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FORM 10-K
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2000
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 1-12749
HARTFORD LIFE, INC.
(Exact name of registrant as specified in its charter)
DELAWARE 06-1470915
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification Number)
200 HOPMEADOW STREET, SIMSBURY, CONNECTICUT 06089
(Address of principal executive offices)
(860) 547-5000
(Registrant's telephone number, including area code)
Securities registered pursuant to section 12(b) of the Act: the following, which
are registered on the New York Stock Exchange, Inc.:
7.2% Trust Preferred Securities, Series A, issued by Hartford Life
Capital I
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during
the preceding 12 months (or for such shorter period that the registrant was
required to file such reports), and (2) has been subject to such filing
requirements for the past 90 days. Yes [X] No[ ]
As of March 28, 2001 there were outstanding 1,000 shares of Common Stock, $0.01
par value per share, of the registrant, all of which were directly owned by
Hartford Fire Insurance Company, a direct wholly-owned subsidiary of The
Hartford Financial Services Group, Inc.
The registrant meets the conditions set forth in General Instruction I(1)(a)
and (b) of Form 10-K and is therefore filing this form with the reduced
disclosure format.
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[HARTFORD LIFE LOGO]
Hartford Life, Inc. and its subsidiaries (Hartford Life) is a leading financial
services and insurance organization providing investment products such as
variable annuities and mutual funds, individual and corporate owned life
insurance and group benefits products.
A subsidiary of The Hartford Financial Services Group, Inc., Hartford Life is
the nation's largest writer of individual variable annuities, the number three
writer of group disability insurance, a top provider of individual variable life
insurance and offers the fastest growing non-proprietary family of mutual funds.
CONTENTS
ITEM DESCRIPTION PAGE
PART I 1 Business of Hartford Life* 3
2 Properties* 11
3 Legal Proceedings 11
4 **
PART II 5 Market for Hartford Life's Common Stock and Related Stockholder Matters 11
6 **
7 Management's Discussion and Analysis of Financial Condition and Results
of Operations* 12
7A Quantitative and Qualitative Disclosures About Market Risk 32
8 Financial Statements and Supplementary Data 32
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 32
PART III 10 **
11 **
12 **
13 **
PART IV 14 Exhibits, Financial Statements, Schedules and Reports on Form 8-K 32
Signatures II-1
Exhibits Index II-2
* Item prepared in accordance with General Instruction I(2) of Form 10-K
** Item omitted in accordance with General Instruction I(2) of Form 10-K
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PART I
ITEM 1. BUSINESS OF HARTFORD LIFE
(Dollar amounts in millions, unless otherwise stated)
GENERAL
Hartford Life, Inc. and its subsidiaries ("Hartford Life" or the "Company"), an
indirect subsidiary of The Hartford Financial Services Group, Inc. ("The
Hartford"), is headquartered in Simsbury, Connecticut and is a leading financial
services and insurance organization. Hartford Life provides (i) investment
products, including variable annuities, fixed market value adjusted (MVA)
annuities, mutual funds and retirement plan services for the savings and
retirement needs of over 1.5 million customers, (ii) individual life insurance
for income protection and estate planning to approximately 500,000 customers,
(iii) group benefits products such as group life and group disability insurance
for the benefit of millions of individuals and (iv) corporate owned life
insurance. According to the latest publicly available data, with respect to the
United States, the Company is the largest writer of individual variable
annuities based on sales for the year ended December 31, 2000 and the third
largest writer of group disability insurance based on sales for the nine months
ended September 30, 2000. In addition, the Company offers a retail-oriented
mutual fund family that is the fastest in history to reach $10 billion in
assets. The Company's strong position in each of its core businesses provides an
opportunity to increase the sale of Hartford Life's products and services as
individuals increasingly save and plan for retirement, protect themselves and
their families against disability or death and engage in estate planning. The
Company is the third largest consolidated life insurance group based on
statutory assets as of December 31, 1999.
Hartford Life, together with The Hartford, strives to maintain and enhance its
position as a market leader within the financial services industry and to
maximize shareholder value. The Company has pursued a strategy of developing and
selling diverse and innovative products through multiple distribution channels,
continuously developing and expanding those distribution channels, achieving
cost efficiencies through economies of scale and improved technology,
maintaining effective risk management and prudent underwriting techniques and
capitalizing on its brand name and customer recognition of The Hartford Stag
Logo, one of the most recognized symbols in the financial services industry. In
the past year, Hartford Life's total assets under management, which include
$11.4 billion of third party assets invested in the Company's mutual funds,
increased 7% to $155.1 billion at December 31, 2000. Hartford Life generated
$6.0 billion in revenues and net income of $575 in 2000.
ORGANIZATION
Hartford Life, Inc., a Delaware corporation, was formed in December 1996 as a
direct subsidiary of Hartford Accident and Indemnity Company (HA&I) and an
indirect subsidiary of The Hartford. Pursuant to an initial public offering (the
"IPO") on May 22, 1997, Hartford Life sold to the public 26 million shares of
Class A Common Stock at $28.25 per share and received proceeds, net of offering
expenses, of $687. The 26 million shares sold in the IPO represented
approximately 18.6% of the equity ownership in Hartford Life. On June 27, 2000,
The Hartford acquired all of the outstanding common shares of Hartford Life not
already owned by The Hartford (The Hartford Acquisition). As a result of The
Hartford Acquisition, Hartford Life again became a wholly-owned subsidiary of
The Hartford. Additional information regarding the organization of the business
and The Hartford Acquisition may be found in Notes 1 and 3 of Notes to
Consolidated Financial Statements, respectively.
As a holding company, Hartford Life, Inc. has no significant business operations
of its own and, therefore, relies mainly on the dividends from its insurance
company subsidiaries, which are primarily domiciled in Connecticut, as the
principal source of cash to meet its obligations. Additional information
regarding the cash flow and liquidity needs of Hartford Life, Inc. may be found
in the Capital Resources and Liquidity section of the Management's Discussion
and Analysis of Financial Condition and Results of Operations (MD&A).
The Company maintains a retail mutual fund operation, whereby the Company,
through wholly-owned subsidiaries, provides investment management and
administrative services to The Hartford Mutual Funds, Inc., a family of fourteen
mutual funds. Investors can purchase "shares" in the mutual funds, all of which
are registered with the Securities and Exchange Commission, in accordance with
the Investment Company Act of 1940. The mutual funds are owned by the
shareholders of those funds and not by the Company.
On January 25, 2001, The Hartford, through Hartford Life, agreed to acquire the
U.S. individual life insurance, annuity and mutual fund businesses of Fortis,
Inc. (operating as Fortis Financial Group and referred to as "Fortis") for $1.12
billion in cash. The Company will effect the acquisition through several
reinsurance agreements with subsidiaries of Fortis and the purchase of 100% of
the stock of Fortis Advisors, Inc. and Fortis Investors, Inc., wholly-owned
subsidiaries of Fortis. The Fortis transaction, which is subject to insurance
regulatory approval and other customary conditions, is expected to be completed
in the second quarter of 2001. The acquisition will be accounted for as a
purchase transaction. (For additional information, see the Capital Resources and
Liquidity section of the MD&A under "Subsequent Event".)
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DISTRIBUTION
Hartford Life utilizes a multiple channel distribution network which provides a
distinct competitive advantage in selling products and services to a broad
cross-section of customers throughout varying economic and market cycles. In
particular, the Company has developed an extensive network of banks and
broker-dealers, which is one of the largest in the industry, including over
1,500 national, regional and independent broker-dealers and approximately 500
banks. Consistent with this strategy, in 1998, the Company purchased all the
outstanding shares of PLANCO Financial Services, Inc. and its affiliate, PLANCO,
Incorporated (collectively, "PLANCO"), the nation's largest wholesaler of
individual annuities and the Company's primary wholesale distributor of The
Director(R) variable annuity and retail mutual funds, thus securing an important
distribution channel. In connection with the previously mentioned acquisition of
Fortis, Hartford Life will broaden its reach in the emerging affluent market
with the addition of a retail broker-dealer consisting of approximately 3,000
registered representatives. Additionally, the Company continues to expand its
opportunity to sell through financial institutions. As of September 30, 2000,
the Company was selling products through 24 of the nation's 25 largest retail
banks, including proprietary relationships with 10 of the top 25. The Company's
broad distribution network has enabled the Company to introduce new products and
services in an effective manner and allows the Company significant opportunity
to access its customer base. Hartford Life sells variable annuities, mutual
funds, fixed MVA annuities, variable life insurance and retirement plan services
through its broker-dealer and bank distribution systems.
