective second quarter and six month periods, while related
average account values grew $14.8 billion, or 29%, to $66.5 billion for the six
months ended June 30, 1999 from $51.7 billion for the six months ended June 30,
1998. This growth was due, in part, to strong individual variable annuity sales
of $5.3 billion for the first six months of 1999, as well as strong persistency
and equity market appreciation. In addition, fee income from other investment
products increased $14 and $32 for the respective second quarter and six month
periods, primarily driven by the Company's retail mutual funds where average
assets under management increased $2.0 billion, or 154%, to $3.3 billion for the
six months ended June 30, 1999 from $1.3 billion for the six months ended June
30, 1998. The substantial growth in mutual fund assets under management was
primarily due to strong net sales (sales less redemptions) of $1.2 billion for
the six months ended June 30, 1999 and equity market appreciation. Partially
offsetting this segment's revenue growth was a decline in net investment income
of $17 and $40 for the respective second quarter and six month periods,
primarily due to a decrease in general account assets related to the Company's
guaranteed investment contract (GIC) business.
Due to continued growth in assets under management, expenses increased $28, or
7%, and $60, or 8%, for the second quarter and six months ended June 30, 1999,
respectively, compared to the equivalent prior year periods. This increase was
driven by amortization of deferred policy acquisition costs, which grew $22 and
$49 for the respective second quarter and six month periods, and operating
expenses, which increased $8 and $21 over respective prior year levels.
Operating expenses as a percentage of average assets under management for this
segment were relatively consistent for the second quarter and six months ended
June 30, 1999 as compared to the equivalent prior year periods. Partially
offsetting this segment's expense growth was a decrease in benefits and claims
of $7 and $30 for the respective second quarter and six month periods, primarily
related to the Company's GIC business.
Net income increased $15, or 23%, and $32, or 25%, for the second quarter and
six months ended June 30, 1999, respectively, as compared to the equivalent
prior year periods. These increases were driven by the segment's growth in fee
income as a result of the increase in average assets under management of 19% and
22%, for the second quarter and six months ended June 30, 1999, respectively, as
compared to the equivalent 1998 periods.
11
<PAGE> 12
INDIVIDUAL LIFE
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-----------------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 140 $ 142 $ 273 $ 276
Expenses 123 127 241 248
- ---------------------------------------------------------------------------------------------
NET INCOME $ 17 $ 15 $ 32 $ 28
- ---------------------------------------------------------------------------------------------
</TABLE>
Revenues in the Individual Life segment were relatively consistent for the
second quarter and six months ended June 30, 1999, as compared to the equivalent
prior year periods. However, fee income increased $11, or 13%, and $19, or 12%,
for the respective second quarter and six month periods primarily as a result of
higher variable life average account values, which increased $700, or 58%, to
$1.9 billion for the six months ended June 30, 1999 as compared to $1.2 billion
for the six months ended June 30, 1998. The higher fee income was offset by a
decrease in premium revenue resulting from the segment's shift from traditional
life insurance products to investment oriented life insurance products.
Expenses were relatively consistent for the second quarter and six months ended
June 30, 1999, as compared to the equivalent prior year periods. The segment
experienced favorable mortality which was partially offset by higher
amortization of deferred policy acquisition costs.
Net income increased $2, or 13%, and $4, or 14%, for the second quarter and six
months ended June 30, 1999, respectively, as compared to the equivalent 1998
periods. These increases were driven by the higher average variable life account
values and favorable mortality described above. Total life insurance in force
was over $63 billion as of June 30, 1999, a 10% increase over the same period in
1998.
