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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 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)
Securities registered pursuant to section 12(b) of the Act: the following, which
are registered on the New York Stock Exchange, Inc.:
Class A Common Stock, par value $0.01 per share
7.2% Trust Preferred Securities, Series A, issued by Hartford Life Capital I
Securities registered pursuant to Section 12(g) of the Act: None
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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [X]
As of February 29, 2000, there were outstanding 25,934,517 shares of Class A
Common Stock, $0.01 par value per share, and 114,000,000 of Class B Common
Stock, $0.01 par value per share, of the registrant. The aggregate market value
of the shares of the registrant's common equity held by non-affiliates of the
registrant was $910,113,213 based on the closing price of $35.375 per share of
Class A Common Stock on the New York Stock Exchange on February 29, 2000.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 2000 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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[HARTFORD LIFE LOGO]
Hartford Life, Inc. and its subsidiaries (Hartford Life) is a leading financial
services and insurance organization providing investment products such as
variable annuities and mutual funds, individual and corporate owned life
insurance and employee benefits products.
A majority owned subsidiary of The Hartford Financial Services Group, Inc.,
Hartford Life is the nation's largest writer of individual variable annuities,
the number three writer of group disability insurance, a top provider of
individual variable life insurance and offers the fastest growing
non-proprietary family of mutual funds.
CONTENTS
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ITEM DESCRIPTION PAGE
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PART I 1 Business of Hartford Life 3
2 Properties 12
3 Legal Proceedings 12
4 Submission of Matters to a Vote of Security Holders 12
PART II 5 Market for Hartford Life's Common Stock and Related Stockholder Matters 12
6 Selected Financial Data 13
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations 14
7A Quantitative and Qualitative Disclosures About Market Risk 36
8 Financial Statements and Supplementary Data 36
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 36
PART III 10 Directors and Executive Officers of Hartford Life 36
11 Executive Compensation 36
12 Security Ownership of Certain Beneficial Owners and Management 36
13 Certain Relationships and Related Transactions 36
PART IV 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 36
Signatures II-1
Exhibits Index II-2
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PART I
ITEM 1. BUSINESS OF HARTFORD LIFE
(Dollar amounts in millions, except for share data, unless otherwise stated)
GENERAL
Hartford Life, Inc. and its subsidiaries ("Hartford Life" or the "Company"), an
indirect subsidiary of The Hartford Financial Services Group, Inc. (The
Hartford), is headquartered in Simsbury, Connecticut and is a leading financial
services and insurance organization. Hartford Life provides (i) investment
products, including variable annuities, fixed market value adjusted (MVA)
annuities, mutual funds and retirement plan services for the savings and
retirement needs of over 1.3 million customers, (ii) life insurance for income
protection and estate planning to approximately 500,000 customers, (iii)
employee benefits products such as group life and group disability insurance for
the benefit of millions of individuals and (iv) corporate owned life insurance.
According to the latest publicly available data, with respect to the United
States, the Company is the largest writer of individual variable annuities based
on sales for the year ended December 31, 1999; the third largest writer of group
disability insurance based on premiums written for the nine months ended
September 30, 1999; as well as, the third largest consolidated life insurance
company based on statutory assets as of December 31, 1998. In addition, the
Company offers the fastest growing non-proprietary family of mutual funds. The
Company's strong position in each of its core businesses provides an opportunity
to increase the sale of Hartford Life's products and services as individuals
increasingly save and plan for retirement, protect themselves and their families
against disability or death and prepare their estates for an efficient transfer
of wealth between generations.
Hartford Life strives to maintain and enhance its position as a market leader
within the financial services industry and to maximize shareholder value. The
Company has pursued a strategy of developing and selling diverse and innovative
products through multiple distribution channels, continuously developing and
expanding those distribution channels, achieving cost efficiencies through
economies of scale and improved technology, maintaining effective risk
management and prudent underwriting techniques and capitalizing on its brand
name and customer recognition of The Hartford Stag Logo, one of the most
recognized symbols in the financial services industry. In the past year, the
Company's total assets under management, which includes $6.4 billion of assets
invested in the Company's retail mutual funds, increased 17% to $145.4 billion
and total stockholders' equity, excluding net unrealized capital losses on
securities, was $2.6 billion as of December 31, 1999. In addition, Hartford Life
generated $5.5 billion in revenues and $467 in net income in 1999. The Company's
return on stockholders' equity, excluding net unrealized capital gains (losses)
on securities, was 19.2% in 1999.
ORGANIZATION
Hartford Life, Inc., a Delaware corporation, was formed in December 1996 as a
direct subsidiary of Hartford Accident and Indemnity Company (HA&I) and an
indirect subsidiary of The Hartford. Pursuant to an initial public offering (the
"IPO") of 26 million shares of the Company's Class A Common Stock on May 22,
1997, Hartford Life became a publicly traded company representing approximately
18.6% of the equity ownership in the Company. Additional information regarding
the organization of the business and the IPO may be found in Notes 1 and 3 of
Notes to Consolidated Financial Statements, respectively.
As a holding company, Hartford Life, Inc. has no significant business operations
of its own and, therefore, relies mainly on the dividends from its insurance
company subsidiaries, which are primarily domiciled in Connecticut, as the
principal source of cash to meet its obligations (predominantly debt
obligations) and pay shareholder dividends. Statutory net income and statutory
capital and surplus are key determinants in the amount of dividend capacity
available in the insurance company subsidiaries. Each has grown significantly
over the past five years, although statutory net income of $220 in 1999 was
lower than 1998 due to losses realized on certain securities. Excluding these
losses, statutory net income in 1999 was $290, 9% higher than 1998 and nearly
four times 1994. Statutory capital and surplus as of December 31, 1999 was $2.2
billion, 10% higher than December 31, 1998 and 100% above the level as of
December 31, 1994. Additional information regarding the cash flow and liquidity
needs of Hartford Life, Inc. may be found in the Capital Resources and Liquidity
section of the Management's Discussion and Analysis of Financial Condition and
Results of Operations (MD&A).
DISTRIBUTION
Hartford Life utilizes a multiple channel distribution network which provides a
distinct competitive advantage in selling products and services to a broad
cross-section of customers throughout varying economic and market cycles. In
particular, the Company has developed an extensive network of banks and
broker-dealers, which is one of the largest in the industry, including over
1,500 national, regional and independent broker-dealers and approximately 500
banks. Consistent with this strategy, in 1998, the Company purchased all the
outstanding shares of PLANCO Financial Services, Inc. and its affiliate, PLANCO,
Incorporated (collectively, "PLANCO"), the nation's largest wholesaler of
individual annuities and the Company's primary wholesale distributor of its
Director(R) variable annuity and retail mutual funds, thus securing an important
distribution channel. In addition, the Company continues to
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expand its opportunity to sell through financial institutions. As of December
31, 1999, the Company was selling products through twenty-four of the nation's
twenty-five largest retail banks, including proprietary relationships with four
of the top ten. The Company's broad distribution network has enabled the Company
to introduce new products and services in an effective manner and allows the
Company significant opportunity to access its customer base. Hartford Life sells
variable annuities, mutual funds, fixed MVA annuities, variable life insurance
and retirement plan services through its broker-dealer and bank distribution
systems.
PRODUCTS
It is Hartford Life's belief that, as Americans journey through life, they have
specific needs related to building and preserving their financial resources. The
Company's goal is to be the "official supplier" of that journey--the preferred
source of financial solutions for both individuals and employers, as well as the
financial professionals who serve them. To achieve this goal, Hartford Life has
focused its efforts on offering products that provide mechanisms for saving
(e.g. mutual funds), planning for retirement (e.g. annuities) and protecting and
preserving income and wealth (e.g. individual life, group life and group
disability). To ensure that it is able to meet the emerging opportunities that
will arise for individuals pursuing their dreams in the new millennium, the
Company expects to continue to expend significant resources and development
efforts in creating innovative new products and services.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
Hartford Life maintains advantageous economies of scale and operating
efficiencies due to its continued growth, attention to expense management and
commitment to customer service and technology. These advantages allow the
Company to competitively price its products for its distribution network and
policyholders. The Company continues to achieve operating efficiencies in its
Investment Products business. Operating expenses associated with the Company's
individual annuity products as a percentage of total individual annuity account
value have been more than cut in half over the past seven years, declining from
43 basis points in 1992 to 21 basis points in 1999. In addition, the Company
utilizes computer technology to enhance communications within the Company and
throughout its distribution network in order to improve the Company's efficiency
in marketing, selling and servicing its products and, as a result, provides
high-quality customer service. In recognition of excellence in customer service
for variable annuities, Hartford Life was awarded the 1999 Annuity Service Award
by DALBAR Inc., a recognized independent financial services research
organization, for the fourth consecutive year. Hartford Life is the only company
to receive this prestigious award in every year of its existence. Additional
information related to Hartford Life's technology in respect of Year 2000 issues
may be found in the Regulatory Matters and Contingencies section of the MD&A.
RISK MANAGEMENT
Hartford Life's product designs, prudent underwriting standards and risk
management techniques protect it against disintermediation risk and greater than
expected mortality and morbidity experience. As of December 31, 1999, the
Company had limited exposure to disintermediation risk on approximately 98% of
its insurance liabilities through the use of non-guaranteed separate accounts,
MVA features, policy loans, surrender charges and non-surrenderability
provisions. The Company effectively utilizes prudent underwriting to select and
price insurance risks and regularly monitors mortality and morbidity assumptions
to determine if experience remains consistent with these assumptions and to
ensure that its product pricing remains appropriate. The Company also enforces
disciplined claims management to protect itself against greater than expected
morbidity experience.
BRAND NAME AND FINANCIAL STRENGTH
The Hartford Stag Logo is one of the most recognized symbols in the insurance
and financial services industry. This brand recognition, coupled with a strong
balance sheet and sound ratings, has enabled the Company to establish the
reputation and financial strength necessary to maintain distribution
relationships, make strategic acquisitions and enhance important alliances and
generate new customer sales. Pursuant to a Master Intercompany Agreement with
The Hartford, the Company has been granted a perpetual non-exclusive license to
use the Stag Logo in connection with the sale of Hartford Life's products and
services. However, in the event that The Hartford reduces its beneficial
ownership below 50% of the combined voting power of the Company's then
outstanding securities, the license may be revoked upon the later of the fifth
anniversary of the date of consummation of the Company's IPO of its Class A
Common Stock or one year after receipt by the Company of written notice of The
Hartford's intention to revoke the license.
REPORTING SEGMENTS
Hartford Life has the following reportable operating segments: Investment
Products, Individual Life, Employee Benefits and Corporate Owned Life Insurance
(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 following is a description of each
segment, including a discussion of principal products, methods of distribution
and competitive environments. Additional information on Hartford Life's segments
may be found in the MD&A on pages 14 to 35 and Note 17 of Notes to Consolidated
Financial Statements.
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INVESTMENT PRODUCTS
The Investment Products segment focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired through the sale of individual fixed and variable annuities,
mutual funds, retirement plan services and other investment products. From
December 31, 1995 to December 31, 1999, this segment's assets under management
grew to $111.7 billion from $43.9 billion, a five year compounded annual growth
rate of 26%. This growth has been driven primarily by strong net cash flow of
individual variable annuities, the result of a high volume of sales and
favorable persistency, as well as equity market appreciation in the separate
accounts of the Company's individual and group variable annuities. Investment
Products generated revenues of $2.0 billion and $1.8 billion in 1999 and 1998,
respectively. Net income in the Investment Products segment was $330 in 1999, a
24% increase over 1998.
Hartford Life is the market leader in the annuity industry and, according to
Variable Annuity and Research Data Service (VARDS), was the number one writer of
individual variable annuities in the United States for 1999 and 1998 with sales
of $10.3 billion and $9.9 billion, respectively. The Company sells both variable
and fixed individual annuity products through a wide distribution network of
national and regional broker-dealer organizations, banks and other financial
institutions and independent financial advisors. Total individual annuity sales
were $10.9 billion and $10.0 billion in 1999 and 1998, respectively. The Company
was also the number one seller of individual variable annuities through banks in
1999 and 1998, according to Kenneth Kehrer and Associates.
The Company's total account value related to individual annuity products was
$89.0 billion as of December 31, 1999. Of this total account value, $80.6
billion, or 91%, related to individual variable annuity products and $8.4
billion, or 9%, related primarily to fixed MVA annuity products.
Hartford Life is also beginning to emerge as a significant participant in the
retail mutual fund business. The Company, with sales of $3.3 billion in 1999,
surpassed $6 billion in assets under management in December 1999. According to
Strategic Insight, this made The Hartford Mutual Funds the first retail-oriented
fund family in history to reach this level in less than three and a half years.
Also during the year, seven of the twelve funds received Morningstar ratings
and, as of December 31, 1999, all seven have three-, four- or five-star ratings.
The Company is among the top providers of retirement products and services,
including asset management and plan administration, to municipalities pursuant
to Section 457 and plans to corporations under Section 401(k) of the Internal
Revenue Code of 1986, as amended (herein after referred to as "Section 457" and
"Section 401(k)", respectively). The Company presently administers over 2,000
Section 457 plans and over 900 Section 401(k) plans. The Company also provides
structured settlement contracts, terminal funding products and other investment
products such as guaranteed investment contracts (GICs).
Products
Individual Variable Annuities -- Hartford Life earns fees for managing variable
annuity assets and maintaining policyholder accounts, which are based on the
policyholders' account values. The Company uses specified portions of the
periodic premiums of a customer to purchase units in one or more mutual funds,
as directed by the customer, who then assumes the investment performance risks
and rewards. As a result, variable annuities permit policyholders to choose
aggressive or conservative investment strategies as they deem appropriate
without affecting the composition and quality of assets in the Company's general
account. These products offer the policyholder a variety of equity and fixed
income options, as well as the ability to earn a guaranteed rate of interest in
the general account of the Company. The Company offers an enhanced guaranteed
rate of interest for a specified period of time (no longer than twelve months)
if the policyholder elects to dollar-cost average (DCA) funds from the Company's
general account into one or more non-guaranteed separate accounts. Due to this
enhanced rate and the volatility experienced in the overall equity markets, this
option has become very popular with policyholders. Deposits of varying amounts
may be made at regular or irregular intervals and the value of these assets
fluctuates in accordance with the investment performance of the funds selected
by the policyholder. To encourage persistency, many of the Company's individual
variable annuities are subject to withdrawal restrictions and surrender charges
ranging initially from 6% to 7% of the contract's face amount which reduce to
zero on a sliding scale, usually within seven policy years. Volatility
experienced by the equity markets in 1998 and 1999 did not cause a significant
increase in variable annuity surrenders, demonstrating that policyholders are
aware of the long-term nature of these products. Individual variable annuity
account value of $80.6 billion as of December 31, 1999, has grown significantly
from $13.1 billion as of December 31, 1994 due to strong net cash flow, the
result of a high level of sales and low levels of surrenders, coupled with
equity market appreciation in both the equity and fixed income allocations of
the policyholders' account value. Approximately 86% of the individual variable
annuity account value was held in non-guaranteed separate accounts as of
December 31, 1999.
The assets underlying the Company's variable annuities are managed both
internally and by outside money managers, while the Company provides all policy
administration services. The Company utilizes a select group of money managers,
such as Wellington Management Company, LLP (Wellington), Putnam Financial
Services, Inc. (Putnam), American Funds, MFS Investment Management (MFS),
Franklin Templeton Group and Morgan Stanley Dean Witter InterCapital, Inc. All
have an interest in the continued growth in sales of the Company's products and
greatly enhance the marketability of the Company's annuities and the
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strength of its product offerings. Two of the industry's top ten leading
variable annuities, The Director and Putnam Hartford Capital Manager Variable
Annuity (based on sales for the year ended 1999) are sponsored by Hartford Life
and are managed in part by Wellington and Putnam, respectively. In July 1999,
the Company introduced Hartford Leaders, a new multi-manager variable annuity.
This new venture combines the product manufacturing, wholesaling and service
capabilities of Hartford Life with the investment management expertise of three
of the nation's most successful investment management organizations, American
Funds, Franklin Templeton Group and MFS. Hartford Life created a separate
division at PLANCO to wholesale the product in order to ensure that the Company
fully capitalizes on this immense opportunity and, by the end of 1999, the
Company had in place a team of over 30 wholesalers. In a matter of six months,
sales of Hartford Leaders have already reached a $1 billion annualized sales
rate, placing this venture as one of the most successful new product launches in
the history of the variable annuity industry.
Fixed MVA Annuities -- Fixed MVA annuities are fixed rate annuity contracts
which guarantee a specific sum of money to be paid in the future, either as a
lump sum or as monthly income. In the event that a policyholder surrenders a
policy prior to the end of the guarantee period, the MVA feature increases or
decreases the cash surrender value of the annuity in respect of any interest
rate decreases or increases, respectively, thereby protecting the Company from
losses due to higher interest rates at the time of surrender. The amount of
payment will not fluctuate due to adverse changes in the Company's investment
return, mortality experience or expenses. The Company's primary fixed MVA
annuities have terms varying from one to ten years with an average term of
approximately seven years. Sales of the Company's fixed MVA annuities increased
during 1999 as a result of a higher interest rate environment making 1999 the
best sales year for this product since 1995. Account values of fixed MVA
annuities were $8.4 billion and $8.6 billion as of December 31, 1999 and 1998,
respectively.
Mutual Funds -- In September 1996, the Company launched a new family of retail
mutual funds. In its fourth year of existence, the Company's family of
non-proprietary mutual funds was designated the fastest growing in United States
history according to a 1999 report by Strategic Insight, an industry research
organization. Also during the year, seven of the twelve funds received
Morningstar ratings and, as of December 31, 1999, all seven have three-, four-
or five-star ratings. These funds are managed by Wellington and Hartford
Investment Management Company, a wholly owned subsidiary of The Hartford. The
Company has entered into agreements with over 600 financial services firms to
distribute these mutual funds.
Retirement Plans -- With respect to retirement products and services, Section
457 plans comprise approximately 80% of the related account values. These assets
have traditionally been held in the Company's general account, but increasingly,
plan beneficiaries are transferring assets into mutual funds held in separate
accounts. The Company offers a number of different funds, both fixed income and
equity, to the employees in Section 457 plans. Generally, the Company manages
the fixed income funds and certain other outside money managers act as advisors
to the equity funds offered in Section 457 plans administered by the Company.
The Company also sells Section 401(k) products targeting the small and medium
case markets since the Company believes these markets are underpenetrated in
comparison to the large case market.
Institutional Liabilities -- Hartford Life also sells structured settlement
contracts which provide for periodic payments to an injured person or survivor
for a generally determinable number of years, typically in settlement of a claim
under a liability policy in lieu of a lump sum settlement. The Company's
structured settlements are sold through The Hartford's property-casualty
insurance operations as well as specialty brokers. The Company also markets
other annuity contracts for special purposes such as the funding of terminated
defined benefit pension plans. In addition, the Company offers GICs and short
term funding agreements.
Marketing and Distribution
The Investment Products distribution network has been developed based on
management's strategy of utilizing multiple and competing distribution channels
in an effort to achieve the broadest distribution to reach target customers. The
success of the Company's marketing and distribution system depends on its
product offerings, fund performance, successful utilization of wholesaling
organizations, relationships with national and regional broker-dealer firms,
banks and other financial institutions, and independent financial advisors
(through which the sale of the Company's individual annuities to customers is
consummated) and quality of customer service.
Hartford Life maintains a network of approximately 1,500 broker-dealers and
approximately 500 banks, including 24 of the 25 largest retail banks in the
United States. The Company periodically negotiates provisions and terms of its
relationships with unaffiliated parties and there can be no assurance that such
terms will remain acceptable to the Company or such third parties. In August
1998, the Company completed the purchase of all outstanding shares of PLANCO, a
primary wholesaler of the Company's individual annuities and mutual funds.
PLANCO 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 fixed and variable annuities,
mutual funds and single premium variable life insurance by providing sales
support to registered representatives, financial planners and broker-dealers at
brokerage firms and banks across the United States. This acquisition secured an
important distribution channel for the Company and gives the Company a wholesale
distribution platform which it can expand in terms of both the number of
individuals wholesaling its products and the portfolio of products in which they
wholesale. In addition, the Company uses internal personnel with
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extensive experience in the Section 457 market, as well as access to the Section
401(k) market, to sell its products and services in the retirement plan market.
Competition
The Investment Products segment competes with numerous other insurance companies
as well as certain banks, securities brokerage firms, investment advisors and
other financial intermediaries marketing annuities, mutual funds and other
retirement-oriented products. As the industry continues to consolidate, some of
these companies have or will gain greater financial strength and resources than
Hartford Life. In particular, national banks may become more significant
competitors in the future for insurers who sell annuities as a result of court
decisions and recent regulatory actions. Passage in November 1999 of the
Gramm-Leach-Bliley Act (the Financial Services Modernization Act), which permits
affiliations among banks, securities firms and insurance companies, may have
competitive, operational and other implications to the Company. (For additional
information, see the Regulatory Matters and Contingencies section of the MD&A.)
Product sales are affected by competitive factors such as investment performance
ratings, product design, visibility in the marketplace, financial strength
ratings, distribution capabilities, levels of charges and credited rates,
reputation and customer service.
INDIVIDUAL LIFE
The Individual Life segment, which focuses on the high end estate and business
planning markets, sells a variety of products including variable life, universal
life, interest sensitive whole life and term life insurance. Life insurance in
force increased 9% to $66.7 billion as of December 31, 1999 from $61.1 billion
as of December 31, 1998. Account values grew 20% to $5.4 billion as of December
31, 1999 from $4.5 billion as of December 31, 1998. The Individual Life segment
generated revenues of $584 and $567 in 1999 and 1998, respectively. Net income
in the Individual Life segment was $71 in 1999, a 9% increase over 1998.
Products
The trend in the individual life industry has been a shift away from traditional
products and fixed universal life insurance towards variable life (including
variable universal life) insurance products. Hartford Life has been on the
leading edge of this industry trend and is a top ten writer of new variable life
sales according to Tillinghast-Towers Perrin. In 1999, of the Company's new
sales of individual life insurance, 84% was variable life and 13% was either
universal life or interest sensitive whole life. The Company also sold a small
amount of term life insurance.
Variable Life -- Variable life insurance provides a return linked to an
underlying investment portfolio and the Company allows policyholders to
determine their desired asset mix among a variety of underlying mutual funds. As
the return on the investment portfolio increases or decreases, as the case may
be, the death benefit or surrender value of the variable life policy may
increase or decrease. The Company's single premium variable life product
provides a death benefit to the policy beneficiary based on a single premium
deposit. The Company's second-to-die products are distinguished from other
products in that two lives are insured rather than one, and the policy proceeds
are paid upon the second death of the two insureds. Second-to-die policies are
frequently used in estate planning, often to fund estate taxes for a married
couple. Variable life account values were $2.6 billion and $1.7 billion as of
December 31, 1999 and 1998, respectively.
Universal Life and Interest Sensitive Whole Life -- Universal life and interest
sensitive whole life insurance coverages provide life insurance with adjustable
rates of return based on current interest rates. The Company offers both
flexible and fixed premium policies and provides policyholders with flexibility
in the available coverage, the timing and amount of premium payments and the
amount of the death benefit provided there are sufficient policy funds to cover
all policy charges for the coming period. Universal life and interest sensitive
whole life represented 13% of new annualized premium sales of individual life
insurance in 1999. The Company also sells universal life insurance policies with
a second-to-die feature similar to that of the variable life insurance product
offered. Universal life and interest sensitive whole life account values were
$2.0 billion as of December 31, 1999 and 1998.
Marketing and Distribution
Consistent with the Company's strategy to access multiple distribution outlets,
the Individual Life distribution organization has been developed to penetrate a
multitude of retail sales channels. These include independent life insurance
sales professionals; agents of other companies; national, regional and
independent broker-dealers; banks and property-casualty insurance organizations.
The primary organization used to wholesale Hartford Life's products to these
outlets is a group of highly qualified life insurance professionals with
specialized training in sophisticated life insurance sales, particularly as it
pertains to estate and business planning. These individuals are generally
employees of Hartford Life, who are managed through a regional sales office
system. The Company has grown this organization rapidly the past few years, to
over 180 individuals, and expects to continue to increase the number of
wholesalers in the future.
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Competition
The Individual Life segment competes with approximately 1,600 life insurance
companies in the United States, as well as other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered,
competitiveness of pricing, relationships with third-party distributors and the
quality of underwriting and customer service.
EMPLOYEE BENEFITS
The Employee Benefits segment primarily sells 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. The Company also offers disability
underwriting, administration, claims processing services and reinsurance to
other insurers and self-funded employer plans. According to the latest results
published by Life Insurance Marketing and Research Association (LIMRA), the
Company, based on sales, was the third largest provider of group disability
insurance and the fourth largest writer of group life insurance in the United
States for the nine months ended September 30, 1999. Generally, policies sold in
this segment are term insurance, typically with one or two year rate guarantees.
This allows the Company to make adjustments in rate or terms of its policies in
order to minimize the adverse effect of various market trends. In the disability
market, the Company focuses on strong underwriting and claims management to
derive a competitive advantage. Employee Benefits generated premiums of $1.8
billion in 1999 of which $716 was attributable to group disability coverage and
$614 was attributable to group life coverage. As of December 31, 1999, the
Company's Consolidated Balance Sheet included disability reserves of $1.8
billion and group life reserves of $560. The Employee Benefits segment generated
revenues of $2.0 billion and $1.8 billion in 1999 and 1998, respectively. Net
income in the Employee Benefits segment was $79 in 1999, an 11% increase over
1998.
Products
Group Disability -- Hartford Life is one of the largest participants in the
"large case" market of the group disability insurance business. The large case
market, as defined by the Company, generally consists of group disability
policies covering over 1,000 employees in a particular company. The Company is
continuing to expand its operations in the "small" and "medium case" group
markets, emphasizing name recognition and reputation as well as the Company's
managed disability approach to claims and administration. The Company's efforts
in the group disability market focus on early intervention, return-to-work
programs, reduction of long-term disability claims and successful
rehabilitation. The focus of new disability products introduced is to provide
incentives for employees to return to independence. The Company also works with
disability claimants to improve the receipt rate of Social Security offsets
(i.e., reducing payment of benefits by the amount of Social Security payments
received).
Hartford Life has concentrated on a managed disability approach, which
emphasizes early claimant intervention in an effort to facilitate a disabled
claimant's return to work and thereby contain costs. This approach, coupled with
an individualized approach to claim servicing, and an incentive to contain
costs, leads to an overall reduction in the cost of disability coverage for
employers. The Company's short-term disability benefit plans provide a weekly
benefit amount (typically 60% to 70% of the employee's earned income up to a
specified maximum benefit) to insured employees when they are unable to work due
to an accident or illness. Long-term disability insurance provides a monthly
benefit for those periods of time not covered by a short-term disability
benefits plan when insured employees are unable to work due to disability.
Employees may receive total or partial disability benefits. Most of these
policies usually begin providing benefits following a 90 or 180 day waiting
period and continue providing benefits until the employee reaches age 65-70.
Long-term disability benefits are paid monthly and are limited to a portion,
generally 50-70%, of the employee's earned income up to a specified maximum
benefit.
