Back to GetFilings.com
1
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, 2000
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) 547-5000
(Registrant's telephone number, including area code)
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[ ]
As of March 28, 2001, 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 I (1) (a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
2
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of Hartford Life Insurance Company* 3
2 Properties* 9
3 Legal Proceedings 9
4 **
PART II 5 Market for Hartford Life Insurance Company's Common Stock and
Related Stockholder Matters 10
6 **
7 Management's Discussion and Analysis of Financial Condition and
Results of Operations* 11
7A Quantitative and Qualitative Disclosures About Market Risk 26
8 Financial Statements and Supplementary Data 26
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 26
PART III 10 **
11 **
12 **
13 **
PART IV 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 26
Signatures II-1
Exhibits Index II-2
* Item prepared in accordance with General Instruction I(2) of Form 10-K
** Item omitted in accordance with General Instruction I(2) of Form 10-K
2
3
PART I
ITEM 1. BUSINESS OF HARTFORD LIFE INSURANCE COMPANY
(Dollar amounts in millions, unless otherwise stated)
GENERAL
Hartford Life Insurance Company and its subsidiaries ("Hartford Life Insurance
Company" or the "Company"), is a direct subsidiary of Hartford Life and Accident
Insurance Company ("HLA"), a wholly-owned subsidiary of Hartford Life, Inc.
("Hartford Life"). The Company, together with HLA, provides (i) investment
products, including variable annuities, fixed market value adjusted (MVA)
annuities, mutual funds, retirement plan services for the savings and retirement
needs of over 1.5 million customers, (ii) individual life insurance for income
protection and estate planning to approximately 500,000 customers, (iii) group
benefits products such as group life and group disability insurance for the
benefit of millions of individuals that is directly written by the Company and
is substantially ceded to its parent, HLA, and (iv) corporate owned life
insurance. According to the latest publicly available data, with respect to the
United States, the Company, along with its parent, is the largest writer of
individual variable annuities based on sales for the year ended December 31,
2000 and the third largest writer of group disability insurance based on
premiums written for the nine months ended September 30, 2000. The Company's
strong position in each of its core businesses provides an opportunity to
increase the sale of Hartford Life Insurance Company's products and services as
individuals increasingly save and plan for retirement, protect themselves and
their families against disability or death and engage in estate planning. The
Company, along with its parent, is the third largest consolidated life insurance
group based on statutory assets as of December 31, 1999.
Hartford Life strives to maintain and enhance its position as a market leader
within the financial services industry. 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 increased 3% to $138.8
billion at December 31, 2000. In addition, the Company generated $3.4 billion in
revenues and $487 in net income in 2000.
ORGANIZATION
Hartford Life Insurance Company, a Connecticut corporation, was organized in
1902. The Company's indirect parent, Hartford Life, was formed in December 1996
as a direct subsidiary of Hartford Accident and Indemnity Company (HA&I) and is
an indirect subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"). Pursuant to an initial public offering (the "IPO") on May 22, 1997,
Hartford Life sold to the public 26 million shares of Class A Common Stock and
became a publicly traded company. The 26 million shares sold in the IPO
represented approximately 18.6% of the equity ownership in Hartford Life. On
June 27, 2000, The Hartford acquired all of the outstanding common shares of
Hartford Life not already owned by The Hartford (The Hartford Acquisition). As a
result of The Hartford Acquisition, Hartford Life again became a wholly-owned
subsidiary of The Hartford. Additional information regarding the organization of
the business may be found in Note 1 of Notes to Consolidated Financial
Statements.
On January 25, 2001, The Hartford, through Hartford Life, agreed to acquire the
U.S. individual life insurance and annuity businesses of Fortis, Inc. (operating
as Fortis Financial Group and referred to as "Fortis") for $1.12 billion in
cash. Hartford Life will effect the acquisition through several reinsurance
agreements with subsidiaries of Fortis and the purchase of 100% of the stock of
Fortis Advisors, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of
Fortis. The Fortis transaction, which is subject to insurance regulatory
approval and other customary conditions, is expected to be completed in the
second quarter of 2001. The acquisition will be accounted for as a purchase
transaction. (For additional information, see the Capital Resources and
Liquidity section of the MD&A under "Subsequent Event".)
DISTRIBUTION
Hartford Life Insurance Company 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's parent, HLA,
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, thus securing an important
distribution channel. In connection with the previously mentioned acquisition of
Fortis, Hartford Life Insurance Company, along with its parent, will broaden its
reach in the emerging
3
4
affluent market with the addition of a retail broker-dealer distribution channel
consisting of approximately 3,000 registered representatives. In addition, the
Company continues to expand its opportunity to sell through financial
institutions. As of September 30, 2000, the Company, together with HLA, was
selling products through 24 of the nation's 25 largest retail banks, including
proprietary relationships with 10 of the top 25. 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 Insurance Company sells variable
annuities, 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
Insurance Company has focused its efforts on offering products that provide
mechanisms 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 Insurance Company maintains advantageous economies of scale and
operating efficiencies due to its continued growth, attention to expense and
claims 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 values reduced by more than half, declining
from 43 basis points in 1992 to 21 basis points in 1999 and 2000. 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 Insurance Company, along
with its parent, was awarded the 2000 Annuity Service Award by DALBAR Inc., a
recognized independent financial services research organization, for the fifth
consecutive year. Hartford Life Insurance Company, along with its parent, is the
only company to receive this prestigious award in every year of the award's
existence.
RISK MANAGEMENT
Hartford Life Insurance Company'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, 2000, the Company had limited exposure to disintermediation risk on
approximately 98% of its domestic life insurance and annuity 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, Hartford Life has been granted a perpetual non-exclusive license
to use the Stag Logo in connection with the sale of Hartford Life Insurance
Company's products and services. However, in the event that The Hartford reduces
its beneficial ownership below 50% of the combined voting power of Hartford
Life's then outstanding securities, the license may be revoked upon the later of
the fifth anniversary of the date of consummation of Hartford Life'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 Insurance Company has the following reportable operating segments:
Investment Products, Individual Life and Corporate Owned Life Insurance (COLI).
The Company includes in "Other" corporate items not directly allocable to any of
its
4
5
reportable segments, as well as certain group benefits, including group life and
group disability insurance that is directly written by the Company and is
substantially ceded to its parent, HLA. 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 Insurance
Company's segments may be found in the MD&A and Note 13 of Notes to Consolidated
Financial Statements.
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,
retirement plan services and other investment products. From December 31, 1995
to December 31, 2000, this segment's account values grew to $104.6 billion from
$43.9 billion, a five-year compounded annual growth rate of 19%. Investment
Products generated revenues of $2.1 billion, $1.9 billion and $1.8 billion in
2000, 1999 and 1998, respectively, of which individual annuities accounted for
$1.4 billion, $1.3 billion and $1.1 billion of total Investment Products
revenues in 2000, 1999 and 1998, respectively. Net income in the Investment
Products segment was $354 in 2000, an 18% increase over 1999.
Hartford Life Insurance 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. Hartford Life Insurance Company is a market
leader in the annuity industry with sales of $10.7 billion, $10.9 and $10.0
billion in 2000, 1999 and 1998, respectively. According to Variable Annuity and
Research Data Service (VARDS), the Company was the number one writer of
individual variable annuities in the United States for 2000, 1999 and 1998 with
sales of $9.0 billion, $10.3 billion and $9.9 billion, respectively. In
addition, the Company was the number one seller of individual variable annuities
through banks in 2000, 1999 and 1998, according to Kenneth Kehrer Associates (a
leading consultant to banks).
The Company's total account value related to individual annuity products was
$87.2 billion as of December 31, 2000. Of this total account value, $78.2
billion, or 90%, related to individual variable annuity products and $9.0
billion, or 10%, related primarily to fixed MVA annuity products.
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 (referred to as "Section 457" and "Section
401(k)", respectively). The Company also provides structured settlement
contracts, terminal funding products and other investment products such as
guaranteed investment contracts (GICs).
As previously mentioned, in January 2001, The Hartford, through Hartford Life,
agreed to acquire the U.S. annuity businesses of Fortis. This acquisition is
expected to solidify the Company's number one position in variable annuities.
(For additional information, see the Capital Resources and Liquidity section of
the MD&A under "Subsequent Event".)
Principal Products
Individual Variable Annuities -- Hartford Life Insurance Company earns fees,
based on the policyholders' account values, for managing variable annuity assets
and maintaining policyholder accounts. The Company uses specified portions of
the periodic deposits paid by 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 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 continues to be popular with policyholders. Policyholders
may make deposits of varying amounts 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 8% of the contract's initial
deposit less withdrawals which reduce to zero on a sliding scale, usually within
seven policy years. Volatility experienced by the equity markets in 2000, 1999
and 1998 did not cause a significant increase in variable annuity surrenders,
demonstrating that policyholders are generally aware of the long-term nature of
these products. Individual variable annuity account values of $78.2 billion as
of December 31, 2000, 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, low
levels of surrenders and equity market appreciation. Approximately 96% and 95%
of the individual variable annuity account values were held in non-guaranteed
separate accounts as of December 31, 2000 and 1999, respectively.
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
5
6
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 strength of its product
offerings. Two of the industry's top twenty leading variable annuities, (based
on sales for the year ended 2000) The Director(R) and Putnam Hartford Capital
Manager Variable Annuity, are sponsored by Hartford Life and are managed in part
by Wellington and Putnam, respectively. The Hartford Leaders, a multi-manager
variable annuity introduced in July 1999, 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. The
Hartford Leaders has proved to be a strong product from inception and is poised
to join The Director(R) and Putnam Hartford Capital Manager Variable Annuity as
an industry leader.
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 2000 as a result of the higher interest rate environment making 2000 the
best sales year for this product since 1995. Account values of fixed MVA
annuities were $9.0 billion and $8.4 billion as of December 31, 2000 and 1999,
respectively.
Corporate -- The Company sells retirement plan products and services to
corporations under Section 401(k) plans targeting the small and medium case
markets since the Company believes these markets are underpenetrated in
comparison to the large case market. As of December 31, 2000, the Company
administered over 1,400 Section 401(k) plans.
Governmental -- The Company sells retirement plan products and services to
municipalities under Section 457 plans. 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. As of December 31, 2000, the Company administered
over 2,000 Section 457 plans.
Institutional Liabilities -- The Company 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 is based on management's strategy
of utilizing multiple and competing distribution channels 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, quality of
customer service, and 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).
Hartford Life maintains a distribution network of approximately 1,500
broker-dealers and approximately 500 banks. As of September 30, 2000, the
Company was selling products through 24 of the 25 largest retail banks in the
United States, including proprietary relationships with 10 of the top 25. 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, Hartford Life
completed the purchase of all outstanding shares of PLANCO, a primary wholesaler
of the Company's individual annuities. PLANCO is the nation's largest wholesaler
of individual annuities and has played a significant role in Hartford Life
Insurance Company's growth over the past decade. As a wholesaler, PLANCO
distributes Hartford Life Insurance Company's fixed and variable annuities 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 which they
wholesale. In addition, the Company uses internal personnel with 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.
6
7
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, and other
retirement-oriented products. As a result of court decisions and regulatory
actions, national banks may become more significant competitors in the future
for insurers which sell annuities. The 1999 Gramm-Leach-Bliley Act (the
Financial Services Modernization Act), which allows affiliations among banks,
insurance companies and securities firms, did not precipitate any significant
changes in ownership in 2000. (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 sells a variety of products including variable life,
universal life, interest sensitive whole life and term life insurance primarily
to the high end estate and business planning markets. Together with its parent,
Hartford Life Insurance Company's life insurance in force increased 13% to $75.1
billion as of December 31, 2000 from $66.7 billion as of December 31, 1999,
while account values grew 8% to $5.8 billion as of December 31, 2000 from $5.4
billion as of December 31, 1999. The Individual Life segment generated revenues
of $545, $574 and $543 in 2000, 1999 and 1998, respectively. Net income in the
Individual Life segment was $70 in 2000, a 3% increase over 1999.
As previously mentioned, in January 2001, The Hartford, through Hartford Life,
agreed to acquire the U.S. individual life insurance business of Fortis. This
acquisition will add significant scale to the Company's individual life
business, and according to data provided by Tillinghast-Towers Perrin, Hartford
Life will move to third largest from fifth largest writer of variable life
insurance in the United States based upon new premium sales. It will also
broaden the Company's reach in the emerging affluent market with the addition of
a retail broker-dealer consisting of approximately 3,000 registered
representatives. (For additional information, see the Capital Resources and
Liquidity section of the MD&A under "Subsequent Event".)
Principal 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, in which Hartford Life has been on
the leading edge. In 2000, of the Company's new sales of individual life
insurance, 89% was variable life and 10% 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 death of both insureds. Second-to-die policies are frequently
used in estate planning, often to fund estate taxes for a married couple.
Together with its parent, Hartford Life Insurance Company's variable life
account values were $2.9 billion and $2.6 billion as of December 31, 2000 and
1999, 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. The Company also sells universal life
insurance policies with a second-to-die feature similar to that of the variable
life insurance product offered. Together with its parent, Hartford Life
Insurance Company's universal life and interest sensitive whole life account
values were $2.1 billion and $2.0 billion as of December 31, 2000 and 1999,
respectively.