PRODUCTS
It is Hartford Life's belief that, as Americans journey through life, they have
specific needs related to building and preserving their financial resources. The
Company's goal is to be the "official supplier" of that journey -- the preferred
source of financial solutions for both individuals and employers, as well as the
financial professionals who serve them. To achieve this goal, Hartford Life has
focused its efforts on offering products that provide mechanisms for saving
(e.g. mutual funds), planning for retirement (e.g. annuities) and protecting and
preserving income and wealth (e.g. individual life, group life and group
disability). To ensure that it is able to meet the emerging opportunities that
will arise for individuals pursuing their dreams in the new millennium, the
Company expects to continue to expend significant resources and development
efforts in creating innovative new products and services.
CUSTOMER SERVICE, TECHNOLOGY AND ECONOMIES OF SCALE
Hartford Life maintains advantageous economies of scale and operating
efficiencies due to its continued growth, attention to expense and claims
management and commitment to customer service and technology. These advantages
allow the Company to competitively price its products for its distribution
network and policyholders. The Company continues to achieve operating
efficiencies in its Investment Products segment. Operating expenses associated
with the Company's individual annuity products as a percentage of total
individual annuity account values reduced by more than half, declining from 43
basis points in 1992 to 21 basis points in 2000. In addition, the Company
utilizes computer technology to enhance communications within the Company and
throughout its distribution network in order to improve the Company's efficiency
in marketing, selling and servicing its products and, as a result, provides
high-quality customer service. In recognition of excellence in customer service
for variable annuities, Hartford Life was awarded the 2000 Annuity Service Award
by DALBAR Inc., a recognized independent financial services research
organization, for the fifth consecutive year. Hartford Life is the only company
to receive this prestigious award in every year of the award's existence. Also,
The Hartford Mutual Funds, Inc. have been named the leading mid-sized fund
complex in the industry for top service providers, according to a survey of
broker-dealers conducted by DALBAR Inc.
RISK MANAGEMENT
Hartford Life's product designs, prudent underwriting standards and risk
management techniques protect it against disintermediation risk and greater than
expected mortality and morbidity experience. As of December 31, 2000, the
Company had limited exposure to disintermediation risk on approximately 98% of
its domestic life insurance and annuity liabilities through the use of
non-guaranteed separate accounts, MVA features, policy loans, surrender charges
and non-surrenderability provisions. The Company effectively utilizes prudent
underwriting to select and price insurance risks and regularly monitors
mortality and morbidity assumptions to determine if experience remains
consistent with these assumptions and to ensure that its product pricing remains
appropriate. The Company also enforces disciplined claims management to protect
itself against greater than expected morbidity experience.
BRAND NAME AND FINANCIAL STRENGTH
The Hartford Stag Logo is one of the most recognized symbols in the insurance
and financial services industry. This brand recognition, coupled with a strong
balance sheet and sound ratings, has enabled the Company to establish the
reputation and financial strength necessary to maintain distribution
relationships, make strategic acquisitions and enhance important alliances and
generate new customer sales. Pursuant to a Master Intercompany Agreement with
The Hartford, the Company has been granted a perpetual non-exclusive license to
use the Stag Logo in connection with the sale of Hartford Life's products and
services. However, in the event that The Hartford reduces its beneficial
ownership below 50% of the combined voting power of the Company's then
outstanding securities, the license may be revoked upon the later of the fifth
anniversary of the date of consummation of the
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Company's IPO of its Class A Common Stock or one year after receipt by the
Company of written notice of The Hartford's intention to revoke the license.
REPORTING SEGMENTS
Hartford Life has the following reportable operating segments: Investment
Products, Individual Life, Group Benefits (formerly Employee Benefits) and
Corporate Owned Life Insurance (COLI). The Company includes in "Other" corporate
items not directly allocable to any of its reportable operating segments,
principally interest expense, as well as its international operations, which are
primarily located in Latin America and the Far East. The following is a
description of each segment, including a discussion of principal products,
methods of distribution and competitive environments. Additional information on
Hartford Life's segments may be found in the MD&A and Note 17 of Notes to
Consolidated Financial Statements.
INVESTMENT PRODUCTS
The Investment Products segment focuses, through the sale of individual variable
and fixed annuities, mutual funds, retirement plan services and other investment
products, on the savings and retirement needs of the growing number of
individuals who are preparing for retirement or who have already retired. From
December 31, 1995 to December 31, 2000, this segment's assets under management
grew to $116.0 billion from $43.9 billion, a five year compounded annual growth
rate of 21%. Investment Products generated revenues of $2.4 billion, $2.0
billion and $1.8 billion in 2000, 1999 and 1998, respectively, of which
individual annuities accounted for $1.5 billion, $1.4 billion and $1.1 billion
of total Investment Products revenues in 2000, 1999 and 1998, respectively. Net
income in the Investment Products segment was $424 in 2000, a 28% increase over
1999.
Hartford Life sells both variable and fixed individual annuity products through
a wide distribution network of national and regional broker-dealer
organizations, banks and other financial institutions and independent financial
advisors. Hartford Life is a market leader in the annuity industry with sales of
$10.7 billion, $10.9 billion and $10.0 billion in 2000, 1999 and 1998,
respectively. According to Variable Annuity and Research Data Service (VARDS),
Hartford Life was the number one writer of individual variable annuities in the
United States for 2000, 1999 and 1998 with sales of $9.0 billion, $10.3 billion
and $9.9 billion, respectively. In addition, the Company was the number one
seller of individual variable annuities through banks in 2000, 1999 and 1998,
according to Kenneth Kehrer Associates (a leading consultant to banks).
The Company's total account value related to individual annuity products was
$87.2 billion as of December 31, 2000. Of this total account value, $78.2
billion, or 90%, related to individual variable annuity products and $9.0
billion, or 10%, related primarily to fixed MVA annuity products.
Hartford Life is emerging as a significant participant in the mutual fund
business. The Company is among the top providers of retirement products and
services, including asset management and plan administration, to municipalities
pursuant to Section 457 and plans to corporations under Section 401(k) of the
Internal Revenue Code of 1986, as amended (referred to as "Section 457" and
"Section 401(k)", respectively). The Company also provides structured settlement
contracts, terminal funding products and other investment products such as
guaranteed investment contracts (GICs).
As previously mentioned, in January 2001, The Hartford, through Hartford Life,
agreed to acquire the U.S. annuity and mutual fund businesses of Fortis. This
acquisition is expected to increase assets under management in the Company's
fast growing mutual fund business by over 30%, as well as solidify the Company's
number one position in variable annuities. (For additional information, see the
Capital Resources and Liquidity section of the MD&A under "Subsequent Event".)
Principal Products
Individual Variable Annuities -- Hartford Life earns fees, based on the
policyholders' account values, for managing variable annuity assets and
maintaining policyholder accounts. The Company uses specified portions of the
periodic deposits paid by a customer to purchase units in one or more mutual
funds as directed by the customer who then assumes the investment performance
risks and rewards. As a result, variable annuities permit policyholders to
choose aggressive or conservative investment strategies, as they deem
appropriate, without affecting the composition and quality of assets in the
Company's general account. These products offer the policyholder a variety of
equity and fixed income options, as well as the ability to earn a guaranteed
rate of interest in the general account of the Company. The Company offers an
enhanced guaranteed rate of interest for a specified period of time (no longer
than twelve months) if the policyholder elects to dollar-cost average funds from
the Company's general account into one or more non-guaranteed separate accounts.