EMPLOYEE BENEFITS
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-----------------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 489 $ 419 $ 964 $ 908
Expenses 470 402 928 876
- ---------------------------------------------------------------------------------------------
NET INCOME $ 19 $ 17 $ 36 $ 32
- ---------------------------------------------------------------------------------------------
</TABLE>
Revenues in the Employee Benefits segment increased $70 or 17%, and $56, or 6%,
for the second quarter and six months ended June 30, 1999, respectively, as
compared to the equivalent prior year periods. Revenues, excluding buyouts,
increased $59, or 14%, and $70, or 8%, for the respective second quarter and six
month periods, as a result of increased premiums due to strong sales and
persistency. Expenses increased $68, or 17%, and $52, or 6%, for the second
quarter and six months ended June 30, 1999, respectively, as compared to the
equivalent prior year periods, primarily due to higher benefits and claims
associated with the increased premiums, as well as increased operating expenses
due to the growth in this segment. Excluding buyouts, expenses increased $57, or
14%, and $66, or 8%. Expenses as a percentage of revenues, both including and
excluding buyouts, were consistent for the second quarter and six months ended
June 30, 1999, respectively, as compared to the same periods in 1998. Net income
increased $2, or 12%, and $4, or 13%, for the respective second quarter and six
month periods, primarily related to the increased revenues, as well as increased
after-tax net investment income due to the segment's increased holdings in tax
exempt securities.
12
<PAGE> 13
CORPORATE OWNED LIFE INSURANCE (COLI)
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-----------------------------------------
1999 1998 1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Revenues $ 215 $ 132 $ 439 $ 473
Expenses 207 126 425 461
- ---------------------------------------------------------------------------------------------
NET INCOME $ 8 $ 6 $ 14 $ 12
- ---------------------------------------------------------------------------------------------
</TABLE>
COLI revenues increased $83, or 63%, for the second quarter ended June 30, 1999
from the comparable 1998 period. Contributing to the increase in revenues were
cost of insurance charges associated with the MBL business recaptured in
November 1998 and higher fee income associated with increased variable COLI
account values. Average variable COLI account values increased $4.0 billion, or
51%, to $11.8 billion for the second quarter ended June 30, 1999 compared to
$7.8 billion for the comparable 1998 period. These increases were offset by the
reduction in revenue associated with the declining block of leveraged COLI
business due to the Health Insurance Portability and Accountability Act of 1996,
which phased out the deductibility of interest expense on policy loans through
the end of 1998. Revenues decreased $34, or 7%, for the six months ended June
30, 1999 from the comparable 1998 period primarily due to higher revenues in
1998 associated with the segment's significant first quarter 1998 sales. The
revenue decrease was partially offset by the increase in fee income on the
variable COLI business and the increased revenues associated with the MBL
business described above.
Expenses increased $81, or 64%, for the second quarter ended June 30, 1999 from
the comparable 1998 period, primarily due to higher benefits and claims
associated with MBL business, partially offset by decreases due to the declining
block of leveraged COLI business. However, expenses decreased $36, or 8%, for
the six months ended June 30, 1999 as compared to the same period in 1998,
primarily due to significant dividends to policyholders in the first quarter of
1998 relating to the revenues discussed above.
Net income increased $2, or 33%, and $2, or 17%, for the second quarter and six
months ended June 30, 1999, respectively, as compared to the equivalent prior
year periods, primarily due to higher fees earned on increased variable COLI
account values, as well as earnings associated with MBL business.
INVESTMENTS
Invested assets, excluding separate account assets, totaled $22.1 billion as of
June 30, 1999 and were comprised of $17.1 billion of fixed maturities, $4.5
billion of policy loans, equity securities of $154 and other investments of
$333. As of December 31, 1998, general account invested assets totaled $24.9
billion and were comprised of $17.7 billion of fixed maturities, $6.7 billion of
policy loans, equity securities of $140 and other investments of $363. Policy
loans are secured by the cash value of the underlying life policy and do not
mature in a conventional sense, but expire in conjunction with the related
policy liabilities. Policy loans decreased by $2.2 billion from December 31,
1998 as a result of the Company's declining block of leveraged COLI business.
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
-----------------------------------------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- ---------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate $ 8,128 47.7% $ 7,898 44.6%
Asset backed securities 2,554 15.0% 2,465 13.9%
Commercial mortgage backed securities 1,996 11.7% 2,036 11.5%
Municipal - tax-exempt 1,008 5.9% 916 5.2%
Short-term 926 5.4% 2,119 12.0%
Mortgage backed securities - agency 844 4.9% 503 2.9%
Collateralized mortgage obligations 661 3.9% 831 4.7%
Government/Government agencies - Foreign 493 2.9% 530 3.0%
Government/Government agencies - U.S. 228 1.3% 166 0.9%
Municipal - taxable 172 1.0% 223 1.3%
Redeemable preferred stock 48 0.3% 5 --
- -------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $17,058 100.0% $17,692 100.0%
- -------------------------------------------------------------------------------------------------
</TABLE>
Holdings of short-term securities declined primarily as a result of the funding
of scheduled liability maturities and the reallocation of short-term assets into
other asset sectors.