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 and casualty insurance
organizations. The primary organization used to wholesale Hartford Life
Insurance Company'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
7
8
Company has grown this organization rapidly the past few years to over 210
individuals and expects to continue to increase the number of wholesalers in the
future.
Competition
The Individual Life segment competes with approximately 1,500 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, pricing,
relationships with third-party distributors and the quality of underwriting and
customer service.
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
or a trust sponsored by 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, 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. Variable COLI account values were $15.9 billion and $12.4
billion as of December 31, 2000 and 1999, respectively.
Leveraged COLI account values decreased to $5.0 billion as of December 31, 2000
from $5.7 billion as of December 31, 1999, primarily due to the HIPA Act of
1996. Although COLI revenues decreased in 2000 to $765 from $830 in 1999, COLI
net income increased 25%, to $35 in 2000.
OTHER MATTERS
RESERVES
In accordance with applicable insurance regulations under which Hartford Life
Insurance Company operates, the Company establishes and carries as liabilities
actuarially determined reserves which are calculated to meet Hartford Life
Insurance Company'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 Insurance Company'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 Hartford Life Insurance 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 in a manner that
is comparable to direct insurance reserves. Additional information may be found
in the Reserves section of the MD&A.
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 that 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.
REINSURANCE
In accordance with normal industry practice, Hartford Life Insurance Company is
involved in both the cession and assumption of insurance with other insurance
and reinsurance companies. As of December 31, 2000, the maximum amount of life
insurance retained on any one life by any one of the Company's operations was
approximately $2.5.
8
9
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
Insurance Company'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 Insurance Company's approach to managing risks, see the
Investments and Capital Markets Risk Management sections of the MD&A, as well as
Note 3 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 "Guaranty Funds".
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".
EMPLOYEES
Hartford Life Insurance Company's parent (Hartford Life) had approximately 5,600
employees at February 28, 2001.
ITEM 2. PROPERTIES
The principal executive offices of Hartford Life Insurance Company, together
with its parent, are located in Simsbury, Connecticut. The home office complex
consists of approximately 655 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 basis to Hartford Life Insurance Company
by Hartford Fire. The Company believes its properties and facilities are
suitable and adequate for current operations.
ITEM 3. LEGAL PROCEEDINGS
Hartford Life is involved or may become involved in various legal actions, in
the normal course of its business, in which claims for alleged economic and
punitive damages have been or may be asserted. Some of the pending litigation
has been filed as purported class actions and some actions have been filed in
certain jurisdictions that permit punitive damage awards that are
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 potential, pending or threatened legal actions,
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.
9
10
PART II
ITEM 5. MARKET FOR HARTFORD LIFE INSURANCE COMPANY'S COMMON STOCK AND RELATED
STOCKHOLDER MATTERS
All of the Company's outstanding shares are owned by Hartford Life and Accident
Insurance Company, which is ultimately a subsidiary of The Hartford. As of March
28, 2001, the Company had issued and outstanding 1,000 shares of common stock at
a par value of $5,690 per share.
10
11
ITEM 7. 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 Hartford Life Insurance
Company, and its subsidiaries ("Hartford Life Insurance Company" or the
"Company") as of December 31, 2000, compared with December 31, 1999, and its
results of operations for the years ended December 31, 2000 and 1999. This
discussion should be read in conjunction with the Consolidated Financial
Statements and related Notes beginning on page F-1.
Certain of the statements contained herein or in Part I of the Company's Form
10-K, 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 Hartford Life Insurance Company's control and have been
made based upon management's expectations and beliefs concerning future
developments and their potential effect on 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
Insurance 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 the possibility of general economic and business
conditions that are less favorable than anticipated, legislative developments,
changes in interest rates or the stock markets, stronger than anticipated
competitive activity and those factors described in such 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 11 Capital Resources and Liquidity 24
Investment Products 12 Regulatory Matters and Contingencies 25
Individual Life 13 Effect of Inflation 25
Corporate Owned Life Insurance (COLI) 14 Accounting Standards 26
Investments 15
CONSOLIDATED RESULTS OF OPERATIONS
Hartford Life Insurance Company is a leading financial services and insurance
company providing investment and retirement products such as variable and fixed
annuities and retirement plan services; individual and corporate owned life
insurance; and group benefit products such as group life and group disability
insurance that is directly written by the Company and is substantially ceded to
its parent, Hartford Life and Accident Insurance Company (HLA).
Hartford Life Insurance Company derives its revenues principally from: (a) fee
income, including asset management fees on separate accounts and mortality and
expense fees, as well as cost of insurance charges; (b) fully insured premiums;
(c) certain other fees; and (d) net investment income on general account assets.
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 and variable life products. Cost of insurance charges
are assessed on the net amount at risk for investment oriented life insurance
products. Premium revenues are derived primarily from the sale of group life and
group disability insurance products.
Hartford Life Insurance Company'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 Insurance Company's profitability depends largely on the amount of
assets, 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.
OPERATING SUMMARY
2000 1999
-----------------------------
Total revenues $ 3,447 $ 3,400
Total expenses 2,960 3,039
-----------------------------
NET INCOME $ 487 $ 361
-----------------------------
11
12
Hartford Life Insurance Company has the following reportable segments:
Investment Products, Individual Life and Corporate Owned Life Insurance (COLI).
The Company reports in "Other" corporate items not directly allocable to any of
its segments, as well as certain group benefits, including group life and group
disability insurance that is directly written by the Company and is
substantially ceded to its parent, HLA. For information regarding the Company's
segments, see Note 13 of Notes to Consolidated Financial Statements.
On January 25, 2001, The Hartford Financial Services Group, Inc. ("The
Hartford"), through Hartford Life, Inc. and its subsidiaries ("Hartford Life"),
agreed to acquire the U.S. individual life insurance, annuity and mutual fund
businesses of Fortis, Inc. (operating as Fortis Financial Group and referred to
as "Fortis"). This transaction is expected to be completed in the second quarter
of 2001. (For additional information, see the Capital Resources and Liquidity
section under "Subsequent Event".)
Revenues increased slightly, primarily related to the growth in the Investment
Products segment, due to higher fee income in the individual annuity operation
as related average account values in 2000 were higher than 1999. Partially
offsetting the growth in revenues was a decrease in COLI revenues primarily
related to the declining block of leveraged COLI business.
Expenses decreased $79, or 3%, as increases in the Investment Products segment
were more than offset by declines in the Company's other operating segments,
particularly the COLI segment where expenses decreased consistent with revenues.
Net income increased $126, or 35%, led by the Investment Products segment where
net income increased $54, or 18%. Hartford Life Insurance Company also recorded
a benefit related to the settlement of certain federal tax matters of $24 in
2000 (see Note 12 (c) of Notes to Consolidated Financial Statements). This
benefit, along with an $8 benefit related to state income taxes, resulted in $32
of tax benefits for the year ended December 31, 2000. Additionally, net realized
capital losses, after-tax, increased $55 due to portfolio rebalancing. Excluding
the tax items and net realized capital losses, earnings increased $149, or 41%.
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 and to continue the Company's growth in assets. Hartford Life Insurance
Company 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 Insurance
Company'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
Insurance Company are discussed in the Regulatory Matters and Contingencies
section.
SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
2000 1999
------------------------
Investment Products $ 354 $ 300
Individual Life 70 68
Corporate Owned Life Insurance 35 28
Other 28 (35)
------------------------
NET INCOME $ 487 $ 361
------------------------
A description of each segment as well as an analysis of the operating results
summarized above is included on the following pages.
INVESTMENT PRODUCTS
OPERATING SUMMARY
2000 1999
----------------------------
Total revenues $ 2,068 $ 1,884
Total expenses 1,714 1,584
----------------------------
NET INCOME $ 354 $ 300
----------------------------
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 variable and fixed annuities,
retirement plan services and other investment products. The Company was ranked
the number one writer of individual variable annuities in the United States
12
13
for 2000 according to Variable Annuity and Research Data Service (VARDS) and the
number one seller of individual variable annuities through banks, according to
Kenneth Kehrer Associates (a leading consultant to banks).
Revenues increased $184, or 10%, primarily due to higher fee income in the
individual annuity operations. Fee income generated by individual annuities
increased $175, or 16%, while related average account values grew $8.2 billion,
or 10%, to $88.1 billion. The growth in average account values was due, in part,
to strong sales of $10.7 billion in 2000, and the significant equity market
performance in 1999, partially offset by surrenders. Although average individual
annuity account values in 2000 were higher than 1999, account values at December
31, 2000 declined $1.7 billion, or 2%, as compared to December 31, 1999, as
strong sales were not sufficient to offset surrenders and the impact of the
retreating equity markets.
Due to the continued growth in this segment, expenses increased $130, or 8%.
This increase was driven by amortization of deferred policy acquisition costs
and operating costs, which grew $66, or 16%, and $39, or 14%, respectively,
primarily related to growth in the individual annuity operation.
Net income increased $54, or 18%, primarily due to the growth in revenues
discussed above. Additionally, the Investment Products segment continued to
maintain its profit margins related to its primary businesses, thus contributing
to the segment's earnings growth. In particular, its individual annuity
operation's operating expenses as a percentage of average individual annuity
account values remained consistent with the prior year at 21 basis points.
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, new companies are continually entering the
market, aggressively seeking distribution channels 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
permits affiliations among banks, insurance companies and securities firms.
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
2000 1999
-------------------------
Total revenues $ 545 $ 574
Total expenses 475 506
-------------------------
NET INCOME $ 70 $ 68
-------------------------
The Individual Life segment sells a variety of life insurance products,
including variable life, universal life, interest sensitive whole life and term
life insurance primarily to the high end estate and business planning markets.
Revenues decreased $29, or 5%, and expenses decreased $31, or 6%, primarily due
to HLA's December 1, 1999 recapture of an in force block of individual life
insurance previously ceded to the Company. (For a discussion of the recapture,
see Note 9 of the Consolidated Financial Statements.)
Excluding the recapture described above, revenues increased $58, or 12%. This
increase in revenues is attributed to higher fee income associated with the
growing block of variable life insurance. Fee income increased $58, or 17%, as
variable life account values increased $352, or 14%, and variable life insurance
in force increased $9.6 billion, or 40%.
Excluding the recapture described above, expenses increased $53, or 13%. The
increase in expenses were primarily due to a $22, or 11%, increase in benefits,
claims and claim adjustment expenses and a $13, or 11%, increase in amortization
of deferred policy acquisition costs mostly associated with the growth in this
segment's variable business. Additionally, insurance costs and other increased
$15, or 19%, directly associated with the growth in this segment as previously
described. Excluding the recapture described above, net income increased $5, or
8%, primarily due to higher fee income as mortality experience (death claims as
a percentage of net amount at risk) was consistent with prior year.
13
14
OUTLOOK
Management believes that the Company's strong market position will provide
opportunities for growth in this segment as individuals increasingly focus on
estate planning. The Hartford's agreement, through Hartford Life, to acquire the
U.S. individual life insurance business of Fortis is expected to increase the
Company's scale in the life insurance business while broadening its distribution
capabilities through the addition of a retail broker-dealer. It is expected that
the consummation of this transaction will enhance the Company's goal of
broadening its reach in the emerging affluent market.
CORPORATE OWNED LIFE INSURANCE (COLI)
OPERATING SUMMARY
2000 1999
------------------------
Total revenue $ 765 $ 830
Total expenses 730 802
------------------------
NET INCOME $ 35 $ 28
------------------------
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
or a trust sponsored by 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.
Revenues in the COLI segment decreased $65, or 8%, due to a decline in net
investment income of $65, or 15%. This decline was principally due to the
leveraged COLI block of business, as related account values decreased $751, or
13%, as a result of the continued downsizing caused by the HIPA Act of 1996.
Expenses decreased $72, or 9%, primarily due to the factor described above. Net
income increased $7, or 25%, principally due to the variable COLI business where
related account values increased $3.6 billion, or 29%, as well as earnings
associated with a block of leveraged COLI business recaptured in 1998. For
additional information on this recaptured business, see Note 9 of Notes to
Consolidated Financial Statements.
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 Insurance Company's profitability in
recent years and will continue to contribute to the profitability of Hartford
Life Insurance Company in the future, although the level of profit from
leveraged COLI is expected to decline. COLI is subject to a changing legislative
and regulatory environment that could have a material adverse effect on its
business.
RESERVES
In accordance with applicable insurance regulations under which Hartford Life
Insurance Company operates, the Company establishes and carries as liabilities
actuarially determined reserves which are calculated to meet their 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
Insurance Company'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 Hartford Life Insurance 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 in a manner that is comparable to direct insurance reserves.
The liability for policy benefits for universal life-type contracts and
interest-sensitive whole life policies is equal to the balance that accrues to
the benefit of policyholders, including credited interest, amounts that have
been assessed to compensate the Company for services to be performed over future
periods, and any amounts previously assessed against policyholders that are
refundable on termination of the contract. For investment contracts,
policyholder liabilities are equal to the accumulated policy account values,
which consist of an accumulation of deposit payments plus credited interest,
less withdrawals and amounts assessed through the end of the period. 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 levels.