Due to this enhanced rate and the volatility experienced in the overall equity
markets, this option continues to be popular with policyholders. Policyholders
may make deposits of varying amounts at regular or irregular intervals and the
value of these assets fluctuates in accordance with the investment performance
of the funds selected by the policyholder. To encourage persistency, many of the
Company's individual variable annuities are subject to withdrawal restrictions
and surrender charges ranging initially from 6% to 8% of the contract's initial
deposit less withdrawals which reduce to zero on a sliding scale, usually within
seven policy years. Volatility experienced by the equity markets in 2000, 1999
and 1998 did not cause a significant
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increase in variable annuity surrenders, demonstrating that policyholders are
generally aware of the long-term nature of these products. Individual variable
annuity account values of $78.2 billion as of December 31, 2000, has grown
significantly from $13.1 billion as of December 31, 1994 due to strong net cash
flow, the result of a high level of sales, low levels of surrenders and equity
market appreciation. Approximately 96% and 95% of the individual variable
annuity account values were held in non-guaranteed separate accounts as of
December 31, 2000 and 1999, respectively.
The assets underlying the Company's variable annuities are managed both
internally and by outside money managers, while the Company provides all policy
administration services. The Company utilizes a select group of money managers,
such as Wellington Management Company, LLP (Wellington), Putnam Financial
Services, Inc. (Putnam), American Funds, MFS Investment Management (MFS),
Franklin Templeton Group and Morgan Stanley Dean Witter InterCapital, Inc. All
have an interest in the continued growth in sales of the Company's products and
greatly enhance the marketability of the Company's annuities and the strength of
its product offerings. Two of the industry's top twenty leading variable
annuities, (based on sales for the year ended 2000) The Director(R) and Putnam
Hartford Capital Manager Variable Annuity, are sponsored by Hartford Life and
are managed in part by Wellington and Putnam, respectively. The Hartford
Leaders, a multi-manager variable annuity introduced in July 1999, combines the
product manufacturing, wholesaling and service capabilities of Hartford Life
with the investment management expertise of three of the nation's most
successful investment management organizations, American Funds, Franklin
Templeton Group and MFS. The Hartford Leaders has proved to be a strong product
from inception and is poised to join The Director(R) and Putnam Hartford Capital
Manager Variable Annuity as an industry leader.
Fixed MVA Annuities -- Fixed MVA annuities are fixed rate annuity contracts
which guarantee a specific sum of money to be paid in the future, either as a
lump sum or as monthly income. In the event that a policyholder surrenders a
policy prior to the end of the guarantee period, the MVA feature increases or
decreases the cash surrender value of the annuity in respect of any interest
rate decreases or increases, respectively, thereby protecting the Company from
losses due to higher interest rates at the time of surrender. The amount of
payment will not fluctuate due to adverse changes in the Company's investment
return, mortality experience or expenses. The Company's primary fixed MVA
annuities have terms varying from one to ten years with an average term of
approximately seven years. Sales of the Company's fixed MVA annuities increased
during 2000 as a result of the higher interest rate environment making 2000 the
best sales year for this product since 1995. Account values of fixed MVA
annuities were $9.0 billion and $8.4 billion as of December 31, 2000 and 1999,
respectively.
Mutual Funds -- In September 1996, the Company launched a family of retail
mutual funds. The Company provides investment management and administrative
services to The Hartford Mutual Funds, Inc., a family of fourteen mutual funds.
These funds are managed by Wellington and Hartford Investment Management
Company, a wholly-owned subsidiary of The Hartford. The Company has entered into
agreements with over 750 financial services firms to distribute these mutual
funds.
The Company charges management fees to the shareholders of the mutual funds,
which are recorded as revenue by the Company. Investors can purchase shares in
the mutual funds, all of which are registered with the Securities and Exchange
Commission, in accordance with the Investment Company Act of 1940. The mutual
funds are owned by the shareholders of those funds and not by the Company. As
such, the mutual fund assets and liabilities, as well as related investment
returns, are not reflected in the Company's consolidated financial statements
since they are not assets, liabilities and operations of the Company.
According to Strategic Insight (a mutual fund research and consulting
organization), The Hartford Mutual Funds, Inc. reached $10 billion in assets
faster than any other retail-oriented fund family in history. Eight of the
fourteen funds have Morningstar ratings and all eight have three-, four- or
five-star ratings as of December 31, 2000. Total retail mutual fund sales were
$5.2 billion, $3.3 billion and $1.6 billion in 2000, 1999 and 1998,
respectively.
Corporate -- The Company sells retirement plan products and services to
corporations under Section 401(k) plans targeting the small and medium case
markets since the Company believes these markets are underpenetrated in
comparison to the large case market. As of December 31, 2000, the Company
administered over 1,400 Section 401(k) plans.
Governmental -- The Company sells retirement plan products and services to
municipalities under Section 457 plans. The Company offers a number of different
funds, both fixed income and equity, to the employees in Section 457 plans.
Generally, the Company manages the fixed income funds and certain other outside
money managers act as advisors to the equity funds offered in Section 457 plans
administered by the Company. As of December 31, 2000, the Company administered
over 2,000 Section 457 plans.
Institutional Liabilities -- The Company also sells structured settlement
contracts which provide for periodic payments to an injured person or survivor
for a generally determinable number of years, typically in settlement of a claim
under a liability policy in lieu of a lump sum settlement. The Company's
structured settlements are sold through The Hartford's property-casualty
insurance operations as well as specialty brokers. The Company also markets
other annuity contracts for special purposes such as the funding of terminated
defined benefit pension plans. In addition, the Company offers GICs and
short-term funding agreements.
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Marketing and Distribution
The Investment Products distribution network is based on management's strategy
of utilizing multiple and competing distribution channels to achieve the
broadest distribution to reach target customers. The success of the Company's
marketing and distribution system depends on its product offerings, fund
performance, successful utilization of wholesaling organizations, quality of
customer service, and relationships with national and regional broker-dealer
firms, banks and other financial institutions, and independent financial
advisors (through which the sale of the Company's individual annuities to
customers is consummated).
Hartford Life maintains a distribution network of approximately 1,500
broker-dealers and approximately 500 banks. As of September 30, 2000, the
Company was selling products through 24 of the 25 largest retail banks in the
United States, including proprietary relationships with 10 of the top 25. The
Company periodically negotiates provisions and terms of its relationships with
unaffiliated parties, and there can be no assurance that such terms will remain
acceptable to the Company or such third parties. In August 1998, the Company
completed the purchase of all outstanding shares of PLANCO, a primary wholesaler
of the Company's individual annuities and mutual funds. PLANCO is the nation's
largest wholesaler of individual annuities and has played a significant role in
Hartford Life's growth over the past decade. As a wholesaler, PLANCO distributes
Hartford Life's fixed and variable annuities, mutual funds and single premium
variable life insurance by providing sales support to registered
representatives, financial planners and broker-dealers at brokerage firms and
banks across the United States. This acquisition secured an important
distribution channel for the Company and gives the Company a wholesale
distribution platform which it can expand in terms of both the number of
individuals wholesaling its products and the portfolio of products which they
wholesale. In addition, the Company uses internal personnel with extensive
experience in the Section 457 market, as well as access to the Section 401(k)
market, to sell its products and services in the retirement plan market.
Competition
The Investment Products segment competes with numerous other insurance companies
as well as certain banks, securities brokerage firms, investment advisors and
other financial intermediaries marketing annuities, mutual funds and other
retirement-oriented products. As a result of court decisions and regulatory
actions, national banks may become more significant competitors in the future
for insurers which sell annuities. The 1999 Gramm-Leach-Bliley Act (the
Financial Services Modernization Act), which allows affiliations among banks,
insurance companies and securities firms, did not precipitate any significant
changes in ownership in 2000. (For additional information, see the Regulatory
Matters and Contingencies section of the MD&A.) Product sales are affected by
competitive factors such as investment performance ratings, product design,
visibility in the marketplace, financial strength ratings, distribution
capabilities, levels of charges and credited rates, reputation and customer
service.
INDIVIDUAL LIFE
The Individual Life segment sells a variety of products including variable life,
universal life, interest sensitive whole life and term life insurance primarily
to the high end estate and business planning markets. Life insurance in force
increased 13% to $75.1 billion as of December 31, 2000 from $66.7 billion as of
December 31, 1999. Account values grew 8% to $5.8 billion as of December 31,
2000 from $5.4 billion as of December 31, 1999. The Individual Life segment
generated revenues of $640, $584 and $567 in 2000, 1999 and 1998, respectively.
Net income in the Individual Life segment was $79 in 2000, an 11% increase over
1999.