13
<PAGE> 14
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
<TABLE>
<CAPTION>
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-----------------------------------------------
(Before-tax) 1999 1998 1999 1998
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Net investment income - excluding policy loan $ 284 $ 286 $ 574 $ 582
income
Policy loan income 97 106 208 210
- ----------------------------------------------------------------------------------------------------
Net investment income - total $ 381 $ 392 $ 782 $ 792
- ----------------------------------------------------------------------------------------------------
Yield on average invested assets (1) 6.9% 7.4% 6.7% 7.6%
- ----------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents annualized net investment income (excluding net realized
capital gains or losses) divided by average invested assets at cost (fixed
maturities at amortized cost).
Net investment income for the second quarter and six months ended June 30, 1999
was comparable to the respective prior year periods. Yield on average invested
assets declined to 6.9% and 6.7% for the second quarter and six months ended
June 30, 1999, respectively. This decline was a result of a decrease in policy
loan weighted-average interest rates, which declined to 7.8% as of June 30, 1999
from 11.1% as of June 30, 1998. Although yields on policy loans have decreased,
the average policy loan balance has increased due to the MBL Recapture.
Therefore, policy loan investment income is relatively consistent with the prior
year.
There were no net realized capital gains or losses for the second quarter and
six months ended June 30, 1999 and 1998. During the second quarter of 1999, net
realized capital gains from the sale of fixed maturities and equity securities
were offset by a realized capital loss of $32, after-tax, related to an other
than temporary impairment charge associated with asset backed securities
securitized and serviced by Commercial Financial Services, Inc. (CFS). (For
additional information on CFS, see Note 4 (b) of Notes to Consolidated Financial
Statements.)
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life has a disciplined approach to managing risks associated with its
capital markets and asset/liability management activities. Investment portfolio
management is organized to focus investment management expertise on specific
classes of investments, while asset/liability management is the responsibility
of separate and distinct risk management units supporting the Company's
operations. Derivative instruments are utilized in accordance with established
Company policy and are monitored internally and reviewed by senior management.
The Company is exposed to two primary sources of investment and asset/liability
management risk: credit risk, relating to the uncertainty associated with the
ability of an obligor or counterparty to make timely payments of principal
and/or interest, and market risk, relating to the market price and/or cash flow
variability associated with changes in interest rates, securities prices, market
indices, yield curves or currency exchange rates. The Company does not hold any
financial instruments entered into for trading purposes.
Please refer to Hartford Life's 1998 Form 10-K Annual Report for a description
of the Company's objectives, policies and strategies.
CREDIT RISK
The Company invests primarily in securities rated investment grade 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 assessment and ratings
assigned by nationally recognized ratings agencies. Obligor, 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 4 (b) of Notes to 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.
14
<PAGE> 15
As of June 30, 1999 and December 31, 1998, over 98% of the fixed maturity
portfolio was invested in investment-grade securities.
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
--------------------------------------------------
FIXED MATURITIES BY CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- ------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government/Government agencies $ 2,704 10.3% $ 2,596 9.5%
AAA 3,604 13.7% 3,542 12.9%
AA 2,694 10.2% 2,674 9.7%
A 9,028 34.3% 8,878 32.3%
BBB 6,749 25.6% 7,019 25.6%
BB and below 396 1.5% 492 1.8%
Short-term 1,169 4.4% 2,265 8.2%
- ------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 26,344 100.0% $ 27,466 100.0%
- ------------------------------------------------------------------------------------------------------
</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, 1998.
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 Finance Committee of The
Hartford Financial Services Group, Inc., the Company's indirect parent. 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 $11.3 billion and $11.2 billion at June 30, 1999 and
December 31, 1998, respectively.
For a further discussion of market risk exposure, including derivative
instruments, please refer to Hartford Life's 1998 Form 10-K Annual Report.
