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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
[X] QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the quarterly period ended September 30, 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 No.)
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 November 14, 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.
INDEX
PAGE
----
Independent Accountants' Review Report 3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Consolidated Statements of Income - Third Quarter and Nine Months
Ended September 30, 2002 and 2001 4
Consolidated Balance Sheets - September 30, 2002
and December 31, 2001 5
Consolidated Statements of Changes in Stockholder's Equity -
Nine Months Ended September 30, 2002 and 2001 6
Consolidated Statements of Cash Flows - Nine Months Ended
September 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 14
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 22
ITEM 4. CONTROLS AND PROCEDURES 22
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS 23
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K 23
Signature 24
Certificates 25
2
INDEPENDENT ACCOUNTANTS' REVIEW REPORT
Board of Directors and Stockholder
Hartford Life Insurance Company
Hartford, Connecticut
We have reviewed the accompanying consolidated balance sheet of Hartford Life
Insurance Company and subsidiaries (the "Company") as of September 30, 2002, and
the related consolidated statements of income for the third quarter and nine
months then ended, and changes in stockholder's equity, and cash flows for the
nine 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 third quarter and nine months ended September 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, Connecticut
November 12, 2002
3
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
THIRD QUARTER NINE MONTHS
ENDED ENDED
SEPTEMBER 30, SEPTEMBER 30,
-------------------------------------------------------
(In millions) (Unaudited) 2002 2001 2002 2001
- --------------------------------------------------------------------------------------------------------------------
REVENUES
Fee income $ 509 $ 534 $ 1,576 $ 1,592
Earned premiums and other 12 20 50 65
Net investment income 397 377 1,157 1,106
Net realized capital losses (92) (14) (230) (36)
- --------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 826 917 2,553 2,727
-------------------------------------------------------------------------------------------------------------
BENEFITS, CLAIMS AND EXPENSES
Benefits and claims 448 459 1,307 1,290
Insurance expenses and other 154 153 488 452
Amortization of deferred policy acquisition costs and
present value of future profits 138 134 415 417
Dividends to policyholders 7 13 29 28
Goodwill amortization -- -- -- 3
- --------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 747 759 2,239 2,190
-------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE (BENEFIT) AND
CUMULATIVE EFFECT OF ACCOUNTING CHANGE 79 158 314 537
Income tax (benefit) expense (67) (107) (21) 2
- --------------------------------------------------------------------------------------------------------------------
INCOME BEFORE CUMULATIVE EFFECT OF ACCOUNTING
CHANGE 146 265 335 535
Cumulative effect of accounting change, net of tax -- -- -- (6)
- --------------------------------------------------------------------------------------------------------------------
NET INCOME $ 146 $ 265 $ 335 $ 529
====================================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
4
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
SEPTEMBER 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
$23,048 and $18,933) $ 23,969 $ 19,142
Equity securities, at fair value (amortized cost of $64 and $71) 48 64
Policy loans, at outstanding balance 2,941 3,278
Other investments 1,114 1,136
- --------------------------------------------------------------------------------------------------------------
Total investments 28,072 23,620
Cash 90 87
Premiums receivable and agents' balances 16 10
Reinsurance recoverables 1,346 1,215
Deferred policy acquisition costs and present value of future profits 5,628 5,338
Deferred income taxes (314) (11)
Goodwill 186 186
Other assets 728 724
Separate account assets 100,502 114,261
- --------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $ 136,254 $ 145,430
======================================================================================================
LIABILITIES
Future policy benefits $ 6,474 $ 6,050
Other policyholder funds 21,426 18,412
Other liabilities 2,255 1,949
Separate account liabilities 100,502 114,261
- --------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES 130,657 140,672
======================================================================================================
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 679 175
Retained earnings 3,106 2,771
- --------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDER'S EQUITY 5,597 4,758
======================================================================================================
TOTAL LIABILITIES AND STOCKHOLDER'S EQUITY $ 136,254 $ 145,430
=================================================================================================
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
5
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDER'S EQUITY
NINE MONTHS ENDED SEPTEMBER 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 335 335
------------
Other comprehensive income, net of
tax (1)
Unrealized gain on securities (3) 436 436
Net gain on cash flow hedging
instruments 66 66
Cumulative translation adjustments 2 2
------------
Total other comprehensive income 504
------------
Total comprehensive income 839
==============================================================================================================================
BALANCE, SEPTEMBER 30, 2002 $ 6 $ 1,806 $ 550 $ 129 $ -- $ 3,106 $ 5,597
==============================================================================================================================
NINE MONTHS ENDED SEPTEMBER 30, 2001
ACCUMULATED OTHER
COMPREHENSIVE INCOME (LOSS)
----------------------------
UNREALIZED NET GAIN ON
GAIN ON CASH FLOW TOTAL
COMMON CAPITAL SECURITIES, NET HEDGING RETAINED STOCKHOLDER'S
(In millions) (Unaudited) STOCK SURPLUS OF TAX INSTRUMENTS EARNINGS EQUITY
- -----------------------------------------------------------------------------------------------------------------------------------
Balance, December 31, 2000 $ 6 $ 1,045 $ 16 $ -- $ 2,125 $ 3,192
Comprehensive income
Net income 529 529
-------------
Other comprehensive income , net of tax (1)
Cumulative effect of accounting change(2) (18) 21 3
Unrealized gain on securities (3) 241 241
Net gain on cash flow hedging instruments 64 64
-------------
Total other comprehensive income 308
-------------
Total comprehensive income 837
-------------
Capital contribution from parent 761 761
===================================================================================================================================
BALANCE, SEPTEMBER 30, 2001 $ 6 $ 1,806 $ 239 $ 85 $ 2,654 $ 4,790
===================================================================================================================================
(1) Unrealized gain on securities is reflected net of tax provision of $235
and $130 for the nine months ended September 30, 2002 and 2001,
respectively. Cumulative effect of accounting change is net of tax benefit
of $2 for the nine months ended September 30, 2001. Net gain on cash flow
hedging instruments is net of tax provision of $36 and $34 for the nine
months ended September 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 nine months ended September 30, 2001.