Group Life -- Group term life insurance provides term coverage to employees and
their dependents for a specified period and has no accumulation of cash values.
The Company offers innovative options for its basic group life insurance
coverage, including portability of coverage and a living benefit option, whereby
terminally ill policyholders can receive death benefits prior to their death. In
addition, the Company offers employee groups accidental death and dismemberment
coverage.
Other -- Hartford Life also provides long-term care, travel accident, hospital
indemnity, Medicare Supplement and other coverages (including group life and
disability) primarily to individual members of various associations as well as
employee groups. The Company provides excess of loss medical coverage (known as
"stop loss" insurance) to employers who self-fund their medical plans and pay
claims using the services of a third party administrator.
Marketing and Distribution
Hartford Life uses an experienced group of Company employees, managed through a
regional sales office system, to distribute its group insurance products and
services through a variety of distribution outlets. The Company expanded its
sales office system during 1999, by increasing both the sales force and the
number of sales offices by about 25% and 15%, respectively. The Company will
8
<PAGE> 9
continue to expand the system over the coming years in areas that have the
highest growth potential in terms of small and large business growth. The
Company sells its product line to employers through brokers, consultants and
third-party administrators as well as to multiple employer groups through its
relationships with trade associations.
Competition
Competitive factors primarily affecting Employee Benefits are the variety and
quality of products offered, the price quoted for coverage and services, the
Company's relationships with its third-party distributors and the quality of
customer service. Employee Benefits competes with numerous other insurance
companies and other financial intermediaries marketing insurance products.
However, many of these businesses have relatively high barriers to entry and
there have been very few new entrants over the past few years, while other major
carriers have exited the market.
CORPORATE OWNED LIFE INSURANCE (COLI)
Hartford Life is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
named as the beneficiary under the policy. Until the Health Insurance
Portability Act of 1996 (HIPA Act of 1996), the Company sold two principal types
of COLI, leveraged and variable products. Leveraged COLI is a fixed premium life
insurance policy owned by a company or a trust sponsored by a company. The HIPA
Act of 1996 phased out the deductibility of interest on policy loans under
leveraged COLI at the end of 1998, thus virtually eliminating all future sales
of leveraged COLI. Variable COLI continues to be a product used by employers to
fund non-qualified benefits or other postemployment benefit liabilities.
Products marketed in this segment also include coverage owned by employees under
business sold through corporate sponsorship. Variable COLI account values were
$12.4 billion and $11.2 billion as of December 31, 1999 and 1998, respectively.
In November 1998, Hartford Life recaptured an in force block of leveraged COLI
business from MBL Life Assurance Co. of New Jersey (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 policies back to MBL
Life. MBL Life, previously a Mutual Benefit Life subsidiary, operates under the
Rehabilitation Plan for Mutual Benefit Life. The recaptured MBL business
increased revenues and expenses for 1998, however, there was no impact to net
income. Leveraged COLI account values decreased to $5.7 billion as of December
31, 1999 from $9.2 billion as of December 31, 1998, primarily due to the HIPA
Act of 1996. Although COLI revenues decreased in 1999 to $831 from $1,567 in
1998, COLI earnings increased 25%, to $30 in 1999.
OTHER MATTERS
RESERVES
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet
Hartford Life's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect Hartford Life's actual experience when appropriate. These reserves are
computed at amounts that, with additions from estimated premiums to be received
and with interest on such reserves compounded annually at certain assumed rates,
are expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Reserves also include unearned
premiums, premium deposits, claims incurred but not reported and claims reported
but not yet paid. Reserves for assumed reinsurance are computed on bases
essentially comparable to direct insurance reserves.
For Hartford Life's universal life and interest sensitive whole life policies,
reserves are set according to premiums collected, plus interest credited, less
charges. Other fixed death benefit and individual life reserves are based on
assumed investment yield, persistency, mortality and morbidity as per commonly
used actuarial tables, expenses and margins for adverse deviations. For the
Company's group disability policies, the level of reserves is based on a variety
of factors including particular diagnoses, termination rates and benefit
payments.
The persistency of Hartford Life's annuity and other interest sensitive life
insurance reserves is enhanced by policy restrictions on the withdrawal of
funds. Withdrawals in excess of allowable penalty-free amounts are assessed a
surrender charge during a penalty period, which is usually at least seven years.
Such surrender charge is initially a percentage of the accumulation value, which
varies by product, and generally decreases gradually during the penalty period.
Surrender charges are set at levels to protect the Company from loss on early
terminations and to reduce the likelihood of policyholders terminating their
policies during periods of increasing interest rates, thereby lengthening the
effective duration of policy liabilities and improving the Company's ability to
maintain profitability on such policies.
9
<PAGE> 10
Hartford Life's reserves comply, in all material respects, with state insurance
department statutory accounting practices; however, in the Company's
Consolidated Financial Statements, life insurance reserves are determined in
accordance with generally accepted accounting principles, which may vary from
statutory accounting practices.
REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory
and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency which must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and, the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Most states have enacted legislation which regulates insurance holding company
systems such as Hartford Life. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
REINSURANCE
In accordance with normal industry practice, Hartford Life is involved in both
the cession and assumption of insurance with other insurance and reinsurance
companies. As of December 31, 1999, the maximum amount of life insurance
retained on any one life by any of the life operations is approximately $2.5,
excluding accidental death benefits.
INVESTMENT OPERATIONS
The Company's investment operations are managed by its investment strategy group
which reports directly to senior management of the Company. Hartford Life's
investments have been separated into specific portfolios which support specific
classes of product liabilities. The investment strategy group works closely with
the product lines to develop investment guidelines, including duration targets,
asset allocation and convexity constraints, asset/liability mismatch tolerances
and return objectives, to ensure that the product line's individual risk and
return objectives are met. The Company's primary investment objective for its
general account and guaranteed separate accounts is to maximize after-tax
returns consistent with acceptable risk parameters, including the management of
the interest rate sensitivity of invested assets to that of policyholder
obligations.
For further discussion of Hartford Life's investment operations and the
Company's approach to managing investment risk, see the Investments section and
the Capital Markets Risk Management section of the MD&A, as well as Notes 2(f),
2(g), 2(h) and 4 of Notes to Consolidated Financial Statements.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-Based Capital".
LEGISLATIVE AND REGULATORY INITIATIVES
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Legislative and Regulatory Initiatives".
INSOLVENCY FUND
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Insolvency Fund".
10
<PAGE> 11
NAIC PROPOSALS
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "NAIC Proposals".
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Dependence on Certain Third Party Relationships".
YEAR 2000
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Year 2000".
EMPLOYEES
Hartford Life had approximately 5,000 employees at February 29, 2000.
EXECUTIVE OFFICERS OF HARTFORD LIFE
Information about the executive officers of Hartford Life who are also directors
and/or nominees for election as directors is set forth in Hartford Life's 2000
Proxy Statement. In addition to those executive officers who are listed in the
2000 Proxy Statement, listed below are other Company executive officers:
GREGORY A. BOYKO, 48, is Senior Vice President and Director of the Company's
international operations since November 1997. He joined Hartford Life in 1995 as
Controller. In 1996, he became the Company's Chief Financial Officer and
Treasurer, which position he held until August 1998. He previously worked at ING
America Life Insurance Company where he held the position of Senior Vice
President and Chief Financial Officer. His prior experience included positions
at Connecticut Mutual Life Insurance Company (CML), where he progressed from
Controller of CML to Chief Financial Officer of Connecticut Mutual Insurance
Services. Mr. Boyko holds a Juris Doctor degree and is a Certified Public
Accountant, Chartered Life Underwriter and Chartered Financial Consultant. He is
a member of the Connecticut and American Bar Associations and the Connecticut
Society of Certified Public Accountants.
DAVID T. FOY, 33, is Senior Vice President and Chief Financial Officer. Mr. Foy
was appointed to his current position in August 1998 and was given the title of
Chief Financial Officer in October 1999. He joined Hartford Life in 1993 in the
individual annuity product management area and assumed the position of Director
of Strategic Planning in 1995. He was promoted to Assistant Vice President and
Director of Finance in 1997. He began his career in 1989 at Milliman &
Robertson, an actuarial consulting firm. He is a Fellow of the Society of
Actuaries and a member of the American Academy of Actuaries.
LYNDA GODKIN, 45, is Senior Vice President and General Counsel. She joined
Hartford Life in 1990 as Counsel for the Employee Benefits Segment. In 1994 she
was named Assistant General Counsel and Director of Hartford Life's Law
Department. In 1996 she was named General Counsel of Hartford Life. She
previously practiced law at CIGNA Corporation. She began her legal career in
1981 at the law firm of Day, Berry & Howard in Hartford, Connecticut.
She is a member of the Connecticut and American Bar Associations.
JOHN C. WALTERS, 38 , will join Hartford Life in April 2000 as Executive Vice
President and Director of Investment Products. Previously, Mr. Walters was
President of the Financial Services Group of First Union Securities (First
Union) and its predecessors since 1996. He joined First Union through its 1998
acquisition of Wheat First Butcher Singer, where he had been since 1984 and held
positions of increasing responsibilities, including Managing Director, Financial
Services from 1992 to 1994 and Director of Sales from 1994 to 1996.
RAYMOND P. WELNICKI, 51, is Senior Vice President and heads the Strategic
Operations Unit since February 1999. He joined Hartford Life in 1992 as Actuary,
Director of Group Actuarial and Long-Term Care. He was named Vice President of
Hartford Life in 1993. He served as Senior Vice President and Director of
Employee Benefits from 1994 to 1999. Prior to 1992, he was employed with Aetna
Life & Casualty Company as Assistant Vice President, Issues and Strategic
Management. He is a Fellow of the Society of Actuaries.
LIZABETH H. ZLATKUS, 41, is Executive Vice President and Director of Employee
Benefits since March 2000. Ms. Zlatkus has held positions of increasing
responsibility since joining The Hartford in 1983. She was named Senior Vice
President and Director of Employee Benefits Division in 1999 and served as
Senior Vice President and Director of Group Life and Disability from 1997 to
1999. Prior to that time, she served as Vice President and Director of Risk
Management and Business Operations. She began her career at Peat, Marwick,
Mitchell & Company. She became a Certified Public Accountant in 1982.
DAVID M. ZNAMIEROWSKI, 39, is Senior Vice President and Chief Investment
Officer. Mr. Znamierowski was appointed to his current position in October 1999.
Mr. Znamierowski joined Hartford Life in 1996 as Director of Risk Management.
Previously, he held various positions with Aetna Life & Casualty Company,
including Vice President, Investment Strategy and Policy. From 1986 through
1991, Mr. Znamierowski held positions with Salomon Brothers Inc.
11
<PAGE> 12
ITEM 2. PROPERTIES
Hartford Life's principal executive offices are located in Simsbury,
Connecticut. The Company's home office complex consists of approximately 615
thousand square feet, and is leased from a third party by Hartford Fire
Insurance Company (Hartford Fire), an indirect subsidiary of The Hartford. This
lease expires in the year 2009. Expenses associated with these offices are
allocated on a direct and indirect basis to Hartford Life by Hartford Fire.
ITEM 3. LEGAL PROCEEDINGS
Hartford Life is involved in pending and threatened litigation in the normal
course of its business in which claims for alleged economic and punitive damages
have been asserted. Some of these cases have been filed as purported class
actions and some cases have been filed in certain jurisdictions that permit
punitive damage awards disproportionate to the actual damages incurred. 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 estimated 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
No matter was submitted to a vote of security holders of Hartford Life during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR HARTFORD LIFE'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Hartford Life's Class A Common Stock is traded on the New York Stock Exchange
(NYSE) under the trading symbol "HLI". Hartford Life's Class B Common Stock is
held by Hartford Accident and Indemnity Company (HA&I), an indirect wholly-owned
subsidiary of The Hartford. As such, the Class B Common Stock is not listed on
any exchange and there is no established public trading market for it.
The following table presents high and low closing prices for the Class A Common
Stock of Hartford Life on the NYSE for the periods indicated, and the quarterly
dividends declared per share on Class A and Class B Common Stock:
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------- --------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
----------------------------------------------------------------------------------------------------------------------------------
Common Stock Price
<S> <C> <C> <C> <C> <C> <C> <C> <C>
High $59.38 $55.00 $53.25 $54.50 $50.00 $56.94 $62.19 $58.38
Low $50.25 $45.63 $42.38 $37.63 $40.00 $46.75 $42.25 $33.88
Dividends Declared $0.09 $0.09 $0.09 $0.09 $0.09 $0.09 $0.09 $0.09
----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
As of February 29, 2000, there were approximately 600 shareholders of record of
Hartford Life's Class A Common Stock and HA&I was the only holder of Class B
Common Stock.
On February 17, 2000, Hartford Life's Board of Directors approved an 11%
increase in the quarterly dividend to $0.10 per share, payable on April 3, 2000
to stockholders of record on March 1, 2000. Future dividend decisions will be
based on, and affected by, a number of factors, including the operating results
and financial requirements of Hartford Life on a stand-alone basis and the
impact of regulatory restrictions discussed in the Capital Resources and
Liquidity section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations (MD&A) under "Liquidity Requirements".
There are also various legal limitations governing the extent to which Hartford
Life's insurance subsidiaries may pay dividends, extend credit or otherwise
provide funds to Hartford Life, Inc. as discussed in the Capital Resources and
Liquidity section of the MD&A under "Liquidity Requirements".
12
<PAGE> 13
ITEM 6. SELECTED FINANCIAL DATA
<TABLE>
<CAPTION>
(In millions, except for per share data) 1999 1998 1997 1996 1995
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (1)
<S> <C> <C> <C> <C> <C>
General account invested assets $ 21,786 $ 24,882 $ 20,970 $ 19,830 $ 20,072
Separate account assets (2) 110,652 90,628 69,362 49,770 36,296
All other assets 6,595 6,512 10,648 10,333 9,594
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $139,033 $122,022 $100,980 $ 79,933 $ 65,962
- ------------------------------------------------------------------------------------------------------------------------------------
Policy liabilities $ 23,109 $ 25,484 $ 26,078 $ 26,239 $ 26,318
Separate account liabilities (2) 110,652 90,628 69,362 49,770 36,296
Allocated advances from parent (3) -- -- -- 893 732
Debt (3) 650 650 700 -- --
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely parent
junior subordinated debentures (4) 250 250 -- -- --
All other liabilities 2,066 2,517 2,696 1,757 1,439
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $136,727 $119,529 $ 98,836 $ 78,659 $ 64,785
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 2,306 $ 2,493 $ 2,144 $ 1,274 $ 1,177
- ------------------------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA (1)
Total revenues $ 5,536 $ 5,788 $ 4,699 $ 4,384 $ 4,090
Total expenses 5,069 5,402 4,393 4,360 3,940
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME (5) $ 467 $ 386 $ 306 $ 24 $ 150
- ------------------------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DATA
Basic earnings per share (6) $ 3.34 $ 2.76 $ 2.28 $ 0.19 $ --
Diluted earnings per share (6) $ 3.33 $ 2.75 $ 2.28 $ 0.19 $ --
Dividends declared per common share (7) $ 0.36 $ 0.36 $ 0.18 $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1)On November 10, 1998, the Company recaptured an in force block of corporate
owned life insurance (COLI) business from MBL Life Assurance Co. of New
Jersey (MBL Life). For additional information, see the COLI section as well
as the MBL Recapture discussion under "Purchases of Affiliates and Other"
within the Capital Resources and Liquidity section of the Management's
Discussion and Analysis of Financial Condition and Results of Operations
(MD&A).
(2)Includes both non-guaranteed and guaranteed separate accounts.
(3)For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford Financial Services Group, Inc. (The
Hartford) to the Company's life insurance subsidiaries as allocated advances
from parent. Cash received in respect of allocated advances from parent was
used to support the growth of the life insurance subsidiaries.
(4)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. For additional
information, see Note 8 of Notes to Consolidated Financial Statements.
(5)1996 includes realized losses of $225 primarily resulting from actions taken
in the third quarter of 1996 related to the Company's guaranteed investment
contract business.
(6)Pro forma effect on basic and diluted earnings per share has been given for
the 1997 and 1996 periods presented for the conversion of 1,000 shares of
common stock into 114 million shares of Class B Common Stock, which occurred
on April 3, 1997, prior to the Company's initial public offering (IPO). For
information regarding the IPO and earnings per share data, see Notes 3 and 10
of Notes to Consolidated Financial Statements, respectively.
(7)Dividends per common share represent amounts declared subsequent to the
Company's IPO on May 22, 1997. (For information regarding the IPO, see Note 3
of Notes to Consolidated Financial Statements.) The table does not include
dividends paid to the parent in periods prior to the IPO.
13
<PAGE> 14
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, except for share data, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Consolidated Financial
Statements and related Notes beginning on page F-1.
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 the possibility of general economic, business and legislative
conditions that are less favorable than anticipated, changes in interest rates
or the stock markets, stronger than anticipated competitive activity and those
described in the forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Consolidated Results of Operations 14
Investment Products 16
Individual Life 17
Employee Benefits 18
Corporate Owned Life Insurance (COLI) 19
Reserves 20
Investments 20
Capital Markets Risk Management 22
Capital Resources and Liquidity 30
Regulatory Matters and Contingencies 33
Effect of Inflation 35
Accounting Standards 35
CONSOLIDATED RESULTS OF OPERATIONS
Hartford Life is a leading financial services and insurance company providing
investment and retirement products such as variable and fixed annuities, mutual
funds and retirement plan services; individual and corporate owned life
insurance; and, employee benefit products such as group life and disability
insurance.
The Company derives its revenues principally from: (a) asset management fees on
separate account and mutual fund assets and mortality and expense fees; (b)
fully insured premiums; (c) cost of insurance charges; (d) net investment income
on general account assets; and (e) certain other fees earned by the Company.
Asset management fees and mortality and expense fees are primarily generated
from separate account assets, which are deposited with the Company through the
sale of variable annuity products and variable life products, and mutual funds.
Premium revenues are derived primarily from the sale of group life and group
disability insurance products. Cost of insurance charges are assessed on the net
amount at risk for investment oriented life insurance products.
Hartford Life's expenses essentially consist of interest credited to
policyholders on general account liabilities, insurance benefits provided,
dividends to policyholders, costs of selling and servicing the various products
offered by the Company, and other general business expenses.
Hartford Life's profitability depends largely on the amount of assets under
management, the level of fully insured premiums, the adequacy of product pricing
and underwriting discipline, and its ability to earn target spreads between
earned investment rates on general account assets and credited rates to
customers.
14
<PAGE> 15
OPERATING SUMMARY
<TABLE>
<CAPTION>
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations $ 3,979 $ 3,833 $ 3,163
Net investment income 1,562 1,955 1,536
Net realized capital losses (5) -- --
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 5,536 5,788 4,699
------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 3,054 3,227 2,671
Amortization of deferred policy acquisition costs 568 441 345
Dividends to policyholders 104 330 241
Other expenses 1,124 1,205 962
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,850 5,203 4,219
------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 686 585 480
Income tax expense 219 199 174
- ----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 467 $ 386 $ 306
------------------------------------------------------------------------------------------------------------------
</TABLE>
Hartford Life has the following reportable operating 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,
which are primarily located in Latin America, in an "Other" category. For
information regarding the Company's reportable segments, see Note 17 of Notes to
Consolidated Financial Statements.
1999 COMPARED TO 1998 - Revenues decreased $252, or 4%, due primarily to the
declining block of leveraged COLI business. Excluding the COLI segment, revenues
increased $484, or 11%, driven mostly by the Investment Products and Employee
Benefits segments, where revenues increased $257, or 14%, and $215, or 12%,
respectively. The revenue growth in the Investment Products segment was, for the
most part, due to higher fee income in the individual annuity and mutual fund
operations. Combined fee income for these products increased $301, or 33%, to
$1,215 due to significant growth in related assets under management resulting
from strong sales, favorable persistency and equity market appreciation. The
growth in Employee Benefits revenues was fundamentally due to higher premium
revenue generated by persistency of the in force block of business, coupled with
strong sales to new customers.
Total benefits, claims and expenses decreased $353, or 7%, primarily due to the
declining block of leveraged COLI business. Excluding the COLI segment, total
benefits, claims and expenses increased $394, or 11%, consistent with the
revenue growth described above. Net income increased $81, or 21%, driven mostly
by increased fee income associated with higher assets under management in the
Investment Products segment, as well as continued growth across its other
reportable segments.
1998 COMPARED TO 1997 - Revenues increased $1.1 billion, or 23%, essentially due
to the continued growth of revenues in the Investment Products and Individual
Life segments of $274 and $57, respectively. Investment Products and Individual
Life revenues increased as a result of higher assets under management associated
with strong net cash flow and equity market appreciation. Additionally, Employee
Benefits revenues increased $109, or 6%, due to strong sales and favorable
persistency. COLI revenues increased $587 primarily due to the recapture in the
fourth quarter of 1998 of an in force block of COLI business previously ceded to
MBL Life Assurance Co. of New Jersey. (For a discussion of the MBL Recapture,
see the Capital Resources and Liquidity section.)
Total benefits, claims and expenses increased $984, or 23%, principally due to
costs associated with the recaptured MBL business as well as continued growth in
the Company's other reportable segments. Net income increased $80, or 26%, most
notably as a result of an increase in earnings in the Investment Products
segment of $64 and in the Individual Life segment of $9, both of which were
driven by higher fees associated with growth in assets under management.
Additionally, earnings in the Employee Benefits segment increased $13 as group
insurance revenue increased and the Company achieved favorable mortality and
morbidity experience.
OUTLOOK
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader within the financial services
industry, to continue the Company's growth in assets under management and fully
insured premium growth and to maximize shareholder value. Hartford Life is well
positioned to assist individuals in meeting their financial goals as they
increasingly save and plan for retirement, protect themselves and their families
against disability or death and prepare their estates for an efficient transfer
of wealth between generations. Hartford Life's strong market position in its
primary businesses, which align with these growing markets, will provide
opportunities to increase sales of the Company's products and services.
Certain proposed legislative initiatives which could impact Hartford Life are
discussed in the Regulatory Matters and Contingencies section.
15
<PAGE> 16
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
<TABLE>
<CAPTION>
1999 1998 1997
- ---------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Investment Products $ 330 $ 266 $ 202
Individual Life 71 65 56
Employee Benefits 79 71 58
Corporate Owned Life Insurance 30 24 27
Other (43) (40) (37)
- ---------------------------------------------------------------------------------------------------------
NET INCOME $ 467 $ 386 $ 306
- ---------------------------------------------------------------------------------------------------------
</TABLE>
A description of each segment as well as an analysis of the operating results
summarized above is included on the following pages. Reserves and Investments
are discussed in separate sections.
INVESTMENT PRODUCTS
OPERATING SUMMARY
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations $ 1,333 $ 1,045 $ 771
Net investment income 708 739 739
- ------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,041 1,784 1,510
--------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 668 671 677
Amortization of deferred policy acquisition costs 430 326 250
Other expenses 440 376 269
- ------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,538 1,373 1,196
--------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 503 411 314
Income tax expense 173 145 112
- ------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 330 $ 266 $ 202
--------------------------------------------------------------------------------------------------------------
Individual variable annuity account values $ 80,588 $ 62,210 $ 46,920
Other individual annuity account values 8,383 8,574 9,349
Other investment products account values 16,352 15,389 14,039
- ------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 105,323 86,173 70,308
Retail mutual fund assets under management 6,374 2,506 972
- ------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $ 111,697 $ 88,679 $ 71,280
-------------------------------------------------------------------------------------------------------------
</TABLE>
The Investment Products segment focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired through the sale of individual fixed and variable annuities,
mutual funds, retirement plan services and other investment products. The
Company was ranked the number one writer of individual variable annuities in the
United States for 1999 according to Variable Annuity and Research Data Service
(VARDS) and the number one seller of individual variable annuities through
banks, according to Kenneth Kehrer and Associates. In addition, The Hartford
Mutual Funds became the first retail mutual fund family to surpass $6.0 billion
in assets in less than three and a half years of existence. Also, seven of the
twelve mutual funds received Morningstar ratings and, as of December 31, 1999,
all seven have three-, four- or five-star ratings.
1999 COMPARED TO 1998 - Revenues increased $257, or 14%, primarily due to higher
fee income in the individual annuity and retail mutual fund operations. Fees
generated by individual annuities increased $248, or 29%, as related account
values increased $18.2 billion, or 26%. The growth in individual annuity account
values was mostly due to significant net cash flow, resulting from strong sales
of $10.9 billion and favorable persistency, as well as equity market
appreciation. In addition, fee income from other investment products increased
$68, or 59%, primarily due to the Company's continued growth in its retail
mutual fund operation, where assets under management grew $3.9 billion, or 154%.
This tremendous growth was driven by phenomenal sales of $3.3 billion, favorable
persistency and equity market appreciation.
Associated with continued growth in this segment, total benefits, claims and
expenses increased $165, or 12%. This increase was primarily driven by
amortization of deferred policy acquisition costs, which grew $104, or 32%, and
operating expenses, which increased $32, or 13%, as a result of growth in the
individual annuity and mutual fund operations described above.
16
<PAGE> 17
Net income increased $64, or 24%, for the most part due to the growth in
revenues discussed above. Also contributing to the higher net income were
operating efficiencies that the segment continues to achieve, particularly in
its individual variable annuity operation, where operating expenses as a
percentage of average individual annuity account values decreased from 23 basis
points to 21 basis points.
1998 COMPARED TO 1997 - Revenues increased $274, or 18%, driven primarily by
higher fee income in the individual annuity operation. Individual variable
annuity fee income increased $236, or 38%, as related account values grew $15.3
billion, or 33%. The growth in individual variable annuity account values was
due to significant net cash flow, the result of strong sales of $9.9 billion and
favorable persistency, as well as equity market appreciation. In addition, fee
income from other investment products increased $60, or 107%, most notably the
result of growth in the Company's mutual fund operations, where related assets
under management increased $1.5 billion, or 158%.
Total benefits, claims and expenses increased $177, or 15%, as a result of the
continued growth in this segment. Amortization of deferred policy acquisition
costs grew $76, or 30%, and other expenses increased $107, or 40%, essentially
due to growth in the individual annuity and mutual fund operations discussed
above. The increased revenues associated with the 33% growth in individual
variable annuity account values, coupled with a reduction in individual annuity
operating expenses as a percentage of average individual annuity account values
to 23 basis points from 25 basis points, contributed to the increase in net
income of $64, or 32%.
OUTLOOK
The market for retirement products continues to expand as individuals
increasingly save and plan for retirement. Demographic trends suggest that as
the baby boom generation matures, a significant portion of the United States
population will allocate a greater percentage of their disposable incomes to
saving for their retirement years due to uncertainty surrounding the Social
Security system and increases in average life expectancy. As this market grows,
particularly for variable annuities and mutual funds, new companies are
continually entering the market and aggressively seeking distribution
capabilities and pursuing market share. This trend is not expected to subside,
particularly in light of the Gramm-Leach-Bliley Act of 1999 (the Financial
Services Modernization Act), which was enacted into law, allowing banks,
securities firms and insurance companies to have ownership affiliation. (For
additional information, see the Regulatory Matters and Contingencies section.)