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of
Hartford Life and its ability to generate cash flows from each of the business
segments and borrow funds at competitive rates to meet operating and growth
needs. The Company maintained cash and short-term investments totaling $1.0
billion and $2.2 billion as of June 30, 1999 and December 31, 1998,
respectively. Holdings of short-term securities declined primarily as a result
of the funding of scheduled liability maturities and the reallocation of
short-term assets into other asset sectors.
15
<PAGE> 16
The capital structure of the Company consists of debt and equity, and is
summarized as follows:
<TABLE>
<CAPTION>
JUNE 30, 1999 DECEMBER 31, 1998
---------------------------------------------------------------------------------------------------
<S> <C> <C>
Long-term debt $ 650 $ 650
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely parent junior
subordinated debentures (TruPS) 250 250
-------------------------------------------------------------------------------------------------
TOTAL DEBT $ 900 $ 900
-------------------------------------------------------------------------------------------------
Equity excluding net unrealized capital gains (losses) on $ 2,422 $ 2,230
securities, net of tax
Net unrealized capital gains (losses) on securities, net
of tax (104) 263
---------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 2,318 $ 2,493
-------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION (1) $ 3,322 $ 3,130
-------------------------------------------------------------------------------------------------
Debt to equity (1) 37% 40%
Debt to capitalization (1) 27% 29%
---------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes net unrealized capital gains (losses) on securities, net of
tax.
CAPITALIZATION
The Company's total capitalization, excluding net unrealized capital gains
(losses) on securities, net of tax, increased $192, or 6%, as of June 30, 1999,
as compared to December 31, 1998. This increase was primarily the result of net
income of $220 partially offset by dividends declared of $25. As a result, both
the debt to equity and debt to capitalization ratios (both excluding net
unrealized capital gains (losses) on securities, net of tax) decreased to 37%
and 27% as of June 30, 1999, respectively, from 40% and 29% as of December 31,
1998, respectively. Net unrealized capital gains (losses) on securities, net of
tax, decreased $367 as of June 30, 1999, as compared to December 31, 1998,
primarily due to an increase in interest rates as reflected in the fixed
maturity portfolio.
DIVIDENDS
Hartford Life declared $25 in dividends for the six month period ended June 30,
1999 to holders of Class A and Class B Common Stock.
The Company's direct regulated life insurance subsidiary, Hartford Life and
Accident Insurance Company, declared dividends of $57 for the six months ended
June 30, 1999, of which $40 had been received by the Company as of June 30,
1999.
TREASURY STOCK
During the first six months of 1999, to make shares available to employees
pursuant to stock-based benefit plans, the Company repurchased 70,000 shares of
its Class A Common Stock in the open market at a total cost of $3. Shares
repurchased in the open market are carried at cost and reflected as a reduction
to stockholders' equity. Treasury shares subsequently reissued are reduced from
treasury stock on a weighted average cost basis. The Company currently intends
to purchase additional shares of its Class A Common Stock to make shares
available for its various employee stock-based benefit plans.
CASH FLOWS
<TABLE>
<CAPTION>
SIX MONTHS ENDED
JUNE 30,
-------------------------
1999 1998
- ---------------------------------------------------------------------------------------------
<S> <C> <C>
Cash provided by operating activities $ 187 $ 119
Cash provided by (used for) investing activities 2,298 (436)
Cash (used for) provided by financing activities (2,425) 287
Cash - end of period 96 58
- ---------------------------------------------------------------------------------------------
</TABLE>
The increase in cash provided by operating activities was primarily the result
of timing in the settlement of receivables and payables in the first six months
of 1999. The increase in cash provided by (used for) investing activities and
the decrease in cash (used for) provided by financing activities primarily
related to the significant downsizing of the leveraged COLI block of business,
as well as the decrease in the Company's GIC business. Operating cash flows in
both periods have been more than adequate to meet liquidity requirements.