As previously mentioned, in January 2001, The Hartford, through Hartford Life,
agreed to acquire the U.S. individual life insurance business of Fortis. This
acquisition will add significant scale to the Company's individual life
business, and according to data provided by Tillinghast-Towers Perrin, Hartford
Life will move to third largest from fifth largest writer of variable life
insurance in the United States based upon new premium sales. It will also
broaden the Company's reach in the emerging affluent market with the addition of
a retail broker-dealer consisting of approximately 3,000 registered
representatives. (For additional information, see the Capital Resources and
Liquidity section of the MD&A under "Subsequent Event".)
Principal Products
The trend in the individual life industry has been a shift away from traditional
products and fixed universal life insurance towards variable life (including
variable universal life) insurance products, in which Hartford Life has been on
the leading edge. In 2000, of the Company's new sales of individual life
insurance, 89% was variable life and 10% was either universal life or interest
sensitive whole life. The Company also sold a small amount of term life
insurance.
Variable Life -- Variable life insurance provides a return linked to an
underlying investment portfolio and the Company allows policyholders to
determine their desired asset mix among a variety of underlying mutual funds. As
the return on the investment portfolio increases or decreases, as the case may
be, the death benefit or surrender value of the variable life policy may
increase or decrease. The Company's single premium variable life product
provides a death benefit to the policy beneficiary based on a single premium
deposit. The Company's second-to-die products are distinguished from other
products in that two lives are insured rather than one, and the policy proceeds
are paid upon the death of both insureds. Second-to-die policies are frequently
used in estate
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planning, often to fund estate taxes for a married couple. Variable life account
values were $2.9 billion and $2.6 billion as of December 31, 2000 and 1999,
respectively.
Universal Life and Interest Sensitive Whole Life -- Universal life and interest
sensitive whole life insurance coverages provide life insurance with adjustable
rates of return based on current interest rates. The Company offers both
flexible and fixed premium policies and provides policyholders with flexibility
in the available coverage, the timing and amount of premium payments and the
amount of the death benefit, provided there are sufficient policy funds to cover
all policy charges for the coming period. The Company also sells universal life
insurance policies with a second-to-die feature similar to that of the variable
life insurance product offered. Universal life and interest sensitive whole life
account values were $2.1 billion and $2.0 billion as of December 31, 2000 and
1999, respectively.
Marketing and Distribution
Consistent with the Company's strategy to access multiple distribution outlets,
the Individual Life distribution organization has been developed to penetrate a
multitude of retail sales channels. These include independent life insurance
sales professionals; agents of other companies; national, regional and
independent broker-dealers; banks and property and casualty insurance
organizations. The primary organization used to wholesale Hartford Life's
products to these outlets is a group of highly qualified life insurance
professionals with specialized training in sophisticated life insurance sales,
particularly as it pertains to estate and business planning. These individuals
are generally employees of Hartford Life, who are managed through a regional
sales office system. The Company has grown this organization rapidly the past
few years to over 210 individuals and expects to continue to increase the number
of wholesalers in the future.
Competition
The Individual Life segment competes with approximately 1,500 life insurance
companies in the United States, as well as other financial intermediaries
marketing insurance products. Competitive factors related to this segment are
primarily the breadth and quality of life insurance products offered, pricing,
relationships with third-party distributors and the quality of underwriting and
customer service.
GROUP BENEFITS
The Group Benefits segment sells group life and group disability insurance, as
well as other products, including stop loss and supplementary medical coverage
to employers and employer sponsored plans, accidental death and dismemberment,
travel accident and other special risk coverages to employers and associations.
The Company also offers disability underwriting, administration, claims
processing services and reinsurance to other insurers and self-funded employer
plans. According to the latest results published by Life Insurance Marketing and
Research Association (LIMRA), the Company, based on sales, was the third largest
provider of group disability insurance and the fourth largest writer of group
term life insurance in the United States for the nine months ended September 30,
2000. Generally, policies sold in this segment are term insurance, typically
with one or two year rate guarantees. These rate guarantees allow the Company to
make adjustments in rate or terms of its policies in order to minimize the
adverse effect of various market trends. In the disability market, the Company
focuses on strong underwriting and claims management to derive a competitive
advantage. As of December 31, 2000 and 1999, the Company had group disability
reserves of $2.0 billion and $1.8 billion and group life reserves of $601 and
$560, respectively. The Group Benefits segment generated revenues of $2.2
billion, $2.0 billion and $1.8 billion in 2000, 1999 and 1998, respectively, of
which group disability insurance accounted for $939, $860 and $763 and group
life insurance accounted for $687, $654 and $593 of total Group Benefits
revenues in 2000, 1999 and 1998, respectively. Net income in the Group Benefits
segment was $90 in 2000, a 14% increase over 1999.
Principal Products
Group Disability -- Hartford Life is one of the largest participants in the
"large case" market of the group disability insurance business. The large case
market, as defined by the Company, generally consists of group disability
policies covering over 500 employees in a particular company. The Company is
continuing its focus on the "small case" and "medium case" group markets,
emphasizing name recognition and reputation as well as the Company's managed
disability approach to claims and administration. The Company's efforts in the
group disability market focus on early intervention, return-to-work programs,
reduction of long-term disability claims and successful rehabilitation. Over the
last several years, the focus of new disability products introduced is to
provide incentives for employees to return to independence. The Company also
works with disability claimants to improve the receipt rate of Social Security
offsets (i.e., reducing payment of benefits by the amount of Social Security
payments received).
Hartford Life has concentrated on a managed disability approach, which
emphasizes early claimant intervention in an effort to facilitate a disabled
claimant's return to work and thereby contain costs. This approach, coupled with
an individualized approach to claim servicing, and an incentive to contain
costs, leads to an overall reduction in the cost of disability coverage for
employers. The Company's short-term disability benefit plans provide a weekly
benefit amount (typically 60% to 70% of the employee's earned income up to a
specified maximum benefit) to insured employees when they are unable to work due
to an accident or illness. Long-
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term disability insurance provides a monthly benefit for those extended periods
of time not covered by a short-term disability benefit plan when insured
employees are unable to work due to disability. Employees may receive total or
partial disability benefits. Most of these policies begin providing benefits
following a 90 or 180 day waiting period and generally continue providing
benefits until the employee reaches age 65. Long-term disability benefits are
paid monthly and are limited to a portion, generally 50-70%, of the employee's
earned income up to a specified maximum benefit.
Group Life -- Group term life insurance provides term coverage to employees and
their dependents for a specified period and has no accumulation of cash values.
The Company offers options for its basic group life insurance coverage,
including portability of coverage and a living benefit option, whereby
terminally ill policyholders can receive death benefits prior to their deaths.
In addition, the Company offers premium waivers and accidental death and
dismemberment coverage to employee groups.
Other -- Hartford Life provides excess of loss medical coverage (known as stop
loss insurance) to employers who self-fund their medical plans and pay claims
using the services of a third-party administrator. The Company provides Medicare
Supplement, travel accident, hospital indemnity and other coverages (including
group life and group disability) primarily to individual members of various
associations as well as employee groups.
Marketing and Distribution
Hartford Life uses an experienced group of Company employees, managed through a
regional sales office system, to distribute its group insurance products and
services through a variety of distribution outlets. The Company expanded its
sales office system during 1999, by increasing the sales force and the number of
sales offices by about 25% and 15%, respectively. The Company will continue to
expand the system over the coming years in areas that have the highest growth
potential. The Company will also continue to develop alternative distribution
channels to sell its products, such as sales to employers through brokers,
consultants and third-party administrators as well as to multiple employer
groups through its relationships with trade associations. In keeping with its
strategy of developing multiple distribution channels, the Company signed an
agreement in January 2001 with Wausau Benefits, Inc., the country's tenth
largest third-party administrator, to sell its group life and group disability
products.
Competition
Competitive factors primarily affecting Group Benefits are the variety and
quality of products offered, the price quoted for coverage and services, the
Company's relationships with its third-party distributors and the quality of
customer service. Group Benefits competes with numerous other insurance
companies and other financial intermediaries marketing insurance products.
However, many of these businesses have relatively high barriers to entry and
there have been very few new entrants over the past few years, while other major
carriers have exited the market.
CORPORATE OWNED LIFE INSURANCE (COLI)
Hartford Life is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
or a trust sponsored by the company named as the beneficiary under the policy.
