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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
----------
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For The Quarterly Period Ended June 30, 2002
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)
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 August 13, 2002 there were outstanding 1,000 shares of Common Stock,
$5,690 par value per share, of the registrant, all of which were directly owned
by Hartford Life and Accident Insurance Company.
The registrant meets the conditions set forth in General Instruction H(1)(a)
and (b) of Form 10-Q and is therefore filing this form with the reduced
disclosure format.
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INDEX
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS PAGE
----
Independent Accountants' Review Report 3
Consolidated Statements of Income - Second Quarter and Six Months
Ended June 30, 2002 and 2001 4
Consolidated Balance Sheets - June 30, 2002 and
December 31, 2001 5
Consolidated Statements of Changes in Stockholder's Equity -
Six Months Ended June 30, 2002 and 2001 6
Consolidated Statements of Cash Flows - Six Months Ended
June 30, 2002 and 2001 7
Notes to Consolidated Financial Statements 8
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS 13
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 19
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 19
Signature 20
2
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholder
Hartford Life Insurance Company
Hartford, CT
We have reviewed the accompanying consolidated balance sheet of Hartford Life
Insurance Company and subsidiaries (the "Company") as of June 30, 2002, and the
related consolidated statements of income for the three-month and six-month
periods then ended, and changes in stockholder's equity, and cash flows for the
six months then ended. These consolidated financial statements are the
responsibility of the Company's management.
We conducted our review in accordance with standards established by the American
Institute of Certified Public Accountants. A review of interim financial
information consists principally of applying analytical procedures to financial
data and of making inquiries of persons responsible for financial and accounting
matters. It is substantially less in scope than an audit conducted in accordance
with auditing standards generally accepted in the United States of America, the
objective of which is the expression of an opinion regarding the financial
statements taken as a whole. Accordingly, we do not express such an opinion.
Based on our review, we are not aware of any material modifications that should
be made to such consolidated financial statements for them to be in conformity
with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial information as of December 31, 2001, and
for the three-month and six-month periods ended June 30, 2001, were not audited
or reviewed by us and, accordingly, we do not express an opinion or any other
form of assurance on them.
Deloitte & Touche LLP
Hartford, CT
August 12, 2002
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
SECOND QUARTER SIX MONTHS
ENDED ENDED
JUNE 30, JUNE 30,
-------- --------
(In millions) (Unaudited) 2002 2001 2002 2001
-------- -------- -------- --------
REVENUES
Fee income $ 536 $ 558 $ 1,067 $ 1,058
Earned premiums and other 18 23 38 45
Net investment income 381 372 760 729
Net realized capital losses (121) (22) (138) (22)
-------- -------- -------- --------
TOTAL REVENUES 814 931 1,727 1,810
-------- -------- -------- --------
BENEFITS, CLAIMS AND EXPENSES
Benefits and claims 437 441 859 831
Insurance expenses and other 157 153 334 299
Amortization of deferred policy acquisition
costs and present value of future profits 146 146 277 283
Dividends to policyholders 16 3 22 15
Goodwill amortization -- 3 -- 3
-------- -------- -------- --------
TOTAL BENEFITS, CLAIMS AND EXPENSES 756 746 1,492 1,431
-------- -------- -------- --------
INCOME BEFORE INCOME TAX EXPENSE AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 58 185 235 379
Income tax expense 1 53 46 109
-------- -------- -------- --------
INCOME BEFORE CUMULATIVE EFFECT OF
ACCOUNTING CHANGE 57 132 189 270
Cumulative effect of accounting change, net of tax -- (3) -- (6)
-------- -------- -------- --------
NET INCOME $ 57 $ 129 $ 189 $ 264
======== ======== ======== ========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
JUNE 30, DECEMBER 31,
(In millions, except for share data) 2002 2001
---------- ----------
(Unaudited)
ASSETS
Investments
Fixed maturities, available for sale, at
fair value (amortized cost of
$20,913 and $18,933) $ 21,242 $ 19,142
Equity securities, at fair value 62 64
Policy loans, at outstanding balance 3,165 3,278
Other investments 1,025 1,136
---------- ----------
Total investments 25,494 23,620
Cash 50 87
Premiums receivable and agents' balances 13 10
Reinsurance recoverables 1,385 1,215
Deferred policy acquisition costs and present
value of future profits 5,537 5,338
Deferred income tax (162) (11)
Goodwill 189 189
Other assets 798 724
Separate account assets 109,333 114,261
---------- ----------
TOTAL ASSETS $ 142,637 $ 145,433
========== ==========
LIABILITIES
Future policy benefits $ 6,424 $ 6,050
Other policyholder funds 19,617 18,412
Other liabilities 2,240 1,952
Separate account liabilities 109,333 114,261
---------- ----------
TOTAL LIABILITIES 137,614 140,675
========== ==========
STOCKHOLDER'S EQUITY
Common stock - 1,000 shares authorized, issued
and outstanding, par value $5,690 6 6
Capital surplus 1,806 1,806
Accumulated other comprehensive income 251 175
Retained earnings 2,960 2,771
---------- ----------
TOTAL STOCKHOLDER'S EQUITY 5,023 4,758
========== ==========
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 142,637 $ 145,433
========== ==========
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
SIX MONTHS ENDED JUNE 30, 2002
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
---------------------------
NET GAIN ON
UNREALIZED CASH FLOW
GAIN ON HEDGING CUMULATIVE TOTAL
COMMON CAPITAL SECURITIES, INSTRUMENTS, TRANSLATION RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS NET OF TAX NET OF TAX ADJUSTMENTS EARNINGS EQUITY
- ------------------------- ----- ------- ---------- ---------- ----------- -------- ------
Balance, December 31, 2001 $ 6 $ 1,806 $ 114 $ 63 $ (2) $ 2,771 $ 4,758
Comprehensive income
Net income 189 189
------------
Other comprehensive income,
net of tax (1)
Unrealized gain on securities (3) 70 70
Net gain on cash flow hedging
Instruments 7 7
Cumulative translation adjustments (1) (1)
------------
Total other comprehensive income 76
------------
Total comprehensive income 265
------------
Capital contribution from parent --
====== ======== ========= ========== ========= ========== ============
BALANCE, JUNE 30, 2002 $ 6 $ 1,806 $ 184 $ 70 $ (3) $ 2,960 $ 5,023
====== ======== ========= ========== ========= ========== ============
SIX MONTHS ENDED JUNE 30, 2001
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
---------------------------
UNREALIZED NET GAIN ON
GAIN ON CASH FLOW TOTAL
COMMON CAPITAL SECURITIES, HEDGING RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS NET OF TAX INSTRUMENTS EARNINGS EQUITY
- ------------------------- ----- ------- ---------- ----------- -------- ------
Balance, December 31, 2000 $ 6 $ 1,045 $ 16 $ -- $ 2,125 $ 3,192
Comprehensive income
Net income 264 264
------------
Other comprehensive income,
net of tax (1)
Cumulative effect of accounting
change(2) (18) 21 3
Unrealized gain on securities (3) 32 32
Net gain on cash flow hedging
instruments 6 6
------------
Total other comprehensive income 41
------------
Total comprehensive income 305
------------
Capital contribution from parent 761 761
====== ======== ========= ========== ========= ============
BALANCE, JUNE 30, 2001 $ 6 $ 1,806 $ 30 $ 27 $ 2,389 $ 4,258
====== ======== ========= ========== ========= ============
(1) Unrealized gain on securities is reflected net of tax provision of $38 and
$17 for the six months ended June 30, 2002 and 2001, respectively.