16
<PAGE> 17
REGULATORY INITIATIVES AND CONTINGENCIES
NAIC PROPOSALS
The NAIC has been developing several model laws and regulations, including a
Model Investment Law and amendments to the Model Holding Company System
Regulatory Act (the "Holding Act Amendments"). The Model Investment Law defines
the investments which are permissible for life insurers to hold, and the Holding
Act Amendments address the types of activities in which subsidiaries and
affiliates may engage. The NAIC adopted these models in 1997 and 1996, but the
laws have not been enacted for insurance companies domiciled in the State of
Connecticut, such as the insurance company subsidiaries of Hartford Life. Even
if enacted in Connecticut, it is expected that these laws will neither
significantly change Hartford Life's investment strategies nor have any material
adverse effect on Hartford Life's liquidity or financial position.
The 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 Connecticut will adopt the 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's insurance subsidiaries.
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
Hartford Life distributes its annuity and life insurance products through a
variety of distribution channels, including broker-dealers, banks, wholesalers,
its own internal sales force and other third party marketing organizations. The
Company periodically negotiates provisions and renewals of these relationships
and there can be no assurance that such terms will remain acceptable to the
Company or such service providers. An interruption in the Company's continuing
relationship with certain of these third parties could materially affect the
Company's ability to market its products. During the first quarter of 1999, the
Company modified its contract with Putnam Mutual Funds Corp. (Putnam) to
eliminate the exclusivity provision, which will allow both parties to pursue new
market opportunities. Putnam is contractually obligated to support and service
the related annuity in force block of business and to market, support and
service new business. However, there can be no assurance that this contract
modification will not adversely impact the Company's ability to distribute
Putnam-related products.
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
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 issues insurance policies, annuities, mutual funds and
other financial products to individual and business customers, nearly all of
which contain date sensitive data, such as policy expiration dates, birth dates
and premium payment dates. 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.
17
<PAGE> 18
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
IT and non-IT systems for Year 2000 readiness; (4) deploying such remediated and
tested systems back into their respective production environments; and (5)
conducting internal and external integrated testing of such systems. As of
December 31, 1998, Hartford Life substantially completed initiatives (1) through
(4) of its internal Year 2000 efforts. Hartford Life is currently performing
initiative (5) testing and management currently anticipates that such activity
will continue into the fourth quarter 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,
including, without limitation, suppliers, computer hardware and software
vendors, insurance agents and brokers, third party administrators, securities
broker dealers, banks and other distributors and servicers of financial
products, 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 (or a third
party's failure to respond) and the significance of the business relationship,
conducting additional activities with respect to third parties as determined to
be necessary in each case. These activities may include conducting additional
inquiries, more in-depth evaluations of Year 2000 readiness and plans, and
integrated IT systems testing. Hartford Life has substantially completed third
party initiatives (1) and (2). Hartford Life is currently conducting the
additional activities described in initiative (3) and management currently
anticipates that it will continue to do so through the end of 1999. 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 these third parties to adequately address their Year
2000 issues.
Year 2000 Costs
The after-tax costs of Hartford Life's Year 2000 efforts that were incurred
prior to the year ended December 31, 1998 were not material to Hartford Life's
financial condition or results of operations. For the year ended December 31,
1998, the after-tax costs were approximately $4. Management currently estimates
that after-tax costs related to the Year 2000 program to be incurred in 1999
will be approximately $5 to $10, of which approximately $2 were incurred in the
six months ended June 30, 1999. These costs are being expensed as incurred.
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. In addition,
Hartford Life's investing activities are an important aspect of its business and
Hartford Life may be exposed to the risk that issuers of investments held by it
will be adversely impacted by Year 2000 issues. Given the uncertain nature of
Year 2000 problems that may arise, especially those related to the readiness of
third parties discussed above, management 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 has substantially completed the development of certain contingency
plans so that if, despite its Year 2000 efforts, Year 2000 problems ultimately
arise, the impact of such problems may be avoided or minimized. The contingency
planning process involved identifying reasonably likely business disruption
scenarios that, if they were to occur, could create significant problems in
critical functions of the Company. The Company has developed plans to respond to
such problems so that critical business functions may continue to operate with
minimal disruption. Contingency planning also included assessing the dependency
of business functions on critical third parties and their Year 2000 readiness.
These plans will be reviewed and tested on an integrated basis, where
appropriate, for the remainder of the year. Furthermore, 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.