(3) There were reclassification adjustments for after-tax losses realized in
net income of $(148) and $(23) for the nine months ended September 30,
2002 and 2001, respectively.
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
6
HARTFORD LIFE INSURANCE COMPANY AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
SEPTEMBER 30,
-----------------------
(In millions) (Unaudited) 2002 2001
========================================================================================================================
OPERATING ACTIVITIES
Net income $ 335 $ 529
ADJUSTMENTS TO RECONCILE NET INCOME TO NET CASH PROVIDED BY OPERATING ACTIVITIES
Net realized capital losses 230 36
Cumulative effect of change in accounting, net of tax -- 6
Amortization of deferred policy acquisition costs and present value of future profits 415 417
Additions to deferred policy acquisition costs and present value of future profits (705) (719)
Depreciation and amortization 4 (18)
Increase in premiums receivable and agents' balances (6) (3)
Decrease in other liabilities (124) (119)
Change in receivables, payables and accruals (52) (59)
Increase (decrease) in accrued tax 134 (22)
Decrease in deferred income tax 36 35
Increase in future policy benefits 424 262
Increase in reinsurance recoverables (72) (84)
Other, net 4 (111)
========================================================================================================================
NET CASH PROVIDED BY OPERATING ACTIVITIES 623 150
========================================================================================================================
INVESTING ACTIVITIES
Purchases of investments (9,257) (7,074)
Sales of investments 4,230 3,191
Maturities and principal paydowns of fixed maturity investments 1,487 1,688
Acquisition of Fortis Financial Group -- (715)
Capital expenditures and other 1 --
========================================================================================================================
NET CASH USED FOR INVESTING ACTIVITIES (3,539) (2,910)
========================================================================================================================
FINANCING ACTIVITIES
Capital contribution from parent -- 761
Net receipts from investment and universal life-type contracts 2,918 2,014
- ------------------------------------------------------------------------------------------------------------------------
NET CASH PROVIDED BY FINANCING ACTIVITIES 2,918 2,775
========================================================================================================================
Net increase in cash 2 15
Impact of foreign exchange 1 --
- ------------------------------------------------------------------------------------------------------------------------
Cash - beginning of period 87 56
- ------------------------------------------------------------------------------------------------------------------------
CASH - END OF PERIOD $ 90 $ 71
========================================================================================================================
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
NET CASH PAID DURING THE PERIOD FOR
Income taxes $ 2 $ 27
SEE NOTES TO CONSOLIDATED FINANCIAL STATEMENTS.
7
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLAR AMOUNTS IN MILLIONS, UNLESS OTHERWISE STATED)
(UNAUDITED)
NOTE 1. BASIS OF PRESENTATION AND ACCOUNTING POLICIES
(a) BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements of Hartford Life
Insurance Company and its 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.
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.
In the opinion of management these financial statements include all normal
recurring adjustments necessary to present fairly the financial position,
results of operations and cash flows for the periods presented.
Certain reclassifications have been made to prior year financial information to
conform to the current year classifications.
(b) SIGNIFICANT ACCOUNTING POLICIES
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.
(c) 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. SFAS No. 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 SFAS No. 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.
Adoption of the provisions of SFAS No. 145 related to the rescission of SFAS No.
4 is not expected to have a material impact on the Company's consolidated
financial condition or results of operations. The provisions of SFAS No. 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 consolidated financial condition or
results of operations.
Effective September 2001, the Company adopted EITF Issue 01-10 "Accounting for
the Impact of the Terrorist Attacks of September 11, 2001". Under the consensus,
costs related to the terrorist acts should be reported as part of income from
continuing operations and not as an extraordinary item. The Company has
recognized and classified all direct and indirect costs associated with the
attack of September 11 in accordance with the consensus. (For a discussion of
the impact of the September 11 terrorist attack, see Note 3)
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 SFAS No. 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 consolidated
financial condition or results of operations.
8
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.
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 must be 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.
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 consolidated
financial condition or results of operations.
SFAS No. 142 also requires that useful lives for intangibles other than goodwill
be reassessed and remaining amortization periods be adjusted accordingly. (For
further discussion of the impact of SFAS No. 142, see Note 2.)
(d) FUTURE ADOPTION OF NEW ACCOUNTING STANDARDS
In July 2002, the FASB issued SFAS No. 146 "Accounting for Certain Costs
Associated with Exit or Disposal Activities", which nullifies Emerging Issues
Task Force ("EITF") Issue No. 94-3, "Liability Recognition for Certain Employee
Termination Benefits and Other Costs to Exit an Activity (including Certain
Costs Incurred in a Restructuring)." SFAS No. 146 establishes a change in the
requirements for recognition of a liability for a cost associated with an exit
or disposal activity. This statement now requires liabilities to be recognized
when a company actually incurs the liability. Previously, under EITF Issue No.
94-3, liabilities were recognized at the date an entity committed to an exit
plan. Provisions of SFAS No. 146 are effective for activities initiated after
December 31, 2002. Adoption of this statement is not expected to have a material
impact on the Company's consolidated financial condition or results of
operations.
(e) EXPENSING STOCK OPTIONS
Beginning in January 2003, the Company's ultimate parent, The Hartford Financial
Services Group, Inc. ("The Hartford"), will adopt the fair-value recognition
provisions of accounting for employee stock options under SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company believes the use of the
fair-value method to record employee stock-based compensation expense is
consistent with the Company's accounting for all other forms of compensation.