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader in the financial services industry.
INDIVIDUAL LIFE
OPERATING SUMMARY
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations $ 412 $ 378 $ 339
Net investment income 172 189 171
- -------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 584 567 510
---------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 258 269 251
Amortization of deferred policy acquisition costs 129 108 87
Dividends to policyholders and other expenses 88 89 85
- -------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 475 466 423
---------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 109 101 87
Income tax expense 38 36 31
- -------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 71 $ 65 $ 56
---------------------------------------------------------------------------------------------------------------
Variable life account values $ 2,595 $ 1,727 $ 1,076
Total account values $ 5,419 $ 4,512 $ 3,791
- -------------------------------------------------------------------------------------------------------------------------
Variable life insurance in force $ 23,854 $ 16,305 $ 9,750
Total life insurance in force $ 66,690 $ 61,074 $ 55,441
- -------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Individual Life segment, which focuses on the high end estate and business
planning markets, sells a variety of life insurance products, including variable
life, universal life, interest sensitive whole life and term life insurance.
17
<PAGE> 18
1999 COMPARED TO 1998 - Revenues increased $17, or 3%, resulting primarily from
higher fee income associated with the growing block of variable life insurance.
Fee income increased $59, or 18%, as variable life account values increased
$868, or 50%, and variable life insurance in force increased $7.5 billion, or
46%. The higher fee income was partially offset by a decrease in premium revenue
resulting from the sale of the Company's Canadian life insurance operation in
1999. Total benefits, claims and expenses increased slightly, principally due to
a $21 increase in amortization of deferred policy acquisition costs associated
with the growth in this segment's revenues, partially offset by a decrease of
$11 in benefits, claims and claim adjustment expenses due to the sale of the
Canadian life insurance operation and lower mortality costs. Net income
increased $6, or 9%, essentially due to the higher fee income and favorable
mortality described above.
1998 COMPARED TO 1997 - Revenues increased $57, or 11%, resulting from higher
fee income associated with the Company's growing block of variable life
insurance. Variable life account values increased $651, or 61%, due to strong
sales of $127, a 30% increase over prior year levels, as well as equity market
appreciation, while variable life insurance in force increased $6.6 billion, or
67%. Total benefits, claims and expenses increased $43, or 10%, as a result of
an increase in amortization of deferred policy acquisition costs of $21 and an
increase in benefits, claims and claim adjustment expenses of $18 related to the
growth in this segment. The growth in the Individual Life operation's account
values and life insurance in force, particularly variable life, resulted in an
increase in net income of $9, or 16%.
OUTLOOK
Management believes that the Company's strong market position will provide
opportunities for growth in this segment as individuals increasingly prepare
their estates for an efficient transfer of wealth between generations.
EMPLOYEE BENEFITS
OPERATING SUMMARY
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations $ 1,829 $ 1,629 $ 1,538
Net investment income 195 180 162
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 2,024 1,809 1,700
--------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 1,507 1,335 1,301
Amortization of deferred policy acquisition costs and other expenses 415 376 309
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,922 1,711 1,610
--------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 102 98 90
Income tax expense 23 27 32
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 79 $ 71 $ 58
--------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Employee Benefits segment sells 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. The Company also offers disability underwriting,
administration, claims processing services and reinsurance to other insurers and
self-funded employer plans. According to the latest results published by the
Life Insurance Marketing and Research Association (LIMRA), the Company was the
third largest provider of group disability insurance and the fourth largest
writer of group life insurance in the United States for the nine months ended
September 30, 1999.
1999 COMPARED TO 1998 - Revenues increased $215, or 12%, driven by growth in
fully insured premiums, excluding buyouts, which increased $172, or 11%. This
increase was fundamentally due to group life and group disability, where ongoing
premiums increased $49, or 9%, and $63, or 11%, respectively, due to strong
persistency of the in force block of business, coupled with an increase in sales
to new customers.
Total benefits, claims and expenses increased $211, or 12%, primarily due to
higher benefits, claims and claim adjustment expenses, which, excluding buyouts,
increased $187, or 11%, due to the growth in this segment. The ratio of
benefits, claims and claim adjustment expenses as a percentage of premiums and
other considerations (loss ratio), excluding buyouts, remained consistent at
82%, indicating a continuation of favorable mortality and morbidity experience.
In addition, the ratio of amortization of deferred policy acquisition costs and
other expenses as a percentage of premiums and other considerations (expense
ratio), excluding buyouts, remained consistent at 24%.
18
<PAGE> 19
The segment's effective income tax rate was reduced to 23% from 28% as a result
of increasing the level of investment in tax-exempt securities. As a result of
increased premium revenue, consistent loss and expense ratios and increased
after-tax investment income, net income increased $8, or 11%.
1998 COMPARED TO 1997 - Revenues increased $109, or 6%, driven by growth in
fully insured premiums, excluding buyouts, which increased $181, or 13%. This
increase was primarily due to group life and group disability, where ongoing
premiums increased $69 and $55, respectively, due to strong sales and good
persistency. Sales of fully insured business, excluding buyouts, increased $68,
or 21%, of which group life and group disability business increased $26 and $23,
respectively.
Total benefits, claims and expenses increased $101, or 6%, primarily due to
higher benefits, claims and claim adjustment expenses, which, excluding buyouts,
increased $121 associated with this growing block of business. However, the
ratio of benefits, claims and claim adjustment expenses as a percentage of
premiums and other considerations, excluding buyouts, improved to 82% from 83%.
This improvement was partially offset by an increase in other expenses of $66,
whereby other expenses as a percentage of premiums and other considerations,
excluding buyouts, increased to 24% from 22%. This trend is due to the Company's
continued investment in claims management initiatives, which result in higher
operating expenses but improve benefits, claims and claim adjustment expenses.
The segment's effective income tax rate was reduced to 28% from 36% as a result
of increasing the level of investment in tax-exempt securities, which improved
the after-tax investment yield to 5.2% from 5.0%. As a result of increased
premium revenue, an improved after-tax investment yield and favorable mortality
and morbidity experience, net income increased $13, or 22%.
OUTLOOK
As employers continue to offer benefit plans in order to attract and retain
valued employees, management expects that the need for group life and group
disability insurance will continue to expand and believes the Company is well
positioned to take advantage of this growth potential.
CORPORATE OWNED LIFE INSURANCE (COLI)
OPERATING SUMMARY
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Premiums and other considerations $ 400 $ 774 $ 551
Net investment income 431 793 429
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 831 1,567 980
--------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 621 924 439
Dividends to policyholders 104 329 240
Other expenses 59 278 259
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 784 1,531 938
--------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 47 36 42
Income tax expense 17 12 15
- ------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 30 $ 24 $ 27
--------------------------------------------------------------------------------------------------------------------
Variable COLI account values $ 12,386 $ 11,220 $ 6,600
Leveraged COLI account values 5,729 9,148 5,719
- ------------------------------------------------------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $ 18,115 $ 20,368 $ 12,319
-------------------------------------------------------------------------------------------------------------------
</TABLE>
Hartford Life is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
named as beneficiary under the policy. Until the Health Insurance Portability
and Accountability Act of 1996 (HIPA Act of 1996), the Company sold two
principal types of COLI business, leveraged and variable products. Leveraged
COLI is a fixed premium life insurance policy owned by a company or a trust
sponsored by a company. The HIPA Act of 1996 phased out the deductibility of
interest on policy loans under leveraged COLI through the end of 1998, virtually
eliminating all future sales of this product. Variable COLI continues to be a
product used by employers to fund non-qualified benefits or other postemployment
benefit liabilities. Products marketed in this segment also include coverage
owned by employees under business sold through corporate sponsorship.
1999 COMPARED TO 1998 - Revenues decreased $736, or 47%, primarily attributable
to the downsizing of the leveraged COLI business as a result of the HIPA Act of
1996. During 1999, leveraged COLI account values decreased $3.4 billion, or 37%.
Consistent with the decrease in revenues, benefits, claims and expenses
decreased $747, or 49%. Net income increased $6, or 25%, primarily due
19
<PAGE> 20
to growth in the variable COLI business, where related account values increased
$1.2 billion, or 10%. Additionally, leveraged COLI net income increased due to
earnings associated with the MBL business recaptured in November 1998 (as
discussed earlier), which was partially offset by decreases associated with the
downsizing of the overall leveraged COLI business.
1998 COMPARED TO 1997 - Revenues increased $587, or 60%, primarily related to
the recaptured MBL business of $541, comprised of $163 of premiums and other
considerations and $378 of net investment income. In addition, revenues
increased due to fee income on growing variable COLI account values, partially
offset by declines in revenues associated with the downsizing of the overall
leveraged COLI business. Benefits, claims and expenses increased $593, or 63%,
primarily due to the recaptured MBL business. The MBL recapture resulted in an
increase in benefits, claims and expenses of $541 and was comprised of $452 of
benefits, claims and other expenses and $89 of dividends to policyholders. Net
income declined $3, or 11%, as the growth in the Company's variable COLI
business was offset by the declining block of leveraged COLI the Company had
prior to passage of the HIPA Act of 1996. The recaptured MBL business had no
impact on net income in 1998.
OUTLOOK
The focus of this segment is variable COLI, which continues to be a product
generally used by employers to fund non-qualified benefits or other
postemployment benefit liabilities. The leveraged COLI product has been an
important contributor to Hartford Life's profitability in recent years and will
continue to contribute to the profitability of Hartford Life in the future,
although the level of profit is expected to decline. COLI is subject to a
changing legislative and regulatory environment that could have a material
adverse affect on its business. Certain proposed legislative initiatives could
impact COLI and are discussed in the Regulatory Matters and Contingencies
section.
RESERVES
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet
Hartford Life's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect Hartford Life's actual experience when appropriate. These reserves are
computed at amounts that, with additions from premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Reserves include unearned
premiums, premium deposits, claims incurred but not reported and claims reported
but not yet paid. Reserves for assumed reinsurance are computed on bases
essentially comparable to direct insurance reserves.
INVESTMENTS
GENERAL
The Company's investments are managed by its investment strategy group, which
consists of a risk management unit and a portfolio management unit and reports
directly to senior management of the Company. The risk management unit is
responsible for monitoring and managing the Company's asset/liability profile
and establishing investment objectives and guidelines. The portfolio management
unit is responsible for determining, within specified risk tolerances and
investment guidelines, the appropriate asset allocation, duration, and convexity
characteristics of the Company's general account and guaranteed separate account
investment portfolios. The Hartford Investment Management Company, a wholly
owned subsidiary of The Hartford Financial Services Group, Inc., executes the
investment plan of the investment strategy group, including the identification
and purchase of securities that fulfill the objectives of the strategy group.
The primary investment objective of the Company's general account and guaranteed
separate accounts is to maximize after-tax returns consistent with acceptable
risk parameters (including the management of the interest rate sensitivity of
invested assets relative to that of policyholder obligations). The Company does
not hold any financial instruments purchased for trading purposes. The Company
is exposed to two primary sources of investment risk: credit risk, relating to
the uncertainty associated with an obligor's continued ability to make timely
payment of principal and/or interest, and interest rate risk, relating to the
market price and/or cash flow variability associated with changes in market
yield curves. See the Capital Markets Risk Management section for further
discussion of the Company's approach to managing these investment risks.
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $101.8 billion and $80.6 billion as of
December 31, 1999 and 1998, respectively, wherein the policyholder assumes
substantially all the investment risk and reward, and guaranteed separate
accounts totaling $8.9 billion and $10.0 billion as of December 31, 1999 and
1998, respectively, wherein Hartford Life contractually guarantees either a
minimum return or account value to the policyholder. Non-
20
<PAGE> 21
guaranteed separate account products include variable annuities, variable life
insurance contracts and variable COLI. Guaranteed separate account products
primarily consist of modified guaranteed individual annuities and modified
guaranteed life insurance and generally include market value adjustment features
to mitigate the risk of disintermediation.
The Company's general account consists of a diversified portfolio of
investments. Although all the assets of the general account support the
Company's general account liabilities, the Company's investment strategy group
has developed separate investment portfolios for specific classes of product
liabilities within the general account. The strategy group works closely with
the business lines to develop specific investment guidelines, including duration
targets, asset allocation and convexity constraints, asset/liability mismatch
tolerances and return objectives for each product line in order to achieve each
product line's individual risk and return objectives.
Invested assets in the Company's general account totaled $21.8 billion as of
December 31, 1999 and were comprised of $17.0 billion of fixed maturities, $4.2
billion of policy loans, equity securities of $153 and other investments of
$376. 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. The
decrease in policy loans was primarily due to the decline in leveraged COLI
business (as discussed in the COLI section). 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.
The following table sets forth by type the fixed maturity securities held in the
Company's general account as of December 31, 1999 and 1998.
<TABLE>
<CAPTION>
1999 1998
--------------------------------------------------------------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
---------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Corporate $ 7,737 45.4% $ 7,898 44.6%
Asset backed securities 2,508 14.7% 2,465 13.9%
Commercial mortgage backed securities 2,112 12.4% 2,036 11.5%
Short-term 1,346 7.9% 2,119 12.0%
Municipal - tax-exempt 1,108 6.5% 916 5.2%
Mortgage backed securities - agency 853 5.0% 503 2.9%
Collateralized mortgage obligations 592 3.5% 831 4.7%
Government/Government agencies - Foreign 339 2.0% 530 3.0%
Government/Government agencies - U.S. 229 1.3% 166 0.9%
Municipal - taxable 165 1.0% 223 1.3%
Redeemable preferred stock 46 0.3% 5 --
---------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 17,035 100.0% $ 17,692 100.0%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>
During 1999, the Company, in executing its investment strategy, increased its
allocation to municipal tax-exempt securities with the objective of increasing
after-tax yields, and also increased its allocation to mortgage backed and
commercial mortgage backed securities. Holdings of short-term securities
declined, primarily as a result of the funding of scheduled liability
maturities.
Approximately 21.5% and 22.8% of the Company's fixed maturity portfolio was
invested in private placement securities (including Rule 144A offerings) as of
December 31, 1999 and 1998, respectively. Private placement securities are
generally less liquid than public securities; however, covenants for private
placements are designed to mitigate liquidity risk. Most of the private
placement securities in the Company's portfolio are rated by nationally
recognized rating organizations. For further discussion of the Company's
investment credit policies, see the Capital Markets Risk Management section
under "Credit Risk".
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
<TABLE>
<CAPTION>
(Before-tax) 1999 1998 1997
-----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Net investment income - excluding policy loan income $ 1,171 $ 1,166 $ 1,111
Policy loan income 391 789 425
-----------------------------------------------------------------------------------------------------------------------------------
Net investment income - total $ 1,562 $ 1,955 $ 1,536
-----------------------------------------------------------------------------------------------------------------------------------
Yield on average invested assets (1) 6.7% 7.9% 7.6%
-----------------------------------------------------------------------------------------------------------------------------------
Net realized capital losses $ (5) $ -- $ --
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents net investment income (excluding net realized capital losses)
divided by average invested assets at cost (fixed maturities at amortized
cost). In 1998, average invested assets were calculated assuming the
recaptured MBL business proceeds were received on January 1, 1998.
21
<PAGE> 22
1999 COMPARED TO 1998 - Total net investment income, before-tax, decreased $393,
or 20%, most notably due to a decrease in policy loan income of $398 associated
with the downsizing of the leveraged COLI business. Yield on average invested
assets declined to 6.7% as a result of a decline in the policy loan weighted
average interest rate to 7.5% in 1999 from 9.9% in 1998. Net realized capital
losses included a $5 loss from the sale of Hartford Life Insurance Company
Canada Holdings, Inc. Additionally, net realized capital gains on the sale of
equity securities and fixed maturities offset a $32, after-tax, other than
temporary impairment charge related to asset backed securities securitized and
serviced by Commercial Financial Services, Inc. (CFS) securities, which were
sold in August of 1999.
1998 COMPARED TO 1997 - Total net investment income, before-tax, increased $419,
or 27%, principally due to an increase in policy loan income of $364, which is
primarily due to the recaptured MBL business. (For additional information on the
MBL Recapture, see the Capital Resources and Liquidity section.) Yield on
average invested assets, before-tax, increased to 7.9%, primarily due to the
increase in policy loan income that resulted from the recaptured MBL business,
as well as an increase in fixed maturities rated BBB. There were no net realized
capital gains or losses for the years ended December 31, 1998 and 1997. During
1998, realized capital gains from the sale of fixed maturities and equity
securities were offset by realized capital losses, including $21, after-tax,
related to the other than temporary impairment charge associated with asset
backed securities securitized and serviced by CFS.
CAPITAL MARKETS RISK MANAGEMENT
As described below, credit risk and market risk are the primary sources of
investment risk to the Company. The following discussion identifies the
Company's policies and procedures for managing these risks and monitoring the
results of the Company's risk management activities.
CREDIT RISK
Hartford Life has established investment credit policies that focus on the
credit quality of obligors and counterparties, limit credit concentrations,
encourage diversification and require frequent creditworthiness reviews.
Investment activity, including setting of policy and defining acceptable risk
levels, is subject to regular review and approval by senior management.
The Company invests primarily in securities rated investment grade and has
established exposure limits, diversification standards and review procedures for
all credit risks including borrower, issuer and 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, asset sector and
industry concentrations are subject to established limits and monitored at
regular intervals.
The following table identifies fixed maturity securities for the Company's
operations by credit quality. The ratings referenced in the tables are based on
the ratings of nationally recognized rating organizations or, if not rated,
assigned based on the Company's internal analysis of such securities.
As of December 31, 1999 and 1998, over 97% of the fixed maturity portfolio,
including guaranteed separate accounts, was invested in investment grade
securities.
<TABLE>
<CAPTION>
1999 1998
---------------------------------------------------------------------------------
FIXED MATURITIES BY CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government/Government agencies $ 2,404 9.3% $ 2,596 9.5%
AAA 3,535 13.6% 3,542 12.9%
AA 3,199 12.3% 2,674 9.7%
A 8,731 33.6% 8,878 32.3%
BBB 5,816 22.4% 7,019 25.6%
BB & below 559 2.1% 492 1.8%
Short-term 1,728 6.7% 2,265 8.2%
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 25,972 100.0% $ 27,466 100.0%
- ----------------------------------------------------------------------------------------------------------------------------------
</TABLE>
The Company also maintains credit policies regarding the financial stability and
credit standing of its major derivatives' counterparties and typically requires
credit enhancement provisions to further reduce its credit risk. Credit risk for
derivatives contracts is limited to the amounts calculated to be due to the
Company on such contracts based on current market conditions and potential
payment obligations between the Company and its counterparties. Credit exposures
are quantified weekly and netted. Collateral is pledged to or held by the
Company to the extent the current value of derivatives exceeds exposure policy
thresholds.
22
<PAGE> 23
MARKET RISK
Hartford Life's general and guaranteed separate account exposure to market risk
relates to the market price and/or cash flow variability associated with changes
in market interest rates. The following discussion focuses on the Company's
exposure to interest rate risk, asset/liability management strategies utilized
to manage this risk, and characteristics of the Company's insurance liabilities
and their sensitivity to movements in interest rates.
Upward movement in market interest rates during 1999 resulted in a significant
decline in the fair value of the fixed maturities portfolio over 1998. However,
the Company's asset allocation, and therefore its exposure to market risk, has
not changed materially from its position at December 31, 1998.
INTEREST RATE RISK
Changes in interest rates can potentially impact the Company's profitability.
Under certain circumstances of interest rate volatility, the Company could be
exposed to disintermediation risk and reduction in net interest rate spread or
profit margins. For non-guaranteed separate accounts, the Company's exposure is
not significant since the policyholder assumes substantially all the investment
risk.
The Company's general account and guaranteed separate account investment
portfolios primarily consist of investment grade, fixed maturity securities,
including corporate bonds, asset backed securities, collateralized mortgage
obligations and mortgage backed securities. The fair value of these and the
Company's other invested assets fluctuates depending on the interest rate
environment and other general economic conditions. During periods of declining
interest rates, paydowns on mortgage backed securities and collateralized
mortgage obligations increase as the underlying mortgages are prepaid. In
addition, during such periods, the Company generally will not be able to
reinvest the proceeds of any such prepayments at comparable yields. Conversely,
during periods of rising interest rates, the rate of prepayments generally
declines, exposing the Company to the possibility of asset/liability cash flow
and yield mismatch. For a discussion of the Company's risk management techniques
to manage this market risk, see "Asset/Liability Management Strategies Used to
Manage Market Risk" below.
As described above, the Company holds a significant fixed maturity portfolio,
which includes both fixed and variable rate features. The following table
reflects the principal amounts of the fixed and variable rate fixed maturity
portfolio, along with the respective weighted average coupons by estimated
maturity year as of December 31, 1999. Comparative totals are included for
December 31, 1998. Expected maturities differ from contractual maturities due to
call or prepayment provisions. The weighted average coupon on variable rate
securities is based on spot rates as of December 31, 1999 and 1998, and is
primarily based on the London Interbank Offered Rate (LIBOR). Callable bonds and
notes are distributed to either call dates or maturity, depending on which date
produces the most conservative yield. Asset backed securities, collateralized
mortgage obligations and mortgage backed securities are distributed to maturity
year based on estimates of the rate of future prepayments of principal over the
remaining life of the securities. These estimates are developed using prepayment
speeds provided in broker consensus data. Such estimates are derived from
prepayment speeds previously experienced at the interest rate levels projected
for the underlying collateral. Actual prepayment experience may vary from these
estimates. Financial instruments with certain leverage features have been
included in each of the fixed maturity categories. These instruments have not
been separately displayed because they were immaterial to the Company's
investment portfolio.
23
<PAGE> 24
<TABLE>
<CAPTION>
1999 1998
2000 2001 2002 2003 2004 Thereafter TOTAL Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BONDS AND NOTES - CALLABLE
Fixed Rate
Par value $ 100 $ 56 $ 35 $ 66 $ 9 $ 810 $ 1,076 $ 1,083
Weighted average coupon 7.0% 5.8% 7.1% 7.5% 8.1% 5.1% 5.6% 5.6%
Fair value $ 1,016 $ 1,080
Variable Rate
Par value $ 126 $ 39 $ 26 $ -- $ 30 $ 1,142 $ 1,363 $ 1,082
Weighted average coupon 6.6% 6.2% 6.6% -- 7.3% 6.6% 6.6% 6.0%
Fair value $ 1,256 $ 982
BONDS AND NOTES - OTHER
Fixed Rate
Par value $ 3,361 $ 1,847 $ 1,247 $ 1,187 $1,217 $ 6,864 $ 15,723 $ 15,290
Weighted average coupon 6.7% 7.1% 7.3% 6.9% 6.4% 5.5% 6.2% 6.3%
Fair value $ 14,044 $ 15,315
Variable Rate
Par value $ 222 $ 84 $ 122 $ 84 $ 65 $ 343 $ 920 $ 1,153
Weighted average coupon 6.5% 6.0% 6.1% 5.7% 5.7% 4.9% 5.7% 5.8%
Fair value $ 827 $ 1,114
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 442 $ 623 $ 331 $ 227 $ 189 $ 387 $ 2,199 $ 2,153
Weighted average coupon 6.8% 6.6% 6.5% 6.4% 6.8% 7.3% 6.8% 6.8%
Fair value $ 2,045 $ 2,074
Variable Rate
Par value $ 218 $ 292 $ 252 $ 241 $ 192 $ 482 $ 1,677 $ 1,730
Weighted average coupon 6.4% 6.4% 6.6% 6.7% 6.8% 6.7% 6.6% 6.1%
Fair value $ 1,540 $ 1,683
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 354 $ 251 $ 154 $ 85 $ 51 $ 243 $ 1,138 $ 1,425
Weighted average coupon 6.0% 6.1% 6.2% 6.6% 7.2% 7.4% 6.5% 6.5%
Fair value $ 1,022 $ 1,371
Variable Rate
Par value $ 20 $ 3 $ 1 $ 1 $ 1 $ 102 $ 128 $ 266
Weighted average coupon 7.3% 5.0% 6.9% 15.5% 8.1% 5.5% 5.8% 6.2%
Fair value $ 117 $ 264
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 131 $ 158 $ 151 $ 55 $ 104 $ 1,497 $ 2,096 $ 1,767
Weighted average coupon 6.7% 7.6% 7.2% 7.2% 7.2% 7.1% 7.2% 7.1%
Fair value $ 1,922 $ 1,784
Variable Rate
Par value $ 248 $ 144 $ 154 $ 187 $ 137 $ 563 $ 1,433 $ 1,160
Weighted average coupon 7.3% 7.5% 7.3% 7.3% 7.6% 7.6% 7.5% 6.7%
Fair value $ 1,228 $ 1,075
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 85 $ 99 $ 99 $ 89 $ 80 $ 836 $ 1,288 $ 723
Weighted average coupon 7.1% 7.0% 7.0% 7.0% 7.0% 7.8% 7.5% 7.6%
Fair value $ 994 $ 682
Variable Rate
Par value $ 1 $ 1 $ -- $ -- $ -- $ 2 $ 4 $ 11
Weighted average coupon 6.6% 6.6% -- -- -- 6.3% 6.4% 8.6%
Fair value $ 4 $ 10
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
24
<PAGE> 25
The table below provides information as of December 31, 1999 and 1998 on debt
obligations and reflects principal cash flows and related weighted average
effective interest rate by maturity year.
<TABLE>
<CAPTION>
1999 1998
2000 2001 2002 2003 2004 Thereafter TOTAL Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
LONG-TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ 200 $ 450 $ 650 $ 650
Weighted average effective interest rate -- -- -- -- 7.0% 7.5% 7.4% 7.4%
Fair value $ 633 $ 710
TruPS (1)
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 250 $ 250 $ 250
Weighted average effective interest rate -- -- -- -- -- 7.4% 7.4% 7.4%
Fair value $ 203 $ 254
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Represents company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely parent junior
subordinated debentures.
ASSET/LIABILITY MANAGEMENT STRATEGIES USED TO MANAGE 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.
Derivatives play an important role in facilitating the management of interest
rate risk, creating opportunities to efficiently fund obligations, hedge against
risks that affect the value of certain liabilities and adjust broad investment
risk characteristics as a result of any significant changes in market risks. The
Company uses a variety of derivatives, including swaps, caps, floors, forwards
and exchange traded financial futures and options, in order to hedge exposure
primarily to interest rate risk on anticipated investment purchases or existing
assets and liabilities. The Company does not make a market or trade derivatives
for the express purpose of earning trading profits. The Company's derivative
program is monitored by an internal compliance unit and is reviewed frequently
by senior management. The notional amounts of derivative contracts, which
represent the basis upon which pay or receive amounts are calculated and are not
reflective of credit risk, totaled $9.6 billion as of December 31, 1999 ($6.3
billion related to insurance investments and $3.3 billion related to life
insurance liabilities). As of December 31, 1998, the notional amounts pertaining
to derivatives totaled $11.2 billion ($6.0 billion related to insurance
investments and $5.2 billion related to life insurance liabilities).
The strategies described below are used to manage the aforementioned risks.
Anticipatory Hedging -- For certain liabilities, the Company commits to the
price of the product prior to receipt of the associated premium or deposit.