Until the Health Insurance Portability Act of 1996 (HIPA Act of 1996), the
Company sold two principal types of COLI, leveraged and variable products.
Leveraged COLI is a fixed premium life insurance policy owned by a company or a
trust sponsored by a company. The HIPA Act of 1996 phased out the deductibility
of interest on policy loans under leveraged COLI at the end of 1998, virtually
eliminating all future sales of leveraged COLI. Variable COLI continues to be a
product used by employers to fund non-qualified benefits or other postemployment
benefit liabilities. Variable COLI account values were $15.9 billion and $12.4
billion as of December 31, 2000 and 1999, respectively.
Leveraged COLI account values decreased to $5.0 billion as of December 31, 2000
from $5.7 billion as of December 31, 1999, primarily due to the HIPA Act of
1996. Although COLI revenues decreased in 2000 to $767 from $831 in 1999, COLI
net income increased 13%, to $34 in 2000.
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OTHER MATTERS
RESERVES
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of Hartford Life establish and carry as
liabilities actuarially determined reserves which are calculated to meet their
future obligations. Reserves for life insurance and disability contracts are
based on actuarially recognized methods using prescribed morbidity and mortality
tables in general use in the United States, which are modified to reflect
Hartford Life's actual experience when appropriate. These reserves are computed
at amounts that, with additions from estimated premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet Hartford Life's policy obligations at their
maturities or in the event of an insured's death. Reserves also include unearned
premiums, premium deposits, claims incurred but not reported and claims reported
but not yet paid. Reserves for assumed reinsurance are computed in a manner that
is comparable to direct insurance reserves. Additional information may be found
in the Reserves section of the MD&A.
REGULATION AND PREMIUM RATES
Insurance companies are subject to comprehensive and detailed regulation and
supervision throughout the United States. The extent of such regulation varies,
but generally has its source in statutes which delegate regulatory, supervisory
and administrative powers to state insurance departments. Such powers relate to,
among other things, the standards of solvency that must be met and maintained;
the licensing of insurers and their agents; the nature of and limitations on
investments; premium rates; claim handling and trade practices; restrictions on
the size of risks which may be insured under a single policy; deposits of
securities for the benefit of policyholders; approval of policy forms; periodic
examinations of the affairs of companies; annual and other reports required to
be filed on the financial condition of companies or for other purposes; fixing
maximum interest rates on life insurance policy loans and minimum rates for
accumulation of surrender values; and the adequacy of reserves and other
necessary provisions for unearned premiums, unpaid claims and claim adjustment
expenses and other liabilities, both reported and unreported.
Most states have enacted legislation that regulates insurance holding company
systems such as Hartford Life. This legislation provides that each insurance
company in the system is required to register with the insurance department of
its state of domicile and furnish information concerning the operations of
companies within the holding company system which may materially affect the
operations, management or financial condition of the insurers within the system.
All transactions within a holding company system affecting insurers must be fair
and equitable. Notice to the insurance departments is required prior to the
consummation of transactions affecting the ownership or control of an insurer
and of certain material transactions between an insurer and any entity in its
holding company system. In addition, certain of such transactions cannot be
consummated without the applicable insurance department's prior approval.
REINSURANCE
In accordance with normal industry practice, Hartford Life is involved in both
the cession and assumption of insurance with other insurance and reinsurance
companies. As of December 31, 2000, the maximum amount of life insurance
retained on any one life by any one of the life operations was approximately
$2.5.
INVESTMENT OPERATIONS
The Company's investment operations are managed by its investment strategy group
which reports directly to senior management of the Company. Hartford Life's
investments have been separated into specific portfolios which support specific
classes of product liabilities. The investment strategy group works closely with
the product lines to develop investment guidelines, including duration targets,
asset allocation and convexity constraints, asset/liability mismatch tolerances
and return objectives, to ensure that the product line's individual risk and
return objectives are met. The Company's primary investment objective for its
general account and guaranteed separate accounts is to maximize after-tax
returns consistent with acceptable risk parameters, including the management of
the interest rate sensitivity of invested assets to that of policyholder
obligations.
For further discussion of Hartford Life's approach to managing risks, see the
Investments and Capital Markets Risk Management sections of the MD&A, as well as
Note 4 of Notes to Consolidated Financial Statements.
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RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-Based Capital".
LEGISLATIVE AND REGULATORY INITIATIVES
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Legislative and Regulatory Initiatives".
INSOLVENCY FUND
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Guaranty Fund".
NAIC PROPOSALS
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "NAIC Proposals".
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
Reference is made to the Regulatory Matters and Contingencies section of the
MD&A under "Dependence on Certain Third Party Relationships".
EMPLOYEES
Hartford Life had approximately 5,600 employees at February 28, 2001.
ITEM 2. PROPERTIES
Hartford Life's principal executive offices are located in Simsbury,
Connecticut. The Company's home office complex consists of approximately 655
thousand square feet, and is leased from a third party by Hartford Fire
Insurance Company (Hartford Fire), an indirect subsidiary of The Hartford. This
lease expires in the year 2009. Expenses associated with these offices are
allocated on a direct basis to Hartford Life by Hartford Fire. The Company
believes its properties and facilities are suitable and adequate for current
operations.
ITEM 3. LEGAL PROCEEDINGS
Hartford Life is involved or may become involved in various legal actions, in
the normal course of its business, in which claims for alleged economic and
punitive damages have been or may be asserted. Some of the pending litigation
has been filed as purported class actions and some actions have been filed in
certain jurisdictions that permit punitive damage awards that are
disproportionate to the actual damages incurred. Although there can be no
assurances, at the present time, the Company does not anticipate that the
ultimate liability arising from potential, pending or threatened legal actions,
after consideration of provisions made for estimated losses and costs of
defense, will have a material adverse effect on the financial condition or
operating results of the Company.
PART II
ITEM 5. MARKET FOR HARTFORD LIFE'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
All of the Company's outstanding shares are ultimately owned by The Hartford. As
of March 28, 2001 the Company had issued and outstanding 1,000 shares of Common
Stock at $0.01 par value per share.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS
(Dollar amounts in millions, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations ("MD&A") addresses the financial condition of Hartford Life, Inc. and
its subsidiaries ("Hartford Life" or the "Company") as of December 31, 2000,
compared with December 31, 1999, and its results of operations for the years
ended December 31, 2000 and 1999. This discussion should be read in conjunction
with the Consolidated Financial Statements and related Notes beginning on page
F-1.
Certain of the statements contained herein or in Part I of the Company's Form
10-K, other than statements of historical fact, are forward-looking statements.
These statements are made pursuant to the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995 and include estimates and assumptions
related to economic, competitive and legislative developments. These
forward-looking statements are subject to change and uncertainty which are, in
many instances, beyond Hartford Life'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 will be those anticipated by
management. Actual results could differ materially from those expected by the
Company, depending on the outcome of certain factors, including the possibility
of general economic and business conditions that are less favorable than
anticipated, legislative developments, changes in interest rates or the stock
markets, stronger than anticipated competitive activity and those factors
described in such forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
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Consolidated Results of Operations 12
Investment Products 14
Individual Life 15
Group Benefits 16
Corporate Owned Life Insurance (COLI) 17
Reserves 17
Investments 18
Capital Markets Risk Management 20
Capital Resources and Liquidity 27
Regulatory Matters and Contingencies 30
Effect of Inflation 31
Accounting Standards 31
CONSOLIDATED RESULTS OF OPERATIONS
- --------------------------------------------------------------------------------
Hartford Life provides investment and retirement products such as variable and
fixed annuities, mutual funds and retirement plan services; individual and
corporate owned life insurance; and, group benefit products such as group life
and group disability insurance.
Hartford Life derives its revenues principally from: (a) fee income, including
asset management fees on separate account and mutual fund assets and mortality
and expense fees, as well as cost of insurance charges; (b) fully insured
premiums; (c) certain other fees; and (d) net investment income on general
account assets. Asset management fees and mortality and expense fees are
primarily generated from separate account assets, which are deposited with the
Company through the sale of variable annuity and variable life products, and
mutual funds. Cost of insurance charges are assessed on the net amount at risk
for investment oriented life insurance products. Premium revenues are derived
primarily from the sale of group life and group disability insurance products.