This method of accounting for stock options will be used for all awards granted
or modified after January 1, 2003. The Hartford currently applies the intrinsic
value-based provisions set forth in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". SFAS No. 123 permits companies
either to use the fair-value method and recognize compensation expense upon the
issuance of stock options, thereby lowering earnings, or, alternatively, to
disclose the pro-forma impact of the issuance.
The FASB is conducting a fast-track project, which proposes three optional
transition methods for entities that decide to voluntarily adopt the fair value
recognition principles of SFAS No. 123 and modifies the disclosure requirements
of that Statement. Under the guidance contained in an exposure draft issued by
the FASB, entities would have the ability to select any one of the three
proposed transition methods. While The Hartford is committed to expensing the
fair value of its option grants, the ultimate transition method to be used by
The Hartford will be determined at the completion of the FASB project.
Upon adoption of the fair-value recognition provisions of accounting for
employee stock options under SFAS No. 123 by The Hartford, the Company will
expense its portion of the cost of stock options allocated by The Hartford.
2. GOODWILL
Effective January 1, 2002, the Company adopted SFAS No. 142 and accordingly
ceased all amortization of goodwill.
9
The following table shows net income for the third quarter and nine months ended
September 30, 2002 and 2001, with the 2001 periods adjusted for goodwill
amortization recorded during the specified period.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------------------------
NET INCOME 2002 2001 2002 2001
- ------------------------------------------------------------------------------------------------------------------
Income before cumulative effect of accounting changes $ 146 $ 265 $ 335 $ 535
Goodwill amortization, net of tax -- -- -- 3
- ------------------------------------------------------------------------------------------------------------------
Adjusted income before cumulative effect of accounting changes 146 265 335 538
Cumulative effect of accounting changes, net of tax -- -- -- (6)
- ------------------------------------------------------------------------------------------------------------------
Adjusted net income $ 146 $ 265 $ 335 $ 532
==================================================================================================================
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 SEPTEMBER 30, 2002
---------------------------
GROSS ACCUMULATED
CARRYING NET
AMORTIZED INTANGIBLE ASSETS AMOUNT AMORTIZATION
- ------------------------------------------------------------------------------------
Present value of future profits $536 $ 69
- ------------------------------------------------------------------------------------
Total $536 $ 69
====================================================================================
Net amortization expense for the third quarter ended and nine months ended
September 30, 2002 was $13 and $32, respectively.
Estimated future net 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 $186 as of both September 30, 2002 and
December 31, 2001.
3. SEPTEMBER 11 TERRORIST ATTACK
As a result of the September 11 terrorist attack, the Company recorded an
estimated loss amounting to $9, net of taxes and reinsurance, in the third
quarter of 2001. The Company based the loss estimate upon a review of insured
exposures using a variety of assumptions and actuarial techniques, including
estimated amounts for unknown and unreported policyholder losses. Also included
was an estimate of amounts recoverable under the Company's ceded reinsurance
programs, including the cost of additional reinsurance premiums. In the first
quarter of 2002, the Company recognized a $3 after-tax benefit related to
favorable development of reserves related to the September 11 terrorist attack.
4. 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 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.
10
As of September 30, 2002, the Company reported $209 of derivative assets in
other investments and $70 of derivative liabilities in other liabilities.
Cash-Flow Hedges
For the third quarter and nine months ended September 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 September
30, 2002, approximately $4.6 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 September 30, 2002, the Company held
approximately $2.6 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 nine months ended September 30, 2002.
Fair-Value Hedges
For the third quarter and nine months ended September 30, 2002, the Company's
gross gains and losses representing the total ineffectiveness of all fair-value
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. As of September 30, 2002, the Company held
approximately $180 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 instruments. 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 September 30, 2002,
the Company held approximately $2.9 billion in derivative notional value related
to strategies categorized as Other Risk Management Activities.
5. FORTIS ACQUISITION
On April 2, 2001, 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 between the Company and subsidiaries of
Fortis and the purchase of 100% of the stock of Fortis Advisers, Inc. and Fortis
Investors, Inc., wholly-owned subsidiaries of Fortis, by another subsidiary of
Hartford Life. The acquisition was recorded as a purchase transaction and as
such, the revenues and expenses generated by this business from April 2, 2001
are included in the 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. Of the amounts identified above, $761 was contributed to the
Company to affect the acquisition of the individual life and annuity businesses
of Fortis.
6. SALE OF SUDAMERICANA HOLDING S.A
On September 7, 2001, Hartford Life completed the sale of its ownership interest
in an Argentine subsidiary, Sudamericana Holding S.A. The Company recognized an
after-tax net realized capital loss of $11 related to the sale.
11
7. COMMITMENTS AND CONTINGENCIES
(a) LITIGATION
Hartford Life Insurance Company is 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, 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. On
August 28, 2002, the Court entered an order awarding Bancorp prejudgment
interest on the breach of contract claim in the amount of $16.
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 advisors, 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 began in October 2002.
(b) TAX MATTERS
The Company's Federal income tax returns are routinely audited by the Internal
Revenue Service ("IRS"). Throughout the audit of the 1996-1997 years, the
Company and the IRS have been engaged in an ongoing dispute regarding what
portion of the separate account dividends-received deduction ("DRD") is
deductible by the Company. During 2001, the Company continued its discussions
with the IRS. As part of the Company's due diligence with respect to this issue,
the Company closely monitored the activities of the IRS with respect to other
taxpayers on this issue and consulted with outside tax counsel and advisors on
the merits of the Company's separate account DRD. The due diligence was
completed during the third quarter of 2001 and the Company concluded that it was
probable that a greater portion of the separate account DRD claimed on its filed
returns would be realized. Based on the Company's assessment of the probable
outcome, the Company concluded an additional $130 tax benefit was appropriate to
record in the third quarter of 2001, relating to the tax years 1996-2000.