14
15
The persistency of Hartford Life Insurance Company'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 either the
accumulation value or considerations received, which varies by product, and
generally decreases gradually during the penalty period. Surrender charges are
set at levels to protect Hartford Life Insurance 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.
INVESTMENTS
Hartford Life Insurance Company's investments are managed by its investment
strategy group which consists of a risk management unit and a portfolio
management unit that 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 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) as discussed in the Capital Markets Risk Management
section under "Market Risk - Interest Rate Risk".
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 $18.7 billion as of
December 31, 2000 and were comprised of $14.3 billion of fixed maturities, $3.6
billion of policy loans, equity securities of $48 and other investments of $784.
As of December 31, 1999, general account invested assets totaled $18.1 billion
and were comprised of $13.5 billion of fixed maturities, $4.2 billion of policy
loans, equity securities of $56 and other investments of $342. 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 increase in other
investments primarily reflects an increase in limited partnership investments.
The following table sets forth by type the fixed maturity securities held in the
Company's general account as of December 31, 2000 and 1999.
2000 1999
--------------------------------------------------------------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- -----------------------------------------------------------------------------------------------------------------------------
Corporate $ 6,692 46.8% $ 6,675 49.4%
Asset backed securities 2,778 19.5% 2,197 16.3%
Commercial mortgage backed securities 2,304 16.2% 1,670 12.4%
Collateralized mortgage obligations 740 5.2% 507 3.8%
Mortgage backed securities - agency 440 3.1% 675 5.0%
Government/Government agencies - Foreign 268 1.9% 281 2.1%
Government/Government agencies - U.S. 201 1.4% 182 1.3%
Municipal - taxable 83 0.6% 156 1.1%
Short-term 750 5.3% 1,156 8.6%
Redeemable preferred stock 1 - - -
------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 14,257 100.0% $ 13,499 100.0%
------------------------------------------------------------------------
During 2000, the Company, in executing its investment strategy, increased its
allocation to asset backed securities and commercial mortgage backed securities.
The fair value of corporate securities remained essentially unchanged although
the percentage of corporate securities declined. Holdings of short-term
securities declined, primarily as a result of the funding of scheduled liability
maturities and reallocation into other asset sectors, particularly asset backed
securities and commercial mortgage backed securities.
15
16
Additionally, investments were shifted from mortgage backed securities - agency
to collateralized mortgage obligations to increase the prepayment protection of
the portfolio.
As of December 31, 2000 and 1999, approximately 24.5% and 22.2%, respectively,
of the Company's fixed maturity portfolio was invested in private placement
securities (including 15% and 13% of Rule 144A offerings as of December 31, 2000
and 1999, respectively). Private placement securities are generally less liquid
than public securities. However, a significant portion of the private placements
have covenants designed to compensate for 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 Insurance Company's investment results.
(Before-tax) 2000 1999
-------------------------------------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 1,021 $ 968
Policy loan income 305 391
------------------------------------
Net investment income - total $ 1,326 $ 1,359
------------------------------------
Yield on average invested assets (1) 7.1% 6.8%
------------------------------------
Net realized capital losses $ (85) $ (4)
------------------------------------
(1) Represents net investment income (excluding net realized capital losses)
divided by average invested assets at cost (fixed maturities at amortized
cost).
Net investment income, excluding policy loan income, increased $53, or 5%. The
increase was primarily due to higher yields earned on the investment cash flow
from operations and reinvestment of proceeds from sales and maturities of fixed
maturity securities in a higher interest rate environment. Policy loan income
decreased $86, or 22%, due to the decrease in leveraged COLI business. Yield on
average invested assets increased to 7.1%, as a result of an increase in the
policy loan weighted average interest rate to 8.5% in 2000 from 7.5% in 1999.
Net realized capital losses increased $81 compared to 1999 primarily as a result
of portfolio rebalancing in a higher interest rate environment.
SEPARATE ACCOUNT PRODUCTS
Separate account products are those for which a separate investment and
liability account is maintained on behalf of the policyholder. Separate accounts
reflect two categories of risk assumption: non-guaranteed separate accounts
totaling $104.1 billion and $101.7 billion as of December 31, 2000 and 1999,
respectively, wherein the policyholder assumes substantially all the investment
risk and reward, and guaranteed separate accounts totaling $9.6 billion and $8.7
billion as of December 31, 2000 and 1999, respectively, wherein Hartford Life
Insurance Company contractually guarantees either a minimum return or account
value to the policyholder. The primary investment objective of the Company's
guaranteed separate account 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) as
discussed in the Capital Market Risk Management section under "Market Risk -
Interest Rate Risk".
Investment objectives for non-guaranteed separate accounts vary by fund type, as
outlined in the applicable fund prospectus or separate account plan of
operations. Non-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 and surrender charges to mitigate the risk of disintermediation.
CAPITAL MARKETS RISK MANAGEMENT
Hartford Life Insurance Company is exposed to two primary sources of investment
risk and asset/liability management risk: credit risk, relating to the
uncertainty associated with an obligor's continued ability to make timely
payment of principal and/or interest, and market risk, relating to the market
price and/or cash flow variability associated with changes in interest rates,
security prices, market indices, yield curves or currency exchange rates. The
Company does not hold any financial instruments purchased for trading purposes.
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.
16
17
CREDIT RISK
Hartford Life Insurance Company 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 which are 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 on a regular interval.
Hartford Life Insurance Company is not exposed to any significant credit
concentration risk of a single issuer.
The following table identifies fixed maturity securities, including guaranteed
separate accounts, 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, 2000 and 1999, over 97% of the fixed maturity portfolio,
including guaranteed separate accounts, was invested in investment grade
securities.
2000 1999
-------------------------------------------------------------------------
FIXED MATURITIES BY CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
-------------------------------------------------------------------------------------------------------------------------
U.S. Government/Government agencies $ 1,969 8.2% $ 2,123 9.6%
AAA 3,594 15.2% 2,583 11.6%
AA 2,883 12.2% 2,549 11.4%
A 8,798 37.1% 7,801 35.0%
BBB 5,030 21.2% 5,171 23.2%
BB & below 631 2.7% 507 2.3%
Short-term 801 3.4% 1,529 6.9%
-------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 23,706 100.0% $ 22,263 100.0%
-------------------------------------------------------------------------
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 generally quantified weekly and netted. Collateral is pledged to and held
by, or on behalf of, the Company to the extent the current value of derivatives
exceeds exposure policy thresholds.
MARKET RISK
Hartford Life Insurance Company'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.
Downward movement in market interest rates during 2000 resulted in a significant
increase in the unrealized appreciation of the fixed income security portfolio
from 1999. However, the Company's asset allocation, and its exposure to market
risk, has not changed materially from its position at December 31, 1999.
INTEREST RATE RISK
Changes in interest rates can potentially impact Hartford Life Insurance
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. The Company analyzes interest
rate risk using various models including multi-scenario cash flow projection
models that forecast cash flows of the liabilities and their supporting
investments, including derivative instruments. For non-guaranteed separate
accounts, the Company's exposure is not significant, as 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
17
18
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. 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 general and guaranteed separate account
fixed and variable rate fixed maturity portfolios, along with the respective
weighted average coupons by estimated maturity year as of December 31, 2000.
Comparative totals are included for December 31, 1999. 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, 2000 and 1999, 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 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.
18
19
2000 1999
2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -----------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES - CALLABLE
Fixed Rate
Par value $ 5 $ 50 $ 14 $ 27 $ 7 $ 362 $ 465 $ 477
Weighted average coupon 7.0% 6.4% 6.4% 4.6% 6.1% 5.6% 5.7% 6.2%
Fair value $ 424 $ 456
Variable Rate
Par value $ 1 $ 11 $ 22 $ 38 $ 1 $ 970 $ 1,043 $1,222
Weighted average coupon 7.4% 7.5% 6.5% 7.3% 7.3% 7.1% 7.1% 6.6%
Fair value $ 968 $1,124
BONDS AND NOTES - OTHER
Fixed Rate
Par value $ 598 $ 1,391 $ 1,087 $ 1,085 $ 1,058 $ 7,312 $12,531 $13,586
Weighted average coupon 7.4% 6.1% 7.3% 6.9% 6.1% 5.8% 6.1% 6.2%
Fair value $11,436 $12,015
Variable Rate
Par value $ 16 $ 116 $ 165 $ 175 $ 63 $ 760 $ 1,295 $ 874
Weighted average coupon 5.1% 6.5% 7.0% 7.2% 6.3% 7.9% 7.4% 5.7%
Fair value $ 1,176 $ 901
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 663 $ 413 $ 276 $ 238 $ 169 $ 373 $ 2,132 $1,983
Weighted average coupon 6.7% 6.4% 6.9% 7.1% 7.2% 7.7% 6.9% 6.7%
Fair value $ 2,132 $1,847
Variable Rate
Par value $ 200 $ 286 $ 291 $ 208 $ 313 $ 724 $ 2,022 $1,487
Weighted average coupon 7.3% 7.2% 7.3% 7.1% 7.2% 7.4% 7.3% 6.6%
Fair value $ 1,998 $1,419
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 133 $ 115 $ 90 $ 76 $ 88 $ 406 $ 908 $1,042
Weighted average coupon 6.5% 6.6% 6.5% 6.4% 6.3% 6.4% 6.4% 6.4%
Fair value $ 900 $ 941
Variable Rate
Par value $ 4 $ 2 $ 1 $ 2 $ 1 $ 102 $ 112 $ 124
Weighted average coupon 9.4% 11.6% 12.7% 8.9% 10.4% 4.8% 5.3% 5.8%
Fair value $ 101 $ 113
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 44 $ 57 $ 44 $ 86 $ 40 $ 1,992 $ 2,263 $1,761
Weighted average coupon 7.2% 7.0% 7.0% 7.2% 7.1% 7.3% 7.3% 7.1%
Fair value $ 2,325 $1,604
Variable Rate
Par value $ 292 $ 249 $ 263 $ 209 $ 87 $ 474 $ 1,574 $1,247
Weighted average coupon 7.8% 7.7% 7.9% 7.7% 7.8% 8.1% 7.9% 7.5%
Fair value $ 1,581 $1,073
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 60 $ 65 $ 65 $ 58 $ 51 $ 332 $ 631 $1,076
Weighted average coupon 7.1% 7.2% 7.2% 7.2% 7.2% 7.1% 7.2% 7.6%
Fair value $ 638 $ 816
Variable Rate
Par value $ 1 $ 1 $ -- $ -- $ -- $ 1 $ 3 $ 4
Weighted average coupon 7.2% 7.2% -- -- -- 6.9% 7.0% 6.4%
Fair value $ 3 $ 4
19
20
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. As
an end user of derivatives, 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 $7.1
billion as of December 31, 2000 ($5.2 billion related to insurance investments
and $1.9 billion related to life insurance liabilities). As of December 31,
1999, the notional amounts pertaining to derivatives totaled $7.5 billion ($4.7
billion related to insurance investments and $2.8 billion related to life
insurance liabilities).
The company uses derivative instruments in its management of market risk
consistent with the four risk management strategies described below.
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 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 amounts of anticipatory hedges as of December 31, 2000
and 1999 were $144 and $186, 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 Insurance Company'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 amounts of derivatives used for liability hedges as of
December 31, 2000 and 1999 were $1.9 billion and $2.8 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 of the
market, and the asset and liability characteristics. The notional amounts of
asset hedges as of December 31, 2000 and 1999 were $4.9 billion and $3.5
billion, respectively.
Portfolio Hedging -- The Company periodically compares the duration and
convexity of its portfolios of assets to its 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 amounts of portfolio hedges as of December 31, 2000 and 1999 were $223
and $1.0 billion, respectively.
The following tables provide information as of December 31, 2000, with
comparative totals for December 31, 1999, 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 receive 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.
20
21
2000 1999
INTEREST RATE SWAPS 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- ----------------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable
Notional value $ 65 $ 95 $ 98 $ 35 $ 23 $ 286 $ 602 $ 844
Weighted average pay rate 6.0% 4.4% 5.9% 6.1% 6.6% 6.3% 5.9% 5.9%
Weighted average receive rate 6.7% 7.0% 6.9% 6.8% 6.8% 6.7% 6.8% 6.3%
Fair value $ (8) $ 26
Pay Variable/Receive Fixed
Notional value $ 336 $ 372 $ 645 $ 1,197 $ 861 $ 1,042 $ 4,453 $3,911
Weighted average pay rate 6.7% 6.7% 6.6% 6.7% 8.3% 6.7% 7.0% 6.2%
Weighted average receive rate 7.0% 6.5% 5.8% 6.1% 7.8% 6.9% 6.7% 6.3%
Fair value $ 76 $ (120)
Pay Variable/Receive Different Variable
Notional value $ 25 $ 15 $ 4 $ 20 $ 5 $ 46 $ 115 $ 131
Weighted average pay rate 6.6% 6.7% 7.0% 4.9% 6.2% 7.2% 6.6% 6.0%
Weighted average receive rate* 5.4% 6.2% 6.7% 0.8% 7.2% 7.2% 5.7% 6.2%
Fair value $ 1 $ 1
*The weighted average receive rate in 2004 of 0.8% resulted when payments are
required on both sides of an index swap.
