<PAGE> 1
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For The Quarterly Period Ended September 30, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 2-89516
HARTFORD LIFE INSURANCE COMPANY
(Exact name of registrant as specified in its charter)
CONNECTICUT 06-0974148
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 843-7716
(Registrant's telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days.
Yes [X] No[ ]
As of November 13, 1998 there were outstanding 1,000 shares of Common Stock,
$5,690 par value per share, of the registrant, all of which were directly
owned by Hartford Life and Accident Insurance Company.
The registrant meets the conditions set forth in General Instruction H (1)
(a) and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
<PAGE> 2
INDEX
PART I. FINANCIAL INFORMATION
<TABLE>
<CAPTION>
PAGE
<S> <C>
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Statements of Income - Third Quarter and
Nine Months Ended September 30, 1998 and 1997 3
Condensed Consolidated Balance Sheets - September 30, 1998 and December 31, 1997 4
Condensed Consolidated Statements of Changes in Stockholder's Equity-
Nine Months Ended September 30, 1998 and 1997 5
Condensed Consolidated Statements of Cash Flows - Nine
Months Ended September 30, 1998 and 1997 6
Notes to Condensed Consolidated Financial Statements 7
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 8
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 13
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 13
Signature 14
</TABLE>
2
<PAGE> 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF INCOME
<TABLE>
<CAPTION>
Third Quarter Nine Months
Ended Ended
September 30, September 30,
-----------------------------------------------------------------------------------
(In millions) (Unaudited)
1998 1997 1998 1997
-----------------------------------------------------------------------------------
<S> <C> <C> <C> <C>
REVENUES
Premiums and other considerations $ 484 $ 360 $ 1,430 $ 993
Net investment income 339 319 1,035 978
Net realized capital (losses) gains 3 - (3) 4
-----------------------------------------------------------------------------------
TOTAL REVENUES 826 679 2,462 1,975
===================================================================================
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim
adjustment expenses 353 318 1,100 970
Amortization of deferred policy
acquisition costs 119 80 328 252
Dividends to policyholders 61 47 177 119
Other insurance expenses 155 105 461 295
-----------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND
EXPENSES 688 550 2,066 1,636
===================================================================================
INCOME BEFORE INCOME TAX
EXPENSE 138 129 396 339
Income tax expense 49 48 139 121
81
-----------------------------------------------------------------------------------
NET INCOME $ 89 $ 81 $ 257 $ 218
===================================================================================
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
3
<PAGE> 4
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>
September 30, December 31,
(In millions, except for share data) 1998 1997
- -----------------------------------------------------------------------------------------------
(Unaudited)
<S> <C> <C>
ASSETS
Investments
Fixed maturities, available for sale, at fair value
(amortized cost of $13,771 and $13,885) $ 14,214 $ 14,176
Equity securities, at fair value 114 180
Policy loans, at outstanding balance 3,742 3,756
Other investments, at cost 275 47
-------- --------
Total investments 18,345 18,159
Cash 86 54
Premiums and amounts receivable 22 18
Accrued investment income 330 330
Reinsurance recoverables 5,903 6,114
Deferred policy acquisition costs 3,674 3,315
Deferred income tax 376 348
Other assets 332 352
Separate account assets 76,725 69,055
-------- --------
TOTAL ASSETS $105,793 $ 97,745
======== ========
LIABILITIES
Future policy benefits $ 3,341 $ 3,059
Other policyholder funds 20,684 21,034
Other liabilities 2,331 2,254
Separate account liabilities 76,725 69,055
-------- --------
TOTAL LIABILITIES 103,081 95,402
======== ========
STOCKHOLDER'S EQUITY
Common stock - authorized, issued and outstanding 1,000,
par value $5,690 6 6
Capital surplus 1,045 1,045
Accumulated other comprehensive income
Net unrealized capital gains on securities, net of tax 291 179
-------- --------
Total accumulated other comprehensive income 291 179
-------- --------
Retained earnings 1,370 1,113
-------- --------
TOTAL STOCKHOLDER'S EQUITY 2,712 2,343
======== ========