18
<PAGE> 19
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to 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
Hartford Life 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, at the present time the
Company does not anticipate that the ultimate liability arising from such
pending or threatened litigation, after consideration of provisions made for
potential losses and costs of defense, will have a material adverse effect on
the financial condition or operating results of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 20, 1999, Hartford Life held its annual meeting of stockholders. The
following matters were considered and voted upon: (1) to elect three nominees to
the Board of Directors to hold office until the 2002 annual meeting of
shareholders and until their successors are elected and qualified; and (2) to
ratify the appointment of Arthur Andersen LLP as independent auditors of the
Company for the fiscal year ending December 31, 1999.
Each of the nominees for election as directors were elected to the Board of
Directors, and the appointment of Arthur Andersen LLP was approved. Hartford
Accident and Indemnity Company (Hartford A&I), an indirect wholly-owned
subsidiary of The Hartford Financial Services Group, Inc., is record owner of
all of the Class B Common Stock of the Company, representing 95.6% of the
combined voting power of the Company's Class A and Class B Common Stock. Holders
of Class A Common Stock generally have identical rights to the holders of Class
B Common Stock except that the holders of Class A Common Stock are entitled to
one vote per share while holders of Class B Common Stock are entitled to five
votes per share on all matters submitted to a vote of the Company's
stockholders. Hartford A&I voted in favor on each matter submitted to a vote.
Set forth is the vote tabulation of holders of Class A Common Stock relating to
the election of directors and the appointment of Arthur Andersen LLP:
(1) Board of Directors
<TABLE>
<CAPTION>
CLASS A
NAME OF DIRECTOR NOMINEES SHARES FOR SHARES WITHHELD
- --------------------------------------------------------------------------------
<S> <C> <C>
Gail Deegan 22,160,432 115,561
Lowndes A. Smith 22,165,179 110,814
Robert W. Selander 22,158,932 117,061
- --------------------------------------------------------------------------------
</TABLE>
(2) Ratification of the appointment of Arthur Andersen LLP
<TABLE>
<S> <C>
Class A shares for 22,125,526
Class A shares against 86,880
Class A shares abstained 63,587
</TABLE>
Shareholders of record on March 22, 1999 were entitled to vote at the annual
meeting. As of that date, there were 25,928,071 shares of the Company's Class A
Common Stock and 114,000,000 of Class B Common Stock outstanding.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index.
(b) Reports on Form 8-K - None.
19
<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.
/s/ Mary Jane B. Fortin
-----------------------------------
Mary Jane B. Fortin
Vice President and Chief Accounting
Officer
AUGUST 13, 1999
20
<PAGE> 21
HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-Q
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT # DESCRIPTION
--------- -----------
<S> <C>
27 Financial Data Schedule is filed herewith.
</TABLE>
21
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> JUN-30-1999
<DEBT-HELD-FOR-SALE> 17,058
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 154
<MORTGAGE> 144
<REAL-ESTATE> 0
<TOTAL-INVEST> 22,074
<CASH> 96
<RECOVER-REINSURE> 544
<DEFERRED-ACQUISITION> 4,038
<TOTAL-ASSETS> 129,042
<POLICY-LOSSES> 5,816
<UNEARNED-PREMIUMS> 42
<POLICY-OTHER> 17,066
<POLICY-HOLDER-FUNDS> 100,343
<NOTES-PAYABLE> 650
250<F1>
0
<COMMON> 1
<OTHER-SE> 2,317
<TOTAL-LIABILITY-AND-EQUITY> 129,042
1,910
<INVESTMENT-INCOME> 782
<INVESTMENT-GAINS> 0
<OTHER-INCOME> 0
<BENEFITS> 1,537
<UNDERWRITING-AMORTIZATION> 267
<UNDERWRITING-OTHER> 513
<INCOME-PRETAX> 327
<INCOME-TAX> 107
<INCOME-CONTINUING> 220
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 220
<EPS-BASIC> 1.57
<EPS-DILUTED> 1.57
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
<FN>
<F1>REPRESENTS COMPANY OBLIGATED MANDATORILY REDEEMABLE PREFERRED SECURITIES OF
SUBSIDIARY TRUST HOLDING SOLELY PARENT JUNIOR SUBORDINATED DEBENTURES
</FN>
</TABLE>