Anticipatory hedges are routinely executed to offset the impact of changes in
asset prices arising from interest rate changes pending the receipt of premium
or deposit and the subsequent purchase of an asset. These hedges involve taking
a long position in interest rate futures or entering into an interest rate swap
with duration characteristics equivalent to the associated liabilities or
anticipated investments. The notional amount of anticipatory hedges as of
December 31, 1999 and 1998 was $314 and $712, respectively.
Liability Hedging -- Several products obligate the Company to credit a return to
the contractholder which is indexed to a market rate. To hedge risks associated
with these products, the Company enters into various derivative contracts.
Interest rate swaps are used to convert the contract rate into a rate that
trades in a more liquid and efficient market. This hedging strategy enables the
Company to customize contract terms and conditions to customer objectives and
satisfies Hartford Life's asset/liability matching policy. Interest rate swaps
are also used to convert certain fixed contract rates into floating rates,
thereby allowing them to be appropriately matched against floating rate assets.
Additionally, interest rate caps are used to hedge against the risk of
contractholder disintermediation in a rising interest rate environment. The
notional amount of derivatives used for liability hedges as of December 31, 1999
and 1998 was $3.3 billion and $5.2 billion, respectively.
Asset Hedging -- To meet the various policyholder obligations and to provide
cost effective prudent investment risk diversification, the Company may combine
two or more financial instruments to achieve the investment characteristics of a
fixed maturity security or that match an associated liability. The use of
derivative instruments in this regard effectively transfers unwanted investment
risks or attributes to others. The selection of the appropriate derivative
instruments depends on the investment risk, the liquidity and efficiency
25
<PAGE> 26
of the market, and the asset and liability characteristics. The notional amount
of asset hedges as of December 31, 1999 and 1998 was $4.8 billion and $3.8
billion, respectively.
Portfolio Hedging -- The Company periodically compares the duration and
convexity of its portfolios of assets to their corresponding liabilities and
enters into portfolio hedges to reduce any difference to desired levels.
Portfolio hedges reduce the mismatch between assets and liabilities and offset
the potential impact to cash flows caused by changes in interest rates. The
notional amount of portfolio hedges as of December 31, 1999 and 1998 was $1.2
billion and $1.5 billion, respectively.
The following tables provide information as of December 31, 1999, with
comparative totals for December 31, 1998, on derivative instruments used in
accordance with the aforementioned hedging strategies. For interest rate swaps,
caps and floors, the tables present notional amounts with weighted average pay
and received rates for swaps and weighted average strike rates for caps and
floors by maturity year. For interest rate futures, the table presents contract
amount and weighted average settlement price by expected maturity year. The
Company uses option contracts to hedge debt instruments that totaled $254 and
$110 in notional amounts and $(50) and $(20) in carrying value as of December
31, 1999 and 1998, respectively.
<TABLE>
<CAPTION>
1999 1998
INTEREST RATE SWAPS 2000 2001 2002 2003 2004 Thereafter TOTAL Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Pay Fixed/Receive Variable
Notional value $ 164 $ 148 $ 222 $ 140 $ 116 $ 904 $ 1,694 $ 1,383
Weighted average pay rate 5.1% 6.1% 5.1% 6.0% 5.6% 6.1% 5.8% 5.9%
Weighted average receive rate 6.7% 6.2% 6.2% 6.2% 6.2% 6.2% 6.2% 5.4%
Fair value $ 76 $ (46)
Pay Variable/Receive Fixed
Notional value $ 577 $ 318 $ 439 $ 675 $ 1,244 $ 1,510 $ 4,763 $ 4,925
Weighted average pay rate 6.1% 6.2% 6.1% 6.1% 6.2% 6.2% 6.2% 5.3%
Weighted average receive rate 6.3% 7.0% 6.3% 5.8% 6.1% 6.4% 6.2% 6.3%
Fair value $ (160) $ 160
Pay Variable/Receive Different Variable
Notional value $ 145 $ 85 $ 40 $ 29 $ 101 $ 42 $ 442 $ 1,403
Weighted average pay rate 6.3% 6.3% 6.0% 6.1% 5.9% 6.3% 6.2% 5.2%
Weighted average receive rate 5.9% 5.6% 6.1% 6.2% 6.3% 6.8% 6.0% 5.8%
Fair value $ 1 $ (2)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1999 1998
INTEREST RATE CAPS - LIBOR BASED (1) 2000 2001 2002 2003 2004 Thereafter TOTAL Total
- ------------------------------------------------------------------------------------------------------------------------------------
Purchased
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 42
Weighted average strike rate (4.0 - 5.9%) -- -- -- -- -- -- -- 5.2%
Fair value $ -- $ 1
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 35
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 6.6%
Fair value $ -- $ 1
Notional value $ -- $ -- $ 10 $ 54 $ -- $ 107 $ 171 $ 200
Weighted average strike rate (8.0 - 9.9%) -- -- 8.9% 8.5% -- 8.4% 8.5% 8.5%
Fair value $ 2 $ 1
Notional value $ 10 $ -- $ 21 $ -- $ -- $ -- $ 31 $ 41
Weighted average strike rate (10.0 - 11.9%) 11.5% -- 10.1% -- -- -- 10.6% 10.7%
Fair value $ -- $ --
Issued
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 13
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 7.2%
Fair value $ -- $ --
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 13
Weighted average strike rate (8.0 - 9.9%) -- -- -- -- -- -- -- 8.3%
Fair value $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
26
<PAGE> 27
(1) LIBOR represents the London Interbank Offered Rate.
<TABLE>
<CAPTION>
1999 1998
INTEREST RATE CAPS - CMT BASED (1) 2000 2001 2002 2003 2004 Thereafter TOTAL Total
- ------------------------------------------------------------------------------------------------------------------------------------
Purchased
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional value $ 244 $ -- $ -- $ 250 $ -- $ -- $ 494 $ 611
Weighted average strike rate (6.0 - 7.9%) 7.7% -- -- 7.7% -- -- 7.7% 7.7%
Fair value $ 1 $ --
Notional value $ -- $ -- $ 100 $ 250 $ -- $ 500 $ 850 $ 950
Weighted average strike rate (8.0 - 9.9%) -- -- 9.5% 8.7% -- 8.7% 8.8% 8.7%
Fair value $ 4 $ 1
Issued
Notional value $ 244 $ -- $ -- $ -- $ -- $ -- $ 244 $ 361
Weighted average strike rate (6.0 - 7.9%) 7.7% -- -- -- -- -- 7.7% 7.8%
Fair value $ -- $ --
Notional value $ -- $ -- $ 100 $ -- $ -- $ -- $ 100 $ 200
Weighted average strike rate (8.0 - 9.9%) -- -- 9.5% -- -- -- 9.5% 8.8%
Fair value $ -- $ --
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) CMT represents the Constant Maturity Treasury Rate.
<TABLE>
<CAPTION>
1999 1998
INTEREST RATE FLOORS - LIBOR BASED 2000 2001 2002 2003 2004 Thereafter TOTAL Total
- ------------------------------------------------------------------------------------------------------------------------------------
Purchased
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 100
Weighted average strike rate (4.0 - 5.9%) -- -- -- -- -- -- -- 4.2%
Fair value $ -- $ --
Notional value $ -- $ -- $ -- $ -- $ 27 $ -- $ 27 $ 65
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- 7.9% -- 7.9% 7.0%
Fair value $ 2 $ 7
Issued
Notional value $ -- $ 10 $ 31 $ 54 $ 34 $ 77 $ 206 $ 240
Weighted average strike rate (4.0 - 5.9%) -- 4.9% 5.3% 5.4% 5.3% 5.3% 5.3% 5.3%
Fair value $ (1) $ (7)
Notional value $ -- $ -- $ -- $ -- $ 27 $ -- $ 27 $ 27
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- 7.8% -- 7.8% 7.8%
Fair value $ (2) $ (4)
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
1999 1998
INTEREST RATE FLOORS - CMT BASED 2000 2001 2002 2003 2004 Thereafter TOTAL Total
- ------------------------------------------------------------------------------------------------------------------------------------
Purchased
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Notional value $ 100 $ -- $ -- $ 150 $ -- $ -- $ 250 $ 250
Weighted average strike rate (4.0 - 5.9%) 5.8% -- -- 5.5% -- -- 5.6% 5.6%
Fair value $ 1 $ 8
Notional value $ 10 $ -- $ -- $ -- $ -- $ -- $ 10 $ 50
Weighted average strike rate (6.0 - 7.9%) 6.0% -- -- -- -- -- 6.0% 6.4%
Fair value $ -- $ 1
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
27
<PAGE> 28
<TABLE>
<CAPTION>
1999 1998
INTEREST RATE FUTURES 2000 2001 2002 2003 2004 Thereafter TOTAL Total
- ------------------------------------------------------------------------------------------------------------------------------------
Long
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Contract amount/notional $ 27 $ -- $ -- $ -- $ -- $ -- $ 27 $ 12
Weighted average settlement price $ 97 $ -- $ -- $ -- $ -- $ -- $ 97 $ 106
Short
Contract amount/notional $ 51 $ -- $ -- $ -- $ -- $ -- $ 51 $ 240
Weighted average settlement price $ 93 $ -- $ -- $ -- $ -- $ -- $ 93 $ 124
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
Note: Fair value is not applicable.
Asset Accumulation Vehicles
While interest rate risk associated with these insurance products has been
reduced through the use of market value adjustment features and surrender
charges, the primary risk associated with asset accumulation products is that
the spread between investment return and credited rate may not be sufficient to
earn targeted returns.
Fixed Rate -- Products in this category require the Company to pay a fixed rate
for a certain period of time. The cash flows are not interest sensitive because
the products are written with a market value adjustment feature and the
liabilities have protection against the early withdrawal of funds through
surrender charges. Product examples include fixed rate annuities with a market
value adjustment and fixed rate guaranteed investment contracts. Contract
duration is dependent on the policyholder's choice of guarantee period.
Indexed -- Products in this category are similar to the fixed rate asset
accumulation vehicles but require the Company to pay a rate that is determined
by an external index. The amount and/or timing of cash flows will therefore vary
based on the level of the particular index. The primary risks inherent in these
products are similar to the fixed rate asset accumulation vehicles, with an
additional risk that changes in the index may adversely affect profitability.
Product examples include indexed guaranteed investment contracts with an
estimated duration of up to two years.
Interest Credited -- Products in this category credit interest to policyholders,
subject to market conditions and minimum guarantees. Policyholders may surrender
at book value but are subject to surrender charges for an initial period.
Product examples include universal life contracts and the general account
portion of the Company's variable annuity products. Liability duration is short
to intermediate term.
Other Insurance Products
Long-Term Pay Out Liabilities -- Products in this category are long term in
nature and may contain significant actuarial (including mortality and morbidity)
pricing and cash flow risks. The cash flows associated with these policy
liabilities are not interest rate sensitive but do vary based on the timing and
amount of benefit payments. The primary risks associated with these products are
that the benefits will exceed expected actuarial pricing and/or that the actual
timing of the cash flows will differ from those anticipated resulting in an
investment return lower than that assumed in pricing. Product examples include
structured settlement contracts, on-benefit annuities (i.e., the annuitant is
currently receiving benefits thereon) and long-term disability contracts.
Contract duration is generally five to ten years.
Short-Term Pay Out Liabilities -- These liabilities are short term in nature
with a duration of less than one year. The primary risks associated with these
products are determined by the non-investment contingencies such as mortality or
morbidity and the variability in the timing of the expected cash flows.
Liquidity is of greater concern than for the long-term pay out liabilities.
Products include individual and group term life insurance contracts and
short-term disability contracts.
28
<PAGE> 29
Management of the duration of investments with respective policyholder
obligations is an explicit objective of the Company's management strategy. The
estimated cash flows of insurance policy liabilities based upon internal
actuarial assumptions as of December 31, 1999 are reflected in the table below
by expected maturity year. Comparative totals are included for December 31,
1998.
(Dollars in billions)
<TABLE>
<CAPTION>
1999 1998
DESCRIPTION (1) 2000 2001 2002 2003 2004 Thereafter TOTAL Total
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Fixed rate asset accumulation vehicles $ 1.9 $ 1.4 $ 0.7 $ 1.3 $ 2.2 $ 2.2 $ 9.7 $ 10.9
Weighted average credited rate 6.6% 6.8% 6.3% 5.5% 6.9% 6.8% 6.6% 6.6%
Indexed asset accumulation vehicles $ 0.4 $ 0.2 $ -- $ -- $ -- $ -- $ 0.6 $ 0.3
Weighted average credited rate 6.2% 6.3% -- -- -- -- 6.2% 5.1%
Interest credited asset accumulation vehicles $ 4.7 $ 0.6 $ 0.5 $ 0.3 $ 0.3 $ 4.2 $ 10.6 $ 11.1
Weighted average credited rate 5.9% 5.5% 5.5% 5.6% 5.6% 5.6% 5.7% 5.7%
Long-term pay out liabilities $ 0.7 $ 0.6 $ 0.5 $ 0.4 $ 0.4 $ 3.0 $ 5.6 $ 4.9
Short-term pay out liabilities $ 0.8 $ -- $ -- $ -- $ -- $ -- $ 0.8 $ 0.7
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) As of December 31, 1999 and 1998, the fair value of the Company's
investment contracts, including guaranteed separate accounts, was $20.9
billion and $21.7 billion, respectively.
CURRENCY EXCHANGE RISK
Hartford Life's international holdings, which are primarily located in Latin
America, totaled approximately $90 as of December 31, 1999. These holdings are
inherently affected by currency fluctuations. The Company's primary currency
exposure relates to the Brazilian real and the Argentine peso and is not
expected to have a material impact on the Company's liquidity or financial
condition.
SENSITIVITY TO CHANGES IN INTEREST RATES
For liabilities whose cash flows are not substantially affected by changes in
interest rates (fixed liabilities) and where investment experience is
substantially absorbed by the Company, the sensitivity of the net economic value
(discounted present value of asset cash flows less the discounted present value
of liability cash flows) of those portfolios to 100 basis point shifts in
interest rates is shown in the table below. These fixed liabilities represent
approximately 55% of the Company's general and guaranteed separate account
liabilities at both December 31, 1999 and 1998. The remaining liabilities
generally allow the Company significant flexibility to adjust credited rates to
reflect actual investment experience and thereby pass through a substantial
portion of actual investment experience to the policyholder. The fixed liability
portfolios are managed and monitored relative to defined objectives and are
analyzed regularly by management for internal risk management purposes using
scenario simulation techniques, and evaluated annually consistent with
regulatory requirements.
<TABLE>
<CAPTION>
CHANGE IN NET ECONOMIC VALUE
---------------------------------------------------------------------------------------------
1999 1998
---------------------------------------------------------------------------------------------
Basis point shift - 100 + 100 - 100 + 100
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
Amount $ (4) $ (5) $ 7 $ (16)
Percent of liability value (0.03)% (0.03)% 0.05% (0.10)%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
29
<PAGE> 30
CAPITAL RESOURCES AND LIQUIDITY
Capital resources and liquidity represent the overall financial strength of
Hartford Life and its ability to generate strong cash flows from each of the
business segments and borrow funds at competitive rates to meet operating and
growth needs. The Company maintained cash and short-term investments totaling
$1.4 billion, $2.2 billion and $1.5 billion as of December 31, 1999, 1998 and
1997, respectively. The capital structure of Hartford Life consists of debt and
equity, and is summarized as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- ------------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Short-term debt $ -- $ -- $ 50
Long-term debt 650 650 650
Company obligated mandatorily redeemable preferred securities of subsidiary
trust holding solely parent junior subordinated debentures (TruPS) 250 250 --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL DEBT $ 900 $ 900 $ 700
-------------------------------------------------------------------------------------------------------------------------------
Equity excluding net unrealized capital gains (losses) on securities, net of tax $ 2,642 $ 2,230 $ 1,907
Net unrealized capital gains (losses) on securities, net of tax (336) 263 237
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 2,306 $ 2,493 $ 2,144
-------------------------------------------------------------------------------------------------------------------------------
TOTAL CAPITALIZATION (1) $ 3,542 $ 3,130 $ 2,607
-------------------------------------------------------------------------------------------------------------------------------
Debt to equity (1) (2) 34% 40% 37%
Debt to capitalization (1) (2) 25% 29% 27%
- ------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) Excludes net unrealized capital gains (losses) on securities, net of
tax.
(2) Excluding TruPS, the debt to equity ratios were 25% and 29%, and the
debt to capitalization ratios were 18% and 21% as of December 31, 1999
and 1998, respectively.
CAPITALIZATION
The Company's total capitalization, excluding net unrealized capital gains
(losses) on securities, net of tax, increased $412, or 13%, in 1999 and $523, or
20%, in 1998. In 1999, the increase was primarily the result of net income of
$467 partially offset by dividends declared of $50. In 1998, the increase was
primarily the result of net income of $386 and the issuance of TruPS of $250,
which were partially offset by the retirement of $50 in commercial paper and
dividends declared of $50. As a result, both the debt to equity and debt to
capitalization ratios (both exclude net unrealized capital gains {losses} on
securities, net of tax) decreased to 34% and 25% as of December 31, 1999,
respectively, from 40% and 29% as of December 31, 1998, respectively. Net
unrealized capital gains (losses) on securities, net of tax, decreased $599 as
of December 31, 1999, as compared to December 31, 1998, primarily due to the
impact of increased interest rates on the Company's fixed maturity portfolio.
INITIAL PUBLIC OFFERING
For a discussion of Hartford Life's IPO, see Note 3 of Notes to Consolidated
Financial Statements.
DEBT
For a discussion of Debt, see Note 7 of Notes to 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 8 of Notes to Consolidated Financial Statements.
30
<PAGE> 31
DIVIDENDS
In 1999, a total of $50 in dividends was declared to holders of Class A and
Class B Common Stock.
On February 17, 2000, Hartford Life's Board of Directors approved an 11%
increase in the quarterly dividend to $0.10 per share, payable on April 3, 2000
to stockholders of record on March 1, 2000. Future dividend decisions are based
on, and affected by, a number of factors, including the operating results and
financial requirements of Hartford Life on a stand-alone basis and the impact of
the regulatory restrictions discussed in Liquidity Requirements below.
As a holding company, Hartford Life, Inc. has no significant business operations
of its own and, therefore, relies mainly on the dividends from its insurance
company subsidiaries, which are primarily domiciled in Connecticut, as the
principal source of cash to meet its obligations (predominantly debt
obligations) and pay stockholder dividends. Hartford Life, Inc. received
dividends from its regulated life insurance subsidiaries of $90 in 1999.
Statutory net income and statutory capital and surplus, key determinants in the
amount of dividend capacity available in the insurance company subsidiaries, has
grown significantly over the past several years. Statutory net income of $220 in
1999 was lower than 1998 due to losses realized on certain securities. Excluding
those losses, statutory net income in 1999 was $290, 9% higher than 1998.
Statutory capital and surplus as of December 31, 1999 was $2.2 billion, a 10%
increase over December 31, 1998.
TREASURY STOCK
During 1999, to make shares available to employees pursuant to stock based
benefit plans, the Company repurchased 225,000 shares of its Class A Common
Stock in the open market at a total cost of $10. 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.
RATINGS
The following table summarizes Hartford Life's significant U.S. member
companies' financial ratings from the major independent rating organizations as
of February 29, 2000:
<TABLE>
<CAPTION>
DUFF & STANDARD &
A.M. BEST PHELPS MOODY'S POOR'S
- ------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
INSURANCE RATINGS
Hartford Life Insurance Company A+ AA+ Aa3 AA
Hartford Life and Accident A+ AA+ Aa3 AA
Hartford Life and Annuity A+ AA+ Aa3 AA
- ------------------------------------------------------------------------------------------
OTHER RATINGS
Hartford Life, Inc.
Senior debt a+ A+ A2 A
Commercial paper -- D-1 P-1 A-1
Hartford Life Capital I
Trust preferred securities a+ A a2 BBB+
- ------------------------------------------------------------------------------------------
</TABLE>
Ratings are an important factor in establishing the competitive position of an
insurance company such as Hartford Life. There can be no assurance that the
Company's ratings will continue for any given period of time or that they will
not be changed. In the event that the Company's ratings are downgraded, the
level of sales or the persistency of the Company's block of in force business
may be adversely impacted.
31
<PAGE> 32
LIQUIDITY REQUIREMENTS
The liquidity requirements of Hartford Life have been and will continue to be
met by funds from operations as well as the issuance of commercial paper, debt
securities and bank borrowings. The principal sources of funds are premiums and
investment income as well as maturities and sales of invested assets. Hartford
Life is a holding company which receives operating cash flow in the form of
dividends from its subsidiaries, enabling it to service its debt, pay dividends
on its common stock and support its other obligations.
Dividends to Hartford Life, Inc. from its direct subsidiary, Hartford Life and
Accident Insurance Company (HLA), as an insurance company domiciled in
Connecticut, are subject to restriction as prescribed in the insurance holding
company laws of Connecticut. HLA adheres to these laws, which require notice to
and approval by the state insurance commissioner for the declaration or payment
of any dividend that, together with other dividends or distributions made within
the preceding twelve months, exceeds the greater of (i) 10% of the insurer's
policyholder surplus as of December 31 of the preceding year or (ii) net income
(or net gain from operations, if such company is a life insurance company) for
the twelve month period ending on the thirty-first day of December last
preceding, in each case determined under statutory insurance accounting
policies. In addition, if any dividend of a Connecticut-domiciled insurer
exceeds the insurer's earned surplus, it requires the prior approval of the
Connecticut Insurance Commissioner. The total amount of statutory dividends
which may be paid by the insurance subsidiaries of the Company without prior
approval in 2000 is estimated to be $221.
The insurance holding company laws of the other jurisdictions in which Hartford
Life's insurance subsidiaries are incorporated or deemed commercially domiciled
generally contain similar limitations on the payment of dividends.
The primary uses of funds are to pay claims, policy benefits, operating expenses
and commissions, and to purchase new investments. Hartford Life carries a
significant short-term investment position and accordingly does not anticipate
selling intermediate- and long-term fixed maturity investments to meet any
liquidity needs. For a discussion of the Company's investment objectives and
strategies, see the Investments section.
RISK-BASED CAPITAL
The National Association of Insurance Commissioners (NAIC) has regulations
establishing minimum capitalization requirements based on Risk-Based Capital
(RBC) formulas for life insurance companies. The requirements consist of
formulas which identify companies that are undercapitalized and require specific
regulatory actions. The RBC formula for life insurance companies establishes
capital requirements relating to insurance, business, asset and interest rate
risks. The RBC ratios for each of the life insurance subsidiaries are in excess
of 200% as of December 31, 1999, which are greater than the minimum threshold.
<TABLE>
<CAPTION>
CASH FLOW
1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
Cash provided by operating activities $ 724 $ 667 $ 1,147
Cash provided by (used for) investing activities 1,907 87 (650)
Cash used for financing activities (2,578) (803) (480)
Cash - end of year 89 36 88
- -----------------------------------------------------------------------------------------
</TABLE>
During 1999, the increase in cash provided by operating activities was primarily
the result of an increase in net income as well as timing in the settlement of
receivables and payables. The increase in cash provided by (used for) investing
activities and the decrease in cash used for financing activities primarily
related to the significant downsizing of the leveraged COLI block of business,
as well as the decrease in the Company's guaranteed investment contract (GIC)
business.
In 1998, the change in cash provided by operating activities was primarily the
result of timing in the settlement of receivables and payables. The change in
cash provided by (used for) investing activities primarily reflects a decrease
in policy loans resulting from the reduction of COLI account values in
conjunction with the decline of the block of leveraged COLI offset by the
investment of cash from operating and financing activities. The change in cash
used for financing activities was primarily due to declines in GIC and COLI
account values as well as proceeds from the IPO in May 1997, partially offset by
changes in debt, dividends paid and proceeds from the TruPS offering.
Operating cash flows in the periods presented have been more than adequate to
meet liquidity requirements.
32
<PAGE> 33
PURCHASES OF AFFILIATES AND OTHER
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 annuities and mutual funds, 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 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.
MBL Recapture -- On November 10, 1998, the Company recaptured an in force block
of COLI business (referred to as "MBL Recapture") previously ceded to MBL Life
Assurance Co. of New Jersey (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, which was placed in
court-supervised rehabilitation in 1991, and reinsured a portion of those
policies back to MBL Life. MBL Life, previously a Mutual Benefit Life
subsidiary, operated under the Rehabilitation Plan for Mutual Benefit Life. The
MBL Recapture has been recorded retroactive to January 1, 1998 with respect to
results of operations. The transaction resulted in a decrease in reinsurance
recoverables of $4.8 billion with an offset primarily in policy loans and other
investments.
In conjunction with the MBL Recapture transaction, the Company also purchased
the outstanding interest in International Corporate Marketing Group, Inc.
(ICMG), which was previously 40% owned by MBL Life.
REGULATORY MATTERS AND CONTINGENCIES
LEGISLATIVE AND REGULATORY INITIATIVES
The business of insurance is primarily regulated by the states and is also
affected by a range of legislative developments at the state and federal levels.
Passage in November 1999 of the Gramm-Leach-Bliley Act (the Financial Services
Modernization Act), which permits affiliations among banks, insurance companies
and securities firms, may have competitive, operational and other implications
for the Company. In particular, the measure includes privacy protections
requiring all financial services providers to disclose their privacy policies
and restrict the sharing of personal information for marketing purposes. Various
states are considering even more restrictive privacy measures that could
potentially affect the Company's operations. Medical records are also subject to
new privacy safeguards under guidelines proposed by the U.S. Department of
Health and Human Services. These and similar measures proposed at the state
level could affect the Company's ability to manage medical claims.
Enactment of Gramm-Leach-Bliley at the federal level has focused renewed
attention on state regulation of insurance. Elements of the insurance industry
are involved in a countrywide initiative to streamline regulatory procedures.
Such measures could result in reduced transaction costs and improved speed to
market.
Current and proposed federal measures which may significantly affect the life
insurance business include tax law changes affecting the tax treatment of life
insurance products and its impact on the relative desirability of various
personal investment vehicles, medical testing for insurability, and proposed
legislation to prohibit the use of gender in determining insurance and pension
rates and benefits. In particular, President Clinton's 2001 federal budget
proposal currently contains certain recommendations for modifying tax rules
related to the treatment of COLI by contractholders which, if enacted as
described, could have a material adverse impact on the Company's sales of these
products. The budget proposal also includes provisions which would result in a
significant increase in the "DAC tax" on certain of the Company's products and
would apply a tax to the Company's policyholder surplus account. (For further
discussion on policyholder surplus accounts and related tax treatment as of
December 31, 1999, see Note 14 of Notes to Consolidated Financial Statements.)
It is too early to determine whether these tax proposals will ultimately be
enacted by Congress. Therefore, the potential impact to the Company's financial
condition or results of operations cannot be reasonably estimated at this time.
INSOLVENCY FUND
See Note 16 (b) of Notes to Consolidated Financial Statements.