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $105,793 $ 97,745
======== ========
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
4
<PAGE> 5
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 30, 1998
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
------------
NET
UNREALIZED
CAPITAL
GAINS
ON TOTAL
COMMON CAPITAL SECURITIES, RETAINED STOCKHOLDER'S
(In millions)(Unaudited) STOCK SURPLUS NET OF TAX EARNINGS EQUITY
------------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1997 $ 6 $ 1,045 $ 179 $ 1,113 $ 2,343
Comprehensive income
Net income - - - 257 257
-------
Other comprehensive income, net of tax (1):
Changes in net unrealized capital gains
on securities (2) - - 112 - 112
-------
Total other comprehensive income 112
-------
Total comprehensive income 369
------------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1998 $ 6 $ 1,045 $ 291 $ 1,370 $ 2,712
------------------------------------------------------------------------------------------------------------
</TABLE>
NINE MONTHS ENDED SEPTEMBER 30, 1997
<TABLE>
<CAPTION>
ACCUMULATED
OTHER
COMPREHENSIVE
INCOME
------------
NET
UNREALIZED
CAPITAL
GAINS
ON TOTAL
COMMON CAPITAL SECURITIES, RETAINED STOCKHOLDER'S
(In millions)(Unaudited) STOCK SURPLUS NET OF TAX EARNINGS EQUITY
--------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
BALANCE, DECEMBER 31, 1996 $ 6 $ 1,045 $ 30 $ 811 $ 1,892
Comprehensive income
Net income - - - 218 218
-------
Other comprehensive income, net of tax (1):
Changes in net unrealized capital gains
on securities (2) - - 105 - 105
-------
Total other comprehensive income 105
-------
Total comprehensive income 323
--------------------------------------------------------------------------------------------------------
BALANCE, SEPTEMBER 30, 1997 $ 6 $ 1,045 $ 135 $ 1,029 $ 2,215
--------------------------------------------------------------------------------------------------------
</TABLE>
(1) Net unrealized gain on securities is reflected net of tax of $60
and $57 as of September 30, 1998 and 1997, respectively.
(2) Net of reclassification adjustment for (losses) gains realized in net
income of $(2) and $3 for the nine months ended September 30, 1998 and
1997, respectively.
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
5
<PAGE> 6
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
<TABLE>
<CAPTION>
Nine Months Ended
September 30,
--------------------
(In millions) (Unaudited) 1998 1997
- -----------------------------------------------------------------------------------
<S> <C> <C>
OPERATING ACTIVITIES
Net income $ 257 $ 218
ADJUSTMENTS TO NET INCOME:
Depreciation and amortization (15) 5
Net realized capital losses (gains) 3 (4)
Increase in deferred income taxes (90) (14)
Increase in deferred policy acquisition costs (359) (396)
(Increase) decrease in premiums and amounts receivable (4) 3
Decrease in accrued investment income - 48
Decrease in other assets 65 169
Decrease (increase) in reinsurance recoverables 39 (310)
Increase in liability for future policy benefits 282 650
(Decrease) increase in other liabilities (55) 131
- -----------------------------------------------------------------------------------
CASH PROVIDED BY OPERATING ACTIVITIES 123 500
- -----------------------------------------------------------------------------------
INVESTING ACTIVITIES
Purchases of fixed maturity investments (4,530) (4,628)
Sales of fixed maturity investments 2,848 3,039
Maturities and principal paydowns of fixed maturity
investments 1,387 1,643
Net (purchases) sales of other investments (89) 32
Net sales (purchases) of short-term investments 492 (70)
- -----------------------------------------------------------------------------------
CASH PROVIDED BY INVESTING ACTIVITIES 108 16
- -----------------------------------------------------------------------------------
FINANCING ACTIVITIES
Net disbursements for investment and universal life-type
contracts charged against policyholder accounts (199) (506)
- -----------------------------------------------------------------------------------
CASH USED FOR FINANCING ACTIVITIES (199) (506)
- -----------------------------------------------------------------------------------
Increase in cash 32 10
Cash - beginning of period 54 43
- -----------------------------------------------------------------------------------
CASH - END OF PERIOD $ 86 $ 53
- -----------------------------------------------------------------------------------
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
NET CASH PAID DURING THE PERIOD FOR:
Income taxes $ 241 $ 31
</TABLE>
SEE NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS.