Additionally, the Company increased its estimate of the separate account DRD
recognized with respect to tax year 2001 from $44 to $60.
Throughout the audit in 2002, the Company and its IRS agent requested advice
from the National Office of the IRS with respect to certain aspects of the
computation of the separate account DRD that had been claimed by the Company for
the 1996-1997 audit period. During September 2002, the IRS National Office
issued a ruling that confirmed that the Company had properly computed the items
in question in the separate account DRD claimed on its 1996-1997 tax returns.
Additionally, during the third quarter, the Company reached agreement with the
IRS on all other issues with respect to the 1996-1997 tax years. The Company
recorded a benefit of $76 during the third quarter of 2002, primarily relating
to the tax treatment of such issues for the 1996-1997 tax years, as well as
appropriate carryover adjustments to the 1998-2002 years. The Company will
continue to monitor further developments surrounding the computation of the
separate account DRD, as well as other items, and will adjust its estimate of
the probable outcome of these issues as developments warrant. 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.
12
8. 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 an
"Other" category 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.
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.
THIRD QUARTER ENDED Investment Individual
SEPTEMBER 30, 2002 Products Life COLI Other Total
- ------------------------------------------------------------------------------------------
Total revenues $ 543 $ 216 $ 145 $ (78) $ 826
Net income 81 30 10 25 146
- ------------------------------------------------------------------------------------------
THIRD QUARTER ENDED Investment Individual
SEPTEMBER 30, 2001 Products Life COLI Other Total
- ------------------------------------------------------------------------------------------
Total revenues $ 525 $ 205 $ 169 $ 18 $ 917
Net income 92 26 8 139 265
- ------------------------------------------------------------------------------------------
NINE MONTHS ENDED Investment Individual
SEPTEMBER 30, 2002 Products Life COLI Other Total
- ------------------------------------------------------------------------------------------
Total revenues $1,627 $ 644 $ 450 $ (168) $2,553
Net income 266 86 19 (36) 335
- ------------------------------------------------------------------------------------------
NINE MONTHS ENDED Investment Individual
SEPTEMBER 30, 2001 Products Life COLI Other Total
- ------------------------------------------------------------------------------------------
Total revenues $1,578 $ 553 $ 532 $ 64 $2,727
Net income 278 75 26 150 529
- ------------------------------------------------------------------------------------------
13
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 September 30, 2002, compared with December 31, 2001, and its
results of operations for the third quarter and nine months ended September 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. These factors include: the
response of reinsurance companies under reinsurance contracts, the impact of
increasing reinsurance rates, and the availability and adequacy of reinsurance
to protect the Company against losses; the possibility of more unfavorable loss
experience than anticipated; the possibility of general economic and business
conditions that are less favorable than anticipated; the effect of changes in
interest rates, the stock markets or other financial markets; stronger than
anticipated competitive activity; unfavorable legislative, regulatory or
judicial developments; the Company's ability to distribute its products through
distribution channels, both current and future; the uncertain effects of
emerging claim and coverage issues; the effect of assessments and other
surcharges for guaranty funds; a downgrade in the Company's claims-paying,
financial strength or credit ratings; the ability of the Company's subsidiaries
to pay dividends to the Company; and other factors described in such
forward-looking statements.
- -------------------------------------------------------------------------------
INDEX
- -------------------------------------------------------------------------------
Critical Accounting Policies 14
Consolidated Results of Operations - Operating Summary 16
Investment Products 18
Individual Life 18
Corporate Owned Life Insurance (COLI) 19
Investments 19
Capital Markets Risk Management 20
Regulatory Initiatives and Contingencies 22
Accounting Standards 22
- -------------------------------------------------------------------------------
CRITICAL ACCOUNTING POLICIES
- -------------------------------------------------------------------------------
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 Company has identified the following policies as critical accounting
policies because they involve a higher degree of judgment. In applying these
policies, management makes subjective and complex judgments that frequently
require estimates about matters that are inherently uncertain. Although
variability is inherent in these estimates, management believes the amounts
provided are appropriate based upon the facts available at the time.
DEFERRED ACQUISITION COSTS
Policy acquisition costs, which include commissions and certain other expenses
that vary with and are primarily associated with acquiring business, are
deferred and amortized over the estimated lives of the contracts, usually 20
years.
Deferred policy acquisition costs ("DAC") related to investment contracts and
universal life-type contracts 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 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. The
average long-term rate of assumed investment yield used in estimating expected
gross
14
profits related to variable annuity and variable life business was 9.0% at
December 31, 2001, and for all other products including fixed annuities and
other universal life type contracts, the average assumed investment yield ranged
from 5.0% - 8.5%.
Deferred policy acquisition costs related to traditional policies are amortized
over the premium-paying period of the related policies in proportion to the
ratio of the present value of annual expected premium income to the present
value of total expected premium income. Adjustments are made each year to
recognize actual experience as compared to assumed experience for the current
period.
To date, our experience has generally been comparable to the assumptions used in
determining DAC amortization. However, if the Company was to experience a
material adverse deviation in certain critical assumptions, including surrender
rates, mortality experience, or investment performance, there could be a
negative effect on the Company's consolidated results of operations or financial
condition.
RESERVES
In accordance with applicable insurance regulations under which Hartford Life
Insurance Company operates, the Company's life insurance subsidiaries establish
and carry as liabilities actuarially determined reserves which are calculated to
meet the 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 the 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 the Company's
policy obligations at their maturities or in the event of an insured's death.