Hartford Life's expenses essentially consist of interest credited to
policyholders on general account liabilities, insurance benefits provided,
dividends to policyholders, costs of selling and servicing the various products
offered by the Company, and other general business expenses.
Hartford Life's profitability depends largely on the amount of assets under
management, the level of fully insured premiums, the adequacy of product pricing
and underwriting discipline, claims management and operating efficiencies, and
its ability to earn target spreads between earned investment rates on general
account assets and credited rates to customers.
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OPERATING SUMMARY
2000 1999
- --------------------------------------------------------------------------------
Fee income $ 2,484 $ 2,105
Earned premiums and other 2,002 1,874
Net investment income 1,592 1,562
Net realized capital losses (88) (5)
- --------------------------------------------------------------------------------
TOTAL REVENUES 5,990 5,536
- --------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 3,162 3,054
Insurance expenses and other 1,236 1,057
Amortization of deferred policy acquisition costs 671 568
Dividends to policyholders 67 104
Interest expense 66 67
- --------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 5,202 4,850
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 788 686
Income tax expense 213 219
- --------------------------------------------------------------------------------
NET INCOME $ 575 $ 467
- --------------------------------------------------------------------------------
Hartford Life has the following reportable operating segments: Investment
Products, Individual Life, Group Benefits (formerly Employee Benefits) and
Corporate Owned Life Insurance (COLI). The Company reports corporate items not
directly allocable to any of its segments, principally interest expense, as well
as its international operations, which are primarily located in Latin America
and the Far East, in an "Other" category. For information regarding the
Company's reportable segments, see Note 17 of Notes to Consolidated Financial
Statements.
On June 27, 2000, The Hartford Financial Services Group, Inc. ("The Hartford")
acquired all of the outstanding shares of Hartford Life that it did not already
own. (For additional information, see the Capital Resources and Liquidity
section under "Common Stock Acquired by The Hartford".)
On January 25, 2001, The Hartford, through Hartford Life, agreed to acquire the
U.S. individual life insurance, annuity and mutual fund businesses of Fortis,
Inc. (operating as Fortis Financial Group and referred to as "Fortis"). This
transaction is expected to be completed in the second quarter of 2001. (For
additional information, see the Capital Resources and Liquidity section under
"Subsequent Event".)
Revenues increased $454, or 8%, primarily related to the growth across each of
Hartford Life's primary operating segments, particularly the Investment Products
and Group Benefits segments, where revenues increased $339, or 17%, and $183, or
9%, respectively. The revenue growth in the Investment Products segment was
primarily due to higher fee income in the individual annuity and retail mutual
fund operations as related average assets under management in 2000 were higher
than 1999. The Group Benefits segment experienced higher earned premiums due to
strong sales and persistency. The Individual Life segment also contributed to
the revenue increase as a result of strong sales and favorable persistency.
Partially offsetting the growth in revenues was the decrease in COLI revenues
primarily related to the declining block of leveraged COLI business.
Benefits, claims and expenses increased $352, or 7%, primarily related to the
growth in Hartford Life's principal operating segments described above. Net
income increased $108, or 23%, led by the Investment Products segment where net
income increased $94, or 28%. Additionally, net income related to each of the
remaining three operating segments increased 10% or more. Hartford Life also
recorded a benefit related to the settlement of certain federal tax matters of
$24 in 2000 (see Note 16 (c) of Notes to Consolidated Financial Statements).
This benefit, along with an $8 benefit related to state income taxes, resulted
in $32 of tax benefits for the year ended December 31, 2000. Additionally, net
realized capital losses increased due to portfolio rebalancing. Excluding the
tax items and net realized capital losses, earnings increased $133, or 28%.
OUTLOOK
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader within the financial services
industry, to continue the Company's growth in assets under management and fully
insured premium growth and to maximize shareholder value. Hartford Life is well
positioned to assist individuals in meeting their financial goals as they
increasingly save and plan for retirement, protect themselves and their families
against disability or death and prepare their estates for an efficient transfer
of wealth between generations. Hartford Life's strong market position in its
primary businesses, which align with these growing markets, will provide
opportunities to increase sales of the Company's products and services.
Certain proposed legislative initiatives which could impact Hartford Life are
discussed in the Regulatory Matters and Contingencies section.
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SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
2000 1999
- --------------------------------------------------------------------------------
Investment Products $ 424 $ 330
Individual Life 79 71
Group Benefits 90 79
Corporate Owned Life Insurance 34 30
Other (52) (43)
- --------------------------------------------------------------------------------
NET INCOME $ 575 $ 467
- --------------------------------------------------------------------------------
A description of each segment as well as an analysis of the operating results
summarized above is included on the following pages. Reserves and Investments
are discussed in separate sections.
INVESTMENT PRODUCTS
OPERATING SUMMARY
2000 1999
- --------------------------------------------------------------------------------
Fee income and other $ 1,639 $ 1,333
Net investment income 741 708
- --------------------------------------------------------------------------------
TOTAL REVENUES 2,380 2,041
- --------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 700 668
Insurance expenses and other 551 440
Amortization of deferred policy acquisition costs 516 430
- --------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,767 1,538
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 613 503
Income tax expense 189 173
- --------------------------------------------------------------------------------
NET INCOME $ 424 $ 330
- --------------------------------------------------------------------------------
Individual variable annuity account values $ 78,174 $ 80,588
Other individual annuity account values 9,059 8,383
Other investment products account values 17,376 16,352
- --------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES 104,609 105,323
Mutual fund assets under management 11,432 6,374
- --------------------------------------------------------------------------------
TOTAL INVESTMENT PRODUCTS ASSETS UNDER MANAGEMENT $116,041 $111,697
- --------------------------------------------------------------------------------
The Investment Products segment focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired through the sale of individual variable and fixed annuities,
mutual funds, retirement plan services and other investment products. The
Company was ranked the number one writer of individual variable annuities in the
United States for 2000 according to Variable Annuity and Research Data Service
(VARDS) and the number one seller of individual variable annuities through
banks, according to Kenneth Kehrer Associates (a leading consultant to banks).
In addition, The Hartford Mutual Funds, Inc. reached $10 billion in assets
faster than any other retail-oriented mutual fund family in history, according
to Strategic Insight. Also, eight of the fourteen retail mutual funds have
Morningstar ratings and, as of December 31, 2000, all eight have three-, four-
or five-star ratings.
Revenues increased $339, or 17%, primarily due to higher fee income in the
individual annuity and retail mutual fund operations. Fee income generated by
individual annuities increased $227, or 20%, while related average account
values grew $8.2 billion, or 10%, to $88.1 billion. The growth in average
account values was due, in part, to strong sales of $10.7 billion in 2000, and
the significant equity market performance in 1999, partially offset by
surrenders. Although average individual annuity account values in 2000 were
higher than 1999, account values at December 31, 2000 declined $1.7 billion, or
2%, as compared to December 31, 1999, as strong sales were not sufficient to
offset surrenders and the impact of the retreating equity markets. In addition,
fee income from other investment products increased $99, or 54%, primarily
driven by the Company's retail mutual fund operation, where related assets under
management increased $4.0 billion, or 63%. This substantial increase in the
retail mutual fund operation was due to sales of $5.2 billion in 2000, which was
partially offset by redemptions.
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Due to the continued growth in this segment, particularly the individual annuity
and retail mutual fund operations, total benefits, claims and expenses increased
$229, or 15%. This increase was driven by amortization of deferred policy
acquisition costs and operating expenses, which grew $86, or 20%, and $43, or
15%, respectively, primarily related to growth in the individual annuity
operation. Additionally, non-deferred commissions increased $83, or 59%,
principally related to growth in the retail mutual fund operation.
Net income increased $94, or 28%, primarily due to the growth in revenues
discussed above. Additionally, the Investment Products segment continued to
maintain its profit margins related to its primary businesses, thus contributing
to the segment's earnings growth. In particular, its individual annuity
operation's operating expenses as a percentage of average individual annuity
account values remained consistent with the prior year at 21 basis points.