6
<PAGE> 7
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS EXCEPT FOR SHARE DATA UNLESS OTHERWISE STATED)
(UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying unaudited condensed consolidated financial statements of
Hartford Life Insurance Company and subsidiaries (the "Company") have been
prepared pursuant to the rules and regulations of the Securities and Exchange
Commission. Certain information and note disclosures which are normally included
in financial statements prepared in accordance with generally accepted
accounting principles have been condensed or omitted pursuant to those rules and
regulations, although the Company believes that the disclosures made are
adequate to make the information presented not misleading. In the opinion of
management, these statements include all adjustments which were normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. For a description of
significant accounting policies, see Note 2 of Notes to Consolidated Financial
Statements in the Company's 1997 Form 10-K Annual Report.
(b) CHANGES IN ACCOUNTING PRINCIPLES
Effective January 1, 1998, the Company adopted Statement of Financial Accounting
Standards (SFAS) No. 130, "Reporting Comprehensive Income", which establishes
standards for reporting and display of comprehensive income and its components
in a full set of general purpose financial statements. The objective of this
statement is to report a measure of all changes in equity of an enterprise that
result from transactions and other economic events of the period other than
transactions with owners. Comprehensive income is the total of net income and
all other nonowner changes in equity. Accordingly, the Company has reported
comprehensive income in the Condensed Consolidated Statement of Changes in
Stockholder's Equity.
In March 1998, the American Institute of Certified Public Accountants issued
Statement of Position (SOP) No. 98-1, "Accounting for the Costs of Computer
Software Developed or Obtained for Internal Use". The SOP provides guidance on
accounting for the costs of internal use software and in determining whether the
software is for internal use. The SOP defines internal use software as software
that is acquired, internally developed, or modified solely to meet internal
needs and identifies stages of software development and accounting for the
related costs incurred during the stages. This statement is effective for fiscal
years beginning after December 15, 1998 and is not expected to have a material
impact on the Company's financial condition or results of operations.
In June 1998, the Financial Accounting Standards Board issued SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". The new standard
establishes accounting and reporting guidance for derivative instruments,
including certain derivative instruments embedded in other contracts. The
standard requires, among other things, that all derivatives be carried on the
balance sheet at fair value. The standard also specifies hedge accounting
criteria under which a derivative can qualify for special accounting. In order
to receive special accounting, the derivative instrument must qualify as either
a hedge of the fair value or the variability of the cash flow of a qualified
asset or liability. Special accounting for qualifying hedges provides for
matching the timing of gain or loss recognition on the hedging instrument with
the recognition of the corresponding changes in value of the hedged item. SFAS
No. 133 will be effective for fiscal years beginning after June 15, 1999.
Initial application for the Company will begin for the first quarter of the year
2000. The Company is currently in the process of quantifying the impact of SFAS
No. 133.
In September 1998, the Securities and Exchange Commission stated that until the
Emerging Issues Task Force (EITF) concludes its discussion regarding the
accounting for combined structured notes, affected companies that entered into
these notes prior to September 25, 1998 are required to either restate prior
period financial statements to conform with the recently prescribed unit
accounting model or disclose the related impact on earnings for all periods
presented and cumulatively over the life of the instruments had the registrant
accounted for the structure as a unit. Included in net income for the nine
months ended September 30, 1998 was $32 of after-tax net realized capital losses
and approximately $2 of after-tax net investment income related to a combined
structured note transaction, which was accounted for in accordance with then
current generally accepted accounting principles (GAAP). Had the transaction
been accounted for as a unit, based upon recently prescribed GAAP for such types
of transactions entered into after September 24, 1998, net income would have
been approximately $2 lower for the third quarter and $30 higher for the nine
months ended September 30, 1998.
7
<PAGE> 8
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
NOTE 2. INITIAL PUBLIC OFFERING (IPO)
On February 10, 1997, the Company's indirect parent, Hartford Life, Inc.
(Hartford Life), filed a registration statement, as amended, with the Securities
and Exchange Commission, relating to the IPO of Hartford Life's Class A Common
Stock. Pursuant to the IPO on May 22, 1997, Hartford Life sold to the public 26
million shares at $28.25 per share and received proceeds, net of offering
expenses, of $687. Of the proceeds, $527 was used to retire debt related to
Hartford Life's promissory notes outstanding and line of credit. The remaining
$160 was contributed by Hartford Life to Hartford Life and Accident Insurance
Company, the Company's direct parent, to support growth in its core businesses.