Cumulative effect of accounting change is net of tax benefit of $2 for the
six months ended June 30, 2001. Net gain on cash flow hedging instruments
is net of tax provision of $4 and $3 for the six months ended June 30,
2002 and 2001, respectively. There is no tax effect on cumulative
translation adjustments.
(2) Unrealized gain on securities, net of tax, includes cumulative effect of
accounting change of $(3) to net income and $21 to net gain on cash flow
hedging instruments for the six months ended June 30, 2001.
(3) There were reclassification adjustments for after-tax losses realized in
net income of $(90) and $(14) for the six months ended June 30, 2002 and
2001, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
SIX MONTHS ENDED
JUNE 30,
--------
(In millions) (Unaudited) 2002 2001
-------- --------
OPERATING ACTIVITIES
Net income $ 189 $ 264
ADJUSTMENTS TO RECONCILE NET INCOME TO NET
CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital losses 138 22
Cumulative effect of change in accounting, net of tax -- 6
Amortization of deferred policy acquisition costs and
present value of future profits 277 283
Additions to deferred policy acquisition costs and
present value of future profits (476) (486)
Depreciation and amortization -- (14)
Increase in premiums receivable and agents' balances (3) --
Decrease in other liabilities (119) (211)
Change in receivables, payables and accruals -- (53)
Increase (decrease) in accrued tax 63 (63)
Decrease in deferred income tax 114 90
Increase in future policy benefits 374 341
(Increase) decrease in reinsurance recoverables (131) 2
Other, net (65) (102)
======== ========
NET CASH PROVIDED BY OPERATING ACTIVITIES 361 79
======== ========
INVESTING ACTIVITIES
Purchases of investments (5,020) (4,532)
Sales of investments 2,584 2,237
Maturities and principal paydowns of fixed
maturity investments 881 1,059
Acquisition of Fortis Financial Group -- (715)
Other 4 --
======== ========
NET CASH USED FOR INVESTING ACTIVITIES (1,551) (1,951)
======== ========
FINANCING ACTIVITIES
Capital contribution from parent -- 761
Net receipts from investment and universal life-type
contracts charged against policyholder accounts 1,154 1,155
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 1,154 1,916
======== ========
Net (decrease) increase in cash (36) 44
Impact of foreign exchange (1) --
-------- --------
Cash - beginning of period 87 56
-------- --------
CASH - END OF PERIOD $ 50 $ 100
======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH (RECEIVED) PAID DURING THE PERIOD FOR
Income taxes $ 37 $ 27
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
(UNAUDITED)
NOTE 1. SIGNIFICANT ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hartford Life
Insurance Company and its consolidated subsidiaries ("Hartford Life Insurance
Company" or the "Company") have been prepared on the basis of accounting
principles generally accepted in the United States of America, which differ
materially from the accounting prescribed by various insurance regulatory
authorities. All material intercompany transactions and balances between
Hartford Life Insurance Company, its subsidiaries and affiliates have been
eliminated.
The preparation of financial statements, in conformity with accounting
principles generally accepted in the United States of America, 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.
In the opinion of management these statements include all normal recurring
adjustments necessary to present fairly the financial position, results of
operations and cash flows for the periods presented. (For a description of
accounting policies, see Note 2 of Notes to Consolidated Financial Statements
included in Hartford Life Insurance Company's 2001 Form 10-K Annual Report)
The most significant estimates include those used in determining deferred policy
acquisition costs, the liability for future policy benefits and other
policyholder funds, and investment values. 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
In April 2002, the Financial Accounting Standards Board ("FASB") issued
Statement of Financial Accounting Standards ("SFAS") No. 145, "Rescission of
FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and
Technical Corrections". Under historical guidance all gains and losses resulting
from the extinguishment of debt were required to be aggregated and, if material,
classified as an extraordinary item, net of related income tax effect. SFAS No.
145 rescinds that guidance and requires that gains and losses from
extinguishment of debt be classified as extraordinary items only if they are
both unusual and infrequent in occurrence. Statement 145 also amends SFAS No.