Reserves also include unearned premiums, premium deposits, claims incurred but
not reported ("IBNR") 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. Certain contracts include provisions
whereby a guaranteed death benefit is provided in the event that the
contractholder's account value at death is below the guaranteed value. Although
the Company reinsures the majority of the death benefit guarantees associated
with its in-force block of business, declines in the equity market may increase
the Company's net exposure to death benefits under these contracts. The Company
records the death benefit costs, net of reinsurance, as they are incurred. 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.
The persistency of the 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.
This 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 the Company from loss on early terminations and to reduce the likelihood
of policyholders terminating their policies during periods of increasing
interest rates, thereby lengthening the effective duration of policy liabilities
and improving the Company's ability to maintain profitability on such policies.
INVESTMENTS
The 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 amortized cost reflected in
stockholders' equity as a component of accumulated other comprehensive income.
Policy loans are carried at outstanding balance, which approximates fair value.
Other invested assets consist primarily of limited partnership investments that
are accounted for by the equity method, except in instances in which the
Company's interest is so minor that it exercises virtually no influence over
operating and financial policies. In such instances, the Company applies the
cost method of accounting. The Company's net income from partnerships is
included in net investment income. Other investments also include mortgage loans
at amortized cost and derivatives at fair value.
The Company's accounting policy for impairment recognition requires other than
temporary impairments charges to be recorded when it is determined that the
Company is unable to recover its cost basis in the investment. Impairment
charges on investments are included in net realized capital gains and losses.
Factors considered in evaluating whether a decline in value is other than
temporary include: (a) the length of time and the extent to which the fair value
has been less than cost, (b) the financial condition and near-term prospects of
the issuer, and (c) the intent and ability of the Company to retain the
investment for a period of time sufficient to allow for any anticipated
recovery. In addition, for certain asset-backed and other securities, the
Company evaluates the future cash flows expected from the
15
securitized assets in determining whether a decline in fair value is other than
temporary. Furthermore, 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.
The Company utilizes a variety of derivative instruments, including swaps, caps,
floors, forwards and exchange traded futures and options, in order to achieve
one of four Company approved objectives: 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. When derivatives meet specific criteria, they may be designated as
hedges and accounted for as fair value or cash-flow hedges.
- --------------------------------------------------------------------------------
CONSOLIDATED RESULTS OF OPERATIONS: OPERATING SUMMARY
- --------------------------------------------------------------------------------
OPERATING SUMMARY THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
------------------------------------------------------
2002 2001 2002 2001
- -----------------------------------------------------------------------------------------------------------------------------------
Revenues $ 826 $ 917 $ 2,553 $ 2,727
Expenses 680 652 2,218 2,192
Cumulative effect of accounting changes, net of tax [1] -- -- -- (6)
===================================================================================================================================
NET INCOME [2], [3] 146 265 335 529
===================================================================================================================================
Less: Cumulative effect of accounting changes, net of tax [1] -- -- -- (6)
Net realized capital losses, after-tax (58) (9) (148) (23)
===================================================================================================================================
OPERATING INCOME [2], [3] $ 204 $ 274 $ 483 $ 558
===================================================================================================================================
[1] For the nine months ended September 30, 2001 represents the cumulative
impact of the Company's adoption of Emerging Issues Task Force ("EITF")
Issue No. 99-20, "Recognition of Interest Income and Impairment on
Purchased and Retained Beneficial Interests in Securitized Financial
Assets" and SFAS No. 133, as amended, "Accounting for Derivative
Instruments and Hedging Activities".
[2] Includes $76 and $130 for the third quarter and nine months ended
September 30, 2002 and 2001, respectively, related to favorable tax items.
[3] Includes $9 of after-tax losses for the third quarter and nine months
ended September 30, 2001 related to September 11, and a $3 after-tax
benefit for the nine months ended September 30, 2002 due to favorable
development related to September 11. Additionally, for the nine months
ended September 30, 2002, includes $11 after-tax expense related to the
Bancorp Services, LLC litigation.
"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).
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 $91, or 10%, and $174, or 6%, for the third quarter and nine
months ended September 30, 2002, respectively, as compared to the equivalent
periods in 2001. The decreases were primarily driven by realized capital losses
of $92 and $230 for the third quarter and nine months ended September 30, 2002,
respectively, as compared to $14 and $36 for the equivalent periods in 2001.
(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 across its other operating segments. Revenues related to the Investment
Products segment increased as a result of continued growth related to its
institutional investment product business, which more than 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. Additionally, Individual Life revenues were higher as the
result of the Fortis acquisition and increased life insurance in-force for the
nine months ended September 30, 2002.
16
Expenses increased $28, or 4%, for the third quarter ended September 30, 2002,
primarily due to a lower benefit recorded related to favorable resolution of
separate account dividends-received deduction ("DRD")-related tax items as
compared to the same period in 2001. Expenses for the nine months ended
September 30, 2002 increased $26, or 1% as compared to the equivalent prior year
period, which is primarily driven by the Fortis acquisition and the Investment
Products segment, principally related to the growth in the institutional
investment product business and an increase in death benefits related to the
individual annuity operation, as a result of the lower equity markets. In
addition, expenses for the nine months ended September 30, 2002 include $11,
after-tax, of accrued expenses recorded within the COLI segment related to the
Bancorp litigation. (For a discussion of the Bancorp litigation, see "Item 1.
Legal Proceedings".) Also included in expenses for the nine months ended
September 30, 2002 was an after-tax benefit of $3, recorded within "Other,"
associated with favorable development related to the Company's estimated
September 11 exposure.