The 26 million shares sold in the IPO 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. Hartford Financial
Services Group, Inc., an indirect parent of Hartford Life, owns all of the 114
million outstanding shares of Class B Common Stock of Hartford Life,
representing approximately 81.4% of the equity ownership in Hartford Life 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
Hartford Life's stockholders.
NOTE 3. COMMITMENTS AND CONTINGENCIES
(a) LITIGATION
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, management, at the present
time, does not anticipate that the ultimate liability arising from such pending
or threatened litigation will have a material effect on the financial condition
or operating results of the Company.
(b) INVESTMENTS
As of September 30, 1998, the Company held $110 of asset-backed securities
securitized and serviced by Commercial Finance Services, Inc. (CFS). In October
1998, the Company became aware of allegations of improper activities at CFS. CFS
has engaged an independent accounting firm and outside legal counsel to
investigate these allegations. Currently, these securities are performing in
line with expectations. Based upon information available at this time, the
Company is presently unable to determine the amount of potential loss, if any,
related to the securities.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS
(DOLLAR AMOUNTS IN MILLIONS UNLESS OTHERWISE STATED)
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A) addresses the financial condition of the Company as of
September 30, 1998, compared with December 31, 1997, and its results of
operations for the third quarter and nine months ended September 30, 1998
compared with the equivalent 1997 periods. This discussion should be read in
conjunction with the MD&A in the Company's 1997 Form 10-K Annual Report.
Certain statements contained in this discussion, other than statements of
historical fact, are forward-looking statements. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
Company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect on Hartford
Life Insurance Company and subsidiaries (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 the Company will be
those anticipated by management. Actual results could differ materially from
those expected by the Company, depending on the outcome of certain factors,
including those described in the forward-looking statements.
8
<PAGE> 9
INDEX
Consolidated Results of Operations: Operating Summary 9
Annuity 10
Individual Life Insurance 11
Employee Benefits 11
Guaranteed Investment Contracts 11
Regulatory Initiatives and Contingencies 12
Accounting Standards 13
Other Matters 13
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
<TABLE>
<CAPTION>
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------
1998 1997 1998 1997
---------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 826 $ 679 $2,462 $1,975
EXPENSES 737 598 2,205 1,757
------ ------ ------ ------
NET INCOME $ 89 $ 81 $ 257 $ 218
====== ====== ====== ======
</TABLE>
The Company's insurance business operates in three principal segments: Annuity,
Individual Life Insurance, and Employee Benefits as well as a Guaranteed
Investments Contracts segment, which is primarily comprised of business written
prior to 1995. The Company also maintains a Corporate operation through which it
reports items that are not directly allocable to any of its business segments.
The Annuity segment focuses on the savings and retirement needs of the growing
number of individuals who are preparing for retirement or have already retired.
This segment consists of two areas of operation: Individual Annuity and Group
Annuity. The variety of products sold within this segment reflects the diverse
nature of the market. These include, in the Individual Annuity area, individual
variable annuities, fixed market value adjusted (MVA) annuities, and mutual
funds; and in the Group Annuity area, deferred compensation and retirement plan
services for municipal governments and corporations, structured settlement
contracts and other special purpose annuity contracts, and investment management
contracts. The Individual Life Insurance segment, which focuses on the high end
estate and business planning markets, sells a variety of life insurance
products, including variable life and universal life insurance. The Employee
Benefits segment consists of two areas of operation: Group Insurance and
Specialty Insurance. Through Group Insurance, the Company offers products such
as group life insurance, group short- and long-term disability and accidental
death and dismemberment. Substantially all of the Group Insurance business
directly written by the Company is ceded to its direct parent, Hartford Life and
Accident Insurance Company. Specialty Insurance primarily consists of the
Company's corporate owned life insurance (COLI) business. The Guaranteed
Investment Contracts segment consists of guaranteed rate contract (GRC) business
that is supported by assets held in either the Company's general account or a
guaranteed separate account and includes a closed block of guaranteed rate
contracts (Closed Book GRC). The Company decided in 1995, after a thorough
review of its GRC business, that it would significantly de-emphasize general
account GRC, choosing to focus its distribution efforts on other products sold
through other divisions. Management expects no material income or loss from the
Guaranteed Investment Contracts segment in the future.