33
<PAGE> 34
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 Hartford Life. Even if enacted in Connecticut or other
states in which Hartford Life's insurance subsidiaries are domiciled, 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 that each of Hartford Life's domiciliary states
will adopt the SAP and the Company will make the necessary changes required for
implementation. The Company has not yet determined the impact that the SAP will
have on the statutory financial statements of the insurance subsidiaries of
Hartford Life.
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 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, banks and
other distributors and servicers of financial products, many of which provide
date sensitive data to Hartford Life and whose operations are important to
Hartford Life's business.
Internal and Third Party Year 2000 Efforts
Beginning in 1990, Hartford Life began working on making its IT systems Year
2000 ready, either through installing new programs or replacing systems. These
efforts were substantially completed by the end of 1999, including the internal
and external integrated testing of such systems. In addition, Hartford Life's
Year 2000 efforts included assessing the potential impact on Hartford Life of
third parties' Year 2000 readiness.
34
<PAGE> 35
Status and Contingency Plans
As of February 29, 2000, Hartford Life had not experienced any Year 2000 -
related business interruptions arising either from its own systems or those of
third parties. However, Hartford Life has developed 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 the critical
functions of each business segment. Each business segment 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 Hartford Life's critical business on third parties and their
Year 2000 readiness. These plans were reviewed and simulated on an integrated
basis, where appropriate, and will continue to be evaluated. 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.
Year 2000 Costs
The after-tax costs of Hartford Life's Year 2000 efforts that were incurred
prior to January 1, 1998 were not material to Hartford Life's financial
condition or results of operations. For the years ended December 31, 1999 and
1998, the after-tax costs were approximately $3 and $4, respectively. These
costs were expensed as incurred. Hartford Life does not expect to incur
significant costs in the year 2000 related to its Year 2000 efforts.
EFFECT OF INFLATION
The rate of inflation as measured by the change in the average consumer price
index has not had a material effect on the revenues or operating results of
Hartford Life during the three most recent fiscal years.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 2 of Notes to Consolidated
Financial Statements.
35
<PAGE> 36
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information called for by Item 7A is set forth in the Capital Markets Risk
Management section of the Management's Discussion and Analysis of Financial
Condition and Results of Operations and is incorporated herein by reference.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
See Index to Consolidated Financial Statements and Schedules elsewhere herein.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF HARTFORD LIFE
Certain of the information called for by Item 10 is set forth in the definitive
proxy statement for the 2000 annual meeting of shareholders (the "Proxy
Statement") filed or to be filed by Hartford Life with the Securities and
Exchange Commission within 120 days after the end of the fiscal year covered by
this Form 10-K under the caption "Item 1. Election of Directors" and "The Board
of Directors and Its Committees" and is incorporated herein by reference.
Additional information required by Item 10 regarding Hartford Life's executive
officers is set forth in Item 1 of this Form 10-K under the caption "Executive
Officers of Hartford Life" and is incorporated herein by reference.
ITEM 11. EXECUTIVE COMPENSATION
The information called for by Item 11 is set forth in the Proxy Statement under
the captions "Compensation of Executive Officers", "The Board of Directors and
its Committees - Directors' Compensation" and "Compensation Committee Interlocks
and Insider Participation" and is incorporated herein by reference.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information called for by Item 12 is set forth in the Proxy Statement under
the caption "Stock Ownership of Directors, Executive Officers and Certain
Shareholders" and is incorporated herein by reference.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information called for by Item 13 is set forth in the Proxy Statement under
the caption "Certain Relationships with The Hartford" and is incorporated herein
by reference.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENTS, SCHEDULES AND REPORTS ON FORM 8-K
(a) Documents filed as a part of this report:
1. CONSOLIDATED FINANCIAL STATEMENTS. See Index to Consolidated Financial
Statements and Schedules elsewhere herein.
2. CONSOLIDATED FINANCIAL STATEMENT SCHEDULES. See Index to Consolidated
Financial Statement and Schedules elsewhere herein.
3. EXHIBITS. See Exhibit Index elsewhere herein.
(b) Reports on Form 8-K - None.
(c) See Item 14(a)(3).
(d) See Item 14(a)(2).
36
<PAGE> 37
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
<TABLE>
<CAPTION>
Page(s)
<S> <C>
Report of Management F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the years ended December 31, 1999, 1998 and 1997 F-3
Consolidated Balance Sheets as of December 31, 1999 and 1998 F-4
Consolidated Statements of Changes in Stockholders' Equity for the years ended
December 31, 1999, 1998 and 1997 F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1999, 1998 and 1997 F-6
Notes to Consolidated Financial Statements F-7 - 26
Schedule I -- Summary of Investments - Other Than Investments in Affiliates S-1
Schedule II -- Condensed Financial Information of Hartford Life, Inc. S-2 - 3
Schedule III -- Supplementary Insurance Information S-4
Schedule IV -- Reinsurance S-5
Schedule V -- Valuation and Qualifying Accounts S-6
</TABLE>
REPORT OF MANAGEMENT
The management of Hartford Life, Inc. (Hartford Life) is responsible for the
preparation and integrity of information contained in the accompanying
Consolidated Financial Statements and other sections of the Annual Report. The
Consolidated Financial Statements are prepared in accordance with generally
accepted accounting principles, and, where necessary, include amounts that are
based on management's informed judgments and estimates. Management believes
these consolidated statements present fairly Hartford Life's financial position
and results of operations, and, that any other information contained in the
Annual Report is consistent with the Consolidated Financial Statements.
Management has made available Hartford Life's financial records and related data
to Arthur Andersen LLP, independent public accountants, in order for them to
perform an audit of Hartford Life's Consolidated Financial Statements. Their
report appears on page F-2.
An essential element in meeting management's financial responsibilities is
Hartford Life's system of internal controls. These controls, which include
accounting controls and the internal auditing program, are designed to provide
reasonable assurance that assets are safeguarded, and transactions are properly
authorized, executed and recorded. The controls, which are documented and
communicated to employees in the form of written codes of conduct and policies
and procedures, provide for careful selection of personnel and for appropriate
division of responsibility. Management continually monitors for compliance,
while Hartford Life's internal auditors independently assess the effectiveness
of the controls and make recommendations for improvement. Also, Arthur Andersen
LLP took into consideration Hartford Life's system of internal controls in
determining the nature, timing and extent of their audit tests.
Another important element is management's recognition of its responsibility for
fostering a strong, ethical climate, thereby ensuring that Hartford Life's
affairs are transacted according to the highest standards of personal and
professional conduct. Hartford Life has a long-standing reputation of integrity
in business conduct and utilizes communication and education to create and
fortify a strong compliance culture.
The Audit Committee of the Board of Directors of Hartford Life (the
"Committee"), composed of independent directors, meets periodically with the
external and internal auditors to evaluate the effectiveness of work performed
by them in discharging their respective responsibilities and to ensure their
independence and free access to the Committee.
F-1
<PAGE> 38
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO HARTFORD LIFE, INC.:
We have audited the accompanying Consolidated Balance Sheets of Hartford Life,
Inc. (Hartford Life) (a Delaware corporation) and subsidiaries as of December
31, 1999 and 1998, and the related Consolidated Statements of Income, Changes in
Stockholders' Equity and Cash Flows for each of the three years in the period
ended December 31, 1999. These Consolidated Financial Statements and the
schedules referred to below are the responsibility of Hartford Life's
management. Our responsibility is to express an opinion on these financial
statements and schedules based on our audits.
We conducted our audits in accordance with auditing standards generally accepted
in the United States. Those standards require that we plan and perform the audit
to obtain reasonable assurance about whether the financial statements are free
of material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.
In our opinion, the Consolidated Financial Statements referred to above present
fairly, in all material respects, the financial position of Hartford Life and
subsidiaries as of December 31, 1999 and 1998, and the results of their
operations and their cash flows for each of the three years in the period ended
December 31, 1999 in conformity with accounting principles generally accepted in
the United States.
Our audits were made for the purpose of forming an opinion on the basic
financial statements taken as a whole. The schedules listed in the Index to
Consolidated Financial Statements and Schedules are presented for the purpose of
complying with the Securities and Exchange Commission's rules and are not part
of the basic financial statements. These schedules have been subjected to the
auditing procedures applied in the audits of the basic financial statements and,
in our opinion, fairly state in all material respects the financial data
required to be set forth therein in relation to the basic financial statements
taken as a whole.
ARTHUR ANDERSEN LLP
Hartford, Connecticut
January 31, 2000
F-2
<PAGE> 39
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
For the years ended December 31,
----------------------------------
(In millions, except for per share data) 1999 1998 1997
- -----------------------------------------------------------------------------------------
<S> <C> <C> <C>
REVENUES
Premiums and other considerations $ 3,979 $ 3,833 $ 3,163
Net investment income 1,562 1,955 1,536
Net realized capital losses (5) -- --
- -----------------------------------------------------------------------------------------
TOTAL REVENUES 5,536 5,788 4,699
=========================================================================================
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 3,054 3,227 2,671
Amortization of deferred policy acquisition costs 568 441 345
Dividends to policyholders 104 330 241
Interest expense 67 58 58
Other expenses 1,057 1,147 904
- -----------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 4,850 5,203 4,219
=========================================================================================
INCOME BEFORE INCOME TAX EXPENSE 686 585 480
Income tax expense 219 199 174
- -----------------------------------------------------------------------------------------
NET INCOME $ 467 $ 386 $ 306
=========================================================================================
Basic earnings per share (1) $ 3.34 $ 2.76 $ 2.28
Diluted earnings per share (1) $ 3.33 $ 2.75 $ 2.28
- -----------------------------------------------------------------------------------------
Weighted average common shares outstanding (1) 139.9 140.0 134.0
Weighted average common shares outstanding and
dilutive potential common shares (1) 140.2 140.2 134.1
- -----------------------------------------------------------------------------------------
Cash dividends declared per share (2) $ 0.36 $ 0.36 $ 0.18
- -----------------------------------------------------------------------------------------
</TABLE>
(1) Pro forma in 1997; see Note 10 of Notes to 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 CONSOLIDATED FINANCIAL STATEMENTS.
F-3
<PAGE> 40
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
As of December 31,
-------------------------
(In millions, except for share data) 1999 1998
- --------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at fair value
(amortized cost of $17,602 and $17,271) $ 17,035 $ 17,692
Equity securities, at fair value 153 140
Policy loans, at outstanding balance 4,222 6,687
Other investments 376 363
- --------------------------------------------------------------------------------------------------
Total investments 21,786 24,882
Cash 89 36
Premiums receivable and agents' balances 214 166
Reinsurance recoverables 449 900
Deferred policy acquisition costs 4,210 3,842
Deferred income tax 522 456
Other assets 1,111 1,112
Separate account assets 110,652 90,628
- --------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 139,033 $ 122,022
=====================================================================================
LIABILITIES
Future policy benefits $ 6,236 $ 5,717
Other policyholder funds 16,873 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 2,066 2,517
Separate account liabilities 110,652 90,628
- --------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 136,727 119,529
==========================================================================================
STOCKHOLDERS' EQUITY
Class A common stock - 600,000,000 shares authorized;
26,122,383 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 1,282 1,281
Treasury stock, at cost - 208,536 and 161,984 shares (10) (9)
Accumulated other comprehensive income (loss)
Net unrealized capital gains (losses) on securities, net of tax (336) 263
Cumulative translation adjustments (12) (7)
---------
Total accumulated other comprehensive income (loss) (348) 256
---------
Retained earnings 1,381 964
- --------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY 2,306 2,493
==========================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 139,033 $ 122,022
==========================================================================================
</TABLE>
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
<PAGE> 41
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
------------------------
NET
UNREALIZED
CAPITAL
GAINS
(LOSSES)
CLASS A CLASS B TREASURY ON CUMULATIVE TOTAL
COMMON COMMON CAPITAL STOCK, SECURITIES, TRANSLATION RETAINED STOCKHOLDERS'
(In millions) STOCK STOCK SURPLUS AT COST NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- --------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
1999
Balance, December 31, 1998 $ - $ 1 $1,281 $ (9) $ 263 $ (7) $ 964 $2,493
Comprehensive income (loss)
Net income 467 467
------
Other comprehensive income (loss),
net of tax (1)
Net unrealized capital losses on
securities (2) (599) (599)
Cumulative translation
adjustments (5) (5)
------
Total other comprehensive income
(loss) (604)
------
Total comprehensive income (loss) (137)
------
Dividends declared (50) (50)
Issuance of shares under incentive
and stock purchase plans 1 9 10
Treasury stock acquired (10) (10)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ - $ 1 $1,282 $(10) $(336) $(12) $1,381 $2,306
=============================================================================================================================
1998
Balance, December 31, 1997 $ - $ 1 $1,283 $ (1) $ 237 $ (4) $ 628 $2,144
Comprehensive income
Net income 386 386
------
Other comprehensive income, net of
tax (1)
Net unrealized capital gains on
securities (2) 26 26
Cumulative translation
adjustments (3) (3)
------
Total other comprehensive income 23
------
Total comprehensive income 409
------
Dividends declared (50) (50)
Issuance of shares under incentive
and stock purchase plans (2) 7 5
Treasury stock acquired (15) (15)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ - $ 1 $1,281 $ (9) $ 263 $ (7) $ 964 $2,493
=============================================================================================================================
1997
Balance, December 31, 1996 $ - $ - $ 585 $ - $ 29 $ (3) $ 663 $1,274
Comprehensive income
Net income 306 306
------
Other comprehensive income, net of
tax (1)
Net unrealized capital gains on
securities (2) 208 208
Cumulative translation
adjustments (1) (1)
------
Total other comprehensive income 207
------
Total comprehensive income 513
------
Issuance of Class A Common Stock 687 687
Conversion to Class B Common Stock 1 (1) -
Capital contribution 12 12
Dividends (341) (341)
Issuance of shares under incentive
and stock purchase plans 3 3
Treasury stock acquired (4) (4)
- -----------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1997 $ - $ 1 $1,283 $ (1) $ 237 $ (4) $ 628 $2,144
=============================================================================================================================
</TABLE>
(1) Net unrealized capital gains (losses) on securities is reflected net of tax
(benefit) provision of $(326), $14 and $112 for the years ended December
31, 1999, 1998 and 1997, 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 years ended December 31, 1999, 1998 and
1997.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
<PAGE> 42
HARTFORD LIFE, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------
(In millions) 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 467 $ 386 $ 306
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Depreciation and amortization 7 30 23
Net realized capital losses 5 -- --
(Increase) decrease in premiums receivable and agents' balances (48) (19) 23
(Decrease) increase in other liabilities (251) (4) 258
Change in receivables, payables and accruals 150 67 87
(Decrease) increase in accrued tax (159) 43 143
Decrease (increase) in deferred income tax 251 (71) 37
Increase in deferred policy acquisition costs (395) (481) (561)
Increase in future policy benefits 710 778 956
Decrease (increase) in reinsurance recoverables 74 (98) (115)
Other, net (87) 36 (10)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 724 667 1,147
=========================================================================================================================
INVESTING ACTIVITIES
Purchases of investments (7,194) (7,846) (8,499)
Sales of investments 7,267 6,247 5,360
Maturity of investments 1,938 1,885 2,513
Purchases of affiliates and other (104) (199) (24)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 1,907 87 (650)
=========================================================================================================================
FINANCING ACTIVITIES
(Decrease) increase in short-term debt -- (50) 50
Proceeds from issuance of 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 (50) (38) (329)
Net disbursements for investment and universal life-type contracts charged
against policyholder accounts (2,527) (957) (644)
Net proceeds from the sale of common stock -- -- 687
Net issuance of common stock (1) (8) (1)
- -------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (2,578) (803) (480)
=========================================================================================================================
Net increase (decrease) in cash 53 (49) 17
Impact of foreign exchange -- (3) (1)
Cash - beginning of year 36 88 72
- -------------------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 89 $ 36 $ 88
=========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID DURING THE YEAR FOR
Income taxes $ 51 $ 257 $ 45
Interest $ 65 $ 54 $ 55
NONCASH INVESTING AND FINANCING ACTIVITIES
Capital contribution $ -- $ -- $ 12
</TABLE>
In 1998, due to the recapture of an in force block of business previously ceded
to MBL Life Assurance Co. of New Jersey, reinsurance recoverables of $4,753 were
exchanged for the fair value of assets comprised of $4,310 in policy loans and
$443 in other net assets.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-6
<PAGE> 43
HARTFORD LIFE, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions, except for share data, unless otherwise stated)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
Hartford Life, Inc. (a Delaware corporation), together with its consolidated
subsidiaries ("Hartford Life" or the "Company"), is a leading financial services
and insurance organization which provides, primarily in the United States,
investment, retirement, estate planning and employee benefits products. Hartford
Life, Inc. was formed on December 13, 1996 and capitalized on December 16, 1996
with the contribution of all the outstanding common stock of Hartford Life and
Accident Insurance Company (HLA). Pursuant to an initial public offering ("IPO"
or "the Offering") of 26 million shares of the Company's Class A Common Stock on
May 22, 1997, Hartford Life became a publicly traded company (see Note 3). The
Company is a direct subsidiary of Hartford Accident and Indemnity Company (HA&I)
and is ultimately a subsidiary of The Hartford Financial Services Group, Inc.
(The Hartford). Hartford Life, Inc. is a holding company and as such has no
material business of its own.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
These Consolidated Financial Statements are prepared on the basis of accounting
principles generally accepted in the United States, which differ materially from
the statutory accounting practices prescribed by various insurance regulatory
authorities. All material intercompany transactions and balances between
Hartford Life, its subsidiaries and affiliates have been eliminated.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States, requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.
The most significant estimates include those used in determining deferred policy
acquisition costs and the liability for future policy benefits and other
policyholder funds. Although some variability is inherent in these estimates,
management believes the amounts provided are adequate.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
(b) ADOPTION OF NEW ACCOUNTING STANDARDS
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 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. 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.
The Company's cash flows were not impacted by these changes in accounting
principles.
F-7
<PAGE> 44
(c) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
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, "Accounting for
Derivative Instruments and Hedging Activities", to defer its effective date for
one year, to fiscal years beginning after June 15, 2000. Initial application for
Hartford Life will begin January 1, 2001. SFAS No. 133 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. The Company has reviewed its
derivative holdings and is in the process of quantifying the impact of SFAS No.
133. The Company is also assessing what actions, if any, need to be taken to
minimize potential volatility, while at the same time maintaining the economic
protection needed to support the goals of its business.
In October 1998, the American Institute of Certified Public Accountants (AICPA)
issued SOP 98-7, "Accounting for Insurance and Reinsurance Contracts That Do Not
Transfer Insurance Risk". This SOP provides guidance on the method of accounting
for insurance and reinsurance contracts that do not transfer insurance risk,
defined in the SOP as the deposit method. This SOP is effective for financial
statements for fiscal years beginning after June 15, 1999 and is not expected to
have a material impact on the Company's financial condition or results of
operations.
(d) REVENUE RECOGNITION
Revenues for investment products and universal life-type policies consist of
policy charges for policy administration, cost of insurance and surrender
charges assessed to policy account balances and are recognized in the period in
which services are provided. Premiums for traditional life insurance and
disability policies are recognized as revenues ratably over the policy period.
(e) DIVIDENDS TO POLICYHOLDERS
Certain life insurance policies contain dividend payment provisions that enable
the policyholder to participate in the earnings on that participating block of
business of the life insurance subsidiaries of the Company. The participating
insurance in force accounted for 20%, 22% and 20% in 1999, 1998 and 1997,
respectively, of total insurance in force.
(f) INVESTMENTS
Hartford Life's investments in both fixed maturities, which include bonds,
redeemable preferred stock and commercial paper, and equity securities, which
include common and non-redeemable preferred stocks, are classified as "available
for sale" in accordance with SFAS No. 115, "Accounting for Certain Investments
in Debt and Equity Securities". Accordingly, these securities are carried at
fair value with the after-tax difference from cost reflected in stockholders'
equity as a component of accumulated other comprehensive income. Policy loans
are carried at outstanding balance which approximates fair value. Other invested
assets primarily consist of partnership investments, which are accounted for by
the equity method, and mortgage loans, whereby the carrying value approximates
fair value. Realized capital gains and losses on security transactions
associated with the Company's immediate participation guaranteed contracts are
excluded from revenues and deferred over the expected maturity of the
securities, since under the terms of the contracts the realized gains and losses
will be credited to policyholders in future years as they are entitled to
receive them. Net realized capital gains and losses, excluding those related to
immediate participation guaranteed contracts, are reported as a component of
revenue and are determined on a specific identification basis.
The Company's accounting policy for impairment requires recognition of an other
than temporary impairment charge on a security if it is determined that the
Company is unable to recover all amounts due under the contractual obligations
of the security. In addition, for securities expected to be sold, an other than
temporary impairment charge is recognized if the Company does not expect the
fair value of a security to recover to cost or amortized cost prior to the
expected date of sale. Once an impairment charge has been recorded, the Company
then continues to review the other than temporarily impaired securities for
additional impairment, if necessary.
F-8
<PAGE> 45
(g) DERIVATIVE INSTRUMENTS
HEDGE ACCOUNTING -- Hartford Life uses a variety of derivative instruments,
including swaps, caps, floors, forwards and exchange traded financial futures
and options as part of an overall risk management strategy. These instruments
are used as a means of hedging exposure to price, foreign currency and/or
interest rate risk on planned investment purchases or existing assets and
liabilities. Hartford Life does not hold or issue derivative instruments for
trading purposes. Hartford Life's accounting for derivative instruments used to
manage risk is in accordance with the concepts established in SFAS No. 80,
"Accounting for Futures Contracts", SFAS No. 52, "Foreign Currency Translation",
AICPA SOP 86-2, "Accounting for Options" and various Emerging Issues Task Force
pronouncements. Written options are used, in all cases in conjunction with other
assets and derivatives, as part of the Company's asset and liability management
strategy. Derivative instruments are carried at values consistent with the asset
or liability being hedged. Derivative instruments used to hedge fixed maturities
or equity securities are carried at fair value with the after-tax difference
from cost reflected in stockholders' equity. Derivative instruments used to
hedge other invested assets or liabilities are carried at cost. For a discussion
of SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities",
issued in June 1998, see (c) Future Adoption of New Accounting Standards.
Derivative instruments must be designated at inception as a hedge and measured
for effectiveness both at inception and on an ongoing basis. Hartford Life's
correlation threshold for hedge designation is 80% to 120%. If correlation,
which is assessed monthly or quarterly and measured based on a rolling three
month average, falls outside the 80% to 120% range, hedge accounting will be
terminated. Derivative instruments used to create a synthetic asset must meet
synthetic accounting criteria, including designation at inception and
consistency of terms between the synthetic and the instrument being replicated.
Consistent with industry practice, synthetic instruments are accounted for like
the financial instrument they are intended to replicate. Derivative instruments
which fail to meet risk management criteria, subsequent to acquisition, are
marked to market with the impact reflected in the Consolidated Statements of
Income.
FUTURES -- Gains or losses on financial futures contracts entered into in
anticipation of the investment of future receipt of product cash flows are
deferred and, at the time of the ultimate investment purchase, reflected as an
adjustment to the cost basis of the purchased asset. Gains or losses on futures
used in invested asset risk management are deferred and adjusted into the cost
basis of the hedged asset when the contract futures are closed, except for
futures used in duration hedging, which are deferred and basis adjusted on a
quarterly basis. The basis adjustments are amortized into net investment income
over the remaining asset life.
FORWARD COMMITMENTS -- Open forward commitment contracts are marked to market
through stockholders' equity. Such contracts are accounted for at settlement by
recording the purchase of the specified securities at the previously committed
price. Gains or losses resulting from the termination of forward commitment
contracts are recognized immediately in the Consolidated Statements of Income as
a component of net investment income.
OPTIONS -- The cost of options entered into as part of a risk management
strategy are basis adjusted to the underlying asset or liability and amortized
over the remaining life of the option. Gains or losses on expiration or
termination are adjusted into the basis of the underlying asset or liability and
amortized over the remaining asset life.
INTEREST RATE SWAPS -- Interest rate swaps involve the periodic exchange of
payments without the exchange of underlying principal or notional amounts. Net
receipts or payments are accrued and recognized over the life of the swap
agreement as an adjustment to investment income. Should the swap be terminated,
the gain or loss is adjusted into the basis of the asset or liability and
amortized over the remaining life. Should the hedged asset be sold or liability
terminated without terminating the swap position, any swap gains or losses are
immediately recognized in earnings. Interest rate swaps purchased in
anticipation of an asset purchase (anticipatory transaction) are recognized
consistent with the underlying asset components such that the settlement
component is recognized in the Consolidated Statements of Income while the
change in market value is recognized as an unrealized capital gain or loss.
INTEREST RATE CAPS AND FLOORS -- Premiums paid on purchased cap or floor
agreements and the premium received on issued cap or floor agreements (used for
risk management) are adjusted into the basis of the applicable asset and
amortized over the asset life. Gains or losses on termination of such positions
are adjusted into the basis of the asset or liability and amortized over the
remaining asset life. Net payments are recognized as an adjustment to income or
basis adjusted and amortized depending on the specific hedge strategy.
FORWARD EXCHANGE AND CURRENCY SWAPS CONTRACTS -- Forward exchange contracts and
foreign currency swaps are accounted for in accordance with SFAS No. 52. Changes
in the spot rate of instruments designated as hedges of the net investment in a
foreign subsidiary are reflected in the cumulative translation adjustment
component of stockholders' equity.
Cash flows from futures, options and swaps, accounted for as hedges, are
included with the cash flows of the item being hedged.
F-9
<PAGE> 46
(h) SEPARATE ACCOUNTS
Hartford Life maintains separate account assets and liabilities which are
reported at fair value. Separate account assets are segregated from other
investments. Separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts, wherein the policyholder assumes substantially
all the investment risk and rewards, and guaranteed separate accounts, wherein
the Company contractually guarantees either a minimum return or account value to
the policyholder.
(i) DEFERRED POLICY ACQUISITION COSTS
Policy acquisition costs, which include commissions and certain other expenses
associated with acquiring business, are deferred and amortized over the
estimated lives of the contracts, usually 20 years. Generally, acquisition costs
are deferred and amortized using the retrospective deposit method. Under the
retrospective deposit method, acquisition costs are amortized in proportion to
the present value of expected gross profits from surrender charges, investment
charges, mortality and expense margins. Actual gross profits can vary from
management's estimates, resulting in increases or decreases in the rate of
amortization. Management periodically updates these estimates, when appropriate,
and evaluates the recoverability of the deferred acquisition cost asset. When
appropriate, management revises its assumptions on the estimated gross profits
of these contracts and the cumulative amortization for the books of business are
re-estimated and adjusted by a cumulative charge or credit to income.
Acquisition costs and their related deferral are included in the Company's other
expenses as follows:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
Commissions $ 1,152 $ 1,202 $ 1,073
Deferred acquisition costs (948) (908) (881)
Other 853 853 712
- -------------------------------------------------------------------------------
Total other expenses $ 1,057 $ 1,147 $ 904
===============================================================================
</TABLE>
(j) FUTURE POLICY BENEFITS
Liabilities for future policy benefits are computed by the net level premium
method using interest rate assumptions varying from 3% to 11% and withdrawal and
mortality assumptions appropriate at the time the policies were issued. Claim
reserves, which are the result of sales of group long-term and short-term
disability, stop loss and Medicare Supplement, are stated at amounts determined
by estimates on individual cases and estimates of unreported claims based on
past experience.