Operating income decreased $70, or 26%, and $75, or 13%, for the third quarter
and nine months ended September 30, 2002, respectively. Excluding the impact of
the September 11 in the third quarter of 2001, operating income decreased $79,
or 28%, for the third quarter ended September 30, 2002. For the nine months
ended September 30, 2002, the Company recognized a $3 after-tax benefit due to
favorable development related to September 11. Excluding the impact of the
September 11, operating income for the nine months ended September 30, 2002
decreased $81, or 14%. Individual Life earnings increased $4, or 15%, and $11,
or 15%, for the third quarter and nine months ended September 30, 2002
respectively. Excluding the impact of the September 11, Individual Life's
earnings increased $1, or 3%, and $8, or 10%, for the third quarter and nine
months ended September 30, 2002, respectively as the result of higher fee income
as the result of the Fortis acquisition. COLI earnings increased $2, or 25%, for
the third quarter due to lower death benefits, interest credited expenses, and
other insurance expenses, which more than offset the decline in revenues
discussed above. Excluding the impact of September 11, COLI's earnings remained
consistent for the third quarter ended September 30, 2002. For the nine months
ended September 30, 2002, COLI operating income decreased $7, or 27%. Excluding
the impact of September 11, COLI's earnings decreased $9, or 32%, primarily the
result of the charge associated with the Bancorp litigation. Operating income
for the Investment Products segment was down $11, or 12%, and $12 or 4%, for the
third quarter and nine months ended September 30, 2002, respectively as growth
in the other investment products businesses, particularly institutional
investment products was more than offset by the decline in revenues in the
individual annuity operation, which was negatively impacted by the lower equity
markets.
Beginning in January 2003, The Hartford will adopt the fair-value recognition
provisions of accounting for employee stock options under SFAS No. 123,
"Accounting for Stock-Based Compensation". The Company believes the use of the
fair-value method to record employee stock-based compensation expense is
consistent with the Company's accounting for all other forms of compensation.
This method of accounting for stock options will be used for all awards granted
or modified after January 1, 2003. The Hartford currently applies the intrinsic
value-based provisions set forth in Accounting Principles Board Opinion No. 25,
"Accounting for Stock Issued to Employees". SFAS No. 123 permits companies
either to use the fair-value method and recognize compensation expense upon the
issuance of stock options, thereby lowering earnings, or, alternatively, to
disclose the pro-forma impact of the issuance.
The FASB is conducting a fast-track project, which proposes three optional
transition methods for entities that decide to voluntarily adopt the fair value
recognition principles of SFAS No. 123 and modifies the disclosure requirements
of that Statement. Under the guidance contained in an exposure draft issued by
the FASB, entities would have the ability to select any one of the three
proposed transition methods. While The Hartford is committed to expensing the
fair value of its option grants, the ultimate transition method to be used by
The Hartford will be determined at the completion of the FASB project.
Upon adoption of the fair-value recognition provisions of accounting for
employee stock options under SFAS No. 123 by The Hartford, the Company will
expense its portion of the cost of stock options allocated by The Hartford.
SEGMENT RESULTS
Below is a summary of net income by segment.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------
2002 2001 2002 2001
- ------------------------------------------------------------------------------------------
Investment Products $ 81 $ 92 $ 266 $ 278
Individual Life 30 26 86 75
Corporate Owned Life Insurance (COLI) 10 8 19 26
Other (1), (2), (3), (4) 25 139 (36) 150
- ------------------------------------------------------------------------------------------
NET INCOME $ 146 $ 265 $ 335 $ 529
==========================================================================================
(1) For the quarter ended September 30, 2001, represents the cumulative impact
of the Company's adoption of EITF Issue 99-20. For the nine months ended
September 30, 2001 represents the cumulative impact of the Company's
adoption of EITF Issue 99-20 and SFAS No. 133.
(2) For the third quarter and nine months ended September 30, 2002 include net
realized capital losses, after-tax, of $58 and $148, respectively. For the
third quarter and nine months ended September 30, 2001 include net
realized capital losses, after-tax of $9 and $23, respectively.
(3) Includes $76 and $130 for the third quarter and nine months ended
September 30, 2002 and 2001, respectively, related to favorable tax items.
(4) Includes $9 of after-tax losses for the third quarter and nine months
ended September 30, 2001 related to the September 11 Terrorist Attack, and
a $3 after-tax benefit for the nine months ended September 30, 2002 due to
favorable development related to the September 11, 2001 Terrorist Attack.
Additionally, for the nine months ended September 30, 2002, includes $11
after-tax expense related to Bancorp Services, LLC litigation.
17
The sections that follow analyze each segment's results. Investment results are
discussed separately following the segment overviews.
- -------------------------------------------------------------------------------
INVESTMENT PRODUCTS
- -------------------------------------------------------------------------------
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
---------------------------------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Revenues $ 543 $ 525 $1,627 $1,578
Expenses 462 433 1,361 1,300
- --------------------------------------------------------------------------------
NET INCOME $ 81 $ 92 $ 266 $ 278
================================================================================
Revenues in the Investment Products segment increased $18, or 3%, and $49, or
3%, for the third quarter and nine months ended September 30, 2002,
respectively, primarily driven by growth in the institutional investment product
business, where related assets under management increased $1.2 billion, or 15%
to $9.4 billion as of September 30, 2002 as compared to the equivalent period in
2001. 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 $29, or 7%, and $61, or 5%, for the third quarter and nine
months ended September 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 $11, or 12%, and $12, or 4%, for the third quarter and nine
months ended September 30, 2002, respectively. The growth in revenues was
related to other investment products, particularly the institutional investment
product business. This growth was almost completely offset by the decline in
revenues in the individual annuity operation, which was negatively impacted by
the lower equity markets. Additionally, increases in the death benefit costs
incurred by the individual annuity operation as the result of the lower equity
markets contributed to the decreased earnings as compared to the equivalent
period in 2001. (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
- -------------------------------------------------------------------------------
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Revenues $216 $205 $644 $553
Expenses 186 179 558 478
- --------------------------------------------------------------------------------
NET INCOME $ 30 $ 26 $ 86 $ 75
================================================================================
Revenues in the Individual Life segment increased $11, or 5%, and $91, or 16%,
for the third quarter and nine months ended September 30, 2002, respectively.