Revenues increased $147, or 22%, and $487, or 25%, for the third quarter and
nine months ended September 30 1998, respectively, compared to the equivalent
1997 periods. This increase was driven by higher fee income earned on growth in
separate account assets primarily related to the Annuity and Individual Life
Insurance segments, revenue growth due to new sales and renewals in the Employee
Benefits segment, as well as higher net investment income, partially offset by
decreasing revenues related to the declining block of Closed Book GRC. For a
discussion of combined structured note transactions and investment contingencies
see Notes 1 (b) and 3 (b), respectively, of Notes to Condensed Consolidated
Financial Statements.
Expenses increased $139, or 23%, and $448, or 25%, for the third quarter and
nine months ended September 30, 1998, respectively, compared to the same prior
year periods. This increase was due to higher benefits, claims, and claim
adjustment expenses, increased amortization of deferred policy acquisition costs
and increased operating expenses primarily related to growth in the Company's
principal operating segments.
Net income increased $8, or 10%, and $39, or 18%, for the third quarter and nine
months ended September 30, 1998, respectively, as compared to the same periods
in 1997 primarily due to revenue growth in both the Annuity and Individual Life
Insurance segments. These increases were partially offset by a decrease in
Employee Benefits earnings as a result of COLI.
SEGMENT RESULTS
The Company's reporting segments consist of Annuity, Individual Life Insurance,
Employee Benefits, Guaranteed Investment Contracts and a Corporate Operation.
9
<PAGE> 10
Below is a summary of net income (loss) by segment.
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------
1998 1997 1998 1997
------------------------------------------
<S> <C> <C> <C> <C>
ANNUITY $ 67 $ 56 $ 197 $ 148
INDIVIDUAL LIFE INSURANCE 16 15 44 38
EMPLOYEE BENEFITS 6 8 18 23
GUARANTEED INVESTMENT CONTRACTS -- -- -- --
CORPORATE OPERATION -- 2 (2) 9
----- ----- ----- -----
NET INCOME $ 89 $ 81 $ 257 $ 218
===== ===== ===== =====
</TABLE>
The sections that follow analyze each segment's results.
ANNUITY
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------
1998 1997 1998 1997
---------------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 410 $ 336 $1,208 $ 924
EXPENSES 343 280 1,011 776
------ ------ ------ ------
NET INCOME $ 67 $ 56 $ 197 $ 148
====== ====== ====== ======
</TABLE>
Revenues for the third quarter and nine months ended September 30, 1998
increased $74, or 22%, and $284, or 31%, respectively, compared to the
equivalent prior year periods. This increase was driven by Individual Annuity
revenues which increased $72, or 31%, and $255, or 41%, for the third quarter
and nine months ended September 30, 1998, respectively, as compared to the same
periods in 1997 primarily due to higher fee income earned on growth in
individual variable annuity account values. Despite the fact that the equity
market did not experience significant appreciation during the third quarter of
1998, the segment's assets under management have increased from prior year
levels. Average individual variable annuity account values grew $11.0 billion,
or 29%, to $49.7 billion as of September 30, 1998 from $38.7 billion as of
September 30, 1997. This growth was the result of strong individual variable
annuity sales of $2.4 billion and $7.6 billion for the third quarter and nine
months ended September 30, 1998, respectively, compared to sales of $2.5 billion
and $7.2 billion for the third quarter and nine months ended September 30, 1997,
respectively. In addition, Group Annuity revenues increased $2, or 2%, and $29,
or 10%, for the third quarter and nine months ended September 30, 1998,
respectively, over the equivalent prior periods, primarily due to higher fee
income and net investment income resulting from growth in assets under
management. Group Annuity average total account values grew $1.3 billion, or
13%, to $11.1 billion as of September 30, 1998 from $9.8 billion as of September
30, 1997, due to new deposits.