13, "Accounting for Leases" for the required accounting treatment of certain
lease modifications that have economic effects similar to sale-leaseback
transactions. SFAS No. 145 requires that those lease modifications be accounted
for in the same manner as sale-leaseback transactions. The provisions of
Statement 145 related to the rescission of SFAS No. 4 are applicable in fiscal
years beginning after May 15, 2002 and will be effective for the Company on
January 1, 2003. The provisions of Statement 145 related to SFAS No. 13 are
effective for transactions occurring after May 15, 2002. Adoption of the
provisions of SFAS No. 145 related to SFAS No. 13 did not have a material impact
on the Company's financial condition or results of operations.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets". SFAS No. 144 establishes an accounting model for
long-lived assets to be disposed of by sale that applies to all long-lived
assets, including discontinued operations. SFAS No. 144 requires that those
long-lived assets be measured at the lower of carrying amount or fair value less
cost to sell, whether reported in continuing operations or in discontinued
operations. The provisions of Statement 144 are effective for financial
statements issued for fiscal years beginning after December 15, 2001. Adoption
of SFAS No. 144 did not have a material impact on the Company's financial
condition or results of operations.
In June 2001, the FASB issued SFAS No. 141, "Business Combinations". SFAS No.
141 eliminates the pooling-of-interests method of accounting for business
combinations requiring all business combinations to be accounted for under the
purchase method. Accordingly, net assets acquired are recorded at fair value
with any excess of cost over net assets assigned to goodwill.
SFAS No. 141 also requires that certain intangible assets acquired in a business
combination be recognized apart from goodwill. The provisions of SFAS No. 141
apply to all business combinations initiated after June 30, 2001. Use of the
pooling-of-interests method of accounting for those transactions is prohibited.
Adoption of SFAS No. 141 did not have a material impact on the Company's
consolidated financial condition or results of operations.
8
In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible
Assets". Under SFAS No. 142, amortization of goodwill is precluded; however, its
recoverability is periodically (at least annually) reviewed and tested for
impairment.
Goodwill must be tested at the reporting unit level for impairment in the year
of adoption, including an initial test performed within six months of adoption.
If the initial test indicates a potential impairment, then a more detailed
analysis to determine the extent of impairment must be completed within twelve
months of adoption.
SFAS No. 142 also requires that useful lives for intangibles other than goodwill
be reassessed and remaining amortization periods be adjusted accordingly.
During the second quarter of 2002, the Company completed the review and analysis
of its goodwill asset in accordance with the provisions of SFAS No. 142. The
result of the analysis indicated that each reporting unit's fair value exceeded
its carrying amount, including goodwill. As a result, goodwill for each
reporting unit was not considered impaired. Adoption of all other provisions of
SFAS No. 142 did not have a material impact on the Company's financial condition
or results of operations. (For further discussion of the impact of SFAS No. 142,
see Note 2.)
2. GOODWILL
Effective January 1, 2002, the Company adopted SFAS No. 142 and accordingly
ceased all amortization.
The following table shows net income for the second quarter and six months ended
June 30, 2001 adjusted for goodwill amortization occurring in that period.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
NET INCOME 2002 2001 2002 2001
-------- -------- -------- --------
Income before cumulative effect of accounting changes $ 57 $ 132 $ 189 $ 270
Goodwill amortization, net of tax -- 2 -- 2
-------- -------- -------- --------
Adjusted income before cumulative effect of accounting changes 57 134 189 272
Cumulative effect of accounting changes -- (3) -- (6)
-------- -------- -------- --------
Adjusted net income $ 57 $ 131 $ 189 $ 266
======== ======== ======== ========
The following table shows the Company's intangible assets that continue to be
subject to amortization and aggregate amortization expense. Except for goodwill,
the Company has no intangible assets with indefinite useful lives.
AS OF JUNE 30, 2002
-------------------
GROSS ACCUMULATED
CARRYING NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION
- --------------------------- ------ ------------
Present value of future profits $ 549 $ 56
-------- --------
Total $ 549 $ 56
======== ========
Net amortization expense for the second quarter ended and six months ended June
30, 2002 was $11 and $19, respectively.
Estimated future amortization expense for the succeeding five years is as
follows:
For the year ending December 31,
--------------------------------
2002 $ 44
2003 $ 41
2004 $ 39
2005 $ 36
2006 $ 34
--------
The carrying amount of goodwill is $189 as of June 30, 2002 and December 31,
2001.
3. DERIVATIVES AND HEDGING ACTIVITIES
The Company utilizes a variety of derivative instruments in the ordinary course
of business, including swaps, caps, floors, forwards and exchange traded futures
and options, to manage risk through one of four Company approved risk management
strategies: to hedge risk
9
arising from interest rate, price or currency exchange rate volatility; to
manage liquidity; or to control transaction costs or to enter into income
enhancement and replication transactions. All of the Company's derivative
transactions are permitted uses of derivatives under the derivatives use plan
filed and/ or approved, as applicable, by the State of Connecticut and State of
New York insurance departments.
For a detailed discussion of the Company's use of derivative instruments, see
Note 2(e) of Notes to Consolidated Financial Statements included in the
Company's December 31, 2001 Form 10-K Annual Report.
As of June 30, 2002, the Company reported $124 of derivative assets in other
investments and $77 of derivative liabilities in other liabilities.
Cash-Flow Hedges
For the second quarter and six months ended June 30, 2002, the Company's gross
gains and losses representing the total ineffectiveness of all cash-flow hedges
were immaterial, with the net impact reported as realized capital gains or
losses. All components of each derivative's gain or loss are included in the
assessment of hedge effectiveness.
Gains and losses on derivative contracts that are reclassified from other
comprehensive income to current period earnings are included in the line item in
the statement of income in which the hedged item is recorded. As of June 30,
2002, approximately $3 of after-tax deferred net gains on derivative instruments
accumulated in other comprehensive income are expected to be reclassified to
earnings during the next twelve months. This expectation is based on the
anticipated interest payments on hedged investments in fixed maturity securities
that will occur over the next twelve months, at which time the Company will
recognize the deferred net gains/losses as an adjustment to interest income over
the term of the investment cash flows. The maximum term over which the Company
is hedging its exposure to the variability of future cash flows (for all
forecasted transactions, excluding interest payments on variable-rate debt) is
twelve months. As of June 30, 2002, the Company held approximately $2.4 billion
in derivative notional value related to strategies categorized as cash-flow
hedges. There were no reclassifications from other comprehensive income to
earnings resulting from the discontinuance of cash-flow hedges during the
quarter and six months ended June 30, 2002.