The following table displays the development of claim reserves (included in
future policy benefits on the Consolidated Balance Sheets) resulting primarily
from group disability products as of December 31, 1999, 1998 and 1997:
<TABLE>
<CAPTION>
1999 1998 1997
- -------------------------------------------------------------------------------
<S> <C> <C> <C>
BEGINNING CLAIM RESERVES - GROSS $ 1,938 $ 1,746 $ 1,496
Less: Reinsurance recoverables 125 71 53
- -------------------------------------------------------------------------------
BEGINNING CLAIM RESERVES - NET 1,813 1,675 1,443
- -------------------------------------------------------------------------------
Incurred expenses related to:
Current year 1,013 902 890
Prior years (33) (48) (51)
- -------------------------------------------------------------------------------
Total incurred 980 854 839
- -------------------------------------------------------------------------------
Paid expenses related to:
Current year 360 334 274
Prior years 430 382 333
- -------------------------------------------------------------------------------
Total paid 790 716 607
- -------------------------------------------------------------------------------
ENDING CLAIM RESERVES - NET 2,003 1,813 1,675
Add: Reinsurance recoverables 125 125 71
- -------------------------------------------------------------------------------
ENDING CLAIM RESERVES - GROSS $ 2,128 $ 1,938 $ 1,746
===============================================================================
</TABLE>
F-10
<PAGE> 47
(k) OTHER POLICYHOLDER FUNDS
Other policyholder funds include reserves for investment contracts without life
contingencies, corporate owned life insurance and universal life insurance
contracts. These reserves are based on account values, which represent the
balance that accrues to the benefit of policyholders.
(l) FOREIGN CURRENCY TRANSLATION
Foreign currency translation gains and losses are reflected in stockholders'
equity. Balance sheet accounts are translated at the exchange rates in effect at
each year end and income statement accounts are translated at the average rates
of exchange prevailing during the year. The national currencies of international
operations are generally their functional currencies.
3. INITIAL PUBLIC OFFERING
Pursuant to the Offering on May 22, 1997, Hartford Life sold to the public 26
million shares of Class A Common Stock at $28.25 per share and received
proceeds, net of offering expenses, of $687. Of the proceeds, $527 was used to
retire outstanding promissory notes and an outstanding line of credit. 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 Offering represented approximately 18.6% of
the equity ownership in Hartford Life and approximately 4.4% of the combined
voting power of Hartford Life's Class A and Class B Common Stock. The Hartford
owns all the 114 million outstanding shares of Class B Common Stock of Hartford
Life, representing approximately 81.4% of the equity ownership in the Company
and approximately 95.6% of the combined voting power of Hartford Life'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.
On April 3, 1997, the Company reclassified the authorized shares of common
stock, par value $0.01 per share, of the Company into Class B Common Stock, par
value $0.01 per share (the "Class B Common Stock"), and authorized Class A
Common Stock, par value $0.01 per share (the "Class A Common Stock") and
preferred stock, par value $0.01 per share (the "Preferred Stock").
Holders of Class A Common Stock and Class B Common Stock are entitled to receive
ratably such dividends, if any, as may be declared by the Board of Directors,
subject to any preferential dividend rights of any outstanding Preferred Stock,
and generally have identical voting rights as and vote together (not as separate
classes) with holders of Class B Common Stock, except that 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. Also, each share of Class B Common
Stock is convertible into one share of Class A Common Stock (a) upon the
transfer of such share of Class B Common Stock by the holder thereof to a
non-affiliate (except where the shares of Class B Common Stock so transferred
represent 50% or more of all the outstanding shares of common stock, calculated
without regard to the difference in voting rights between the classes of common
stock) or (b) in the event that the number of shares of outstanding Class B
Common Stock is less than 50% of all the common stock then outstanding.
F-11
<PAGE> 48
4. INVESTMENTS AND DERIVATIVE INSTRUMENTS
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------
1999 1998 1997
- ----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
(a) COMPONENTS OF NET INVESTMENT INCOME
Interest income from fixed maturities $ 1,121 $ 1,129 $ 1,094
Interest income from policy loans 391 789 425
Income from other investments 66 53 35
- ----------------------------------------------------------------------------------------------------------------
Gross investment income 1,578 1,971 1,554
Less: Investment expenses 16 16 18
- ----------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 1,562 $ 1,955 $ 1,536
================================================================================================================
(b) COMPONENTS OF NET REALIZED CAPITAL GAINS (LOSSES)
Fixed maturities $ (13) $ (31) $ (11)
Equity securities 12 21 12
Real estate and other (4) 10 (1)
- ----------------------------------------------------------------------------------------------------------------
NET REALIZED CAPITAL LOSSES $ (5) $ -- $ --
================================================================================================================
(c) NET UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES
Gross unrealized capital gains $ 25 $ 17 $ 22
Gross unrealized capital losses (2) (1) --
- ----------------------------------------------------------------------------------------------------------------
Net unrealized capital gains 23 16 22
Deferred income tax expense 7 5 8
- ----------------------------------------------------------------------------------------------------------------
Net unrealized capital gains, net of tax 16 11 14
Balance - beginning of year 11 14 4
- ----------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON EQUITY SECURITIES $ 5 $ (3) $ 10
================================================================================================================
(d) NET UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized capital gains $ 70 $ 546 $ 461
Gross unrealized capital losses (637) (125) (88)
Unrealized capital (gains) losses credited to policyholders 24 (32) (30)
- ----------------------------------------------------------------------------------------------------------------
Net unrealized capital gains (losses) (543) 389 343
Deferred income tax expense (benefit) (191) 137 120
- ----------------------------------------------------------------------------------------------------------------
Net unrealized capital gains (losses), net of tax (352) 252 223
Balance - beginning of year 252 223 25
- ----------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES $ (604) $ 29 $ 198
================================================================================================================
</TABLE>
F-12
<PAGE> 49
(e) FIXED MATURITY INVESTMENTS
<TABLE>
<CAPTION>
As of December 31, 1999
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 228 $ 5 $ (4) $ 229
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) - asset backed 1,333 5 (40) 1,298
States, municipalities and political subdivisions 1,346 2 (75) 1,273
Foreign governments 347 8 (16) 339
Public utilities 991 7 (41) 957
All other corporate, including international 6,539 36 (292) 6,283
All other corporate - asset backed 4,914 6 (153) 4,767
Short-term investments 1,346 -- -- 1,346
Certificates of deposit 510 1 (14) 497
Redeemable preferred stock 48 -- (2) 46
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $17,602 $ 70 $ (637) $17,035
========================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
As of December 31, 1998
-----------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- --------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 164 $ 2 $ -- $ 166
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) - asset backed 1,138 24 (8) 1,154
States, municipalities and political subdivisions 1,107 33 (1) 1,139
Foreign governments 497 43 (10) 530
Public utilities 935 37 (3) 969
All other corporate, including international 6,170 320 (47) 6,443
All other corporate - asset backed 4,654 74 (47) 4,681
Short-term investments 2,017 1 (1) 2,017
Certificates of deposit 584 12 (8) 588
Redeemable preferred stock 5 -- -- 5
- ------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $17,271 $ 546 $ (125) $17,692
========================================================================================================================
</TABLE>
The amortized cost and estimated fair value of fixed maturity investments as of
December 31, 1999 by estimated maturity year are shown below. Expected
maturities differ from contractual maturities due to call or prepayment
provisions. Asset backed securities, including mortgage backed securities and
collateralized mortgage obligations, are distributed to maturity year based on
the Company's estimates of the rate of future prepayments of principal over the
remaining lives of the securities. These estimates are developed using
prepayment speeds provided in broker consensus data. Such estimates are derived
from prepayment speeds experienced at the interest rate levels projected for the
applicable underlying collateral and can be expected to vary from actual
experience.
F-13
<PAGE> 50
<TABLE>
<CAPTION>
MATURITY Amortized Cost Fair Value
- ----------------------------------------------------------------------------------
<S> <C> <C>
One year or less $ 2,759 $ 2,746
Over one year through five years 5,570 5,476
Over five years through ten years 4,098 3,920
Over ten years 5,175 4,893
- --------------------------------------------------------------------------------
TOTAL $17,602 $17,035
================================================================================
</TABLE>
(f) SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS
Sales of fixed maturities, excluding short-term fixed maturities, for the years
ended December 31, 1999, 1998 and 1997 resulted in proceeds of $3.8 billion,
$4.4 billion and $5.2 billion, gross realized capital gains of $178, $121 and
$175, gross realized capital losses (including writedowns) of $191, $152 and
$186, respectively. Sales of equity security investments for the years ended
December 31, 1999, 1998 and 1997 resulted in proceeds of $38, $39 and $132 and
gross realized capital gains of $12, $21 and $12, respectively, and no gross
realized capital losses for all periods.
(g) CONCENTRATION OF CREDIT RISK
The Company is not exposed to any significant concentration of credit risk in
fixed maturities of a single issuer greater than 10% of stockholders' equity.
(h) 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 transactions costs. The
Company utilizes derivative instruments to manage market risk through four
principal risk management strategies: hedging anticipated transactions, hedging
liability instruments, hedging invested assets and hedging portfolios of assets
and/or liabilities. Hartford Life does not trade in these instruments for the
express purpose of earning trading profits.
The Company maintains a derivatives counterparty exposure policy which
establishes market based credit limits, favors long-term financial stability and
creditworthiness, and typically requires credit enhancement/credit risk reducing
agreements. Credit risk is measured as the amount owed to Hartford Life based on
current market conditions and potential payment obligations between the Company
and its counterparties. Credit exposures are quantified weekly and netted, and
collateral is pledged to or held by the Company to the extent the current value
of derivatives exceeds exposure policy thresholds.
The Company's derivative program is monitored by an internal compliance unit and
is reviewed by senior management. Notional amounts, which represent the basis
upon which pay or receive amounts are calculated and are not reflective of
credit risk, pertaining to derivative financial instruments (excluding the
Company's guaranteed separate account derivative investments), totaled $7.5
billion and $7.6 billion ($5.5 billion and $4.9 billion related to the Company's
investments, $2.0 billion and $2.7 billion on the Company's liabilities) as of
December 31, 1999 and 1998, respectively.
F-14
<PAGE> 51
The tables below provide a summary of derivative instruments held by Hartford
Life as of December 31, 1999 and 1998, segregated by major investment and
liability category:
<TABLE>
<CAPTION>
1999 AMOUNT HEDGED (NOTIONAL AMOUNTS)
----------------------------------------------------------------------------------------
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps, Floors Rate Swaps Currency Notional
ASSETS HEDGED Value & Floors & Options Futures (1) & Forwards Swaps (2) Amount
- ----------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset backed securities
(excluding anticipatory) $ 6,065 $ -- $ 15 $ -- $ 931 $ -- $ 946
Anticipatory (3) -- -- -- 13 232 -- 245
Other bonds and notes 9,624 505 681 -- 3,008 83 4,277
Short-term investments 1,346 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 17,035 505 696 13 4,171 83 5,468
Equity securities, policy loans and
other investments 4,751 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 21,786 505 696 13 4,171 83 5,468
OTHER POLICYHOLDER FUNDS $ 16,873 -- 1,150 -- 848 -- 1,998
- ----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE INSTRUMENTS -
NOTIONAL VALUE $ 505 $ 1,846 $ 13 $ 5,019 $ 83 $ 7,466
==================================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS -
FAIR VALUE $ (22) $ 10 $ -- $ (22) $ 2 $ (32)
==================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1998 AMOUNT HEDGED (NOTIONAL AMOUNTS)
----------------------------------------------------------------------------------
Total Purchased Interest Foreign Total
Carrying Issued Caps Caps & Rate Swaps Currency Notional
ASSETS HEDGED Value & Floors Floors Futures (1) & Forwards Swaps (2) Amount
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C>
Asset backed securities
(excluding anticipatory) $ 5,835 $ 44 $ 258 $ 3 $ 1,084 $ -- $ 1,389
Anticipatory (3) -- -- -- -- 712 -- 712
Other bonds and notes 9,738 461 597 18 1,599 93 2,768
Short-term investments 2,119 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 17,692 505 855 21 3,395 93 4,869
Equity securities, policy loans and
other investments 7,190 -- -- -- -- -- --
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 24,882 505 855 21 3,395 93 4,869
OTHER POLICYHOLDER FUNDS $ 19,767 -- 1,150 -- 1,592 -- 2,742
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE INSTRUMENTS -
NOTIONAL VALUE $ 505 $ 2,005 $ 21 $ 4,987 $ 93 $ 7,611
============================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS -
FAIR VALUE $ (6) $ 19 $ -- $ 55 $ (7) $ 61
============================================================================================================================
</TABLE>
(1) As of December 31, 1999 and 1998, approximately 100% and 5%,
respectively, of the notional futures contracts expire within one year.
(2) As of December 31, 1999 and 1998, approximately 27% and 11%,
respectively, of foreign currency swaps expire within one year.
(3) Deferred gains and losses on anticipatory transactions are included in
the carrying value of fixed maturities in the Consolidated Balance
Sheets. At the time of the ultimate purchase, they are reflected as a
basis adjustment to the purchased asset. As of December 31, 1999, the
Company had $3.4 of deferred losses for interest rate swaps. Hartford
Life expects to basis adjust the entire loss in 2000. As of December
31, 1998, the Company had $0.6 of net deferred gains for interest rate
swaps, which were basis adjusted in 1999.
F-15
<PAGE> 52
The following is a reconciliation of notional amounts by derivative type and
strategy as of December 31, 1999 and 1998:
<TABLE>
<CAPTION>
December 31, 1998 Maturities/ December 31, 1999
Notional Amount Additions Terminations (1) Notional Amount
- --------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
BY DERIVATIVE TYPE
Caps $1,927 $ -- $ 148 $1,779
Floors 583 -- 178 405
Swaps/Forwards 5,080 2,131 2,109 5,102
Futures 21 1,086 1,094 13
Options -- 202 35 167
- --------------------------------------------------------------------------------------------------
TOTAL $7,611 $3,419 $3,564 $7,466
==================================================================================================
BY STRATEGY
Liability $2,742 $ 133 $ 877 $1,998
Anticipatory 712 1,118 1,585 245
Asset 2,914 1,691 512 4,093
Portfolio 1,243 477 590 1,130
- --------------------------------------------------------------------------------------------------
TOTAL $7,611 $3,419 $3,564 $7,466
==================================================================================================
</TABLE>
(1) During 1999, the Company had no significant gains or losses on
terminations of hedge positions using derivative financial instruments.
5. FAIR VALUE OF FINANCIAL INSTRUMENTS
SFAS No. 107, "Disclosure about Fair Value of Financial Instruments", requires
disclosure of fair value information of financial instruments. For certain
financial instruments where quoted market prices are not available, other
independent valuation techniques and assumptions are used. Because considerable
judgment is used, these estimates are not necessarily indicative of amounts that
could be realized in a current market exchange. SFAS No. 107 excludes certain
financial instruments from disclosure, including insurance contracts. Hartford
Life uses the following methods and assumptions in estimating the fair value of
each class of financial instrument.
Fair value for fixed maturities and marketable equity securities approximates
those quotations published by applicable stock exchanges or received from other
reliable sources.
For policy loans, carrying amounts approximate fair value.
Other invested assets primarily consist of partnership investments, which are
accounted for by the equity method, and mortgage loans, whereby the carrying
value approximates fair value.
Other policyholder funds fair value information is determined by estimating
future cash flows, discounted at the current market rate.
Fair value for long-term debt and TruPS (represents company obligated
mandatorily redeemable preferred securities of subsidiary trust holding solely
parent junior subordinated debentures) is based on external valuation using
discounted future cash flows at current market interest rates.
The fair value of derivative financial instruments, including swaps, caps,
floors, futures, options and forward commitments, is determined using a pricing
model which is similar to external valuation models.
F-16
<PAGE> 53
The carrying amount and fair values of Hartford Life's financial instruments as
of December 31, 1999 and 1998 were as follows:
<TABLE>
<CAPTION>
1999 1998
----------------------------- ------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- ----------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
ASSETS
- --------------------------------------------------------------------------------------------------
Fixed maturities $17,035 $17,035 $17,692 $17,692
Equity securities 153 153 140 140
Policy loans 4,222 4,222 6,687 6,687
Other investments 376 387 363 413
- --------------------------------------------------------------------------------------------------
LIABILITIES
Other policyholder funds (1) $11,991 $11,416 $11,723 $11,740
Long-term debt 650 633 650 710
TruPS 250 203 250 254
==================================================================================================
</TABLE>
(1) Excludes corporate owned life insurance and universal life insurance
contracts.
6. SEPARATE ACCOUNTS
Hartford Life maintained separate account assets and liabilities totaling $110.7
billion and $90.6 billion as of December 31, 1999 and 1998, respectively, which
are reported at fair value. Separate account assets, which are segregated from
other investments, reflect two categories of risk assumption: non-guaranteed
separate accounts totaling $101.8 billion and $80.6 billion as of December 31,
1999 and 1998, respectively, wherein the policyholder assumes substantially all
the investment risk, and guaranteed separate accounts totaling $8.9 and $10.0
billion as of December 31, 1999 and 1998, respectively, wherein Hartford Life
contractually guarantees either a minimum return or account value to the
policyholder. Included in non-guaranteed separate account assets were policy
loans totaling $860 and $1.8 billion as of December 31, 1999 and 1998,
respectively. Net investment income (including net realized capital gains and
losses) and interest credited to policyholders on separate account assets are
not reflected in the Consolidated Statements of Income.
Separate account management fees and other revenues were $1.1 billion, $908 and
$699 in 1999, 1998 and 1997, respectively. The guaranteed separate accounts
include fixed market value adjusted (MVA) individual annuity and modified
guaranteed life insurance. The average credited interest rate on these contracts
was 6.5% and 6.6% as of December 31, 1999 and 1998, respectively. The assets
that support these liabilities were comprised of $8.9 billion and $9.8 billion
in fixed maturities as of December 31, 1999 and 1998, respectively, and $0.2
billion of other invested assets as of December 31, 1998. The portfolios are
segregated from other investments and are managed to minimize liquidity and
interest rate risk. In order to minimize the risk of disintermediation
associated with early withdrawals, fixed MVA annuity and modified guaranteed
life insurance contracts carry a graded surrender charge as well as a market
value adjustment. Additional investment risk is hedged using a variety of
derivatives which totaled $(96) and $41 in carrying value and $2.1 billion and
$3.6 billion in notional amounts as of December 31, 1999 and 1998, respectively.
7. DEBT
<TABLE>
<CAPTION>
1999 1998
--------------------------- ----------------------------
Weighted Average Weighted Average
Amount Interest Rate (1) Amount Interest Rate (1)
- -------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
LONG-TERM DEBT
6.90% notes, due June 2004 $200 7.0% $200 7.0%
7.10% notes, due June 2007 200 7.2% 200 7.2%
7.65% debentures, due June 2027 250 7.8% 250 7.8%
- -----------------------------------------------------------------------------------------------
TOTAL LONG-TERM DEBT $650 7.4% $650 7.4%
===============================================================================================
</TABLE>
(1) Represents the weighted average effective interest rate at the end of
the period.
(a) SHORT-TERM DEBT
As of December 31, 1999, Hartford Life maintained a $250 five year revolving
credit facility comprised of four participatory banks. This facility, which
expires in 2003, is available for general corporate purposes and to provide
additional support for the Company's commercial paper program. As of December
31, 1999, there were no outstanding borrowings under the facility or commercial
paper program.
F-17
<PAGE> 54
(b) LONG-TERM DEBT
Hartford Life's long-term debt securities are unsecured obligations of Hartford
Life and rank on a parity with all other unsecured and unsubordinated
indebtedness. In February 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. In June 1997, the
Company issued an aggregate principal amount of $650 of unsecured redeemable
long-term debt in the form of notes and debentures, maturing between 2004 and
2027. Interest on each of the notes and debentures is payable semi-annually on
June 15 and December 15 of each year, which commenced December 15, 1997.
In June 1998, Hartford Life 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, described above. The Company issued $250 of Company Obligated
Mandatorily Redeemable Preferred Securities of Subsidiary Trust Holding Solely
Parent Junior Subordinated Debentures on June 29, 1998, discussed below. As of
December 31, 1999, Hartford Life had $750 remaining on this shelf registration.
Interest expense related to short- and long-term debt totaled $49 in both 1999
and 1998 and $58 in 1997.
8. 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 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 Junior Subordinated Debentures 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.
Hartford Life has the right to redeem the Junior Subordinated Debentures (i) in
whole or in part on or after June 30, 2003 or (ii) at any time, in whole but not
in part, in certain circumstances upon the occurrence of certain specified
events, in either case at a redemption price equal to accrued and unpaid
interest on the Junior Subordinated Debentures so redeemed to the date fixed for
redemption plus the principal amount thereof. In addition, prior to June 30,
2003, Hartford Life shall have the right to redeem the Junior Subordinated
Debentures at any time, in whole or in part, at a redemption price equal to the
accrued and unpaid interest on the Junior Subordinated Debentures so redeemed to
the date fixed for redemption, plus the greater of (a) the principal amount
thereof or (b) an amount equal to the present value on the redemption date of
the interest payments that would have been paid through June 30, 2003, after
discounting that amount on a quarterly basis from the originally scheduled date
for payment, and the present value on the redemption date of principal, after
discounting that amount on a quarterly basis from June 30, 2003, at a discount
rate tied to the interest rate on Treasury securities maturing on June 30, 2003.
The Junior Subordinated Debentures bear interest at the annual rate of 7.2% of
the principal amount, payable quarterly in arrears, which commenced 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 Junior Subordinated Debentures to be distributed to the
holders of the Series A Preferred Securities and the Series A Common Stock.
Hartford Life has
F-18
<PAGE> 55
guaranteed, on a subordinated basis, all 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, winding up
or liquidation to the extent funds are available.
Interest expense with respect to the Series A Preferred Securities totaled
approximately $18 and $9 in 1999 and 1998, respectively.
9. STOCKHOLDERS' EQUITY
(a) PREFERRED STOCK
Hartford Life has 50,000,000 shares of preferred stock authorized, $0.01 par
value. No shares were issued or outstanding as of December 31, 1999 and 1998.
(b) STATUTORY RESULTS
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Statutory net income $ 220 $ 265 $ 223
- --------------------------------------------------------------------------------
Statutory capital and surplus $2,214 $2,010 $1,672
================================================================================
</TABLE>
Statutory net income of $220 in 1999 was lower than 1998 due to losses realized
on certain securities. Excluding those losses, statutory net income in 1999 was
$290, 9% higher than 1998.
A significant percentage of the consolidated statutory surplus is permanently
reinvested or is subject to various state regulatory restrictions which limit
the payment of dividends without prior approval. The total amount of statutory
dividends which may be paid by the insurance subsidiaries of the Company in
2000, without prior regulatory approval, is estimated to be $221.
The domestic insurance subsidiaries of Hartford Life prepare their statutory
financial statements in accordance with accounting practices prescribed by the
applicable state of domicile. Prescribed statutory accounting practices include
publications of the National Association of Insurance Commissioners (NAIC), as
well as state laws, regulations and general administrative rules.
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 that each of Hartford Life's domiciliary states
will adopt the SAP and the Company will make the necessary changes required for
implementation. The Company has not yet determined the impact that the SAP will
have on the statutory financial statements of the insurance subsidiaries of
Hartford Life.
10. 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.
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 allocated advances from its parent, HA&I).
Pro forma effect has been given for the 1997 period 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.
F-19
<PAGE> 56
<TABLE>
<CAPTION>
1999 Income Shares Per Share Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 467 139.9 $ 3.34
----------------
DILUTED EARNINGS PER SHARE
Impact of options and contingently issuable shares - 0.3
----------------------------
Amounts available to common shareholders plus assumed conversions $ 467 140.2 $ 3.33
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1998 Income Shares Per Share Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 386 140.0 $ 2.76
----------------
DILUTED EARNINGS PER SHARE
Impact of options and contingently issuable shares - 0.2
----------------------------
Amounts available to common shareholders plus assumed conversions $ 386 140.2 $ 2.75
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
1997 Income Shares Per Share Amount
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
PRO FORMA BASIC EARNINGS PER SHARE
Amounts available to common shareholders $ 306 134.0 $ 2.28
----------------
PRO FORMA DILUTED EARNINGS PER SHARE
Impact of options and contingently issuable shares - 0.1
----------------------------
Amounts available to common shareholders plus assumed conversions $ 306 134.1 $ 2.28
=============================================================================================================================
</TABLE>
If earnings per share were calculated based upon 140 million weighted average
shares outstanding for the 1997 period presented (representing the weighted
average shares outstanding at the time of the IPO, May 22, 1997), earnings per
share would have been $2.18.
11. STOCK COMPENSATION PLANS
In 1997, the Company adopted the 1997 Hartford Life, Inc. Incentive Stock Plan
(the "Plan"). Under the Plan, options granted may be either non-qualified
options or incentive stock options qualifying under Section 422A of the Internal
Revenue Code, stock appreciation rights, performance shares or restricted stock,
or any combination of the foregoing. The aggregate number of shares of Class A
Common Stock which may be awarded in any one year shall be subject to an annual
limit. The maximum number of shares of Class A Common Stock which may be granted
under the Plan in each year shall be 1.5% of the total issued and outstanding
shares of Hartford Life Class A and Class B Common Stock and treasury stock as
reported in the Annual Report on Form 10-K of the Company for the preceding year
plus unused portions of such limit from prior years.
In addition, no more than 5 million shares of Class A Common Stock shall be
cumulatively available for awards of incentive stock options under the Plan, and
no more than 20% of the total number of shares on a cumulative basis shall be
available for restricted stock and performance shares awards. Performance shares
awards of common stock granted under the Plan become payable upon the attainment
of specific performance goals achieved over a three year period.
All options granted have an exercise price equal to the market price of the
Company's stock on the date of grant and an option's maximum term is ten years.
Certain non-performance based options become exercisable upon the attainment of
specified market price appreciation of the Company's common shares or at seven
years after the date of grant, while the remaining non-performance based options
become exercisable over a three year period commencing with the date of grant.
F-20
<PAGE> 57
During the second quarter of 1997, the Company established the Hartford Life,
Inc. Employee Stock Purchase Plan (ESPP). Under this plan, eligible employees of
Hartford Life may purchase Class A Common Stock of the Company at a 15% discount
from the lower of the market price at the beginning or end of the quarterly
offering period. The Company may sell up to 2,700,000 shares of stock to
eligible employees. The Company sold 120,694, 121,943 and 54,316 shares under
the ESPP in 1999, 1998 and 1997, respectively. The weighted average fair value
of the discount under the ESPP was $7.48 per share in 1999, $13.74 per share in
1998 and $9.63 per share in 1997.
The Company applies Accounting Principles Board Opinion No. 25 and related
interpretation in accounting for its stock based compensation plans.