For the third quarter, the revenue growth was primarily driven by an increase in
fee income as the result of an increase in life insurance in-force as of
September 30, 2002 as compared to the equivalent period in 2001. The revenue
growth related to the nine months ended September 30, 2002 was attributed to
higher fee income and investment income related to the Fortis transaction.
Expenses increased $7, or 4%, and $80, or 17%, for the third quarter and nine
months ended September 30, 2002, principally driven by the growth in the
business resulting from the Fortis acquisition. In addition, mortality
experience (expressed as death claims as a percentage of net amount at risk) for
the nine months ended September 30, 2002 was higher than the comparable prior
year period primarily due to a higher than expected occurrence of large claims
during the first quarter of 2002.
Net income increased $4, or 15%, and $11, or 15%, for the third quarter and nine
months ended September 30, 2002, respectively. Individual Life incurred an
after-tax charge of $3 related to the September 11 Terrorist Attack in the third
quarter of 2001. Excluding this charge, Individual Life's earnings increased $1,
or 3%, and $8, or 10% for the third quarter and nine months ended September 30,
2002, respectively. The increase for the nine months ended September 30, 2002
was due to the contribution to earnings from the Fortis transaction, which more
than offset the unfavorable mortality experience.
18
- --------------------------------------------------------------------------------
CORPORATE OWNED LIFE INSURANCE (COLI)
- --------------------------------------------------------------------------------
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------
2002 2001 2002 2001
- --------------------------------------------------------------------------------
Revenues $145 $169 $450 $532
Expenses 135 161 431 506
- --------------------------------------------------------------------------------
NET INCOME $ 10 $ 8 $ 19 $ 26
================================================================================
COLI revenues decreased $24, or 14%, and $82, or 15%, for the third quarter and
nine months ended September 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 $1.2 billion, or 26%. Net investment
income decreased $20, or 23%, and $57, or 21%, for the third quarter and nine
months ended September 30, 2002, respectively, while fee income decreased $4, or
5%, and $24, or 10%, over the comparable prior year periods.
Expenses decreased $26, or 16%, and $75, or 15%, for the third quarter and nine
months ended September 30, 2002, respectively, consistent with the decrease in
revenues described above. However, the decrease for the nine months ended
September 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 third quarter increased $2, or 25%, compared to prior year.
COLI incurred an after-tax charge of $2 related to the September 11 Terrorist
Attack in the third quarter of 2001. Excluding this charge, COLI's earnings
remained consistent for the third quarter ended September 30, 2002, as the
decrease in benefits and claims expenses and other insurance expenses offset the
decrease in revenues discussed above. Net income decreased $7, or 27%, for the
nine months ended September 30, 2002. Excluding the impact of the September 11
Terrorist Attack, COLI's earnings decreased $9, or 32%, principally due to the
$11, after-tax expense accrued in connection with the Bancorp litigation.
- --------------------------------------------------------------------------------
INVESTMENTS
- --------------------------------------------------------------------------------
Invested assets, excluding separate account assets, totaled $28.1 billion as of
September 30, 2002 and were comprised of $24.0 billion of fixed maturities, $2.9
billion of policy loans, equity securities of $48 and other investments of $1.1
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 $4.5 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.
19
The following table identifies fixed maturities by type held in the Company's
general account as of September 30, 2002 and December 31, 2001.
SEPTEMBER 30, 2002 DECEMBER 31, 2001
----------------------------------------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- ---------------------------------------------------------------------------------------------------
Corporate $12,756 53.2% $10,443 54.5%
Asset backed securities 3,555 14.8% 3,131 16.4%
Commercial mortgage backed securities 3,499 14.6% 2,534 13.2%
Mortgage backed securities -- agency 1,484 6.2% 800 4.2%
Short-term 1,354 5.7% 1,008 5.3%
Collateralized mortgage obligations 689 2.9% 591 3.1%
Government/Government agencies -- Foreign 465 1.9% 327 1.7%
Government/Government agencies -- U.S. 135 0.6% 260 1.4%
Municipal - taxable 31 0.1% 47 0.2%
Municipal - exempt 1 -- -- --
Redeemable preferred stock -- -- 1 --
- ---------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $23,969 100.0% $19,142 100.0%
- ---------------------------------------------------------------------------------------------------
INVESTMENT RESULTS
The table below summarizes the Company's investment results.
THIRD QUARTER ENDED NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
----------------------------------------------------------
(Before-tax) 2002 2001 2002 2001
- ----------------------------------------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 337 $ 300 $ 963 $ 874
Policy loan income 60 77 194 232
- ----------------------------------------------------------------------------------------------------------------------
Net investment income - total $ 397 $ 377 $ 1,157 $ 1,106
- ----------------------------------------------------------------------------------------------------------------------
Yield on average invested assets (1) 6.1% 6.8% 6.2% 7.2%
- ----------------------------------------------------------------------------------------------------------------------
Net realized capital losses $ (92) $ (14) $ (230) $ (36)
- ----------------------------------------------------------------------------------------------------------------------
(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 third quarter and nine months ended September 30, 2002, net investment
income, excluding policy loans, increased $37, or 12%, and $89, or 10%,
respectively, compared to the prior year periods. The increase was primarily due
to income earned on a higher invested asset base partially offset by lower
investment yields. Invested assets increased 19% from December 31, 2001. Yield
on average invested assets decreased as a result of lower rates on new
investment purchases and decreased policy loan income.