2000 1999
INTEREST RATE CAPS - LIBOR BASED (1) 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -----------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ 10 $ 44 $ -- $ 77 $ 15 $ 146 $ 145
Weighted average strike rate (80 - 99%) -- 8.9% 8.5% -- 8.4% 8.3% 8.5% 8.5%
Fair value $ -- $ 2
Notional value $ -- $ 19 $ -- $ -- $ -- $ -- $ 19 $ 31
Weighted average strike rate (10.0 - 11.9%) -- 10.1% -- -- -- -- 10.1% 10.6%
Fair value $ -- $ --
(1) LIBOR represents the London Interbank Offered Rate.
2000 1999
INTEREST RATE CAPS - CMT BASED (2) 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -----------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 494
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 7.7%
Fair value $ -- $ 1
Notional value $ -- $ -- $ 250 $ -- $ 250 $ -- $ 500 $ 850
Weighted average strike rate (8.0 - 9.9%) -- -- 8.7% -- 8.7% -- 8.7% 8.8%
Fair value $ -- $ 4
Issued
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 244
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 7.7%
Fair value $ -- $ --
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 100
Weighted average strike rate (8.0 - 9.9%) -- -- -- -- -- -- -- 9.5%
Fair value $ -- $ --
(2) CMT represents the Constant Maturity Treasury Rate.
21
22
2000 1999
INTEREST RATE FLOORS - LIBOR BASED 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -----------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ -- $ -- $ 27 $ -- $ -- $ 27 $ 27
Weighted average strike rate (6.0 - 7.9%) -- -- -- 7.9% -- -- 7.9% 7.9%
Fair value $ 2 $ 2
Issued
Notional value $ -- $ 28 $ 43 $ 20 $ 77 $ -- $ 168 $ 170
Weighted average strike rate (4.0 - 5.9%) -- 5.3% 5.5% 5.3% 5.3% -- 5.3% 5.3%
Fair value $ (2) $ (1)
Notional value $ -- $ -- $ -- $ 27 $ $ -- $ 27 $ 27
Weighted average strike rate (6.0 - 7.9%) -- -- -- 7.8% -- 7.8% 7.8%
Fair value $ (2) $ (2)
2000 1999
INTEREST RATE FLOORS - CMT BASED 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -----------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ -- $ 150 $ -- $ -- $ -- $ 150 $ 250
Weighted average strike rate (4.0 - 5.9%) -- -- 5.5% -- -- -- 5.5% 5.6%
Fair value $ 3 $ 1
Notional value $ -- $ -- $ -- $ -- $ -- $ -- $ -- $ 10
Weighted average strike rate (6.0 - 7.9%) -- -- -- -- -- -- -- 6.0%
Fair value $ -- $ --
2000 1999
INTEREST RATE FUTURES 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -----------------------------------------------------------------------------------------------------------------------------------
Long
Contract amount/notional $ 198 $ -- $ -- $ -- $ -- $ -- $ 198 $ 20
Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 98
Short
Contract amount/notional $ 59 $ -- $ -- $ -- $ -- $ -- $ 59 $ 51
Weighted average settlement price $ 105 $ -- $ -- $ -- $ -- $ -- $ 105 $ 93
Note: Fair value is not applicable.
Option Contracts -The Company uses option contracts to hedge debt instruments
that totaled $670 and $173 in notional amounts and $(40) and $(51) in carrying
value as of December 31, 2000 and 1999, respectively.
LIFE INSURANCE LIABILITY CHARACTERISTICS
Hartford Life Insurance Company's insurance liabilities, other than
non-guaranteed separate accounts, are primarily related to accumulation vehicles
such as fixed or variable annuities and investment contracts and other insurance
products such as long-term disability and term life insurance.
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.
22
23
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 the
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.
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, 2000 are reflected in the table below
by expected maturity year. Comparative totals are included for December 31,
1999.
(Dollars in billions)
2000 1999
DESCRIPTION (1) 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -----------------------------------------------------------------------------------------------------------------------------------
Fixed rate asset accumulation vehicles $ 1.3 $ 0.8 $ 0.9 $ 2.7 $ 2.0 $ 2.6 $ 10.3 $ 9.6
Weighted average credited rate 6.5% 6.5% 5.6% 6.8% 6.9% 6.9% 6.7% 6.6%
Indexed asset accumulation vehicles $ 0.4 $ 0.1 $ -- $ -- $ -- $ -- $ 0.5 $ 0.5
Weighted average credited rate 6.2% 6.2% -- -- -- -- 6.2% 6.2%
Interest credited asset accumulation vehicles $ 4.1 $ 0.6 $ 0.6 $ 0.3 $ 0.3 $ 3.8 $ 9.7 $ 10.1
Weighted average credited rate 6.4% 5.4% 5.4% 5.6% 5.6% 5.6% 5.9% 5.7%
Long-term pay out liabilities $ 0.4 $ 0.3 $ 0.3 $ 0.2 $ 0.2 $ 2.3 $ 3.7 $ 3.2
Short-term pay out liabilities $ 0.2 $ -- $ -- $ -- $ -- $ -- $ 0.2 $ 0.2
(1) As of December 31, 2000 and 1999, the fair value of the Company's
investment contracts including guaranteed separate accounts was $20.9
billion and $20.4 billion, respectively.
CURRENCY EXCHANGE RISK
As of December 31, 2000, Hartford Life Insurance Company had immaterial currency
exposures resulting from its international operations.
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 represented
approximately 60% and 55% of the Company's general and guaranteed separate
account liabilities at December 31, 2000 and 1999, respectively. 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
23
24
are analyzed regularly by management for internal risk management purposes using
scenario simulation techniques, and evaluated annually consistent with
regulatory requirements.
CHANGE IN NET ECONOMIC VALUE
2000 1999
---------------------- ----------------------
Basis point shift - 100 + 100 - 100 + 100
---------------------- ----------------------
Amount $ (15) $ (27) $ (4) $ (5)
Percent of liability value (0.09)% (0.16)% (0.03)% (0.03)%
CAPITAL RESOURCES AND LIQUIDITY
RATINGS
The following table summarizes the Company's financial ratings from the major
independent rating organizations as of February 28, 2001:
STANDARD &
INSURANCE RATINGS A.M. BEST FITCH(1) MOODY'S POOR'S
------------------------------------------------------------------------------------------
Hartford Life Insurance Company A+ AA+ Aa3 AA
Hartford Life and Annuity A+ AA+ Aa3 AA
(1) Formerly Duff & Phelps.
Ratings are an important factor in establishing the competitive position of an
insurance company such as Hartford Life Insurance Company. 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.
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, 2000, which are greater than the minimum threshold.
CASH FLOW
2000 1999
---- ----
Cash provided by operating activities $ 1,333 $ 325
Cash (used for) provided by investing activities (44) 2,423
Cash used for financing activities (1,288) (2,710)
Cash - end of year 56 55
The increase in cash provided by operating activities was primarily the result
of the timing of the settlement of receivables, payables and other related
liabilities, as well as increased net income associated with growth in the
business. The decrease in cash (used for) provided by investing activities and
the decrease in cash used for financing activities primarily relates to the
significant downsizing of the leveraged COLI block of business during 1999 as
compared to 2000. Operating cash flows in the periods presented have been more
than adequate to meet liquidity requirements.
SUBSEQUENT EVENT
On January 25, 2001, The Hartford, through Hartford Life entities, agreed to
acquire the U.S. individual life insurance, annuity and mutual fund business of
Fortis for $1.12 billion in cash. The acquisition will be effected through
several reinsurance agreements with subsidiaries of Fortis and the purchase of
100% of the stock of Fortis Advisors, Inc. and Fortis Investors, Inc.,
wholly-owned subsidiaries of Fortis. The Fortis transaction, which is subject to
insurance regulatory approval and other customary conditions, is expected to be
completed in the second quarter of 2001. The acquisition will be accounted for
as a purchase transaction. The acquisition is being financed through capital
contributions of $1.2 billion from Hartford Life, Inc.
24
25
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.
The 1999 Gramm-Leach-Bliley Act (the Financial Services Modernization Act),
which allows affiliations among banks, insurance companies and securities firms,
did not precipitate any significant changes in ownership in 2000. The provisions
of the Act requiring the development of a formal privacy policy by each
financial institution have created a number of administrative issues, but the
enforcement date has been delayed until July 1, 2001. Insurance companies are
subject to privacy regulation issued by the federal regulators and by state
regulators who will adopt and implement privacy regulations during 2001. New
medical privacy regulations expected to be issued by the Department of Health
and Human Services will also impact the Company where medical information is
used both in the application process and in the claims process.
The enactment of the Financial Services Modernization Act has focused renewed
attention on state regulation of insurance. Life insurers are working with state
insurance regulators to improve and centralize the process for agent licensing
and form filing. Both of these areas of regulation are critical to the
development of new business. In addition, Congress may consider legislation
providing for optional federal regulation of insurance in 2001. These measures,
state and federal, may lead to improved regulation and reduced transaction
costs.
Federal measures which have been previously considered by Congress and which, if
adopted, could affect the insurance business include tax law changes pertaining
to the tax treatment of insurance companies and life insurance products, as well
as changes in individual income tax rates and the estate tax, a number of which
changes could impact the relative desirability of various personal investment
vehicles. Other proposals pertain to medical testing for insurability, and the
use of gender in determining insurance and pension rates and benefits. It is too
early to determine whether any of these 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.
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. Pursuant to these laws, part of the assessments
paid by insurance companies may be used as credits for a portion of a company's
premium taxes. There were no guaranty fund assessment payments (net of refunds)
in 2000. The Company paid guaranty fund assessments (net of refunds) of
approximately $2 and $9 in 1999 and 1998, respectively, of which $1 and $4,
respectively, were estimated to be creditable against future premium taxes.
NAIC PROPOSALS
The NAIC adopted the Codification of Statutory Accounting Principles
(Codification) in March 1998. The effective date for the statutory accounting
guidance was January 1, 2001. The domiciliary states of the company and its
insurance subsidiaries have adopted Codification, and the Company has made the
necessary changes in its statutory reporting required for implementation. The
Company has determined that the overall impact of applying the new guidance will
result in a one-time statutory cumulative transition benefit of approximately
$50 in statutory surplus.
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.
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 Insurance Company during the fiscal years presented.
25
26
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 2 of Notes to Consolidated
Financial Statements.
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 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) Exhibits - See Item 14(a)(3).
(d) Schedules - See Item 14(a)(2).
26
27
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULES
Page(s)
Report of Management F-1
Report of Independent Public Accountants F-2
Consolidated Statements of Income for the years ended December 31, 2000,
1999 and 1998 F-3
Consolidated Balance Sheets as of December 31, 2000 and 1999 F-4
Consolidated Statements of Changes in Stockholder's Equity for the years
ended December 31, 2000, 1999 and 1998 F-5
Consolidated Statements of Cash Flows for the years ended December 31,
2000, 1999 and 1998 F-6
Notes to Consolidated Financial Statements F-7 - 23
Schedule I -- Summary of Investments - Other Than Investments in Affiliates S-1
Schedule III -- Supplementary Insurance Information S-2
Schedule IV -- Reinsurance S-3
REPORT OF MANAGEMENT
The management of Hartford Life Insurance Company (the "Company") is
responsible for the preparation and integrity of information contained in
the accompanying Consolidated Financial Statements. The Consolidated
Financial Statements are prepared in accordance with accounting principles
generally accepted in the United States and, where necessary, include
amounts that are based on management's informed judgments and estimates.
Management believes these consolidated statements present fairly Hartford
Life Insurance Company's financial position and results of operations.
Management has made available Hartford Life Insurance Company's financial
records and related data to Arthur Andersen LLP, independent public
accountants, in order for them to perform an audit of the Company's
Consolidated Financial Statements. Their report appears on page F-2.
An essential element in meeting management's financial responsibilities is
Hartford Life Insurance Company'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 Insurance Company's internal auditors independently assess
the effectiveness of the controls and make recommendations for improvement.
Also, Arthur Andersen LLP took into consideration the Company'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 Insurance Company's affairs are transacted according to the highest
standards of personal and professional conduct. Hartford Life Insurance
Company 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 The Hartford Financial
Services Group, Inc.(the "Committee"), the Company's ultimate parent,
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 assure their
independence and free access to the Committee.