Expenses increased $63, or 23%, and $235, or 30%, for the third quarter and nine
months ended September 30, 1998, respectively, as compared to the same prior
year periods. Benefits, claims and claim adjustment expenses increased $6 and
$68 for the third quarter and nine months ended September 30, 1998,
respectively, compared to the same periods in 1997 primarily due to increased
interest credited on Individual Annuity general account values. Average
Individual Annuity general account values increased $975, or 31%, to $4.1
billion at September 30, 1998 from $3.1 billion at September 30, 1997.
Amortization of deferred policy acquisition costs increased $26 and $64 for the
third quarter and nine months ended September 30, 1998, respectively, compared
to the same periods in 1997 as prior and current year sales remained strong. In
addition, for the third quarter and nine months ended September 30, 1998, other
business expenses increased $23 and $75, respectively, compared to prior year
periods, as a result of the continued growth in this segment.
Annuity net income increased $11, or 20%, and $49, or 33%, for the third quarter
and nine months ended September 30, 1998, respectively, as compared to the same
prior year periods as a result of revenue growth and continued operating
efficiencies.
10
<PAGE> 11
INDIVIDUAL LIFE INSURANCE
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------
1998 1997 1998 1997
-------------------------------------
<S> <C> <C> <C> <C>
REVENUES $137 $122 $401 $358
EXPENSES 121 107 357 320
---- ---- ---- ----
NET INCOME $ 16 $ 15 $ 44 $ 38
==== ==== ==== ====
</TABLE>
Revenues for the third quarter and nine months ended September 30, 1998
increased $15, or 12%, and $43, or 12%, respectively, as compared to the
equivalent periods in 1997. This increase was primarily due to higher cost of
insurance charges and other fee income earned on the Company's growing block of
variable life insurance. Variable life average account values increased $447, or
57%, to $1.2 billion as of September 30, 1998 from $786 as of September 30, 1997
due to strong sales. Variable life product sales constituted $82, or 75%, of
total Individual Life Insurance new sales as of September 30, 1998, an increase
of $21, or 34%, compared to the same period in 1997.
Expenses increased $14, or 13%, and $37, or 12%, for the third quarter and nine
months ended September 30, 1998, respectively, as compared to the equivalent
period in 1997. This increase was primarily the result of higher benefits,
claims, and claim adjustment expenses and amortization of deferred acquisition
costs associated with the growth in this segment as well as increased mortality
experience during 1998.
Net income increased $1, or 7%, and $6, or 16%, for the third quarter and nine
months ended September 30, 1998, respectively, as compared to the same period in
1997 as a result of strong sales and revenue growth.
EMPLOYEE BENEFITS
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------
1998 1997 1998 1997
-------------------------------------
<S> <C> <C> <C> <C>
REVENUES $219 $150 $697 $471
EXPENSES 213 142 679 448
---- ---- ---- ----
NET INCOME $ 6 $ 8 $ 18 $ 23
==== ==== ==== ====
</TABLE>
Revenues increased $69, or 46%, and $226, or 48%, for the third quarter and nine
months ended September 30, 1998, respectively, as compared to the same periods
in 1997, as a result of an increase in fee income related to new sales of
variable COLI, and renewal premium on leveraged COLI. Expenses increased $71, or
50%, and $231, or 52%, for the third quarter and nine months ended September 30,
1998, respectively, as compared to the same prior year periods, due to higher
expenses associated with variable COLI sales and leveraged COLI renewal premium.
Net income decreased $2, or 25%, and $5, or 22%, for the third quarter and nine
months ended September 30, 1998, respectively, as compared to the same prior
periods in 1997.
GUARANTEED INVESTMENT CONTRACTS
<TABLE>
<CAPTION>
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------
1998 1997 1998 1997
-------------------------------------
<S> <C> <C> <C> <C>
REVENUES $ 35 $ 62 $125 $196
EXPENSES 35 62 125 196
---- ---- ---- ----
NET LOSS $ -- $ -- $ -- $ --
==== ==== ==== ====
</TABLE>
This segment reported no net income for the third quarter and nine months ended
September 30, 1998 and 1997 consistent with management's expectations that net
income from Closed Book GRC in the years subsequent to 1996 will be immaterial
based on the Company's current projections for the performance of the assets and
liabilities associated with Closed Book GRC. However, no assurance can be given
that, under certain unanticipated economic circumstances which result in the
Company's assumptions being proven inaccurate, further losses in respect of
Closed Book GRC will not occur in the future.