Accordingly, in the measurement of compensation expense the Company utilizes the
excess of market price over exercise price, on the first date that both the
number of shares and award price are known. For the years ended December 31,
1999, 1998 and 1997, compensation expense related to the Company's two stock
based compensation plans was not material. Had compensation cost for the
Company's Incentive Stock Plan and ESPP been determined based on the fair value
at the grant dates for awards under those plans consistent with the method under
SFAS No. 123, the Company's net income and basic and diluted earnings per share
would have been reduced to the pro forma amounts indicated below:
<TABLE>
<CAPTION>
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Net income
As reported $ 467 $ 386 $ 306
Pro forma (1) 456 379 304
- --------------------------------------------------------------------------------
Basic earnings per share
As reported $ 3.34 $ 2.76 $ 2.28
Pro forma (1) 3.26 2.71 2.27
- --------------------------------------------------------------------------------
Diluted earnings per share
As reported $ 3.33 $ 2.75 $ 2.28
Pro forma (1) 3.25 2.70 2.27
================================================================================
</TABLE>
(1) The pro forma disclosures are not representative of the effects on net
income and earnings per share in future years.
The fair value of each option grant is estimated on the date of the grant using
the Black-Scholes options-pricing model with the following weighted average
assumptions used for grants in 1999, 1998 and 1997: dividend yield of 1.0% for
1999, 1998 and 1997; expected price variability of 36% for 1999, 33% for 1998
and 29% for 1997; risk free interest rates of 5.3% for the 1999 grants, 4.9% for
the 1998 grants and 6.4% for the 1997 grants; and expected lives of five years
for 1999, 1998 and 1997.
A summary of the status of non-qualified options included in the Company's
incentive stock plan as of December 31, 1999, 1998 and 1997 and changes during
the year ended December 31, 1999 and through the period ended December 31, 1997
is presented below:
<TABLE>
<CAPTION>
1999 1998 1997
-------------------------- ----------------------------- --------------------------
Weighted Weighted Weighted
Average Average Average
Shares Exercise Price Shares Exercise Price Shares Exercise Price
- ----------------------------------------------------------------- ----------------------------- --------------------------
<S> <C> <C> <C> <C> <C> <C>
Outstanding at beginning of year 1,766,397 $ 40.96 422,512 $ 31.54 -- $ --
Granted 621,615 51.83 1,376,375 43.74 450,377 31.52
Exercised (45,063) 35.88 (15,483) 31.10 -- --
Cancelled/Expired (69,447) 42.40 (17,007) 40.24 (27,865) 31.31
---------- ---------- --------
Outstanding at end of year 2,273,502 $ 43.99 1,766,397 $ 40.96 422,512 $ 31.54
- -----------------------------------------------------------------------------------------------------------------------------
Exercisable at end of year 903,605 $ 39.69 504,562 $ 37.72 136,532 $ 31.14
Weighted average fair value of
options granted $ 19.41 $ 15.13 $ 10.93
=============================================================================================================================
</TABLE>
The following table summarizes information about stock options outstanding and
exercisable as of December 31, 1999:
<TABLE>
<CAPTION>
Options Outstanding Options Exercisable
------------------------------------------------------------ ---------------------------------------
Number Outstanding Weighted Average Number Outstanding
Range of as of December 31, Remaining Weighted Average as of December 31, Weighted Average
Exercise Prices 1999 Contractual Life Exercise Price 1999 Exercise Price
- --------------- ------------------ ---------------- ---------------- ------------------- ----------------
<S> <C> <C> <C> <C> <C>
$30.06 - $45.00 1,593,987 8.3 $ 40.02 841,554 $ 38.73
$45.75 - $59.38 679,515 9.0 53.31 62,051 52.67
- -----------------------------------------------------------------------------------------------------------------------
$30.06 - $59.38 2,273,502 8.5 $ 43.99 903,605 $ 39.69
- -----------------------------------------------------------------------------------------------------------------------
</TABLE>
F-21
<PAGE> 58
12. POSTRETIREMENT BENEFIT AND SAVINGS PLANS
(a) PENSION PLANS
Hartford Life's employees are included in The Hartford's non-contributory
defined benefit pension plans. These plans provide pension benefits that are
based on years of service and the employee's compensation during the last ten
years of employment. The Company's funding policy is to contribute annually an
amount between the minimum funding requirements set forth in the Employee
Retirement Income Security Act of 1974, as amended, and the maximum amount that
can be deducted for U.S. federal income tax purposes. Generally, pension costs
are funded through the purchase of the Company's group pension contracts. The
cost to the Company was approximately $10 in 1999, $9 in 1998 and $7 in 1997.
The Company also provides, through The Hartford, certain health care and life
insurance benefits for eligible retired employees. A substantial portion of the
Company's employees may become eligible for these benefits upon retirement. The
Company's contribution for health care benefits will depend on the retiree's
date of retirement and years of service. In addition, the plan has a defined
dollar cap which limits average Company contributions. The Company has prefunded
a portion of the health care and life insurance obligations through trust funds
where such prefunding can be accomplished on a tax effective basis.
Postretirement health care and life insurance benefits expense, allocated by The
Hartford, was not material to the results of operations for 1999, 1998 and 1997.
The assumed rate in the per capita cost of health care (the health care trend
rate) was 7.1% for 1999, decreasing ratably to 5.0% in the year 2003. Increasing
or decreasing the health care trend rates by one percent per year would have an
immaterial impact on the accumulated postretirement benefit obligation and the
annual expense. To the extent that the actual experience differs from the
inherent assumptions, the effect will be amortized over the average future
service of covered employees.
(b) INVESTMENT AND SAVINGS PLAN
Substantially all U.S. employees of the Company are eligible to participate in
The Hartford's Investment and Savings Plan. Under this plan, designated
contributions, which may be invested in Class A Common Stock of Hartford Life or
certain other investments, are matched, up to 3% of compensation, by the
Company. In addition, the Company allocates 0.5% of base salary to the plan for
each eligible employee. Matching Company contributions are used to acquire
Hartford Life Class A Common Stock. The cost to Hartford Life for the
above-mentioned plan was approximately $6 in both 1999 and 1998, and $5 in 1997.
13. REINSURANCE
Hartford Life cedes insurance to other insurers in order to limit its maximum
losses. Such transfer does not relieve Hartford Life of its primary liability.
Failure of reinsurers to honor their obligations could result in losses to
Hartford Life. Hartford Life reduces this risk by evaluating the financial
condition of reinsurers and monitoring for possible concentrations of credit
risk. Hartford Life has no significant reinsurance related concentrations of
credit risk.
The Company records a receivable for the portion of reinsured benefits paid and
insurance liabilities. Reinsurance recoveries on ceded reinsurance contracts
were $168, $119 and $205 for the years ended December 31, 1999, 1998 and 1997,
respectively. Hartford Life also assumes insurance from other insurers.
The effect of reinsurance on premiums and other considerations is summarized as
follows:
<TABLE>
<CAPTION>
For the years ended December 31,
-----------------------------------
1999 1998 1997
- ---------------------------------------------------------------------------------
<S> <C> <C> <C>
Direct premiums and other considerations $ 4,068 $ 3,946 $ 3,352
Reinsurance assumed 154 98 165
Reinsurance ceded (243) (211) (354)
- ---------------------------------------------------------------------------------
PREMIUMS AND OTHER CONSIDERATIONS $ 3,979 $ 3,833 $ 3,163
=================================================================================
</TABLE>
In 1998, the Company recaptured an in force block of Corporate Owned Life
Insurance (COLI) business previously ceded to MBL Assurance Co. of New Jersey
(MBL Life). The transaction was consummated through an 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, which was placed in court-supervised rehabilitation in
1991, and reinsured a portion of those policies back to MBL Life. This recapture
was effective January 1, 1998 and resulted in a decrease in ceded premiums and
other considerations of $163 in 1998. Additionally, this transaction resulted in
a decrease in reinsurance recoverables of $4.8 billion, which was exchanged for
the fair value of assets comprised of $4.3 billion in policy loans and $443 in
other assets.
F-22
<PAGE> 59
14. INCOME TAX
Hartford Life and The Hartford have entered into a tax sharing agreement under
which each member in the consolidated U.S. federal income tax return will make
payments between them such that, with respect to any period, the amount of taxes
to be paid by the Company, subject to certain adjustments, generally will be
determined as though the Company were filing separate federal, state and local
income tax returns.
As long as The Hartford continues to own at least 80% of the combined voting
power and 80% of the value of the outstanding capital stock of the Company, the
Company will be included for federal income tax purposes in the affiliated group
of which The Hartford is the common parent. It is the intention of The Hartford
and its non-life subsidiaries to file a single consolidated federal income tax
return. The life insurance companies filed a separate consolidated federal
income tax return for 1998 and 1997 and intend to file a separate consolidated
federal income tax return for 1999. The Company's effective tax rate was 32%,
34% and 36% in 1999, 1998 and 1997, respectively.
Income tax expense (benefit) is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
-------------------------------------
1999 1998 1997
- --------------------------------------------------------------------------------
<S> <C> <C> <C>
Current $ (41) $ 299 $ 169
Deferred 260 (100) 5
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE $ 219 $ 199 $ 174
================================================================================
</TABLE>
A reconciliation of the tax provision at the U.S. federal statutory rate to the
provision (benefit) for income taxes is as follows:
<TABLE>
<CAPTION>
For the years ended December 31,
--------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------
<S> <C> <C> <C>
Tax provision at the U.S. federal statutory rate $ 240 $ 205 $ 168
Tax-exempt income (17) (9) --
Other (4) 3 6
- -----------------------------------------------------------------------------------
TOTAL $ 219 $ 199 $ 174
===================================================================================
</TABLE>
Deferred tax assets (liabilities) include the following as of December 31:
<TABLE>
<CAPTION>
1999 1998
- -----------------------------------------------------------------------------------------
<S> <C> <C>
Tax basis deferred policy acquisition costs $ 754 $ 767
Financial statement deferred policy acquisition costs and reserves 10 95
Employee benefits 25 21
Net unrealized capital (gains) losses on securities 184 (142)
Investments and other (451) (285)
- -----------------------------------------------------------------------------------------
TOTAL $ 522 $ 456
=========================================================================================
</TABLE>
Hartford Life had a current tax receivable of $40 as of December 31, 1999 and a
current tax payable of $71 as of December 31, 1998.
Prior to the Tax Reform Act of 1984, the Life Insurance Company Income Tax Act
of 1959 permitted the deferral from taxation of a portion of statutory income
under certain circumstances. In these situations, the deferred income was
accumulated in a "Policyholders' Surplus Account" and, based on current tax law,
will be taxable in the future only under conditions which management considers
to be remote; therefore, no federal income taxes have been provided on the
balance in this account, which for tax return purposes was $104 as of December
31, 1999.
F-23
<PAGE> 60
15. RELATED PARTY TRANSACTIONS
Transactions of the Company with HA&I and its affiliates relate principally to
tax settlements, reinsurance, insurance coverage, rental and service fees,
payment of dividends and capital contributions. In addition, certain affiliated
insurance companies purchased group annuity contracts from the Company to fund
pension costs and claim annuities to settle casualty claims. Substantially all
general insurance expenses related to the Company, including rent and employee
benefit plan expenses, are initially paid by The Hartford. Direct expenses are
allocated to the Company using specific identification, and indirect expenses
are allocated using other applicable methods. Indirect expenses include those
for corporate areas which, depending on type, are allocated based on either a
percentage of direct expenses or on utilization. Indirect expenses allocated to
the Company by The Hartford were $72 in both 1999 and 1998, and $59 in 1997.
Included in other liabilities are $15 and $54 due to The Hartford as of December
31, 1999 and 1998, respectively.
16. 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 alleged economic and punitive damages
have been asserted. Some of these cases have been filed as purported class
actions and some cases have been filed in certain jurisdictions that permit
punitive damage awards disproportionate to the actual damages incurred. 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 estimated losses and costs of
defense, will have a material adverse effect on the financial condition or
operating results of the Company.
(b) GUARANTY FUNDS
Under insurance guaranty fund laws in each state, the District of Columbia and
Puerto Rico, insurers licensed to do business can be assessed by state insurance
guaranty associations for certain obligations of insolvent insurance companies
to policyholders and claimants. Recent regulatory actions against certain large
life insurers encountering financial difficulty have prompted various state
insurance guaranty associations to begin assessing life insurance companies for
the deemed losses. Most of these laws do provide, however, that an assessment
may be excused or deferred if it would threaten an insurer's solvency and
further provide annual limits on such assessments. Part of the assessments paid
by the Company's insurance subsidiaries pursuant to these laws may be used as
credits for a portion of the Company's insurance subsidiaries' premium taxes.
The Company paid guaranty fund assessments of approximately $2, $9 and $15 in
1999, 1998 and 1997, respectively, of which $1, $4 and $5, respectively, were
estimated to be creditable against premium taxes.
(c) LEASES
The rent paid to Hartford Fire for space occupied by the Company was $15, $14
and $13 in 1999, 1998 and 1997, respectively. Future minimum rental commitments
are as follows:
<TABLE>
<S> <C>
2000 $ 25
2001 24
2002 24
2003 22
2004 22
Thereafter 110
- --------------------------------------------------------------------------------
TOTAL $ 227
================================================================================
</TABLE>
Hartford Life's principal executive offices are located in Simsbury,
Connecticut. Rental expense is recognized on a level basis over the term of the
primary sublease for the facility located in Simsbury, Connecticut, which
expires on December 31, 2009, and amounted to approximately $16 in each of the
years ended December 31, 1999, 1998 and 1997.
(d) TAX MATTERS
Hartford Life's federal income tax returns are routinely audited by the Internal
Revenue Service. The Company's 1996 - 1997 federal income tax returns are
currently under audit by the Internal Revenue Service. Management believes that
sufficient provision has been made in the financial statements for issues that
may result from tax examinations and other tax related matters for all open tax
years.
F-24
<PAGE> 61
17. SEGMENT INFORMATION
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 fixed and variable annuities,
mutual funds, retirement plan services and other investment products, 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 postemployment 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.
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 Company's revenues are primarily derived from customers within the United
States. The Company's long-lived assets primarily consist of deferred policy
acquisition costs and deferred tax assets from within the United States. The
following tables present summarized financial information concerning the
Company's segments.
<TABLE>
<CAPTION>
Investment Individual Employee
1999 Products Life Benefits COLI Other Total
- -----------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 2,041 $ 584 $2,024 $ 831 $ 56 $ 5,536
Net investment income 708 172 195 431 56 1,562
Amortization of deferred
policy acquisition costs 430 129 9 - - 568
Income tax expense (benefit) 173 38 23 17 (32) 219
Net income (loss) 330 71 79 30 (43) 467
Assets 107,256 6,629 3,640 20,158 1,350 139,033
- -----------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Individual Employee
1998 Products Life Benefits COLI Other Total
- -------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 1,784 $ 567 $1,809 $ 1,567 $ 61 $ 5,788
Net investment income 739 189 180 793 54 1,955
Amortization of deferred
policy acquisition costs 326 108 7 - - 441
Income tax expense (benefit) 145 36 27 12 (21) 199
Net income (loss) 266 65 71 24 (40) 386
Assets 87,706 5,404 3,068 22,631 3,213 122,022
- -------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>
Investment Individual Employee
1997 Products Life Benefits COLI Other Total
- ------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
Total revenues $ 1,510 $ 510 $1,700 $ 980 $ (1) $ 4,699
Net investment income 739 171 162 429 35 1,536
Amortization of deferred
policy acquisition costs 250 87 6 - 2 345
Income tax expense (benefit) 112 31 32 15 (16) 174
Net income (loss) 202 56 58 27 (37) 306
Assets 72,799 5,151 2,355 17,800 2,875 100,980
- ------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-25
<PAGE> 62
18. QUARTERLY RESULTS FOR 1999 AND 1998 (UNAUDITED)
<TABLE>
<CAPTION>
Three Months Ended
-------------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
-------------------------------------------------------------------------------------
1999 1998 1999 1998 1999 1998 1999 1998
- -------------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Revenues $1,335 $1,404 $1,357 $1,155 $1,420 $1,287 $1,424 $1,942
Benefits, claims and expenses 1,178 1,275 1,187 1,013 1,253 1,135 1,232 1,780
Net income 106 84 114 94 119 100 128 108
- -------------------------------------------------------------------------------------------------------------------------------
Basic earnings per share $ 0.76 $ 0.60 $ 0.81 $ 0.67 $ 0.85 $ 0.71 $ 0.91 $ 0.77
Diluted earnings per share $ 0.76 $ 0.60 $ 0.81 $ 0.67 $ 0.85 $ 0.71 $ 0.91 $ 0.77
- -------------------------------------------------------------------------------------------------------------------------------
Weighted average common shares
outstanding 139.9 140.0 139.9 140.0 140.0 140.0 140.0 139.9
Weighted average common shares
outstanding and dilutive potential
common shares 140.3 140.1 140.2 140.3 140.3 140.2 140.1 140.2
- -------------------------------------------------------------------------------------------------------------------------------
</TABLE>
F-26
<PAGE> 63
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
<TABLE>
<CAPTION>
(In millions) As of December 31, 1999
----------------------------------------------
Amount at which
shown on Balance
Type of Investment Cost Fair Value Sheet
- ----------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
FIXED MATURITIES
Bonds and Notes
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 228 $ 229 $ 229
U.S. Government and Government agencies and authorities
(guaranteed and sponsored) - asset backed 1,333 1,298 1,298
States, municipalities and political subdivisions 1,346 1,273 1,273
Foreign governments 347 339 339
Public utilities 991 957 957
All other corporate, including international 6,539 6,283 6,283
All other corporate - asset backed 4,914 4,767 4,767
Short-term investments 1,346 1,346 1,346
Certificates of deposit 510 497 497
Redeemable preferred stock 48 46 46
- ----------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 17,602 17,035 17,035
======================================================================================================================
EQUITY SECURITIES
Common Stocks
Industrial and miscellaneous 130 153 153
- ----------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES 130 153 153
======================================================================================================================
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 17,732 17,188 17,188
======================================================================================================================
POLICY LOANS 4,222 4,222 4,222
- ----------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS
Mortgage loans on real estate 200 200 200
Other invested assets 154 187 176
- ----------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INVESTMENTS 354 387 376
======================================================================================================================
TOTAL INVESTMENTS $22,308 $21,797 $21,786
======================================================================================================================
</TABLE>
S-1
<PAGE> 64
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF HARTFORD LIFE, INC.
(REGISTRANT)
<TABLE>
<CAPTION>
(In millions) As of December 31,
-------------------------
CONDENSED BALANCE SHEETS 1999 1998
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
ASSETS
Fixed maturities, available for sale, at fair value
(amortized cost of $1 and $2) $ 1 $ 2
Investment in subsidiaries 3,209 3,393
Other assets 17 4
- --------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS 3,227 3,399
====================================================================================================================
LIABILITIES AND STOCKHOLDERS' EQUITY
Long-term debt 650 650
Company obligated mandatorily redeemable preferred
securities of subsidiary trust holding solely parent
junior subordinated debentures 250 250
Other liabilities 21 6
- --------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 921 906
TOTAL STOCKHOLDERS' EQUITY 2,306 2,493
====================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $3,227 $3,399
====================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
(In millions)
For the years ended December 31,
-------------------------------------
CONDENSED STATEMENTS OF INCOME 1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
Earnings of subsidiaries $753 $643 $538
Interest expense 67 58 58
- -------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 686 585 480
Income tax expense 219 199 174
- -------------------------------------------------------------------------------------------------------------
NET INCOME $467 $386 $306
=============================================================================================================
</TABLE>
The financial information of Hartford Life, Inc. (parent company of Hartford
Life) should be read in conjunction with the Consolidated Financial Statements
and Notes to Consolidated Financial Statements.
S-2
<PAGE> 65
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE II
CONDENSED FINANCIAL INFORMATION OF HARTFORD LIFE, INC. (CONTINUED)
(REGISTRANT)
<TABLE>
<CAPTION>
(In millions)
CONDENSED STATEMENTS OF CASH FLOWS For the years ended December 31,
---------------------------------------
1999 1998 1997
- -------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C>
OPERATING ACTIVITIES
Net income $ 467 $ 386 $ 306
Undistributed earnings of subsidiaries (420) (348) (279)
Change in other assets and liabilities 3 - (11)
- -------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 50 38 16
=============================================================================================================
INVESTING ACTIVITIES
Sales (purchases) of investments 1 (2) -
Capital contribution to subsidiary - (190) (180)
- -------------------------------------------------------------------------------------------------------------
CASH PROVIDED BY (USED FOR) INVESTING ACTIVITIES 1 (192) (180)
=============================================================================================================
FINANCING ACTIVITIES
Decrease in allocated advances from parent - - (893)
(Decrease) increase in short-term debt - (50) 50
Proceeds from issuance of long-term debt - - 650
Proceeds from issuance of company obligated mandatorily
redeemable preferred securities of subsidiary trust
holding solely parent junior subordinated debentures - 250 -
Dividends paid (50) (38) (329)
Net proceeds from the sale of common stock - - 687
Net issuance of common stock (1) (8) (1)
- -------------------------------------------------------------------------------------------------------------
CASH (USED FOR) PROVIDED BY FINANCING ACTIVITIES (51) 154 164
=============================================================================================================
Net change in cash - - -
Cash - beginning of year - - -
- -------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ - $ - $ -
=============================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH ACTIVITY DURING THE YEAR FOR:
Interest expense paid $ 65 $ 54 $ 55
Tax refund received $ 24 $ 20 $ 17
SUPPLEMENTAL DISCLOSURE OF NONCASH FINANCING ACTIVITIES:
Capital contribution $ - $ - $ 12
Capital contribution to subsidiaries $ - $ - $ 46
</TABLE>
S-3
<PAGE> 66
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 1999, 1998 AND 1997
(In millions)
<TABLE>
<CAPTION>
Deferred Other
Policy Policy- Premiums Net
Acquisition Future Policy holder and Other Investment Net Realized
Segment Costs Benefits Funds Considerations Income Capital Losses
- -----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C> <C>
1999
Investment Products $3,165 $2,882 $ 8,987 $1,333 $ 708 $ -
Individual Life 1,013 331 2,415 412 172 -
Employee Benefits 32 2,698 207 1,829 195 -
Corporate Owned Life
Insurance - 321 5,244 400 431 -
Other - 4 20 5 56 (5)
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $4,210 $6,236 $16,873 $3,979 $1,562 $ (5)
=============================================================================================================================
1998
Investment Products $2,860 $2,470 $ 9,226 $1,045 $ 739 $ -
Individual Life 958 567 2,307 378 189 -
Employee Benefits 24 2,455 114 1,629 180 -
Corporate Owned Life
Insurance - 225 8,097 774 793 -
Other - - 23 7 54 -
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $3,842 $5,717 $19,767 $3,833 $1,955 $ -
=============================================================================================================================
1997
Investment Products $2,479 $2,028 $ 9,621 $ 771 $ 739 $ -
Individual Life 861 566 2,180 339 171 -
Employee Benefits 21 2,261 84 1,538 162 -
Corporate Owned Life
Insurance - 56 9,259 551 429 -
Other - 28 (5) (36) 35 -
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $3,361 $4,939 $21,139 $3,163 $1,536 $ -
=============================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
Benefits, Amortization
Claims and of Deferred
Claim Policy
Adjustment Acquisition Dividends to Other
Segment Expenses Costs Policyholders Expenses*
- --------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
1999
Investment Products $ 668 $430 $ - $ 440
Individual Life 258 129 - 88
Employee Benefits 1,507 9 - 406
Corporate Owned Life
Insurance 621 - 104 59
Other - - - 131
- --------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $3,054 $568 $104 $1,124
============================================================================================
1998
Investment Products $ 671 $326 $ - $ 376
Individual Life 269 108 1 88
Employee Benefits 1,335 7 - 369
Corporate Owned Life
Insurance 924 - 329 278
Other 28 - - 94
- --------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $3,227 $441 $330 $1,205
============================================================================================
1997
Investment Products $ 677 $250 $ - $ 269
Individual Life 251 87 1 84
Employee Benefits 1,301 6 - 303
Corporate Owned Life
Insurance 439 - 240 259
Other 3 2 - 47
- --------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $2,671 $345 $241 $ 962
============================================================================================
</TABLE>
* Includes interest expense.
S-4
<PAGE> 67
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
<TABLE>
<CAPTION>
Assumed
Ceded to From Percentage of
Gross Other Other Net Amount Assumed
(In millions) Amount Companies Companies Amount to Net
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
FOR THE YEAR ENDED DECEMBER 31, 1999
Life insurance in force $515,119 $126,909 $14,903 $403,113 3.7%
- ----------------------------------------------------------------------------------------------------------------------------
PREMIUMS AND OTHER CONSIDERATIONS
Life insurance and annuities $ 2,902 $ 167 $ 54 $ 2,789 1.9%
Accident and health insurance 1,166 76 100 1,190 8.4%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PREMIUMS AND OTHER CONSIDERATIONS $ 4,068 $ 243 $ 154 $ 3,979 3.9%
============================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1998
Life insurance in force $515,688 $194,092 $11,659 $333,255 3.5%
- ----------------------------------------------------------------------------------------------------------------------------
PREMIUMS AND OTHER CONSIDERATIONS
Life insurance and annuities $ 2,839 $ 151 $ 62 $ 2,750 2.3%
Accident and health insurance 1,107 60 36 1,083 3.3%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PREMIUMS AND OTHER CONSIDERATIONS $ 3,946 $ 211 $ 98 $ 3,833 2.6%
============================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1997
Life insurance in force $396,736 $172,928 $42,729 $266,537 16.0%
- ----------------------------------------------------------------------------------------------------------------------------
PREMIUMS AND OTHER CONSIDERATIONS
Life insurance and annuities $ 2,340 $ 273 $ 58 $ 2,125 2.7%
Accident and health insurance 1,012 81 107 1,038 10.3%
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL PREMIUMS AND OTHER CONSIDERATIONS $ 3,352 $ 354 $ 165 $ 3,163 5.2%
============================================================================================================================
</TABLE>
S-5
<PAGE> 68
HARTFORD LIFE, INC. AND SUBSIDIARIES
SCHEDULE V
VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
Additions Deductions
------------------------- ----------
Charged to
Balance Costs and Translation Write-offs/ Balance
(In millions) January 1, Expenses Adjustment Payments/Other December 31,
- --------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
1999
Accumulated depreciation of plant,
property and equipment $ 137 $ 19 $ - $ (2) $ 154
1998
Accumulated depreciation of plant,
property and equipment $ 112 $ 34 $ - $ (9) $ 137
1997
Accumulated depreciation of plant,
property and equipment $ 101 $ 17 $ - $ (6) $ 112
- --------------------------------------------------------------------------------------------------------------------
</TABLE>
S-6
<PAGE> 69
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
By: /s/ Mary Jane B. Fortin
-------------------------------------
Mary Jane B. Fortin
Vice President and Chief
Accounting Officer
Date: March 24, 2000
Pursuant to the requirements of the Securities Exchange Act of 1934, this report
has been signed by the following persons in the capacities and on the dates
indicated.