F-1
28
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
TO HARTFORD LIFE INSURANCE COMPANY:
We have audited the accompanying Consolidated Balance Sheets of Hartford
Life Insurance Company and subsidiaries as of December 31, 2000 and 1999,
and the related Consolidated Statements of Income, Changes in Stockholder's
Equity and Cash Flows for each of the three years in the period ended
December 31, 2000. These Consolidated Financial Statements and the
schedules referred to below are the responsibility of Hartford Life
Insurance Company'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 Insurance Company and subsidiaries as of December 31, 2000
and 1999, and the results of their operations and their cash flows for each
of the three years in the period ended December 31, 2000 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 25, 2001
F-2
29
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
For the years ended December 31,
--------------------------------
(In millions) 2000 1999 1998
- ----------------------------------------------------------------------------------------------
REVENUES
Fee income $ 2,109 $ 1,935 $ 2,089
Earned premiums and other 97 110 129
Net investment income 1,326 1,359 1,759
Net realized capital losses (85) (4) (2)
- ----------------------------------------------------------------------------------------------
TOTAL REVENUES 3,447 3,400 3,975
- ----------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits, claims and claim adjustment expenses 1,495 1,574 1,911
Insurance expenses and other 600 631 766
Amortization of deferred policy acquisition costs 604 539 431
Dividends to policyholders 67 104 329
- ----------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,766 2,848 3,437
- ----------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 681 552 538
Income tax expense 194 191 188
- ----------------------------------------------------------------------------------------------
NET INCOME $ 487 $ 361 $ 350
==============================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-3
30
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
As of December 31,
---------------------
(In millions, except for share data) 2000 1999
- ---------------------------------------------------------------------------------------------------------------------------
ASSETS
Investments
Fixed maturities, available for sale, at fair value (amortized cost of $14,219
and $13,923) $ 14,257 $ 13,499
Equity securities, available for sale, at fair value 48 56
Policy loans, at outstanding balance 3,573 4,187
Other investments 784 342
- ---------------------------------------------------------------------------------------------------------------------------
Total investments 18,662 18,084
Cash 56 55
Premiums receivable and agents' balances 15 29
Reinsurance recoverables 1,257 1,274
Deferred policy acquisition costs 4,325 4,013
Deferred income tax 239 459
Other assets 537 654
Separate account assets 113,744 110,397
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $138,835 $ 134,965
=================================================================================================================
LIABILITIES
Future policy benefits $ 4,828 $ 4,332
Other policyholder funds 14,947 16,004
Other liabilities 2,124 1,613
Separate account liabilities 113,744 110,397
- ---------------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 135,643 132,346
==================================================================================================================
COMMITMENTS AND CONTINGENT LIABILITIES, NOTE 12
STOCKHOLDER'S EQUITY
Common stock - 1,000 shares authorized, issued and outstanding,
par value $5,690 6 6
Capital surplus 1,045 1,045
Accumulated other comprehensive income (loss)
Net unrealized capital gains (losses) on securities, net of tax 16 (255)
--------------------------------------
Total accumulated other comprehensive income (loss) 16 (255)
--------------------------------------
Retained earnings 2,125 1,823
===========================================================================================================================
TOTAL STOCKHOLDER'S EQUITY 3,192 2,619
==================================================================================================================
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $138,835 $ 134,965
==================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-4
31
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
ACCUMULATED OTHER
COMPREHENSIVE INCOME
(LOSS)
--------------------
NET
UNREALIZED
CAPITAL TOTAL
COMMON CAPITAL GAINS (LOSSES) ON RETAINED STOCKHOLDER'S
(In millions) STOCK SURPLUS SECURITIES, NET OF TAX EARNINGS EQUITY
- ------------------------------------------------------------------------------------------------------------------------------------
2000
Balance, December 31, 1999 $ 6 $ 1,045 $(255) $1,823 $2,619
Comprehensive income
Net income 487 487
Other comprehensive income, net of tax (1): ------
Net change in unrealized capital
gains (losses) on securities (2) 271 271
------
Total other comprehensive income 271
------
Total comprehensive income 758
Dividends (185) (185)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 2000 $ 6 $ 1,045 $ 16 $2,125 $3,192
====================================================================================================================================
1999
Balance, December 31, 1998 $ 6 $ 1,045 $ 184 $1,462 $2,697
Comprehensive income
Net income 361 361
Other comprehensive income (loss), ------
net of tax (1):
Net change in unrealized capital
gains (losses) on securities (2) (439) (439)
------
Total other comprehensive loss (439)
Total comprehensive loss (78)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1999 $ 6 $ 1,045 $(255) $1,823 $2,619
====================================================================================================================================
1998
Balance, December 31, 1997 $ 6 $ 1,045 $ 179 $1,113 $2,343
Comprehensive income
Net income 350 350
Other comprehensive income, net of tax (1): ------
Net change in unrealized capital
gains on securities (2) 5 5
------
Total other comprehensive income 5
------
Total comprehensive income 355
Dividends (1) (1)
- ------------------------------------------------------------------------------------------------------------------------------------
BALANCE, DECEMBER 31, 1998 $ 6 $ 1,045 $ 184 $1,462 $ 2,697
====================================================================================================================================
(1) Net change in unrealized capital gain (loss) on securities is reflected
net of tax of $147, $(236) and $3, for the years ended December 31,
2000, 1999 and 1998, respectively.
(2) Net of reclassification adjustment for after-tax losses realized in net
income of $55, $2 and $1 for the years ended December 31, 2000, 1999
and 1998, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
F-5
32
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
For the years ended December 31,
--------------------------------
(In millions) 2000 1999 1998
- -----------------------------------------------------------------------------------------------------------------------------------
OPERATING ACTIVITIES
Net income $ 487 $ 361 $ 350
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital losses 85 4 2
Amortization of deferred policy acquisition costs 604 539 431
Additions to deferred policy acquisition costs (916) (899) (890)
Depreciation and amortization (28) (18) (23)
Loss due to commutation of reinsurance (See Note 9) -- 16 --
Decrease (increase) in premiums receivable and agents' balances 14 (18) 1
Increase (decrease) in other liabilities 375 (303) (120)
Change in receivables, payables, and accruals 53 165 124
Increase (decrease) in accrued taxes 34 (163) 60
Decrease (increase) in deferred income tax 73 241 (118)
Increase in future policy benefits 496 797 536
Decrease (increase) in reinsurance recoverables 32 (318) (101)
Other, net 24 (79) 119
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,333 325 371
====================================================================================================================================
INVESTING ACTIVITIES
Purchases of investments (5,800) (5,753) (6,061)
Sales of investments 4,230 6,383 4,901
Maturity and principle paydowns of fixed maturity investments 1,521 1,818 1,761
Purchases of affiliates and other 5 (25) --
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH (USED FOR) PROVIDED BY INVESTING ACTIVITIES (44) 2,423 601
====================================================================================================================================
FINANCING ACTIVITIES
Dividends paid (185) -- --
Net disbursements for investment and universal life-type contracts charged
against policyholder accounts (1,103) (2,710) (1,009)
- ------------------------------------------------------------------------------------------------------------------------------------
NET CASH USED FOR FINANCING ACTIVITIES (1,288) (2,710) (1,009)
====================================================================================================================================
Net increase (decrease) in cash 1 38 (37)
Cash - beginning of year 55 17 54
- ------------------------------------------------------------------------------------------------------------------------------------
CASH - END OF YEAR $ 56 $ 55 $ 17
====================================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
NET CASH PAID DURING THE YEAR FOR:
Income taxes $ 173 $ 111 $ 263
NONCASH INVESTING ACTIVITIES:
In 1999, the Company's parent, Hartford Life and Accident Insurance Company,
recaptured an in force block of individual life insurance previously ceded to
the Company. This commutation resulted in a reduction in the Company's assets of
$666, consisting of $556 of invested assets, $99 of deferred policy acquisition
costs and $11 of other assets. Liabilities decreased $650, consisting of $543 of
other policyholder funds, $60 of future policy benefits and $47 of other
liabilities. As a result, the Company recognized an after-tax loss relating to
this transaction of $16.
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
33
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollar amounts in millions except per share data unless otherwise stated)
1. ORGANIZATION AND DESCRIPTION OF BUSINESS
These Consolidated Financial Statements include Hartford Life Insurance Company
and its wholly-owned subsidiaries ("Hartford Life Insurance Company" or the
"Company"), Hartford Life and Annuity Insurance Company ("HLAI"), Hartford
International Life Reassurance Corporation ("HLRe") and Servus Life Insurance
Company, formerly Royal Life Insurance Company of America. The Company is a
wholly-owned subsidiary of Hartford Life and Accident Insurance Company ("HLA"),
a wholly-owned subsidiary of Hartford Life, Inc. ("Hartford Life"). Hartford
Life is a direct subsidiary of Hartford Fire Insurance Company ("Hartford
Fire"), a direct subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"). In November 1998, Hartford Life Insurance Company transferred in the
form of a dividend, Hartford Financial Services, LLC and its subsidiaries to
HLA.
Pursuant to an initial public offering (the "IPO") 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. The 26 million
shares sold in the IPO represented approximately 18.6% of the equity ownership
in Hartford Life. On June 27, 2000, The Hartford acquired all of the outstanding
common shares of Hartford Life not already owned by The Hartford (The Hartford
Acquisition). As a result of The Hartford Acquisition, Hartford Life became a
direct subsidiary of Hartford Fire.
Along with its parent, HLA, the Company is a leading financial services and
insurance group which provides (a) investment products, such as individual
variable annuities and fixed market value adjusted annuities, mutual funds and
retirement plan services for savings and retirement needs; (b) individual life
insurance for income protection and estate planning; (c) group benefits products
such as group life and group disability insurance that is directly written by
the Company and is substantially ceded to its parent, HLA, and (d) corporate
owned life insurance.
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 Insurance Company and its subsidiaries 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, 2000, Hartford Life Insurance Company adopted Statement of
Position (SOP) No. 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. Adoption of this SOP
did not have a material impact on the Company's financial condition or results
of operations.
In December 1999, the staff of the Securities and Exchange Commission issued
Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements". SAB 101 provides that if registrants have not applied the
accounting therein, they should implement the SAB and report a change in
accounting principle. SAB 101, as subsequently amended, became effective for the
F-7
34
Company in the fourth quarter of 2000. The adoption of SAB 101 did not have a
material impact on the Company's financial condition or results of operations.
Effective January 1, 1999, Hartford Life Insurance Company adopted SOP No. 98-1,
"Accounting for the Costs of Computer Software Developed or Obtained for
Internal Use". This SOP provides guidance on accounting for costs of internal
use software and in determining whether software is for internal use. The SOP
defines internal use software as software that is acquired, internally
developed, or modified solely to meet internal needs and identifies stages of
software development and accounting for the related costs incurred during the
stages. Adoption of this SOP did not have a material impact on the Company's
financial condition or results of operations.
Effective January 1, 1999, Hartford Life Insurance Company 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.
(c) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In October 2000, the Financial Accounting Standards Board (FASB) issued
Statement of Financial Accounting Standards (SFAS) No. 140, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities -
a Replacement of FASB Statement No. 125". SFAS No. 140 revises the criteria for
accounting for certain transfers of financial assets and the reporting and
disclosure requirements for collateral arrangements. Implementation of the
accounting provisions of SFAS No. 140 is not expected to have a material impact
on the Company's financial condition or results of operations.
In July 2000, the Emerging Issues Task Force (EITF) reached consensus on Issue
No. 99-20, "Recognition of Interest Income and Impairment on Certain
Investments". This pronouncement requires investors in certain asset-backed
securities to record changes in their estimated yield on a prospective basis and
to evaluate these securities for an other-than-temporary decline in value. This
consensus is effective for financial statements with fiscal quarters beginning
after March 15, 2001. Adoption of EITF No. 99-20 is not expected to have a
material impact on the Company's financial condition or results of operations.
In June 2000, the FASB issued SFAS No. 138, "Accounting for Certain Derivative
Instruments and Certain Hedging Activities", which amended SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities". SFAS No. 133
established accounting and reporting requirements for derivative instruments,
including certain derivative instruments embedded in other contracts. SFAS No.
133 requires, among other things, that all derivatives be carried on the balance
sheet at fair value. SFAS No. 133 also specifies hedge accounting criteria under
which a derivative can qualify for special accounting. SFAS No. 138 amended SFAS
No. 133 so that for interest rate hedges, a company may designate as the hedged
risk the risk of changes only in a benchmark interest rate. Also, credit risk is
newly defined as the company-specific spread over the benchmark interest rate
and may be hedged separately from, or in combination with, the benchmark
interest rate. Initial application of SFAS No. 133, as amended, for Hartford
Life Insurance Company began January 1, 2001. Implementation of SFAS No. 133, as
amended, is expected to result in a cumulative transition adjustment charge of
$3 after-tax. However, the FASB's Derivative Implementation Group continues to
deliberate on multiple issues, the resolution of which could have a significant
impact on the Company's expectations.
(d) REVENUE RECOGNITION
Fee income for investment and universal life-type contracts consists of policy
charges for policy administration, cost of insurance charges and surrender
charges assessed against policyholders' account balances and are recognized in
the period in which services are provided. Premiums for traditional life
insurance are recognized as revenues when due from policyholders. Retrospective
and contingent commissions and other related expenses are incurred and recorded
in the same period that the retrospective premiums are recorded or other
contract provisions are met.
(e) DIVIDENDS TO POLICYHOLDERS
Policyholder dividends are accrued using an estimate of the amount to be paid
based on underlying contractual obligations under participating policies and
applicable state laws. If limitations exist on the amount of net income from
participating life insurance contracts that may be distributed to stockholders,
the policyholders' share of net income on those contracts that cannot be
distributed is excluded from stockholder's equity by a charge to operations and
a credit to a liability.