11
<PAGE> 12
REGULATORY INITIATIVES AND CONTINGENCIES
NAIC PROPOSALS
The National Association of Insurance Commissioners ("NAIC") adopted the
Codification of Statutory Accounting Principles ("SAP") in March, 1998. The
proposed effective date for the statutory accounting guidance is January 1,
2001. It is expected that the Company's domiciliary state will adopt SAP and the
Company will make the necessary changes required for implementation. These
changes are not anticipated to have a material impact on the statutory financial
statements of the Company.
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 the Company's IT systems, as well as the
reliability of its non-IT systems, are integral aspects of the Company's
business. The Company has thousands of individual and business customers that
have insurance policies, annuities, mutual funds and other financial products of
the Company. Nearly all of these policies and products contain date sensitive
data, such as policy expiration dates, birth dates, premium payment dates, and
the like. In addition, various IT systems support communications and other
systems that integrate the Company's various business segments and field
offices. The Company also has business relationships with numerous third parties
that affect virtually all aspects of the Company's business, including, without
limitation, suppliers, computer hardware and software vendors, insurance agents
and brokers, securities broker-dealers and other distributors of financial
products, many of which provide date sensitive data to the Company, and whose
operations are important to the Company's business.
INTERNAL YEAR 2000 EFFORTS AND TIMETABLE
Beginning in 1990, the Company began working on making its IT systems Year 2000
ready, either through installing new programs or replacing systems. Since
January 1998, the Company's Year 2000 efforts have focused on the remaining Year
2000 issues related to IT and non-IT systems in all of the Company's business
segments. These Year 2000 efforts include the following five main initiatives:
(1) identifying and assessing Year 2000 issues; (2) taking actions to remediate
IT and non-IT systems so that they are Year 2000 ready; (3) testing and
certifying IT and non-IT systems as Year 2000 ready; (4) deploying such
remediated and tested systems back into their respective production
environments; and (5) conducting internal and external integrated testing of
such systems. The Company currently anticipates that initiatives (1) through (4)
of its internal Year 2000 efforts will be substantially complete by the end of
1998, and that initiative (5) testing will begin in early 1999 and continue
through the end of 1999.
THIRD PARTY YEAR 2000 EFFORTS AND TIMETABLE
The Company's Year 2000 efforts include assessing the potential impact on the
Company of third Year 2000 readiness. The Company's third party Year 2000
efforts include the following three main initiatives: (1) identifying third
parties which have significant business relationships with the Company and
inquiring of such third parties regarding their Year 2000 readiness; (2)
evaluating such third parties' responses to the Company's inquiries; and (3)
based on the evaluation of third party responses and the significance of the
business relationship, conducting additional activities with third parties as
determined to be necessary in each case, which activities may include integrated
IT systems testing. The Company has completed the first third party initiative
and is in the process of evaluating third party responses received. The Company
currently anticipates that it will substantially complete the response
evaluation in early 1999 and that it will conduct the additional activities
described in initiative (3) beginning in early 1999 and continue through the end
of 1999 as necessary. However, notwithstanding these third party Year 2000
efforts, the Company does not have control over these third parties and, as a
result, the Company cannot currently determine to what extent future operating
results may be adversely affected by the failure of these third parties to
adequately address their Year 2000 issues.
12
<PAGE> 13
YEAR 2000 COSTS
The costs of the Company's Year 2000 program that have been incurred through the
year ended December 31, 1997 have not been material to the Company's financial
condition or results of operations. Management estimates that after-tax costs
related to the Year 2000 program to be incurred in 1998 and 1999 will be $4 in
total, of which approximately $2 has been incurred as of September 30, 1998.
These costs are being expensed as incurred and have not had, and are not
currently expected to have, a material impact on Hartford Life's financial
condition or results of operations.
RISKS AND CONTINGENCY PLANS
If significant Year 2000 problems arise, including problems arising with third
parties, failures of IT and non-IT systems could occur, which in turn could
result in substantial interruptions in the Company's business. Given the
uncertain nature of Year 2000 problems that may arise, especially those related
to the readiness of third parties discussed above, the Company cannot determine
at this time whether the consequences of Year 2000 related problems that could
arise will have a material impact on the Company's financial condition or
results of operations.