Fair-Value Hedges
For the second quarter and six months ended June 30, 2002, the Company's gross
gains and losses representing the total ineffectiveness of all fair-value hedges
essentially offset, with the net impact reported as realized capital gains or
losses. All components of each derivative's gain or loss are included in the
assessment of hedge effectiveness. As of June 30, 2002, the Company held
approximately $191 in derivative notional value related to strategies
categorized as fair-value hedges.
Other Risk Management Activities
The Company's other risk management activities primarily relate to strategies
used to reduce economic risk or enhance income and do not receive hedge
accounting treatment. Swap agreements, interest rate cap and floor agreements
and option contracts are used to reduce economic risk. Income enhancement and
replication transactions include the use of written covered call options which
offset embedded equity call options, total return swaps and synthetic
replication of cash market instrument. The change in the value of all
derivatives held for other risk management purposes are reported in current
period earnings as realized capital gains or losses. As of June 30, 2002, the
Company held approximately $2.9 billion in derivative notional value related to
strategies categorized as Other Risk Management Activities.
4. FORTIS ACQUISITION
On April 2, 2001, The Hartford Financial Services Group, Inc. ("The Hartford"),
through Hartford Life, Inc. and its subsidiaries ("Hartford Life"), acquired the
U.S. individual life insurance, annuity and mutual fund businesses of Fortis,
Inc. (operating as Fortis Financial Group, or "Fortis") for $1.12 billion in
cash. Hartford Life affected the acquisition through several reinsurance
agreements with subsidiaries of Fortis and the purchase of 100% of the stock of
Fortis Advisers, Inc. and Fortis Investors, Inc., wholly-owned subsidiaries of
Fortis. The acquisition was recorded as a purchase transaction and as such, the
revenues and expenses generated by this business from April 2, 2001 forward are
included in the Company's Consolidated Statements of Income.
Hartford Life financed the acquisition through (1) a capital contribution from
The Hartford of $615 from its February 16, 2001 offering of common stock (2) net
proceeds from the March 1, 2001 issuance of $400 of senior debt securities under
Hartford Life's shelf registration and (3) net proceeds from the March 6, 2001
issuance of $200 of trust preferred securities under Hartford Life's shelf
registration.
10
5. COMMITMENTS AND CONTINGENCIES
(a) LITIGATION
Hartford Life Insurance Company is 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.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company, et al. in favor of Bancorp in the amount of $118. The case
involved claims of patent infringement, misappropriation of trade secrets, and
breach of contract against the Company and its affiliate International Corporate
Marketing Group, Inc. ("ICMG"). The judge dismissed the patent infringement
claim on summary judgment. The jury's award was based on the last two claims.
Hartford Life Insurance Company and ICMG have moved the district court for,
among other things, judgment as a matter of law or a new trial, and intend to
appeal the judgment if the district court does not set it aside or
substantially reduce it. In either event, the Company's management, based on
the opinion of its legal advisers, believes that there is a substantial
likelihood that the jury award will not survive at its current amount. Based on
the advice of legal counsel regarding the potential outcome of this litigation,
the Company recorded an $11 after-tax charge in the first quarter of 2002 to
increase litigation reserves associated with this matter. Should Hartford Life
Insurance Company and ICMG not succeed in eliminating or reducing the judgment,
a significant additional expense would be recorded in the future related to
this matter.
The Company is involved in arbitration with one of its primary reinsurers
relating to policies with death benefit guarantees written from 1994 to 1999.
The arbitration involves alleged breaches under the reinsurance treaties.
Although the Company believes that its position in this pending arbitration is
strong, an adverse outcome could result in a decrease to the Company's statutory
surplus and capital and potentially increase the death benefit costs incurred by
the Company in the future. The arbitration hearing currently is set to begin in
October 2002.
(b) TAX MATTERS
The Company's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). Management believes that adequate provision has been
made in the accompanying consolidated financial statements for any potential
assessments that may result from tax examinations and other tax related matters
for all open tax years.
6. SEGMENT INFORMATION
Hartford Life Insurance Company is organized into three reportable operating
segments: 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 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
disability insurance that is directly written by the Company and is
substantially ceded to its parent, Hartford Life and Accident Insurance Company,
a wholly-owned subsidiary of Hartford Life, Inc. (Hartford Life).
The accounting policies of the reportable operating segments are the same as
those described in the summary of significant accounting policies in Note 2 of
Notes to Consolidated Financial Statements in Hartford Life Insurance Company's
2001 Form 10-K Annual Report. 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 surplus and the
allocation of net realized capital gains and losses through net investment
income utilizing the duration of the segment's investment portfolios. The
following tables present summarized financial information concerning the
Company's segments.
11
SECOND QUARTER ENDED Investment Individual
JUNE 30, 2002 Products Life COLI Other Total
- ------------- -------- ---- ---- ----- -----
Total revenues $ 547 $ 221 $ 146 $ (100) $ 814
Net income 92 26 9 (70) 57
-------- -------- -------- -------- --------
SECOND QUARTER ENDED Investment Individual
JUNE 30, 2001 Products Life COLI Other Total
- ------------- -------- ---- ---- ----- -----
Total revenues $ 537 $ 209 $ 179 $ 6 $ 931
Net income 93 32 9 (5) 129
-------- -------- -------- -------- --------
SIX MONTHS ENDED Investment Individual
JUNE 30, 2002 Products Life COLI Other Total
- ------------- -------- ---- ---- ----- -----
Total revenues $ 1,084 $ 428 $ 305 $ (90) $ 1,727
Net income 185 56 9 (61) 189
-------- -------- -------- -------- --------
SIX MONTHS ENDED Investment Individual
JUNE 30, 2001 Products Life COLI Other Total
- ------------- -------- ---- ---- ----- -----
Total revenues $ 1,053 $ 348 $ 363 $ 46 $ 1,810
Net income 186 49 18 11 264
-------- -------- -------- -------- --------
12
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life Insurance
Company and its subsidiaries ("Hartford Life Insurance Company" or the
"Company") as of June 30, 2002, compared with December 31, 2001, and its results
of operations for the second quarter and six months ended June 30, 2002 compared
with the equivalent periods in 2001. This discussion should be read in
conjunction with the MD&A included in the Company's 2001 Form 10-K Annual
Report.