Net realized capital losses for the third quarter and nine months ended
September 30, 2002, increased by $78 and $194, respectively compared to the
prior year periods. Included in 2002 net realized capital losses for the third
quarter and nine months ended September 30, 2002 were write-downs for other than
temporary impairments on fixed maturities of $102 and $239, respectively,
partially offset by net realized capital gains 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.
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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.
20
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 September 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 BB & below holdings have
increased due to downgraded credit ratings primarily in public corporate bonds.
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 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. The
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.
The Company's total gross exposure (i.e. before reinsurance) to these guaranteed
death benefits as of September 30, 2002 is $25.9 billion. Due to the fact that
81% of this amount is reinsured, the Company's net exposure is $4.9 billion.
This amount is often referred to as the net amount at risk. However, the Company
will only incur these guaranteed death benefit payments in the future if the
policyholder has an in-the-money guaranteed death benefit at their time of
death. In order to analyze the total costs that the Company may incur in the
future related to these guaranteed death benefits, the Company performed an
actuarial present value analysis. This analysis included developing a model
utilizing 250 stochastically generated investment performance scenarios and best
estimate assumptions related to mortality and lapse rates. A range of projected
costs was developed and discounted back to the statement date utilizing the
Company's cost of capital, which for this purpose was assumed to be 9.25%. Based
on this analysis, the Company estimated that the present value of the retained
death benefit costs to be incurred in the future fell within a range of $91 to
$378. This range was calculated utilizing a 95% confidence interval. The median
of the 250 stochastically generated scenarios was $184.
21
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
began 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 4 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.
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.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The information contained in the Capital Markets Risk Management section of
Management's Discussion and Analysis of Financial Condition and Results of
Operations is incorporated herein by reference.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of disclosure controls and procedures.
The Company's principal executive officer and its principal financial officer,
based on their evaluation of the Company's disclosure controls and procedures
(as defined in Exchange Act Rule 13a-14(c)) as of a date within 90 days prior to
the filing of this Quarterly Report on Form 10-Q, have concluded that the
Company's disclosure controls and procedures are adequate and effective for the
purposes set forth in the definition thereof in Exchange Act Rule 13a-14(c).
Changes in internal controls.
There were no significant changes in the Company's internal controls or in other
factors that could significantly affect the Company's internal controls
subsequent to the date of their evaluation.
PART II. OTHER INFORMATION
22
ITEM 1. LEGAL PROCEEDINGS
Hartford Life Insurance Company is 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, 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. On
August 28, 2002, the Court entered an order awarding Bancorp prejudgment
interest on the breach of contract claim in the amount of $16.
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 advisors, 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 began in October 2002.
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 Current Report on August 13, 2002, Item 7,
Financial Statements, Pro Forma Financial Information and Exhibits, and Item 9,
Regulation FD Disclosure, to report the filing of the certification of Thomas M.
Marra, President, Chief Executive Officer and Chairman of the Company, which
accompanied the Company's Form 10-Q for the quarterly period ended June 30,
2002, pursuant to 18 United States Code section 1350, as enacted by section 906
of the Sarbanes-Oxley Act of 2002; and to report the filing of the certification
of David T. Foy, Senior Vice President and Chief Financial Officer of the
Company, which accompanied the Company's Form 10-Q for the quarterly period
ended June 30, 2002, pursuant to 18 United States Code Section 1350, as enacted
by Section 906 of the Sarbanes-Oxley Act of 2002.
23
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
NOVEMBER 14, 2002
24
CERTIFICATIONS
I, Thomas M. Marra, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hartford Life
Insurance Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
By : /s/ Thomas M. Marra
---------------------------------
Thomas M. Marra
President, Chief Executive Officer and Chairman
(Signature and Title)
25
I, David T. Foy, certify that:
1. I have reviewed this quarterly report on Form 10-Q of Hartford Life
Insurance Company;
2. Based on my knowledge, this quarterly report does not contain any
untrue statement of a material fact or omit to state a material fact
necessary to make the statements made, in light of the circumstances
under which such statements were made, not misleading with respect
to the period covered by this quarterly report;
3. Based on my knowledge, the financial statements, and other financial
information included in this quarterly report, fairly present in all
material respects the financial condition, results of operations and
cash flows of the registrant as of, and for, the periods presented
in this quarterly report;
4. The registrant's other certifying officers and I are responsible for
establishing and maintaining disclosure controls and procedures (as
defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant
and we have:
a) designed such disclosure controls and procedures to ensure
that material information relating to the registrant,
including its consolidated subsidiaries, is made known to us
by others within those entities, particularly during the
period in which this quarterly report is being prepared;
b) evaluated the effectiveness of the registrant's disclosure
controls and procedures as of a date within 90 days prior to
the filing date of this quarterly report (the "Evaluation
Date"); and
c) presented in this quarterly report our conclusions about the
effectiveness of the disclosure controls and procedures based
on our evaluation as of the Evaluation Date;
5. The registrant's other certifying officers and I have disclosed,
based on our most recent evaluation, to the registrant's auditors
and the audit committee of registrant's board of directors (or
persons performing the equivalent function):
a) all significant deficiencies in the design or operation of
internal controls which could adversely affect the
registrant's ability to record, process, summarize and report
financial data and have identified for the registrant's
auditors any material weaknesses in internal controls; and
b) any fraud, whether or not material, that involves management
or other employees who have a significant role in the
registrant's internal controls; and
6. The registrant's other certifying officers and I have indicated in
this quarterly report whether or not there were significant changes
in internal controls or in other factors that could significantly
affect internal controls subsequent to the date of our most recent
evaluation, including any corrective actions with regard to
significant deficiencies and material weaknesses.
Date: November 14, 2002
By : /s/ David T. Foy
---------------------------------
David T. Foy
Senior Vice President and Chief Financial Officer
(Signature and Title)
26