The Company is in the process of developing certain contingency plans so that
if, despite its Year 2000 efforts, Year 2000 problems ultimately arise, the
impact of such problems may be minimized. These contingency plans are being
developed based on, among other things, known or reasonably anticipated
circumstances and potential vulnerabilities. The contingency planning also
includes assessing the dependency of the Company's business on third parties and
their Year 2000 readiness. The Company currently anticipates that internal and
external contingency plans will be substantially complete by the end of the
second quarter of 1999. However, in many contexts, Year 2000 issues are dynamic,
and ongoing assessments of business functions, vulnerabilities and risks must be
made. As such, new contingency plans may be needed in the future and/or then
existing plans may need to be modified as circumstances warrant.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Condensed
Consolidated Financial Statements.
OTHER MATTERS
SUBSEQUENT EVENT
On November 10, 1998, Hartford Life, Inc. (Hartford Life), an indirect parent of
the Company, recaptured an in-force block of COLI business from MBL Life
Assurance Co. of New Jersey (MBL Life), as well as purchased the outstanding
interest in International Corporate Marketing Group (ICMG), which was previously
40% owned by MBL Life. The transaction was consummated through the assignment of
a reinsurance arrangement between Hartford Life and MBL Life to a Hartford Life
subsidiary. Hartford Life originally assumed the life insurance block in 1992
from Mutual Benefit Life Insurance Company (Mutual Benefit Life), which was
placed in court-supervised rehabilitation in 1991, and reinsured a portion of
those polices back to MBL Life. MBL Life, previously a Mutual Benefit Life
subsidiary, operates under the Rehabilitation Plan for Mutual Benefit Life.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
The Company is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, management, at the present
time, does not anticipate that the ultimate liability arising from such pending
or threatened litigation will have a material effect on the financial condition
or operating results of the Company.
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - See Exhibits Index
(b) Reports on Form 8-K - None
13
<PAGE> 14
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
Hartford Life Insurance Company
(Registrant)
/s/ Mary Jane Fortin
----------------------------------
Mary Jane Fortin
Chief Accounting Officer and
Assistant Vice President
NOVEMBER 13, 1998
14
<PAGE> 15
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-Q
EXHIBITS INDEX
EXHIBIT # DESCRIPTION
--------- -----------
27 Financial Data Schedule is filed herewith.
15
<TABLE> <S> <C>
<ARTICLE> 7
<MULTIPLIER> 1,000,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> DEC-31-1998
<PERIOD-END> SEP-30-1998
<DEBT-HELD-FOR-SALE> 14,214
<DEBT-CARRYING-VALUE> 0
<DEBT-MARKET-VALUE> 0
<EQUITIES> 114
<MORTGAGE> 218
<REAL-ESTATE> 0
<TOTAL-INVEST> 18,345
<CASH> 86
<RECOVER-REINSURE> 5,903
<DEFERRED-ACQUISITION> 3,674
<TOTAL-ASSETS> 105,793
<POLICY-LOSSES> 3,341
<UNEARNED-PREMIUMS> 2
<POLICY-OTHER> 20,684
<POLICY-HOLDER-FUNDS> 76,725
<NOTES-PAYABLE> 0
6
0
<COMMON> 0
<OTHER-SE> 2,706
<TOTAL-LIABILITY-AND-EQUITY> 105,793
1,430
<INVESTMENT-INCOME> 1,035
<INVESTMENT-GAINS> (3)
<OTHER-INCOME> 0
<BENEFITS> 1,110
<UNDERWRITING-AMORTIZATION> 328
<UNDERWRITING-OTHER> 626
<INCOME-PRETAX> 396
<INCOME-TAX> 139
<INCOME-CONTINUING> 257
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 257
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<RESERVE-OPEN> 0
<PROVISION-CURRENT> 0
<PROVISION-PRIOR> 0
<PAYMENTS-CURRENT> 0
<PAYMENTS-PRIOR> 0
<RESERVE-CLOSE> 0
<CUMULATIVE-DEFICIENCY> 0
</TABLE>