Certain statements contained in this discussion, other than statements of
historical fact, are forward-looking statements. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond 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.
INDEX
Consolidated Results of Operations 13
Investment Products 15
Individual Life 15
Corporate Owned Life Insurance (COLI) 16
Investments 16
Capital Markets Risk Management 17
Regulatory Initiatives and Contingencies 18
Accounting Standards 19
CONSOLIDATED RESULTS OF OPERATIONS
OPERATING SUMMARY SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $ 814 $ 931 $ 1,727 $ 1,810
Expenses 757 799 1,538 1,540
Cumulative effect of accounting changes,
net of tax [1] -- (3) -- (6)
======== ======== ======== ========
NET INCOME 57 129 189 264
======== ======== ======== ========
Less: Cumulative effect of accounting
changes, net of tax [1] -- (3) -- (6)
======== ======== ======== ========
Net realized capital losses, after-tax (79) (14) (90) (14)
======== ======== ======== ========
OPERATING INCOME $ 136 $ 146 $ 279 $ 284
======== ======== ======== ========
[1] For the quarter ended June 30, 2001, represents the cumulative impact of
the Company's adoption of EITF Issue 99-20. For the six months ended June
30, 2001 represents the cumulative impact of the Company's adoption of
EITF Issue 99-20 and SFAS No. 133.
"Operating income" is defined as after-tax operational results excluding, as
applicable, net realized capital gains or losses, the cumulative effect of
accounting changes and certain other items. Management believes that this
performance measure delineates the results of operations of the Company's
ongoing businesses in a manner that allows for a better understanding of the
underlying trends in the Company's current business. However, operating income
should only be analyzed in conjunction with, and not in lieu of, net income and
may not be comparable to other performance measures used by the Company's
competitors.
Hartford Life Insurance Company has the following reportable segments:
Investment Products, Individual Life and Corporate Owned Life Insurance (COLI).
In addition, the Company includes in an "Other" category corporate items not
directly allocable to any of its reportable operating segments, principally
interest expense, as well as certain group benefits operations, including 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).
13
On April 2, 2001, The Hartford Financial Services Group, Inc. ("The Hartford"),
through Hartford Life, Inc. and its subsidiaries ("Hartford Life"), acquired the
U.S. individual life insurance, annuity and mutual fund businesses of Fortis,
Inc. (operating as Fortis Financial Group, or "Fortis").
Revenues decreased $117, or 13%, and $83, or 5% for the second quarter and six
months ended June 30, 2002, respectively, as compared to the equivalent periods
in 2001. The decreases were primarily driven by net realized capital losses,
which were $121 and $138 for the second quarter and six months ended June 30,
2002, respectively. (See the Investments section of the MD&A for further
discussion of investment results and related net realized capital losses). In
addition, COLI experienced a decline in revenues as a result of the decrease in
leveraged COLI account values as compared to a year ago. However, the Company
experienced revenue growth in its Investment Products segment where revenues
increased as a result of continued growth related to its institutional
investment products business, which offset the decline in revenues within the
individual annuity operation. The individual annuity operation was impacted by
lower assets under management due to the decline in the equity markets.
Expenses decreased $42, or 5%, for the second quarter primarily due to a $42 tax
benefit related to the net realized capital losses recognized in the second
quarter. Expenses for the six months ended June 30, 2002 decreased slightly due
to a $48 tax benefit related to realized capital losses recognized during that
period. In addition, expenses for the six months ended June 30, 2002 include
$11, after-tax, of accrued expenses recorded within the COLI segment related to
the Bancorp litigation, which was partially offset by an after-tax benefit of
$3, recorded within "Other", associated with favorable development related to
the Company's estimated September 11 exposure. (For a discussion of the Bancorp
litigation, see "Item 1. Legal Proceedings").
Operating income decreased $10, or 7%, and $5, or 2% for the second quarter and
six months ended June 30, 2002, respectively. Earnings for the Investment
Products segment were down $1 for both the second quarter and six months ended
June 30, 2002 as compared to the equivalent prior year periods as the decline in
revenues in the individual annuity operation, which was negatively impacted by
the lower equity markets offset the growth in the other investment products
businesses, particularly institutional investment products. Individual Life
earnings declined $6, or 19% in the second quarter as a result of lower fee
income related to variable life account values, which was also driven by the
lower equity markets and an increase in benefits, claims and expenses, while the
"Other" operation experienced lower net investment income in the second quarter
as compared to the comparable prior year period.
For the six months ended June 30, 2002, the decrease in operating income is
principally driven by the COLI segment where operating income declined $9, or
50%, primarily due to the $11 after-tax expense related to the Bancorp
litigation. This decrease was partially offset by an increase in Individual Life
earnings, which is principally related to the Fortis acquisition.
SEGMENT RESULTS
Below is a summary of net income by segment.
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
-------- -------- -------- --------
Investment Products $ 92 $ 93 $ 185 $ 186
Individual Life 26 32 56 49
Corporate Owned Life Insurance (COLI) 9 9 9 18
Other (1) (2) (70) (5) (61) 11
-------- -------- -------- --------
NET INCOME $ 57 $ 129 $ 189 $ 264
======== ======== ======== ========
(1) For the quarter ended June 30, 2001, represents the cumulative impact of
the Company's adoption of EITF Issue 99-20. For the six months ended June
30, 2001 represents the cumulative impact of the Company's adoption of
EITF Issue 99-20 and SFAS No. 133.