<TABLE>
<CAPTION>
SIGNATURE TITLE DATE
--------- ----- ----
<S> <C> <C>
/s/ Ramani Ayer Chairman March 24, 2000
- ----------------------------------------
Ramani Ayer
/s/ Lowndes A. Smith President, Chief Executive Officer March 24, 2000
- ---------------------------------------- and Director
Lowndes A. Smith
/s/ Thomas M. Marra Chief Operating Officer March 24, 2000
- ---------------------------------------- and Director
Thomas M. Marra
/s/ David T. Foy Senior Vice President March 24, 2000
- ---------------------------------------- and Chief Financial Officer
David T. Foy
/s/ Mary Jane B. Fortin Vice President March 24, 2000
- ---------------------------------------- and Chief Accounting Officer
Mary Jane B. Fortin
/s/ Gail Deegan Director March 24, 2000
- ----------------------------------------
Gail Deegan
/s/ Donald R. Frahm Director March 24, 2000
- ----------------------------------------
Donald R. Frahm
/s/ Paul G. Kirk, Jr. Director March 24, 2000
- ----------------------------------------
Paul G. Kirk, Jr.
/s/ Robert E. Patricelli Director March 24, 2000
- ----------------------------------------
Robert E. Patricelli
/s/ Robert W. Selander Director March 24, 2000
- ----------------------------------------
Robert W. Selander
/s/ H. Patrick Swygert Director March 24, 2000
- ----------------------------------------
H. Patrick Swygert
/s/ Gordon I. Ulmer Director March 24, 2000
- ----------------------------------------
Gordon I. Ulmer
/s/ David K. Zwiener Director March 24, 2000
- ----------------------------------------
David K. Zwiener
</TABLE>
II-1
<PAGE> 70
HARTFORD LIFE, INC. AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
EXHIBITS INDEX
<TABLE>
<CAPTION>
EXHIBIT #
- ---------
<S> <C>
3.01 Amended and Restated Certificate of Incorporation of Hartford Life, Inc. ("Hartford Life"
or the "Company") was filed as Exhibit 3.1 to the Company's Registration Statement on Form
S-1 dated February 10, 1997 (Registration No. 333-21459) and is incorporated herein by
reference.
3.02 Amended and Restated By-Laws of the Company, amended effective December 18, 1997 was filed
as Exhibit 3.02 to the Company's Form 10-K filed for the fiscal year ended December 31,
1997 and is incorporated herein by reference.
4.01 Amended and Restated Certificate of Incorporation and By-Laws of the Company (included as
Exhibits 3.01 and 3.02, respectively).
4.02 Senior Indenture, dated as of May 19, 1997, between the Company and Citibank, N.A., as
trustee, with respect to the Company's 6.90% Notes due June 15, 2004, 7.10% Notes due June
15, 2007, and 7.65% Debentures due June 15, 2027, was filed as Exhibit 4.3 to the
Company's Registration Statement on Form S-3 (Amendment No. 2) dated May 23, 1997, and is
incorporated herein by reference.
4.03 Subordinated Indenture between Hartford Life and Wilmington Trust Company, as Trustee,
dated as of June 1, 1998, was filed as Exhibit 4.03 to the Company's Form 10-K for the
fiscal year ended December 31, 1998 and is incorporated herein by reference.
4.04 First Supplemental Indenture, dated as of June 29, 1998 between Hartford Life, as Issuer,
and Wilmington Trust Company, as Trustee, with respect to 7.2% Junior Subordinated
Deferrable Interest Debentures, due 2038, was filed as Exhibit 4.04 to the Company's Form
10-K for the fiscal year ended December 31, 1998 and is incorporated herein by reference.
4.05 Form of Junior Subordinated Deferrable Interest Debenture, Series A, due 2038, included as
Exhibit A to Exhibit 4.04 filed herewith.
4.06 Declaration of Trust of Hartford Life Capital I, dated as of June 3, 1998 between the
Company, as Sponsor, and Wilmington Trust Company, as Trustee, was filed as Exhibit 4.06
to the Company's Form 10-K for the fiscal year ended December 31, 1998 and is incorporated
herein by reference.
4.07 Amended and Restated Declaration of Trust of Hartford Life Capital I, dated as of June 29,
1998 between the Trustee and the Sponsor, relating to the 7.2% Junior Subordinated
Deferrable Interest Debentures, Series A, due 2038, was filed as Exhibit 4.07 to the
Company's Form 10-K for the fiscal year ended December 31, 1998 and is incorporated herein
by reference.
4.08 Form of Preferred Security Certificate for Hartford Capital I, included as Exhibit A-1 to
Exhibit 4.07 filed herewith.
4.09 Preferred Securities Guarantee Agreement, dated as of June 29, 1998 between Hartford Life,
as Guarantor, and Wilmington Trust Company, as Preferred Guarantee Trustee, relating to
Hartford Life Capital I, was filed as Exhibit 4.09 to the Company's Form 10-K for the
fiscal year ended December 31, 1998 and is incorporated herein by reference.
</TABLE>
II-2
<PAGE> 71
<TABLE>
<CAPTION>
<S> <C>
10.01 Master Intercompany Agreement among the Company, The Hartford Financial Services Group,
Inc. (formerly known as ITT Hartford Group, Inc.) (The Hartford) and with respect to
Articles VI and XII, Hartford Fire Insurance Company, was filed as Exhibit 10.1 to the
Company's Form 10-Q filed for the quarterly period ended June 30, 1997 and is incorporated
herein by reference.
10.02 Tax Sharing Agreement among The Hartford and its subsidiaries, including the Company, was
filed as Exhibit 10.2 to the Company's Form 10-Q filed for the quarterly period ended June
30, 1997 and is incorporated herein by reference.
10.03 Management Agreement among Hartford Life Insurance Company and The Hartford Investment
Management Company, was filed as Exhibit 10.3 to the Company's Form 10-Q filed for the
quarterly period ended June 30, 1997 and is incorporated herein by reference.
10.04 Management Agreement among certain subsidiaries of the Company and Hartford Investment
Services, Inc., was filed as Exhibit 10.4 to the Company's Form 10-Q filed for the
quarterly period ended June 30, 1997 and is incorporated herein by reference.
10.05 Sublease Agreement between Hartford Fire Insurance Company and the Company, was filed as
Exhibit 10.5 to the Company's Form 10-Q filed for the quarterly period ended June 30, 1997
and is incorporated herein by reference.
10.06* 1997 Hartford Life, Inc. Incentive Stock Plan, amended as of February 16, 2000, is
filed herewith.
10.07* 1997 Hartford Life, Inc. Deferred Restricted Stock Unit Plan, as amended, was filed as
Exhibit 10.08 to the Company's Form 10-K for the fiscal year ended December 31, 1998 and
is incorporated herein by reference.
10.08* 1997 Hartford Life, Inc. Restricted Stock Plan for Non-Employee Directors, as amended, was
filed as Exhibit 10.09 to the Company's Form 10-K for the fiscal year ended December 31,
1998 and is incorporated herein by reference.
10.09* The Hartford 1996 Deferred Compensation Plan was filed as Exhibit 10.18 to The Hartford's
Form 10-K (File No. 0-19277) for the fiscal year ended December 31, 1998 and is
incorporated herein by reference.
10.10* The Hartford 1997 Senior Executive Severance Pay Plan I, revised as of October 15, 1998, was
filed as Exhibit 10.19 to The Hartford's Form 10-K (File No. 0-19277) for the fiscal year ended
December 31, 1998 and is incorporated herein by reference.
10.11* The Hartford Executive Severance Pay Plan, revised as of February 1, 1999, was filed as
Exhibit 10.20 to The Hartford's Form 10-K (File No. 0-19277) for the fiscal year ended
December 31, 1998 and is incorporated herein by reference.
</TABLE>
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<PAGE> 72
<TABLE>
<CAPTION>
<S> <C>
10.12* Employment Agreement dated July 1, 1997 between the Company and The Hartford and Lowndes
A. Smith was filed as exhibit 10.02 to The Hartford's Form 10-Q filed for the quarterly
period ended September 30, 1997 and is incorporated herein by reference.
10.13* Form of Employment Protection Agreement between the Company and certain executive officers
of the Company was filed as Exhibit 10.12 to the Company's Form 10-K for the fiscal year
ended December 31, 1997 and is incorporated herein by reference.
10.14 Amended and restated Credit Agreement dated as of February 9, 1998 among Hartford Life,
Inc., the lenders named therein and Citibank, N.A. as administrative agent was filed as
Exhibit 10.1 to the Company's Form 10-Q filed for the quarterly period ended March 31,
1998 and is incorporated herein by reference.
12 Computation of Ratio of Earnings to Fixed Charges is filed herewith.
21 Subsidiaries of Hartford Life, Inc. as of February 29, 2000 is filed herewith.
23 Consent of Arthur Andersen LLP to the incorporation by reference into the Company's
Registration Statements on Form S-8 and Form S-3 of the Report of Arthur Andersen LLP
contained in this Form 10-K regarding the audited financial statements is filed herewith.
27 Financial Data Schedule is filed herewith.
</TABLE>
* Management contract, compensatory plan or arrangement.
II-4
<PAGE> 1
EXHIBIT 10.06
1997 HARTFORD LIFE, INC. INCENTIVE STOCK PLAN
(As Amended, February 16, 2000)
1. PURPOSE
The purpose of the 1997 Hartford Life, Inc. Incentive Stock Plan is to motivate
and reward superior performance on the part of Key Employees of Hartford Life,
Inc. and its subsidiaries and Participating Companies and to thereby attract and
retain Key Employees of superior ability. In addition, the Plan is intended to
further opportunities for stock ownership by such Key Employees and Directors
(as defined below) in order to increase their proprietary interest in the
Company, and, as a result, their interest in the success of the Company. Awards
may be made, in the discretion of the Committee, to Key Employees (including
officers and directors who are also Key Employees) whose responsibilities and
decisions directly affect the performance of any Participating Company and its
subsidiaries and also to Directors. Such incentive awards may consist of stock
options and stock appreciation rights payable in stock or cash for Key Employees
or Directors, and performance shares, restricted stock or any combination of the
foregoing for Key Employees, 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, as amended.
"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 or Director 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, as
applicable.
"AWARD AGREEMENT" means the written agreement evidencing each Award
granted 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
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<PAGE> 2
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
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 an Award recipient.
"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.
"DIRECTOR" means a member of the Board who is not an employee of any
Participating Company.
"ELIGIBLE EMPLOYEE" means an Employee employed by a Participating
Company; provided, however, that except as the Board of Directors or the
Committee, pursuant to authority delegated by the Board of Directors, may
otherwise provide on a basis uniformly applicable to all persons similarly
situated, "Eligible Employee" shall not include any "Ineligible Person," which
includes (i) a person who (A) holds a position with the Company's "HARTEMP"
Program, (B) is hired to work for a Participating Company through a temporary
employment agency, or (C) is hired to a position with a Participating Company
with notice on his or her date of hire that the position will terminate on a
certain date; (ii) a person who is a leased employee (within the meaning of Code
Section 414(n)(2)) of a Participating Company or is otherwise employed by or
through a temporary help firm, technical help firm, staffing firm, employee
leasing firm, or professional employer organization, regardless of whether such
person is an Employee of a Participating Company, and (iii) a person who
performs services for a Participating Company as an independent contractor or
under
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<PAGE> 3
any other non-employee classification, or who is classified by a Participating
Company as, or determined by a Participating Company to be, an independent
contractor, regardless of whether such person is characterized or ultimately
determined by the Internal Revenue Service or any other Federal, State or local
governmental authority or regulatory body to be an employee of a Participating
Company or its affiliates for income or wage tax purposes or for any other
purpose.
Notwithstanding any provision in the Plan to the contrary, if any
person is an Ineligible Person, or otherwise does not qualify as an Eligible
Employee, or otherwise is ineligible to participate in the Plan, and such person
is later required by a court or governmental authority or regulatory body to be
classified as a person who is eligible to participate in the Plan, such person
shall not be eligible to participate in the Plan, notwithstanding such
classification, unless and until designated as an Eligible Employee by the
Committee, and if so designated, the participation of such person in the Plan
shall be prospective only.
"EMPLOYEE" means any person regularly employed by a Participating
Company, but shall not include any person who performs services for a
Participating Company as an independent contractor or under any other
non-employee classification, or who is classified by a Participating Company as,
or determined by a Participating Company to be, an independent contractor.
"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 who is an Eligible Employee
and whose responsibilities and decisions, in the judgment of the Committee,
directly affect the performance of the Company and its subsidiaries.
"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 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.
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<PAGE> 4
"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
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
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<PAGE> 5
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 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%.
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, expiration, 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.
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<PAGE> 6
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, and those Directors to whom Options
and Rights are to be granted; (ii) determine the form or forms of Award to be
granted to any Key Employee and any Director; (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 an 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.
(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 or Director 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.
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<PAGE> 7
(f) Except as provided in Section 9, 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 a Key Employee's 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) Except as provided in Section 9, 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 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
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<PAGE> 8
lifetime of the optionee, an Option or Right shall be exercisable only by the
Key Employee or Director 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) Except as provided in Section 9, if a Director's service on the
Board terminates for any reason, including without limitation, termination due
to death, disability or retirement, such Director may exercise any Option or
Right granted to him or her (or in the case of death of such Director, the
Beneficiary, Transferee, or other person or entity to whom such Option or Right
passes by will or by law, as applicable, may exercise such Option or Right) only
to the extent determined by the Committee as set forth in such Director's Award
Agreement and/or any administrative rules or other terms and conditions adopted
by the Committee from time to time applicable to such Option or Right granted to
such Director.
(j) 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.
(k) With respect to the exercisability and settlement of Rights:
(i) Upon exercise of a Right, a Key Employee or Director 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 or Director 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.
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<PAGE> 9
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 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
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<PAGE> 10
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 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) Except as provided in Section 9, 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.
10
<PAGE> 11
(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.
(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 and Director 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 or Director awarded an Option or Right, and no
Key Employee awarded a 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.
11
<PAGE> 12
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;
(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
consolidation or merger of the Company in which
holders of such stock of the Company immediately
prior to the consolidation or merger have the same
proportionate ownership of common stock of the
surviving corporation entitled to vote in the
election of directors immediately after the
consolidation or 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
12
<PAGE> 13
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;
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, upon
the occurrence of a Change of Control:
(i) Each Option and related Right outstanding on the date such Change
of Control occurs, and which is not then fully vested and exercisable, shall
immediately vest and become exercisable to the full extent of the original grant
for the remainder of its term.
(ii) The surviving or resulting corporation may, in its discretion,
provide for the assumption or replacement of each outstanding Option and related
Right granted under the Plan on terms which are no less favorable to the
optionee than those applicable to the Options and Rights immediately prior to
the Change of Control. If the surviving or resulting corporation offers to
assume or replace the Options and Rights, the optionee may elect to have his or
her Options and Rights assumed or replaced, in whole or in part, or to surrender
on the date the Change of Control occurs his or her Options and Rights, in whole
or in part, for cash equal to the excess of the Formula Price as defined in
Section 9(b)(v) hereof over the exercise price.
(iii) In the event the successor corporation does not offer to assume
or replace the outstanding Options and Rights as described in Section 9(b)(ii)
hereof, each Option and Right will be exercised on the date such Change of
Control occurs for cash equal to the excess of the Formula Price as defined in
Section 9(b)(v) hereof over the exercise price.
(iv) If an employee elects to have his or her Options and Rights
assumed or replaced in accordance with clause (ii) above, and within the three
(3) year period following the date of the Change of Control either of the
following occurs: (A) the employment of such
13
<PAGE> 14
employee is involuntarily terminated other than in a Termination For Just Cause
(as defined below), or (B) such employee voluntarily terminates employment in a
Termination For Good Reason (as defined below); then such employee's assumed or
replaced Options and Rights shall remain exercisable in whole or in part for
seven (7) months after the date of such termination (or until the expiration
date for such Options and Rights, if earlier). Such assumed or replaced Options
and Rights may be exercised for cash equal to the higher of (1) the excess of
the Fair Market Value of the successor corporation's common stock on the date of
such termination over the exercise price for such Options and Rights, or (2) the
excess of the Formula Price (as defined below) of the Company's Stock on the
date the Change of Control occurred over the exercise price for such Options and
Rights.
(v) The following definitions shall apply for purposes of this Section
9 only:
"BASE SALARY" means the amount an employee is entitled to receive as wages or
salary on an annualized basis, excluding all bonus, overtime, and incentive
compensation, payable by the Company or the successor corporation, as the case
may be, as consideration for the employee's services, and including earned but
deferred wages or salary.
"FORMULA PRICE" means 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
as constituting a Change of Control; provided that in the case of the exercise
of any such Right related to an Incentive Stock Option, "Formula Price" shall
mean the Fair Market Value of the Stock at the time of such exercise.
"REQUIRED BASE SALARY" means with respect to any employee the higher of (a) the
employee's Base Salary as in effect immediately prior to the Change of Control,
or (b) the employee's highest Base Salary in effect at any time thereafter.
"TARGET BONUS" means the annual bonus of an employee determined as a percentage
of annual base salary based on the annual target bonus percentage established
for the employee under the Executive Bonus Program or the Performance Share
Program (or any other similar or successor plan, policy or program) for a
calendar year, or if no annual target bonus percentage has been established
under the applicable bonus plan, policy or program, based on the highest actual
bonus percentage awarded to the employee under the applicable bonus plan, policy
or program during the three preceding full calendar years.
"TERMINATION FOR GOOD REASON" means a voluntary termination of employment by an
employee because of the occurrence of any of the following (A) a reduction in
the employee's Base Salary below the Required Base Salary; (B) a greater than
10% reduction in the level of the
14
<PAGE> 15
Total Compensation offered to the employee in comparison to the Total
Compensation enjoyed by the employee immediately prior to the Change of Control;
or (C) the successor corporation requiring the employee to be based at any
office or location more than 50 miles from the location at which he or she
performed services immediately prior to the Change of Control, except for travel
reasonably required in the performance of the employee's job responsibilities.
"TERMINATION FOR JUST CAUSE" means a termination of employment based on fraud,
misappropriation or embezzlement on the part of the employee which results in a
final conviction of a felony.
"TOTAL COMPENSATION" means the aggregate of an employee's Base Salary, Target
Bonus, and the value of any long-term incentive compensation award (including
any option award) made to the employee under this Plan or the 1997 Hartford
Life, Inc. Incentive Stock Plan (or any successor plan, policy or program), such
value to be determined as of the date such award was made.
(vi) 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)(vi)(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)(vi)(A) hereof.
(vii) 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, Director, 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,
15
<PAGE> 16
Director, 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 death of the Key Employee, Director, or Transferee, 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 the
death of a Key Employee, Director, or Transferee, as the case may be, or if no
designated Beneficiary survives the Key Employee, Director, or Transferee, or if
such designation conflicts with law, the estate of the Key Employee, Director,
or Transferee, 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 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 (as defined in
Rule 16b-3 of the Act) and Directors shall be made solely by the Committee and
subject to compliance with Rule 16b-3 of the Act.
16
<PAGE> 17
(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 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
Option or 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
eight million (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 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
17
<PAGE> 18
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 or Director 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 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.
18
<PAGE> 19
(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.
19
<PAGE> 1
EXHIBIT 12
HARTFORD LIFE, INC. AND SUBSIDIARIES
COMPUTATION OF RATIOS OF EARNINGS TO FIXED CHARGES AND EARNINGS
TO COMBINED FIXED CHARGES AND PREFERRED STOCK DIVIDENDS
<TABLE>
<CAPTION>
(In millions) 1999 1998 1997 1996 1995
- ----------------------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
EARNINGS $686 $585 $480 $ 31 $226
ADD:
FIXED CHARGES
Interest expense 67 58 58 55 35
Interest factor attributable to rentals 11 10 9 9 8
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED CHARGES 78 68 67 64 43
============================================================================================================================
EARNINGS, AS DEFINED $764 $653 $547 $ 95 $269
============================================================================================================================
FIXED CHARGES
Fixed charges above $ 78 $ 68 $ 67 $ 64 $ 43
Dividends on subsidiary preferred stock - - - - -
- ----------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED CHARGES AND PREFERRED DIVIDEND REQUIREMENTS $ 78 $ 68 $ 67 $ 64 $ 43
============================================================================================================================
RATIOS
Earnings, as defined, to total fixed charges (1) 9.8 9.6 8.2 1.5 6.3
- ----------------------------------------------------------------------------------------------------------------------------
Earnings, as defined, to total fixed charges and preferred
dividend requirements 9.8 9.6 8.2 1.5 6.3
- ----------------------------------------------------------------------------------------------------------------------------
</TABLE>
(1) The 1996 earnings to total fixed charges ratio, excluding charges of $348,
before-tax, primarily related to the recognition of losses in the Company's
guaranteed investment contract business, was 6.9.
<PAGE> 1
EXHIBIT 21
SUBSIDIARIES OF HARTFORD LIFE, INC.
<TABLE>
<CAPTION>
JURISDICTION NAMES UNDER
OF WHICH COMPANY
COMPANY NAME INCORPORATION DOES BUSINESS
- ------------ ------------- -------------
<S> <C> <C>
American Maturity Life Insurance Company (60%) Connecticut "AML"
AML Financial, Inc. Connecticut n/a
Brazilcap Capitalizacao S.A. (17%) Brazil n/a
Consultora de Capitales S.A.
Sociedad Gerente De Fondos Corriunes De Enversion (50%) Argentina n/a
Federal Capitalizacao S.A. (24.5%) Brazil n/a
Galicia Vida Compania de Seguros S.A. (40%) Argentina "Galica Vida"
Hartford Advisers HLS Fund, Inc. Maryland n/a
Hartford Bond HLS Fund, Inc. Maryland n/a
Hartford Capital Appreciation HLS Fund, Inc. Maryland n/a
Hartford - Comprehensive Employee Benefit Service Company Connecticut "CEBSCO"
Hartford Dividend and Growth HLS Fund, Inc. Maryland n/a
Hartford Equity Sales Company, Inc. Connecticut "HESCO"
Hartford Financial Services, LLC Delaware n/a
Hartford Financial Services Life Insurance Company Connecticut n/a
Hartford Index HLS Fund, Inc. Maryland n/a
Hartford International Advisers HLS Fund, Inc. Maryland n/a
Hartford International Life Reassurance Corporation Connecticut n/a
Hartford International Opportunities HLS Fund, Inc. Maryland n/a
Hartford Investment Financial Services Company Delaware n/a
Hartford Investments Canada Corporation Canada n/a
Hartford Life and Accident Insurance Company Connecticut "HLA"
Hartford Life and Annuity Insurance Company Connecticut n/a
Hartford Life Insurance Company Connecticut n/a
Hartford Life International, Ltd. Connecticut n/a
Hartford Life, Ltd. Bermuda n/a
Hartford MidCap HLS Fund, Inc. Maryland n/a
Hartford Money Market HLS Fund, Inc. Maryland n/a
Hartford Mortgage Securities HLS Fund, Inc. Maryland n/a
Hartford Securities Distribution Company, Inc. Connecticut n/a
Hartford Seguros de Retiro S.A. Argentina n/a
Hartford Seguros de Vida S.A. Argentina n/a
Hartford Series Fund, Inc., on behalf of the following Series:
Hartford Global Leaders HLS Fund Maryland n/a
Hartford Growth and Income HLS Fund Maryland n/a
Hartford High Yield HLS Fund Maryland n/a
Hartford Small Company HLS Fund, Inc. Maryland n/a
Hartford Stock HLS Fund, Inc. Maryland n/a
Hart Life Insurance Company Connecticut n/a
HL Investment Advisors, LLC Connecticut n/a
</TABLE>
<PAGE> 2
EXHIBIT 21
SUBSIDIARIES OF HARTFORD LIFE, INC. (CONTINUED)
<TABLE>
<CAPTION>
JURISDICTION NAMES UNDER
OF WHICH COMPANY
COMPANY NAME INCORPORATION DOES BUSINESS
- ------------ ------------- -------------
<S> <C> <C>
Icatu Hartford Administracao de Beneficios Ltda. Brazil n/a
Icatu Hartford Fundo de Pensao Brazil Icatu-Hartford
Icatu Hartford Capitalizacao S.A. (45%) Brazil n/a
Icatu Hartford Seguros S.A. (45%) Brazil n/a
Instituto de Salta Camponia de Seguros de Vida S.A. (90%) Argentina n/a
International Corporate Marketing Group, Inc. Connecticut "ICMG"
ITT Hartford Seguros de Vida S.A. (50%) Uruguay n/a
ITT Hartford Sudamericana Holding S.A. (56.7%) Argentina n/a
Nutmeg Life Insurance Company Iowa n/a
PLANCO Incorporated Pennsylvania "PLANCO Enterprises
Inc." Texas only
PLANCO Financial Services, Inc. Pennsylvania n/a
Servus Life Insurance Company Connecticut n/a
The Evergreen Group Incorporated New York n/a
The Hartford Mutual Funds, Inc., on behalf of the
following Series:
The Hartford Advisers Fund Maryland n/a
The Hartford Bond Income Strategy Fund Maryland n/a
The Hartford Capital Appreciation Fund Maryland n/a
The Hartford Dividend and Growth Fund Maryland n/a
The Hartford Global Leaders Fund Maryland n/a
The Hartford Growth and Income Fund Maryland n/a
The Hartford High Yield Fund Maryland n/a
The Hartford International Opportunities Fund Maryland n/a
The Hartford MidCap Fund Maryland n/a
The Hartford Money Market Fund Maryland n/a
The Hartford Small Company Fund Maryland n/a
The Hartford Stock Fund Maryland n/a
Thesis S.A. Argentina n/a
</TABLE>
<PAGE> 3
EXHIBIT 23
CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS
To Hartford Life, Inc.:
As independent public accountants, we hereby consent to the incorporation of our
report included in this Form 10-K, into the Company's previously filed
registration statements (i) on Forms S-8 (File Nos. 333-28805 and 333-28807) and
(ii) on Forms S-3 (File Nos. 333-21865 and 333-56283).
ARTHUR ANDERSEN LLP
Hartford, Connecticut
March 24, 2000
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> DEC-31-1999
<PERIOD-END> DEC-31-1999
<DEBT-HELD-FOR-SALE> 17,035
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 153
<MORTGAGE> 200
<REAL-ESTATE> 0
<TOTAL-INVEST> 21,786
<CASH> 89
<RECOVER-REINSURE> 449
<DEFERRED-ACQUISITION> 4,210
<TOTAL-ASSETS> 139,033
<POLICY-LOSSES> 6,236
<UNEARNED-PREMIUMS> 48
<POLICY-OTHER> 16,873
<POLICY-HOLDER-FUNDS> 110,652
<NOTES-PAYABLE> 650
1
250<F1>
<COMMON> 0
<OTHER-SE> 2,305
<TOTAL-LIABILITY-AND-EQUITY> 139,033
3,979
<INVESTMENT-INCOME> 1,562
<INVESTMENT-GAINS> (5)
<OTHER-INCOME> 0
<BENEFITS> 3,054
<UNDERWRITING-AMORTIZATION> 568
<UNDERWRITING-OTHER> 1,130
<INCOME-PRETAX> 686
<INCOME-TAX> 219
<INCOME-CONTINUING> 467
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 467
<EPS-BASIC> 3.34
<EPS-DILUTED> 3.33
<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>