OUTLOOK
The market for retirement products continues to expand as individuals
increasingly save and plan for retirement. Demographic trends suggest that as
the "baby boom" generation matures, a significant portion of the United States
population will allocate a greater percentage of their disposable incomes to
saving for their retirement years due to uncertainty surrounding the Social
Security system and increases in average life expectancy. As this market grows,
particularly for variable annuities and mutual funds, new companies are
continually entering the market, aggressively seeking distribution channels and
pursuing market share. This trend is not expected to subside, particularly in
light of the Gramm-Leach-Bliley Act of 1999 (the Financial Services
Modernization Act), which permits affiliations among banks, insurance companies
and securities firms.
Management believes that it has developed and implemented strategies to maintain
and enhance its position as a market leader in the financial services industry.
INDIVIDUAL LIFE
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999
- --------------------------------------------------------------------------------
Fee income and other $ 459 $ 412
Net investment income 181 172
- --------------------------------------------------------------------------------
TOTAL REVENUES 640 584
- --------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 274 258
Amortization of deferred policy acquisition costs 145 129
Insurance expenses and other 103 88
- --------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 522 475
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INCOME BEFORE INCOME TAX EXPENSE 118 109
Income tax expense 39 38
- --------------------------------------------------------------------------------
NET INCOME $ 79 $ 71
- --------------------------------------------------------------------------------
Variable life account values $ 2,947 $ 2,595
Total account values $ 5,849 $ 5,419
- --------------------------------------------------------------------------------
Variable life insurance in force $33,460 $23,854
Total life insurance in force $75,113 $66,690
- --------------------------------------------------------------------------------
The Individual Life segment sells a variety of life insurance products,
including variable life, universal life, interest sensitive whole life and term
life insurance primarily to the high end estate and business planning markets.
Revenues increased $56, or 10%, resulting primarily from fee income associated
with the growing block of variable life insurance. Fee income increased $59, or
15%, as variable life account values increased $352, or 14%, and variable life
insurance in force increased $9.6 billion, or 40%.
Benefits, claims and expenses increased $47, or 10%, primarily due to a $16, or
6%, increase in benefits, claims and claim adjustment expenses and a $16, or
12%, increase in amortization of deferred policy acquisition costs mostly
associated with the growth in this segment's variable business. Additionally,
insurance expenses and other increased $15, or 17%, directly associated with the
growth in this segment as previously described. Net income increased $8, or 11%,
primarily due to higher fee income as mortality experience (death claims as a
percentage of net amount at risk) was consistent with prior year.
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OUTLOOK
Management believes that the Company's strong market position will provide
opportunities for growth in this segment as individuals increasingly focus on
estate planning. The Hartford's agreement, through Hartford Life, to acquire the
U.S. individual life insurance business of Fortis is expected to increase the
Company's scale in the individual life insurance business while broadening its
distribution capabilities through the addition of a retail broker-dealer. It is
expected that the consummation of this transaction will enhance the Company's
goal of broadening its reach in the emerging affluent market.
GROUP BENEFITS
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999
- --------------------------------------------------------------------------------
Earned premiums and other $1,981 $1,829
Net investment income 226 195
- --------------------------------------------------------------------------------
TOTAL REVENUES 2,207 2,024
- --------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 1,643 1,507
Insurance expenses and other 450 415
- --------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 2,093 1,922
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 114 102
Income tax expense 24 23
- --------------------------------------------------------------------------------
NET INCOME $ 90 $ 79
- --------------------------------------------------------------------------------
The Group Benefits segment sells group life and group disability insurance as
well as other products, including stop loss and supplementary medical coverage
to employers and employer sponsored plans, accidental death and dismemberment,
travel accident and other special risk coverages to employers and associations.
The Company also offers disability underwriting, administration, claims
processing services and reinsurance to other insurers and self-funded employer
plans. According to the latest results published by the Life Insurance Marketing
and Research Association (LIMRA), the Company was the third largest provider of
group disability insurance and the fourth largest writer of group term life
insurance, based on sales, in the United States for the nine months ended
September 30, 2000.
Revenues increased $183, or 9%, driven primarily by growth in fully insured
premiums, excluding buyouts, which increased $182, or 10%, principally due to
favorable persistency of the in force block of business, as well as new sales.
Also contributing to the revenue growth was an increase in net investment income
of $31, or 16%.
Total benefits, claims and expenses increased $171, or 9%, primarily due to
higher benefits, claims and claim adjustment expenses which, excluding buyouts,
increased $168, or 12%, directly related to revenue growth in this segment. The
segment's combined ratio (ratio of total benefits, claims and expenses as a
percentage of earned premiums and other) was consistent with the prior year. As
such, net income increased $11, or 14%, primarily driven by the increased
revenues described above.
OUTLOOK
As employers continue to offer benefit plans in order to attract and retain
valued employees, management expects that the need for group life and group
disability insurance will continue to expand and believes the Company is well
positioned to take advantage of this growth potential.
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CORPORATE OWNED LIFE INSURANCE (COLI)
- --------------------------------------------------------------------------------
OPERATING SUMMARY
2000 1999
- --------------------------------------------------------------------------------
Fee income and other $ 401 $ 400
Net investment income 366 431
- --------------------------------------------------------------------------------
TOTAL REVENUES 767 831
- --------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 545 621
Insurance expenses and other 102 59
Dividends to policyholders 67 104
- --------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 714 784
- --------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 53 47
Income tax expense 19 17
- --------------------------------------------------------------------------------
NET INCOME $ 34 $ 30
- --------------------------------------------------------------------------------
Variable COLI account values $15,937 $12,386
Leveraged COLI account values 4,978 5,729
- --------------------------------------------------------------------------------
TOTAL ACCOUNT VALUES $20,915 $18,115
- --------------------------------------------------------------------------------
Hartford Life is a leader in the COLI market, which includes life insurance
policies purchased by a company on the lives of its employees, with the company
or a trust sponsored by the company named as beneficiary under the policy. Until
the Health Insurance Portability and Accountability Act of 1996 (HIPA Act of
1996), the Company sold two principal types of COLI business, leveraged and
variable products. Leveraged COLI is a fixed premium life insurance policy owned
by a company or a trust sponsored by a company. The HIPA Act of 1996 phased out
the deductibility of interest on policy loans under leveraged COLI through the
end of 1998, virtually eliminating all future sales of this product. Variable
COLI continues to be a product used by employers to fund non-qualified benefits
or other postemployment benefit liabilities.
Revenues in the COLI segment decreased $64, or 8%, primarily due to a decline in
net investment income of $65, or 15%. This decline was principally due to the
leveraged COLI block of business, as related account values decreased $751, or
13%, as a result of the continued downsizing caused by the HIPA Act of 1996.
Total benefits, claims and expenses decreased $70, or 9%, primarily due to the
factor described above. Net income increased $4, or 13%, principally due to the
variable COLI business where related account values increased $3.6 billion, or
29%, as well as earnings associated with a block of leveraged COLI business
recaptured in 1998. For additional information on this recaptured business, see
Note 12 of Notes to Consolidated Financial Statements.
OUTLOOK
The focus of this segment is variable COLI, which continues to be a product
generally used by employers to fund non-qualified benefits or other
postemployment benefit liabilities. The leveraged COLI product has been an
important contributor to Hartford Life's profitability in recent years and will
continue to contribute to the profitability of Hartford Life in the future,
although the level of profit from leveraged COLI is expected to decline. COLI is
subject to a changing legislative and regulatory environment that could have a
material adverse effect on its business.
RESERVES
- --------------------------------------------------------------------------------
In accordance with applicable insurance regulations under which Hartford Life
operates, life insurance subsidiaries of the Company establish and carry as
liabilities actuarially determined reserves which are calculated to meet their
future obligations. Reserves for life insurance and disability contracts are
based on actuarially recognized methods using prescribed morbidity and mortality
tables in general use in the United States, which are modified to reflect
Hartford Life's actual experience when appropriate. These reserves are computed
at amounts that, with additions from estimated premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet Hartford Life's policy obligations at their
maturities or in the event of an insured's death. Reserves also include unearned
premiums, premium deposits, claims incurred but not reported and claims reported
but not yet paid. Reserves for assumed reinsurance are computed in a manner that
is comparable to direct insurance reserves.