(2) For the second quarter and six months ended June 30, 2002 include net
realized capital losses, after-tax, of $79 and $90, respectively. For the
second quarter and six months ended June 30, 2001 include net realized
capital losses, after-tax of $11.
14
The sections that follow analyze each segment's results. Investment results are
discussed separately following the segment overviews.
INVESTMENT PRODUCTS
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $ 547 $ 537 $ 1,084 $ 1,053
Expenses 455 444 899 867
-------- -------- -------- --------
NET INCOME $ 92 $ 93 $ 185 $ 186
======== ======== ======== ========
Revenues in the Investment Products segment increased $10, or 2%, and $31, or 3%
for the second quarter and six months ended June 30, 2002 respectively,
primarily driven by growth in the institutional investment products business.
The revenue increase described above was partially offset by lower fee income
related to the individual annuity operation as average account values decreased
from prior year levels, primarily due to the lower equity markets.
Expenses increased $11, or 2%, and $32, or 4% for the second quarter and six
months ended June 30, 2002, respectively, primarily driven by increases in
benefits and claim expenses and operating expenses as a result of the growth in
the institutional investment products business and an increase in the death
benefit costs incurred by the individual annuity operation, as a direct result
of the lower equity markets. Partially offsetting these increases were decreases
in amortization of policy acquisition costs related to the individual annuity
business, which declined as a result of lower estimated gross profits, driven by
the decrease in fee income and the increase in death benefit costs.
Net income decreased $1, or 1% for both the second quarter and six months ended
June 30, 2002, as the decline in revenues in the individual annuity operation,
which was negatively impacted by the lower equity markets offset the earnings
growth in other investment products, particularly the institutional investment
product business. (For discussion of the potential future financial statement
impact of continued declines in the equity market on the Investment Products
segment, see the Capital Markets Risk Management section under "Market Risk".)
INDIVIDUAL LIFE
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $ 221 $ 209 $ 428 $ 348
Expenses 195 177 372 299
-------- -------- -------- --------
NET INCOME $ 26 $ 32 $ 56 $ 49
======== ======== ======== ========
Revenues in the Individual Life segment increased $12, or 6%, and $80, or 23%
for the second quarter and six months ended June 30, 2002, respectively. For the
second quarter, the revenue growth was primarily driven by an increase in fee
income due to growth in the in-force block of business, which was partially
offset by lower fee income due to a decrease in variable life account values,
which declined as a result of the lower equity markets. The revenue growth
related to the six months ended June 30, 2002 was primarily due to higher fee
income and investment income related to the Fortis transaction.
Expenses increased $18, or 10%, and $73, or 24% for the second quarter and six
months ended June 30, 2002, respectively. For the second quarter, the growth in
expenses is primarily driven by an increase in benefits, claims and claim
adjustment expenses due to an increase in death benefit expenses. For the six
months ended June 30, 2002, the increase in expenses is primarily driven by the
growth in the business resulting from the Fortis acquisition. Additionally,
mortality experience (expressed as death claims as a percentage of net amount at
risk) for the second quarter and six months ended June 30, 2002 was higher than
the comparable prior year period primarily due to an increase in the number of
death claims in the second quarter and a higher than expected occurrence of
large claims in the first quarter.
Net income decreased $6, or 19% for the second quarter as compared to the prior
year, principally due to decreased revenues from the variable life business, as
a direct result of the lower equity markets and the increase in benefits,
claims, and claim adjustment expenses. Net income for the six months ended June
30, 2002 increased $7, or 14%, as the contribution to earnings from the Fortis
transaction more than offset the unfavorable mortality experience for the six
month period ended June 30, 2002 and the lower variable life fee income driven
by the decline in the equity markets. (For discussion of the potential future
financial statement impact of continued declines in the equity market on the
Individual Life segment, see the Capital Markets Risk Management section under
"Market Risk".)
15
CORPORATE OWNED LIFE INSURANCE (COLI)
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
2002 2001 2002 2001
-------- -------- -------- --------
Revenues $ 146 $ 179 $ 305 $ 363
Expenses 137 170 296 345
-------- -------- -------- --------
NET INCOME $ 9 $ 9 $ 9 $ 18
======== ======== ======== ========
COLI revenues decreased $33, or 18%, and $58, or 16% for the second quarter and
six months ended June 30, 2002, respectively, primarily related to lower net
investment and fee income related to the declining block of leveraged COLI,
where related account values declined by $737, or 15% to $4.1 billion. Net
investment income decreased $18, or 20%, and $37, or 20% for the second quarter
and six months ended June 30, 2002, respectively. Fee income decreased $15, or
17% and $20, or 12%, for the second quarter and six months ended June 30, 2002,
primarily driven by the decrease in leveraged COLI business which was partially
offset by the increase in fee income from variable COLI business, where related
account values increased approximately $2.4 billion from June 30, 2001.
Expenses decreased $33, or 19%, and $49, or 14% for the second quarter and six
months ended June 30, 2002, respectively, consistent with the decrease in
revenues described above. However, the decrease for the six months ended June
30, 2002 was partially offset by $11, after-tax, in accrued litigation expenses
related to the Bancorp dispute. (For a discussion of the Bancorp litigation, see
"Item 1. Legal Proceedings").
Net income in the second quarter was consistent with the prior year as the
decline in leveraged COLI revenues was directly offset with lower benefits
claims and expenses. Net income for the six months ended June 30, 2002 decreased
$9, or 50%, primarily related to the $11, after-tax expense accrued in
connection with the Bancorp litigation.
INVESTMENTS
Invested assets, excluding separate account assets, totaled $25.5 billion as of
June 30, 2002 and were comprised of $21.2 billion of fixed maturities, $3.2
billion of policy loans, equity securities of $62 and other investments of $1.0
billion. As of December 31, 2001, general account invested assets totaled $23.6
billion and were comprised of $19.1 billion of fixed maturities, $3.3 billion of
policy loans, equity securities of $64 and other investments of $1.1 billion.
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.