F-8
35
Participating life insurance in force accounted for 18%, 24% and 25% as of
December 31, 2000, 1999 and 1998, respectively, of total life insurance in
force. Dividends to policyholders were $67, $104 and $329 for the years ended
December 31, 2000, 1999 and 1998, respectively. There were no additional amounts
of income allocated to participating policyholders.
(f) INVESTMENTS
Hartford Life Insurance Company'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 stockholder's 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.
Net realized capital gains (losses) on security transactions associated with the
Company's immediate participation guaranteed contracts are recorded and
effectively offset by amounts owed to policyholders and were $(9), $2 and $8 for
the years ended December 31, 2000, 1999 and 1998, respectively. 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
appropriate valuation on an ongoing basis.
(g) DERIVATIVE INSTRUMENTS
HEDGE ACCOUNTING -- Hartford Life Insurance Company uses a variety of derivative
instruments, including swaps, caps, floors, forwards and exchange traded futures
and options in compliance with Company policy and in order to achieve one of
three Company approved objectives: to hedge risk arising from interest rate,
price or currency exchange rate volatility; to manage liquidity; or to control
transaction costs. The Company is considered an end user of derivative
instruments and as such does not make a market or trade in these instruments for
the express purpose of earning trading profits. Hartford Life Insurance
Company'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", American Institute of
Certified Public Accountants (AICPA) Issue Paper No. 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
stockholder's equity as a component of accumulated other comprehensive income.
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. Initial application of SFAS No. 133, as
amended, for Hartford Life Insurance Company began in the first quarter of 2001.
Derivative instruments must be designated at inception as a hedge and measured
for effectiveness both at inception and on an ongoing basis. Hartford Life
Insurance Company'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 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
F-9
36
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 stockholder's equity as a component of accumulated other comprehensive
income. 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 or
liability and amortized over the asset life or liability 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 or liability 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 stockholder's equity as a component of
accumulated other comprehensive income.
(h) SEPARATE ACCOUNTS
Hartford Life Insurance Company maintains separate account assets and
liabilities which are reported at fair value. Separate account assets are
segregated from other investments, and investment income and gains and losses
accrue directly to the policyholders. 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 investment, mortality and
expense margins and surrender charges. Actual gross profits can vary from
management's estimates, resulting in increases or decreases in the rate of
amortization. Management periodically reviews these estimates 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.
F-10
37
Acquisition costs and their related deferral are included in the Company's
insurance expenses and other as follows:
2000 1999 1998
- --------------------------------------------------------------------------------
Commissions $ 929 $ 887 $ 1,069
Deferred acquisition costs (916) (899) (890)
General insurance expenses and other 587 643 587
- --------------------------------------------------------------------------------
Insurance expenses and other $ 600 $ 631 $ 766
================================================================================
(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.
(k) OTHER POLICYHOLDER FUNDS
Other policyholder funds include reserves for investment contracts without life
contingencies, corporate owned life insurance and universal life insurance
contracts. Of the amounts included in other policyholder funds, $14.9 billion
and $16.0 billion for the years ended December 31, 2000 and 1999, respectively,
represent policyholder obligations.
The liability for policy benefits for universal life-type contracts is equal to
the balance that accrues to the benefit of policyholders, including credited
interest, amounts that have been assessed to compensate the Company for services
to be performed over future periods, and any amounts previously assessed against
policyholders that are refundable on termination of the contract. For investment
contracts, policyholder liabilities are equal to the accumulated policy account
values, which consist of an accumulation of deposit payments plus credited
interest, less withdrawals and amounts assessed through the end of the period.
3. INVESTMENTS AND DERIVATIVE INSTRUMENTS
For the years ended December 31,
----------------------------------
2000 1999 1998
- ----------------------------------------------------------------------------------------------------------------
(a) COMPONENTS OF NET INVESTMENT INCOME
Interest income from fixed maturities $ 959 $ 934 $ 952
Interest income from policy loans 305 391 789
Income from other investments 75 48 32
- ----------------------------------------------------------------------------------------------------------------
Gross investment income 1,339 1,373 1,773
Less: Investment expenses 13 14 14
- ----------------------------------------------------------------------------------------------------------------
NET INVESTMENT INCOME $ 1,326 $ 1,359 $ 1,759
================================================================================================================
(b) COMPONENTS OF NET REALIZED CAPITAL (LOSSES) GAINS
Fixed maturities $ (106) $ (5) $ (20)
Equity securities 3 2 21
Real Estate and other 9 1 5
Change in liability to policyholders for net realized capital losses 9 (2) (8)
(gains)
- -----------------------------------------------------------------------------------------------------------------
NET REALIZED CAPITAL LOSSES $ (85) $ (4) $ (2)
=================================================================================================================
F-11
38
For the years ended December 31,
--------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------------------------------
(c) NET CHANGE IN UNREALIZED CAPITAL (LOSSES) GAINS ON EQUITY SECURITIES
Gross unrealized capital gains $ 2 $ 9 $ 2
Gross unrealized capital losses (5) (2) (1)
- ------------------------------------------------------------------------------------------------------------------------------
Net unrealized capital (losses) gains (3) 7 1
Deferred income taxes (1) 2 --
- ------------------------------------------------------------------------------------------------------------------------------
Net unrealized capital (losses) gains, net of tax (2) 5 1
Balance - beginning of year 5 1 9
- ------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED CAPITAL (LOSSES) GAINS ON EQUITY SECURITIES $ (7) $ 4 $ (8)
==============================================================================================================================
(d) NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES
Gross unrealized capital gains $ 269 $ 48 $ 421
Gross unrealized capital losses (231) (472) (108)
Unrealized capital gains (losses) credited to policyholders (10) 24 (32)
- ------------------------------------------------------------------------------------------------------------------------------
Net unrealized capital gains (losses) 28 (400) 281
Deferred income taxes 10 (140) 98
- ------------------------------------------------------------------------------------------------------------------------------
Net unrealized capital gains (losses), net of tax 18 (260) 183
Balance - beginning of year (260) 183 170
- ------------------------------------------------------------------------------------------------------------------------------
NET CHANGE IN UNREALIZED CAPITAL GAINS (LOSSES) ON FIXED MATURITIES $ 278 $(443) $ 13
==============================================================================================================================
(e) FIXED MATURITY INVESTMENTS
As of December 31, 2000
--------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
U. S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 185 $ 16 $ - $ 201
U. S. Government and Government agencies and authorities
(guaranteed and sponsored) - asset backed 895 20 (9) 906
States, municipalities and political subdivisions 79 5 (1) 83
Foreign governments 269 7 (8) 268
Public utilities 557 4 (10) 551
All other corporate, including international 5,816 102 (153) 5,765
All other corporate - asset backed 5,284 112 (39) 5,357
Short-term investments 750 - - 750
Certificates of deposit 383 3 (11) 375
Redeemable preferred stock 1 - - 1
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $ 14,219 $ 269 $ (231) $ 14,257
===================================================================================================================================
F-12
39
As of December 31, 1999
---------------------------------------------------------------------
Gross Gross
Amortized Unrealized Unrealized
Cost Gains Losses Fair Value
- -----------------------------------------------------------------------------------------------------------------------------------
U. S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 180 $ 5 $ (3) $ 182
U. S. Government and Government agencies and authorities
(guaranteed and sponsored) - asset backed 1,094 5 (35) 1,064
States, municipalities and political subdivisions 155 2 (1) 156
Foreign governments 289 6 (14) 281
Public utilities 865 7 (39) 833
All other corporate, including international 5,646 18 (244) 5,420
All other corporate - asset backed 4,103 5 (123) 3,985
Short-term investments 1,156 -- -- 1,156
Certificates of deposit 434 -- (12) 422
Redeemable preferred stock 1 -- (1) --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $13,923 $48 $(472) $13,499
===================================================================================================================================
The amortized cost and estimated fair value of fixed maturity investments as of
December 31, 2000 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.
MATURITY Amortized Cost Fair Value
- --------------------------------------------------------------------------------
One year or less $ 1,238 $ 1,238
Over one year through five years 5,532 5,570
Over five years through ten years 4,258 4,305
Over ten years 3,191 3,144
- --------------------------------------------------------------------------------
TOTAL $14,219 $14,257
================================================================================
(f) SALES OF FIXED MATURITY AND EQUITY SECURITY INVESTMENTS
Sales of fixed maturities, excluding short-term fixed maturities, for the years
ended December 31, 2000, 1999 and 1998 resulted in proceeds of $3.0 billion,
$3.4 billion and $3.2 billion, gross realized capital gains of $29, $153 and
$103, gross realized capital losses (including writedowns) of $126, $160 and
$131, respectively. Sales of equity security investments for the years ended
December 31, 2000, 1999 and 1998 resulted in proceeds of $15, $7 and $35 and
gross realized capital gains of $5, $2 and $21, respectively, and gross realized
capital losses of $2 for the year ended December 31, 2000. There were no
realized capital losses on sales of equity security investments in 1999 and
1998.
(g) CONCENTRATION OF CREDIT RISK
The Company is not exposed to any concentration of credit risk in fixed
maturities of a single issuer greater than 10% of stockholder's equity.
(h) DERIVATIVE INSTRUMENTS
Hartford Life Insurance Company utilizes a variety of derivative instruments,
including swaps, caps, floors, forwards and exchange traded futures and options,
in compliance 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
F-13
40
anticipated transactions, hedging liability instruments, hedging invested assets
and hedging portfolios of assets and/or liabilities. The Company is considered
an end user of derivative instruments and, as such, does not make a market or
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 the Company based on
current market conditions and potential payment obligations between the Company
and its counterparties. Credit exposures are generally quantified weekly and
netted, and collateral is pledged to or held by the Company to the extent the
current value of derivatives exceed 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, see Note 5),
totaled $3.7 billion and $5.5 billion ($3.0 billion and $3.9 billion related to
the Company's investments and $661 and $1.6 billion related to Company's
liabilities) as of December 31, 2000 and 1999, respectively.
The tables below provide a summary of derivative instruments held by Hartford
Life Insurance Company as of December 31, 2000 and 1999, segregated by major
investment and liability category:
2000 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
- -----------------------------------------------------------------------------------------------------------------------------------
Asset backed securities (excluding
anticipatory) $ 6,262 $ -- $ -- $ -- $1,492 $ -- $1,492
Anticipatory (3) -- -- -- 144 -- -- 144
Other bonds and notes 7,245 139 158 -- 1,081 34 1,412
Short-term investments 750 -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 14,257 139 158 144 2,573 34 3,048
Equity securities, policy loans and
other investments 4,405 -- -- -- -- -- --
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 18,662 139 158 144 2,573 34 3,048
OTHER POLICYHOLDER FUNDS $ 14,947 -- 650 -- 11 -- 661
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE INSTRUMENTS
- NOTIONAL VALUE $ 139 $808 $144 $2,584 $ 34 $3,709
===================================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS
- FAIR VALUE $ (4) $ 5 $ -- $ 26 $ -- $ 27
===================================================================================================================================
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
- -------------------------------------------------------------------------------------------------------------------------------
Asset backed securities (excluding
anticipatory) $ 5,049 $ -- $ -- $ -- $ 911 $ -- $ 911
Anticipatory (3) -- -- -- 5 112 -- 117
Other bonds and notes 7,294 494 611 -- 1,676 80 2,861
Short-term investments 1,156 -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 13,499 494 611 5 2,699 80 3,889
Equity securities, policy loans and
other investments 4,585 -- -- -- -- -- --
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $ 18,084 494 611 5 2,699 80 3,889
OTHER POLICYHOLDER FUNDS $ 16,004 -- 1,150 -- 430 -- 1,580
- -------------------------------------------------------------------------------------------------------------------------------
TOTAL DERIVATIVE INSTRUMENTS
- NOTIONAL VALUE $ 494 $ 1,761 $ 5 $3,129 $ 80 $ 5,469
===============================================================================================================================
TOTAL DERIVATIVE INSTRUMENTS
- FAIR VALUE $ (22) $ 8 $ -- $ (30) $ 2 $ (42)
===============================================================================================================================
(1) As of December 31, 2000 and 1999, 100% of the notional futures
contracts mature within one year.
F-14
41
(2) As of December 31, 2000, no foreign currency swaps mature within one
year. As of December 31, 1999, approximately 28% of foreign currency
swaps were scheduled to mature within one year. In years 2007 to 2009,
80% of the notional value will mature.
(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, 2000, the
Company had $0.2 of net deferred gains for futures contracts. The
Company expects the anticipatory transaction to occur in the first
quarter of 2001 and the entire $0.2 of net deferred gains will be
amortized into income as a hedge of a forecasted transaction. As of
December 31, 1999, the Company had $1.4 of net deferred losses for
futures contracts and interest rate swaps which were basis adjusted in
2000.