Invested assets increased by $1.9 billion. The increase was primarily due to an
increase in fixed maturities as a result of the investment of increased general
account operating cash flow and an increase in fair value due to a lower
interest rate environment.
The following table identifies fixed maturities by type held in the Company's
general account as of June 30, 2002 and December 31, 2001.
JUNE 30, 2002 DECEMBER 31, 2001
------------- -----------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- ------------------------ ---------- ------- ---------- -------
Corporate $ 11,421 53.8% $ 10,443 54.5%
Asset backed securities 3,428 16.1% 3,131 16.4%
Commercial mortgage backed securities 2,852 13.4% 2,534 13.2%
Mortgage backed securities -- agency 1,217 5.7% 800 4.2%
Short-term 1,043 4.9% 1,008 5.3%
Collateralized mortgage obligations 508 2.4% 591 3.1%
Government/Government agencies -- Foreign 374 1.8% 327 1.7%
Government/Government agencies -- U.S. 366 1.7% 260 1.4%
Municipal -- taxable 32 0.2% 47 0.2%
Redeemable preferred stock 1 -- 1 --
-------- -------- -------- --------
TOTAL FIXED MATURITIES $ 21,242 100.0% $ 19,142 100.0%
-------- -------- -------- --------
INVESTMENT RESULTS
The table below summarizes the Company's investment results.
16
SECOND QUARTER ENDED SIX MONTHS ENDED
JUNE 30, JUNE 30,
-------- --------
(Before-tax) 2002 2001 2002 2001
-------- -------- -------- --------
Net investment income - excluding policy loan income $ 314 $ 298 $ 626 $ 574
Policy loan income 67 74 134 155
-------- -------- -------- --------
Net investment income - total $ 381 $ 372 $ 760 $ 729
-------- -------- -------- --------
Yield on average invested assets (1) 6.3% 7.1% 6.3% 7.2%
-------- -------- -------- --------
Net realized capital losses $ (121) $ (22) $ (138) $ (22)
-------- -------- -------- --------
(1) Represents annualized net investment income (excluding net realized
capital gains or losses) divided by average invested assets at cost (fixed
maturities at amortized cost).
For the second quarter and six months ended June 30, 2002, net investment
income, excluding policy loans, increased $16, or 5%, and $52, or 9%,
respectively, compared to the prior year periods. The increase was primarily due
to income earned on a higher invested asset base. Invested assets increased 16%
from June 30, 2001. Yield on average invested assets decreased as a result of
lower yields on new investment purchases and lower policy loan income in the
quarter ended June 30, 2002.
Net realized capital losses for the second quarter and six months ended June 30,
2002, increased by $99 and $116, respectively compared to the prior year
periods. Included in 2002 net realized capital losses were write-downs for other
than temporary impairments on fixed maturities of $137, including a $74
before-tax loss related to securities issued by WorldCom taken in the second
quarter ended June 30, 2002. Net realized capital losses for the second quarter
ended June 30, 2001 were attributable to portfolio rebalancing activities.
Included in 2001 net losses were losses associated with the credit deterioration
of certain investments in which the Company has an indirect economic interest.
CAPITAL MARKETS RISK MANAGEMENT
The Company has a disciplined approach to managing risks associated with its
capital markets and asset/liability management activities. Investment portfolio
management is organized to focus investment management expertise on specific
classes of investments, while asset/liability management is the responsibility
of separate and distinct risk management units supporting the Company's
operations. Derivative instruments are utilized in compliance with established
Company policy and regulatory requirements and are monitored internally and
reviewed by senior management.
Hartford Life Insurance Company is exposed to two primary sources of investment
and asset/liability management risk: credit risk, relating to the uncertainty
associated with the ability of an obligor or counterparty to make timely
payments of principal and/or interest, and market risk, relating to the market
price and/or cash flow variability associated with changes in interest rates,
securities prices, market indices, yield curves or currency exchange rates. The
Company does not hold any financial instruments purchased for trading purposes.
Please refer to the Capital Markets Risk Management section of the MD&A in
Hartford Life Insurance Company's 2001 Form 10-K Annual Report for further
discussion, including a description of the Company's objectives, policies and
strategies.
Credit Risk
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 or counterparty.
Creditworthiness of specific obligors is determined by an internal credit
assessment and ratings assigned by nationally recognized ratings agencies.
Obligor, asset sector and industry concentrations are subject to established
limits and are monitored at regular intervals. The Company is not exposed to any
credit concentration risk of a single issuer greater than 10% of the Company's
stockholders' equity.
As of June 30, 2002 and December 31, 2001, over 95% and 96%, respectively, of
the fixed maturity portfolio was invested in securities rated investment grade.
While the overall credit quality of the fixed maturity portfolio has remained
essentially unchanged, the percentages of BBB and BB & below holdings have
increased due to downgraded credit ratings primarily in public corporate bonds.
17
Market Risk
Hartford Life Insurance Company has material exposure to both interest rate and
equity market risk. 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.
Equity Markets
Hartford Life Insurance Company's operations are significantly influenced by
changes in the equity markets. The Company's profitability depends largely on
the amount of assets under management, which is primarily driven by the level of
sales, equity market appreciation and depreciation, and the persistency of the
in-force block of business. A prolonged and precipitous decline in the equity
markets, as has been experienced of late, can have a significant impact on the
Company's operations, as sales of variable products may decline and surrender
activity may increase as customer sentiment towards the equity market turns
negative. The lower assets under management will have a negative impact on the
Company's financial results, primarily due to lower fee income related to the
Investment Products and Individual Life segments, where a heavy concentration of
equity linked products are administered and sold. Furthermore, the Company may
experience a reduction in profit margins if a significant portion of the assets
held in the variable annuity separate accounts move to the general account and
the Company is unable to earn an acceptable investment spread, particularly in
light of the low interest rate environment and the presence of contractually
guaranteed minimum interest credited rates, which for the most part are at a 3%
rate. For further discussion of the Company's exposure to interest rate risk,
please refer to the Capital Markets Risk Management section of the MD&A in
Hartford Life Insurance Company's 2001 Form 10-K Annual Report.