The following is a reconciliation of notional amounts by derivative type and
strategy as of December 31, 2000 and 1999:
December 31, 1999 Maturities/ December 31, 2000
Notional Amount Additions Terminations (1) Notional Amount
- -------------------------------------------------------------------------------------------------------------
BY DERIVATIVE TYPE
Caps $1,764 $-- $1,187 $577
Floors 405 100 210 295
Swaps/Forwards 3,209 1,697 2,288 2,618
Futures 5 300 161 144
Options 86 -- 11 75
- -------------------------------------------------------------------------------------------------------------
TOTAL $5,469 $2,097 $3,857 $3,709
=============================================================================================================
BY STRATEGY
Liability $1,580 $215 $1,134 $661
Anticipatory 117 339 312 144
Asset 2,802 1,300 1,338 2,764
Portfolio 970 243 1,073 140
- -------------------------------------------------------------------------------------------------------------
TOTAL $5,469 $2,097 $3,857 $3,709
=============================================================================================================
(1) During 2000, the Company had no significant gains or losses on
terminations of hedge positions using derivative financial instruments.
(i) COLLATERAL ARRANGEMENTS
Hartford Life Insurance Company entered into various collateral arrangements
which require both the pledging and accepting of collateral, in connection with
its derivative instruments and repurchase agreements. As of December 31, 2000,
collateral pledged had not been separately reported in the Consolidated Balance
Sheets. The classification and carrying amounts of collateral pledged at
December 31, 2000 were as follows:
Carrying
ASSETS Amount
- -----------------------------------------------------------------------------------------------------------------
U.S. Government and Government agencies and authorities (guaranteed and sponsored) $3
U.S. Government and Government agencies and authorities (guaranteed and sponsored) - asset backed 4
- -----------------------------------------------------------------------------------------------------------------
TOTAL $7
- -----------------------------------------------------------------------------------------------------------------
At December 31, 2000, Hartford Life Insurance Company had accepted collateral
consisting primarily of U.S. Government securities with a fair value of $252.
While the Company is permitted by contract to sell or repledge the collateral
accepted, none of the collateral has been sold or repledged at December 31,
2000. As of December 31, 2000, all collateral accepted was held in separate
custodial accounts.
4. 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
F-15
42
insurance contracts other than financial guarantees and investment contracts.
Hartford Life Insurance Company 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.
Fair value of other investments, which primarily consist of partnership
investments, is based on external market valuations from partnership management.
Other investments also include 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.
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. Derivative instruments are
reported below as a component of other investments.
The carrying amount and fair values of Hartford Life Insurance Company's
financial instruments as of December 31, 2000 and 1999 were as follows:
2000 1999
----------------------------------------------------------------
Carrying Amount Fair Value Carrying Amount Fair Value
- ------------------------------------------------------------------------------------------------------
ASSETS
Fixed maturities $14,257 $14,257 $13,499 $13,499
Equity securities 48 48 56 56
Policy loans 3,573 3,573 4,187 4,187
Other investments 784 785 342 348
LIABILITIES
Other policyholder funds (1) 11,676 11,305 11,734 11,168
=======================================================================================================
(1) Excludes universal life insurance contracts, including corporate owned
life insurance.
5. SEPARATE ACCOUNTS
Hartford Life Insurance Company maintained separate account assets and
liabilities totaling $113.7 billion and $110.4 billion as of December 31, 2000
and 1999, 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 $104.1 billion and
$101.7 billion as of December 31, 2000 and 1999, respectively, wherein the
policyholder assumes substantially all the investment risks and rewards, and
guaranteed separate accounts totaling $9.6 and $8.7 billion as of December 31,
2000 and 1999, respectively, wherein Hartford Life Insurance Company
contractually guarantees either a minimum return or account value to the
policyholder. Included in non-guaranteed separate account assets were policy
loans totaling $697 and $860 as of December 31, 2000 and 1999, 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 $1.3 billion, $1.1
billion, and $908 in 2000, 1999 and 1998, respectively. The guaranteed separate
accounts include fixed market value adjusted (MVA) individual annuities and
modified guaranteed life insurance. The average credited interest rate on these
contracts was 6.6% and 6.5% as of December 31, 2000 and 1999, respectively. The
assets that support these liabilities were comprised of $9.4 billion and $8.7
billion in fixed maturities as of December 31, 2000 and 1999, respectively, and
$0.2 billion of other invested assets as of December 31, 2000. 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 $3 and $(96) in carrying value and $3.5 billion and
$2.0 billion in notional amounts as of December 31, 2000 and 1999, respectively.
F-16
43
6. STATUTORY RESULTS
For the years ended December 31,
---------------------------------------------------------------------
2000 1999 1998
- ------------------------------------------------------------------------------------------------------
Statutory net income $ 283 $ 151 $ 211
- ------------------------------------------------------------------------------------------------------
Statutory capital and surplus $1,972 $1,905 $1,676
======================================================================================================
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
2001, without prior regulatory approval, is estimated to be $303.
Hartford Life Insurance Company and its domestic insurance subsidiaries 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
(Codification) in March 1998. The effective date for the statutory accounting
guidance is January 1, 2001. Each of Hartford Life Insurance Company's
domiciliary states has adopted Codification and the Company has made the
necessary changes in its statutory reporting required for implementation. The
Company has determined that the overall impact of applying the new guidance will
result in a one-time statutory cumulative transition benefit of approximately
$50 in statutory surplus.
7. STOCK COMPENSATION PLANS
Hartford Life's employees are included in The Hartford 2000 Incentive Stock Plan
and The Hartford Employee Stock Purchase Plan. Prior to The Hartford
Acquisition, eligible employees of Hartford Life were included in Hartford
Life's stock based compensation plans, the 1997 Hartford Life, Inc. Incentive
Stock Plan and the Hartford Life, Inc. Employee Stock Purchase Plan. As a result
of the The Hartford Acquisition, all eligible participants of Hartford Life's
stock based compensation plans were converted to The Hartford's stock based
compensation plans. For the year ended December 31, 2000, Hartford Life
Insurance Company's compensation expense related to The Hartford's two stock
based compensation plans and Hartford Life's two stock based compensation plans
was not material to Hartford Life Insurance Company's results of operations. For
the years ended December 31, 1999 and 1998, Hartford Life Insurance Company's
compensation expense related to Hartford Life's two stock based compensation
plans was not material.
8. POSTRETIREMENT BENEFIT AND SAVINGS PLANS
(a) PENSION PLANS
Hartford Life's employees are included in The Hartford's non-contributory
defined benefit pension and postretirement health care and life insurance
benefit plans. Defined benefit pension expense, allocated by The Hartford to
Hartford Life Insurance Company, was $5 in 2000, $6 in both 1999 and 1998.
Postretirement health care and life insurance benefits expense, allocated by The
Hartford, was not material to the results of operations for 2000, 1999 and 1998.
(b) INVESTMENT AND SAVINGS PLAN
Substantially all Hartford Life's U.S. employees are eligible to participate in
The Hartford's Investment and Savings Plan. The cost to Hartford Life Insurance
Company for this plan was approximately $5 in 2000 and $4 in both 1999 and 1998.
9. REINSURANCE
Hartford Life Insurance Company cedes insurance to other insurers in order to
limit its maximum losses. Such transfer does not relieve Hartford Life Insurance
Company of its primary liability and, as such, failure of reinsurers to honor
their obligations could result in losses to Hartford Life Insurance Company.
Hartford Life Insurance Company reduces this risk by evaluating the financial
condition of reinsurers and monitoring for possible concentrations of credit
risk. As of December 31, 2000, Hartford Life Insurance Company had no
significant concentrations of credit risk related to reinsurance.
F-17
44
The Company records a receivable for reinsured benefits paid and the portion of
insurance liabilities that are reinsured. The cost of reinsurance related to
long-duration contracts is accounted for over the life of the underlying
reinsured policies using assumptions consistent with those used to account for
the underlying policies. Reinsurance recoveries on ceded reinsurance contracts
recognized in the Consolidated Statements of Income were $578, $397 and $300 for
the years ended December 31, 2000, 1999 and 1998, respectively. Hartford Life
Insurance Company also assumes insurance from other insurers.
The effect of reinsurance on fee income, earned premiums and other is summarized
as follows:
For the years ended December 31,
------------------------------------------------------------
FEE INCOME, EARNED PREMIUMS AND OTHER 2000 1999 1998
- -----------------------------------------------------------------------------------------------------
Gross $ 2,885 $ 2,660 $ 2,722
Reinsurance assumed 44 95 150
Reinsurance ceded (723) (710) (654)
- -----------------------------------------------------------------------------------------------------
NET $ 2,206 $ 2,045 $ 2,218
=====================================================================================================
Hartford Life Insurance Company maintains certain reinsurance agreements with
HLA, whereby the Company cedes both group life and group accident and health
risk. Under these treaties, the Company ceded group life premium of $101, $119
and $132 in 2000, 1999 and 1998, respectively, and accident and health premium
of $429, $430 and $379, respectively, to HLA.
Pursuant to a reinsurance agreement dating back to 1992, the Company assumed
100% of certain blocks of individual life insurance from HLA. Under this
reinsurance agreement Hartford Life Insurance Company assumed $9 and $13 of
premium from HLA in 1999 and 1998, respectively. On December 1, 1999, HLA
recaptured this in force block of individual life insurance previously ceded to
the Company. This commutation resulted in a reduction in the Company's assets of
$666, consisting of $556 of invested assets, $99 of deferred policy acquisition
costs and $11 of other assets. Liabilities decreased $650, consisting of $543 of
other policyholder funds, $60 of future policy benefits and $47 of other
liabilities. As a result, the Company recognized an after-tax loss relating to
this transaction of $16.
In 1998, Hartford Life 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 Insurance Company and MBL Life to
a Hartford Life Insurance Company subsidiary. Hartford Life Insurance Company
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 net
assets.
10. 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 a separate federal income tax
return.
As long as The Hartford continues to own at least 80% of the combined voting
power of the value of the outstanding capital stock of the Company, the Company
will be included in The Hartford's consolidated federal income tax return. The
life insurance companies filed a separate consolidated federal income tax return
for 1999 and 1998. The Company's effective tax rate was 28% in 2000 and 35% in
both 1999 and 1998, respectively.
F-18
45
Income tax expense (benefit) is as follows:
For the years ended December 31,
--------------------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------
Current $121 $ (50) $ 307
Deferred 73 241 (119)
- --------------------------------------------------------------------------------
INCOME TAX EXPENSE $194 $ 191 $ 188
================================================================================
A reconciliation of the tax provision at the U.S. federal statutory rate to the
provision (benefit) for income taxes is as follows:
For the years ended December 31,
----------------------------------------
2000 1999 1998
- --------------------------------------------------------------------------------------------------
Tax provision at the U.S. federal statutory rate $ 238 $ 193 $188
Municipal bond and other tax-exempt income (24) -- --
IRS audit settlement (See Note 12(c)) (24) -- --
Other 4 (2) --
- --------------------------------------------------------------------------------------------------
TOTAL $ 194 $ 191 $188
==================================================================================================
Deferred tax assets (liabilities) include the following as of December 31:
2000 1999
---------------------------
Tax basis deferred policy acquisition costs $ 749 $ 720
Financial statement deferred policy acquisition costs and reserves (112) 11
Employee benefits (1) (3)
Net unrealized capital losses (gains) on securities (9) 138
Investments and other (388) (407)
- --------------------------------------------------------------------------------------------------
TOTAL $ 239 $ 459
==================================================================================================
Hartford Life Insurance Company had a current tax receivable of $96 and $56 as
of December 31, 2000 and 1999, respectively.
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, 2000.
11. RELATED PARTY TRANSACTIONS
Transactions of the Company with 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 $56 in 2000 and $47 in both 1999 and 1998.
12. COMMITMENTS AND CONTINGENT LIABILITIES
(a) LITIGATION
Hartford Life Insurance Company is involved or may become involved in various
legal actions, in the normal course of its business, in which claims for alleged
economic and punitive damages have been or may be asserted. Some of the pending
litigation has been
F-19
46
filed as purported class actions and some actions have been filed in certain
jurisdictions that permit punitive damage awards that are 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
potential, pending or threatened legal actions, 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) LEASES
The rent paid to Hartford Fire for space occupied by the Company was $14, $9 and
$7 in 2000, 1999 and 1998, respectively. Future minimum rental commitments are
as follows:
2001 $ 14
2002 13
2003 12
2004 12
2005 13
Thereafter 49
- --------------------------------------------
TOTAL $113
============================================
The principal executive offices of Hartford Life Insurance Company, together
with its parent, 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 $10 in 2000 and $9 in both 1999 and 1998.
(c) TAX MATTERS
Hartford Life's federal income tax returns are routinely audited by the Internal
Revenue Service (IRS). Hartford Life's 1996-1997 federal income tax returns are
currently under audit by the IRS. Management believes that adequate provision
has been made in the financial statements for any potential assessments that may
result from tax examinations and other tax related matters for all open tax
years.
During the second quarter of 2000, Hartford Life reached a settlement with the
IRS with respect to certain tax matters for the 1993-1995 tax years. This
settlement resulted in a $24 tax benefit recorded in the Company's second
quarter results of operations. This same matter is currently under review with
the IRS for the 1996-1997 tax years.
(d) UNFUNDED COMMITMENTS
At December 31, 2000, Hartford Life Insurance Company has outstanding
commitments to fund limited partnership investments totaling $182. These capital
commitments can be called by the partnerships during the five-year commitment
period to fund working capital needs or the purchase of new investments. If the
commitment period expires and the commitment has not been fully funded, Hartford
Life Insurance Company is not required to fund the remaining unfunded
commitment.
13. SEGMENT INFORMATION
Hartford Life Insurance Company is organized into three reportable operating
segments which include Investment Products, Individual Life and Corporate Owned
Life Insurance (COLI). Investment Products offers individual fixed and variable
annuities, retirement plan services and other investment products. Individual
Life sells a variety of life insurance products, including variable life,
universal life, interest sensitive whole life and term life insurance. COLI
primarily offers variable products used by employers to fund non-qualified
benefits or other post-employment benefit obligations as well as leveraged COLI.
The Company includes in "Other" corporate items not directly allocable to any of
its reportable operating segments, as well as certain group benefit products
including group life and group disability insurance that is directly written by
the Company and is substantially ceded to its parent, HLA.
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 Insurance Company 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
F-20
47
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 as well as the Company's revenues by product.
F-21
48
For the years ended December 31,
------------------------------------------------
2000 1999 1998
- ---------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES
Investment Products $ 2,068 $ 1,884 $ 1,779
Individual Life 545 574 543
COLI 765 830 1,567
Other 69 112 86
- ---------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES $ 3,447 $ 3,400 $ 3,975
=====================================================================================================================
NET INVESTMENT INCOME
Investment Products $ 724 $ 699 $ 736
Individual Life 142 169 181
COLI 366 431 793
Other 94 60 49
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NET INVESTMENT INCOME $ 1,326 $ 1,359 $ 1,759
=====================================================================================================================
AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS
Investment Products $ 477 $ 411 $ 326
Individual Life 127 128 105
COLI -- -- --
Other -- -- --
- ---------------------------------------------------------------------------------------------------------------------
TOTAL AMORTIZATION OF DEFERRED POLICY ACQUISITION COSTS $ 604 $ 539 $ 431
=====================================================================================================================
INCOME TAX EXPENSE (BENEFIT)
Investment Products $ 150 $ 159 $ 145
Individual Life 38 37 35
COLI 19 15 12
Other (13) (20) (4)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL INCOME TAX EXPENSE $ 194 $ 191 $ 188
=====================================================================================================================
NET INCOME (LOSS)
Investment Products $ 354 $ 300 $ 270
Individual Life 70 68 64
COLI 35 28 24
Other 28 (35) (8)
- ---------------------------------------------------------------------------------------------------------------------
TOTAL NET INCOME $ 487 $ 361 $ 350
=====================================================================================================================
ASSETS
Investment Products $ 106,553 $ 106,352 $ 87,207
Individual Life 6,558 5,962 5,228
COLI 23,384 20,198 22,631
Other 2,340 2,453 3,197
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 138,835 $ 134,965 $ 118,263
=====================================================================================================================
REVENUES BY PRODUCT
Investment Products
Individual Annuities $ 1,447 $ 1,313 $ 1,132
Other 621 571 647
- ---------------------------------------------------------------------------------------------------------------------
Total Investment Products 2,068 1,884 1,779
Individual Life 545 574 543
COLI 765 830 1,567
=====================================================================================================================
F-22
49
14. SUBSEQUENT EVENT
On January 25, 2001, The Hartford, through the Hartford Life entities, agreed to
acquire the U.S. individual life insurance, annuity and mutual fund business of
Fortis, Inc. (operating as Fortis Financial Group and referred to as "Fortis")
for $1.12 billion in cash. The acquisition will be effected through several
reinsurance agreements with subsidiaries of Fortis and the purchase of 100% of
the stock of Fortis Advisors, Inc. and Fortis Investors, Inc., wholly-owned
subsidiaries of Fortis. The Fortis transaction, which is subject to insurance
regulatory approval and other customary conditions, is expected to be completed
in the second quarter of 2001. The acquisition will be accounted for as a
purchase transaction. The acquisition is being financed through capital
contributions of $1.2 billion from Hartford Life, Inc.
15. QUARTERLY RESULTS FOR 2000 AND 1999 (UNAUDITED)
Three Months Ended
--------------------------------------------------------------------------------
March 31, June 30, September 30, December 31,
- -----------------------------------------------------------------------------------------------------------------------
2000 1999 2000 1999 2000 1999 2000 1999
- -----------------------------------------------------------------------------------------------------------------------
Revenues $838 $838 $831 $853 $919 $846 $859 $863
Benefits, claims and expenses 645 703 682 722 730 695 709 728
Net income 128 88 130 85 129 100 100 88
- -----------------------------------------------------------------------------------------------------------------------
F-23
50
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE I
SUMMARY OF INVESTMENTS - OTHER THAN INVESTMENTS IN AFFILIATES
(In millions) As of December 31, 2000
--------------------------------------------------------------------------------
Amount at which
shown on Balance
Type of Investment Cost Fair Value Sheet
- ------------------------------------------------------------------------------------------------------------------------------------
FIXED MATURITIES
Bonds and Notes
U. S. Government and Government agencies and authorities
(guaranteed and sponsored) $ 185 $ 201 $ 201
U. S. Government and Government agencies and authorities
(guaranteed and sponsored) - asset backed 895 906 906
States, municipalities and political subdivisions 79 83 83
Foreign governments 269 268 268
Public utilities 557 551 551
All other corporate, including international 5,816 5,765 5,765
All other corporate - asset backed 5,284 5,357 5,357
Short-term investments 750 750 750
Certificates of deposit 383 375 375
Redeemable preferred stock 1 1 1
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES 14,219 14,257 14,257
- ------------------------------------------------------------------------------------------------------------------------------------
EQUITY SECURITIES
Common Stocks
Industrial and miscellaneous 51 48 48
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL EQUITY SECURITIES 51 48 48
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES AND EQUITY SECURITIES 14,270 14,305 14,305
- ------------------------------------------------------------------------------------------------------------------------------------
POLICY LOANS 3,573 3,573 3,573
- ------------------------------------------------------------------------------------------------------------------------------------
OTHER INVESTMENTS
Mortgage loans on real estate 201 200 200
Investment in partnerships 569 578 578
Other invested assets 6 7 6
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL OTHER INVESTMENTS 776 785 784
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL INVESTMENTS $18,619 $18,663 $18,662
===================================================================================================================================
S-1
51
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE III
SUPPLEMENTARY INSURANCE INFORMATION
FOR THE YEARS ENDED DECEMBER 31, 2000, 1999 AND 1998
(in millions)
Other Earned
Deferred Policy Policy- Premiums Net
Acquisition Future Holder Policy And Investment
Segment Costs Policy Benefits Funds Fees Other Income
- -----------------------------------------------------------------------------------------------------------------------------
2000
Investment Products $3,292 $3,293 $ 8,287 $1,325 $ 19 $ 724
Individual Life 1,033 274 1,984 394 9 142
Corporate Owned Life
Insurance -- 283 4,645 390 9 366
Other -- 978 31 -- 60 94
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $4,325 $4,828 $14,947 $2,109 $ 97 $1,326
=============================================================================================================================
1999
Investment Products $3,099 $2,744 $ 8,859 $1,148 $ 37 $ 699
Individual Life 914 270 1,880 388 17 169
Corporate Owned Life
Insurance -- 321 5,244 399 -- 431
Other -- 997 21 -- 56 60
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $4,013 $4,332 $16,004 $1,935 $110 $1,359
=============================================================================================================================
1998
Investment Products $2,823 $2,407 $ 9,194 $ 979 $ 64 $ 736
Individual Life 931 466 2,307 336 27 181
Corporate Owned Life
Insurance -- 225 8,097 774 -- 793
Other -- 497 17 -- 38 49
- -----------------------------------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $3,754 $3,595 $19,615 $2,089 $129 $1,759
=============================================================================================================================
Benefits, Amortization
Net Claims and of Deferred
Realized Claim Insurance Policy Dividends
Capital Adjustment expenses and Acquisition To Policy-
Segment Losses Expenses other Costs holders
- ----------------------------------------------------------------------------------------------------
2000
Investment Products $-- $ 686 $401 $477 $--
Individual Life -- 216 94 127 --
Corporate Owned Life
Insurance -- 545 99 -- 67
Other (85) 48 6 -- --
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $(85) $1,495 $600 $604 $ 67
====================================================================================================
1999
Investment Products $-- $ 660 $354 $411 $--
Individual Life -- 254 87 128 --
Corporate Owned Life
Insurance -- 621 62 -- 104
Other (4) 39 128 -- --
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ (4) $1,574 $631 $539 $104
====================================================================================================
1998
Investment Products $-- $ 670 $368 $326 $--
Individual Life (1) 262 77 105 --
Corporate Owned Life
Insurance -- 924 278 -- 329
Other (1) 55 43 -- --
- ----------------------------------------------------------------------------------------------------
CONSOLIDATED OPERATIONS $ (2) $1,911 $766 $431 $329
====================================================================================================
S-2
52
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
SCHEDULE IV
REINSURANCE
Ceded to Assumed Percentage of
Gross Other From Other Net Amount Assumed
(In millions) Amount Companies Companies Amount to Net
- ------------------------------------------------------------------------------------------------------------------------------------
FOR THE YEAR ENDED DECEMBER 31, 2000
Life insurance in force $348,605 $145,529 $10,219 $213,295 4.8%
====================================================================================================================================
FEE INCOME, EARNED PREMIUMS AND OTHER
Life insurance and annuities $ 2,414 $ 271 $ 35 $ 2,178 1.6%
Accident and health insurance 471 452 9 28 32.1%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FEE INCOME, EARNED PREMIUMS AND OTHER $ 2,885 $ 723 $ 44 $ 2,206 2.0%
====================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1999
Life insurance in force $307,970 $131,162 $11,785 $188,593 6.2%
====================================================================================================================================
FEE INCOME, EARNED PREMIUMS AND OTHER
Life insurance and annuities $ 2,212 $ 275 $ 84 $ 2,021 4.2%
Accident and health insurance 448 435 11 24 45.8%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FEE INCOME, EARNED PREMIUMS AND OTHER $ 2,660 $ 710 $ 95 $ 2,045 4.6%
====================================================================================================================================
FOR THE YEAR ENDED DECEMBER 31, 1998
Life insurance in force $326,400 $200,782 $18,289 $143,907 12.7%
====================================================================================================================================
FEE INCOME, EARNED PREMIUMS AND OTHER
Life insurance and annuities $ 2,329 $ 271 142 $ 2,200 6.5%
Accident and health insurance 393 383 8 18 44.4%
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FEE INCOME, EARNED PREMIUMS AND OTHER $ 2,722 $ 654 150 $ 2,218 6.8%
====================================================================================================================================
S-3
53
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 INSURANCE COMPANY
By: /S/ Mary Jane B. Fortin
---------------------------
Mary Jane B. Fortin
Vice President and Chief Accounting
Officer
Date: March 28, 2001
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.
SIGNATURE TITLE DATE
--------- ----- ----
/S/ Lowndes A. Smith Chairman, Chief Executive Officer March 28, 2001
- ------------------------- and Director
Lowndes A. Smith
/S/ Thomas M. Marra President and Director March 28, 2001
- -------------------------
Thomas M. Marra
/S/ David T. Foy Senior Vice President, March 28, 2001
- ------------------------- Chief Financial Officer and Director
David T. Foy
/S/ Mary Jane B. Fortin Vice President March 28, 2001
- ------------------------- and Chief Accounting Officer
Mary Jane B. Fortin
/S/ Christine H. Repasy Director March 28, 2001
- -------------------------
Christine H. Repasy
/S/ John C. Walters Director March 28, 2001
- -------------------------
John C. Walters
/S/ Lizabeth H. Zlatkus Director March 28, 2001
- -------------------------
Lizabeth H. Zlatkus
/S/ David M. Znamierowski Director March 28, 2001
- -------------------------
David M. Znamierowski
II-1
54
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
FORM 10-K
FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000
EXHIBITS INDEX
EXHIBIT #
---------
3.01 Restated Certificate of Incorporation of Hartford Life Insurance
Company filed March 1985 (File No. 2-89516) is incorporated
herein by reference.
3.02 By-Laws of Hartford Life Insurance Company filed March 1985 (File
No. 2-89516) is incorporated herein by reference.
4.01 Restated Certificate of Incorporation and By-Laws of Hartford
Life Insurance Company (included as Exhibits 3.01 and 3.02,
respectively).
10.1 Tax Sharing Agreement among Hartford Life Insurance Company, The
Hartford Financial Services Group, Inc. and certain of their
affiliates was filed as Exhibit 10.2 to Hartford Life, Inc.'s
Form 10-Q filed for the quarter ended June 30, 1997 (File No.
1-12749) and is incorporated herein by reference.
10.2 Management Agreement among Hartford Life Insurance Company,
certain of its affiliates and Hartford Investment Services, Inc.
was filed as Exhibit 10.4 to Hartford Life, Inc.'s Form 10-Q
filed for the quarter ended June 30, 1997 (File No. 1-12749) and
is incorporated herein by reference.
10.3 Management Agreement between Hartford Life Insurance Company and
The Hartford Investment Management Company was filed as Exhibit
10.3 to Hartford Life, Inc.'s Form 10-Q filed for the quarter
ended June 30, 1997 (File No. 1-12749) and is incorporated herein
by reference.
II-2