In addition, prolonged declines in the equity market may also decrease the
Company's expectations of future gross profits, which are utilized to determine
the amount of deferred policy acquisition costs (DAC) to be amortized in a given
financial statement period. A significant decrease in the Company's expected
gross profits would require the Company to accelerate the amount of DAC
amortization in a given period, potentially causing a material adverse deviation
in that period's net income. Although an acceleration of DAC amortization would
have a negative impact on the Company's earnings, it would not affect the
Company's cash flow or liquidity position.
Additionally, the Investment Products segment sells variable annuity contracts
that offer various guaranteed death benefits. For certain guaranteed death
benefits, the Company pays the greater of (1) the account value at death; (2)
the sum of all premium payments less prior withdrawals; or (3) the maximum
anniversary value of the contract, plus any premium payments since the contract
anniversary, minus any withdrawals following the contract anniversary. Hartford
Life Insurance Company currently reinsures a significant portion of these death
benefit guarantees associated with its in-force block of business. The Company
currently records the death benefit costs, net of reinsurance, as they are
incurred. Declines in the equity market may increase the Company's net exposure
to death benefits under these contracts. Furthermore, the Company is involved in
arbitration with one of its primary reinsurers relating to policies with such
death benefit guarantees written from 1994 to 1999. The arbitration involves
alleged breaches under the reinsurance treaties. Although the Company believes
that its position in this pending arbitration is strong, an adverse outcome
could result in a decrease to the Company's statutory surplus and capital and
potentially increase the death benefit costs incurred by the Company in the
future. The arbitration hearing currently is set to begin in October 2002.
Derivative Instruments
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, in compliance with
Company policy and regulatory requirements in order to achieve one of four
Company-approved risk management strategies: to hedge risk arising from interest
rate, price or currency exchange rate volatility; to manage liquidity; to
control transaction costs; or to enter into income enhancement and replication
transactions. The Company does not make a market or trade derivatives for the
express purpose of earning trading profits. (For further discussion on The
Company's use of derivative instruments, refer to Note 3 of Notes to
Consolidated Financial Statements.)
REGULATORY INITIATIVES AND CONTINGENCIES
NAIC Codification
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. Each of Hartford Life Insurance Company's
domiciliary states has adopted Codification, and the Company has made the
necessary changes in its statutory accounting and reporting required for
implementation. The overall impact of applying the new guidance resulted in a
one-time statutory cumulative transition benefit of $38 in statutory surplus for
the Company.
18
Dependence on Certain Third Party Relationships
Hartford Life Insurance Company 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.
ACCOUNTING STANDARDS
For a discussion of accounting standards, see Note 1 of Notes to Consolidated
Financial Statements.
Part II. OTHER INFORMATION
Item 1. LEGAL PROCEEDINGS
Hartford Life Insurance Company is or may become involved in various legal
actions, some of which may involve claims for substantial amounts. In the
opinion of management, the ultimate liability, if any, with respect to such
actual and potential lawsuits, after consideration of provisions made for
potential losses and costs of defense, is not expected to be material to the
consolidated financial condition, results of operations or cash flows of the
Company.
On March 15, 2002, a jury in the U.S. District Court for the Eastern District of
Missouri issued a verdict in Bancorp Services, LLC ("Bancorp") v. Hartford Life
Insurance Company, et al. in favor of Bancorp in the amount of $118. The case
involved claims of patent infringement, misappropriation of trade secrets, and
breach of contract against the Company and its affiliate International Corporate
Marketing Group, Inc. ("ICMG"). The judge dismissed the patent infringement
claim on summary judgment. The jury's award was based on the last two claims.
Hartford Life Insurance Company and ICMG have moved the district court for,
among other things, judgment as a matter of law or a new trial, and intend to
appeal the judgment if the district court does not set it aside or
substantially reduce it. In either event, the Company's management, based on
the opinion of its legal advisers, believes that there is a substantial
likelihood that the jury award will not survive at its current amount. Based on
the advice of legal counsel regarding the potential outcome of this litigation,
the Company recorded an $11 after-tax charge in the first quarter of 2002 to
increase litigation reserves associated with this matter. Should Hartford Life
Insurance Company and ICMG not succeed in eliminating or reducing the judgment,
a significant additional expense would be recorded in the future related to
this matter.
Hartford Life Insurance Company also is involved in arbitration with one of its
primary reinsurers relating to variable annuity contracts with death benefit
guarantees. The arbitration is discussed more fully in the MD&A under the
caption "Capital Markets Risk Management - Market Risk".
Item 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits - None.
(b) Reports on Form 8-K:
The Company filed a Form 8-K/A (Amendment No. 2) Current Report on May 17, 2002,
Item 4, Changes in Registrant's Certifying Accountants, to report the dismissal
by The Hartford Financial Services Group, Inc. ("The Hartford"), the ultimate
parent company of Hartford Life Insurance Company (the "Company"), of Arthur
Andersen LLP as The Hartford's independent auditor.
The Company filed a Form 8-K Current Report on April 23, 2002, Item 4, Changes
in Registrant's Certifying Accountants, to report that the Board of Directors of
The Hartford Financial Services Group, Inc. ("The Hartford"), the ultimate
parent company of Hartford Life Insurance Company (the "Company"), engaged
Deloitte & Touche LLP as The Hartford's independent auditors for the fiscal year
2002.
The Company filed a Form 8-K Current Report on March 20, 2002, Item 5, Other
Events, to report a verdict by a jury in the U.S. District Court for the Eastern
District of Missouri in Bancorp Services, LLC v. Hartford Life Insurance
Company, et al in favor of Bancorp.
19
SIGNATURE
Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
HARTFORD LIFE INSURANCE COMPANY
/s/ Mary Jane B. Fortin
--------------------------------------
Mary Jane B. Fortin
Senior Vice President and Chief
Accounting Officer
AUGUST 13, 2002
20