The liability for policy benefits for universal life-type contracts and
interest-sensitive whole life policies is equal to the balance that accrues to
the benefit of policyholders, including credited interest, amounts that have
been assessed to compensate the Company for services to be performed over future
periods, and any amounts previously assessed against policyholders that are
refundable on termination of the contract. For investment contracts,
policyholder liabilities are equal to the accumulated policy account values,
which consist of an accumulation of deposit payments plus credited interest,
less withdrawals and amounts assessed through the end
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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 Hartford Life's annuity and other interest-sensitive life
insurance reserves is enhanced by policy restrictions on the withdrawal of
funds. Withdrawals in excess of allowable penalty-free amounts are assessed a
surrender charge during a penalty period, which is usually at least seven years.
Such surrender charge is initially a percentage of either the accumulation value
or considerations received, which varies by product, and generally decreases
gradually during the penalty period. Surrender charges are set at levels to
protect Hartford Life from loss on early terminations and to reduce the
likelihood of policyholders terminating their policies during periods of
increasing interest rates, thereby lengthening the effective duration of policy
liabilities and improving the Company's ability to maintain profitability on
such policies.
INVESTMENTS
- --------------------------------------------------------------------------------
Hartford Life's investments are managed by its investment strategy group, which
consists of a risk management unit and a portfolio management unit and reports
directly to senior management of the Company. The risk management unit is
responsible for monitoring and managing the Company's asset/liability profile
and establishing investment objectives and guidelines. The portfolio management
unit is responsible for determining, within specified risk tolerances and
investment guidelines, the appropriate asset allocation, duration, and convexity
characteristics of the Company's general account and guaranteed separate account
investment portfolios. Hartford Investment Management Company, a wholly-owned
subsidiary of The Hartford Financial Services Group, Inc., executes the
investment plan of the investment strategy group, including the identification
and purchase of securities that fulfill the objectives of the strategy group.
The primary investment objective of the Company's general account is to maximize
after-tax returns consistent with acceptable risk parameters (including the
management of the interest rate sensitivity of invested assets relative to that
of policyholder obligations) as discussed in the Capital Markets Risk Management
section under "Market Risk - Interest Rate Risk".
The Company's general account consists of a diversified portfolio of
investments. Although all the assets of the general account support the
Company's general account liabilities, the Company's investment strategy group
has developed separate investment portfolios for specific classes of product
liabilities within the general account. The strategy group works closely with
the business lines to develop specific investment guidelines, including duration
targets, asset allocation and convexity constraints, asset/liability mismatch
tolerances and return objectives for each product line in order to achieve each
product line's individual risk and return objectives.
Invested assets in the Company's general account totaled $22.9 billion as of
December 31, 2000 and were comprised of $18.2 billion of fixed maturities, $3.6
billion of policy loans, equity securities of $171 and other investments of
$910. As of December 31, 1999, general account invested assets totaled $21.8
billion and were comprised of $17.0 billion of fixed maturities, $4.2 billion of
policy loans, equity securities of $153 and other investments of $376. The
decrease in policy loans was primarily due to the decline in leveraged COLI
business (as discussed in the COLI section). Policy loans are secured by the
cash value of the underlying life policy and do not mature in a conventional
sense, but expire in conjunction with the related policy liabilities. The
increase in other investments primarily reflects an increase in limited
partnership investments.
The following table sets forth by type the fixed maturity securities held in the
Company's general account as of December 31, 2000 and 1999.
2000 1999
-------------------------------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- --------------------------------------------------------------------------------------
Corporate $ 7,663 42.0% $ 7,737 45.4%
Asset backed securities 3,070 16.8% 2,508 14.7%
Commercial mortgage backed securities 2,776 15.2% 2,112 12.4%
Municipal - tax-exempt 1,390 7.6% 1,108 6.5%
Collateralized mortgage obligations 928 5.1% 592 3.5%
Mortgage backed securities - agency 602 3.3% 853 5.0%
Government/Government agencies - Foreign 321 1.8% 339 2.0%
Government/Government agencies - U.S. 244 1.3% 229 1.3%
Municipal - taxable 83 0.5% 165 1.0%
Short-term 975 5.3% 1,346 7.9%
Redeemable preferred stock 196 1.1% 46 0.3%
- --------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $18,248 100.0% $17,035 100.0%
- --------------------------------------------------------------------------------------
During 2000, the Company continued its investment strategy of increasing its
allocation to municipal tax-exempt securities with the objective of increasing
after-tax yield. Short-term and corporate securities declined primarily as a
result of the funding of scheduled
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liability maturities and reallocation into other asset sectors, particularly
asset backed securities and commercial mortgage backed securities. Additionally,
investments were shifted from mortgage backed securities - agency to
collateralized mortgage obligations to increase the prepayment protection of the
portfolio.
As of December 31, 2000 and December 31, 1999, approximately 22.3% and 21.5%,
respectively, of the Company's fixed maturity portfolio was invested in private
placement securities (including 13% and 12% of Rule 144A offerings as of
December 31, 2000 and December 31, 1999, respectively). Private placement
securities are generally less liquid than public securities. However, private
placements generally have covenants designed to compensate for liquidity risk.
Most of the private placement securities in the Company's portfolio are rated by
nationally recognized rating agencies. For further discussion of the Company's
investment credit policies, see the Capital Markets Risk Management section
under "Credit Risk".
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results.
(Before-tax) 2000 1999
- --------------------------------------------------------------------------------
Net investment income - excluding policy loan income $ 1,284 $ 1,171
Policy loan income 308 391
- --------------------------------------------------------------------------------
Net investment income - total $ 1,592 $ 1,562
- --------------------------------------------------------------------------------
Yield on average invested assets (1) 7.0% 6.7%
- --------------------------------------------------------------------------------
Net realized capital losses $ (88) $ (5)
- --------------------------------------------------------------------------------
(1) Represents net investment income (excluding net realized capital losses)
divided by average invested assets at cost (fixed maturities at amortized
cost).
Net investment income, excluding policy loan income, increased $113, or 10%. The
increase was primarily due to higher yields earned on the investment cash flow
from operations and reinvestment of proceeds from sales and maturities of fixed
maturity securities in a higher interest rate environment. Policy loan income
decreased $83, or 21%, due to the decrease in leveraged COLI business.
Net realized capital losses increased $83 primarily as a result of portfolio
rebalancing in a higher interest rate environment.
SEPARATE ACCOUNT PRODUCTS
Separate account products are those for which a separate investment and
liability account is maintained on behalf of the policyholder. Separate accounts
reflect two categories of risk assumption: non-guaranteed separate accounts
totaling $104.2 billion and $101.8 billion as of December 31, 2000 and 1999,
respectively, wherein the policyholder assumes substantially all the investment
risk and reward, and guaranteed separate accounts totaling $9.8 billion and $8.9
billion as of December 31, 2000 and 1999, respectively, wherein Hartford Life
contractually guarantees either a minimum return or account value to the
policyholder. The primary investment objective of the Company's guaranteed
separate account is to maximize after-tax returns consistent with acceptable
risk parameters (including the management of the interest rate sensitivity of
invested assets relative to that of policyholder obligations) as discussed in
the Capital Markets Risk Management section under "Market Risk - Interest Rate
Risk."
Investment objectives for non-guaranteed separate accounts vary by fund type, as
outlined in the applicable fund prospectus or separate account plan of
operations. Non-guaranteed separate account products include variable annuities,
variable life insurance contracts and variable COLI. Guaranteed separate account
products primarily consist of modified guaranteed individual annuities and
modified guaranteed life insurance and generally include market value adjustment
features and surrender charges to mitigate the risk of disintermediation.
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CAPITAL MARKETS RISK MANAGEMENT
- --------------------------------------------------------------------------------
Hartford Life is exposed to two primary sources of investment risk and
asset/liability management risk: credit risk, relating to the uncertainty
associated with an obligor's continued ability to make timely payment of
principal and/or interest, and market risk, relating to the market price and/or
cash flow variability associated with changes in interest rates, security
prices, market indices, yield curves or currency exchange rates. The Company
does not hold any financial instruments purchased for trading purposes. The
following discussion identifies the Company's policies and procedures for
managing these risks and monitoring the results of the Company's risk management
activities.
CREDIT RISK
Hartford Life has established investment credit policies that focus on the
credit quality of obligors and counterparties, limit credit concentrations,
encourage diversification and require frequent creditworthiness reviews.
Investment activity, including setting of policy and defining acceptable risk
levels, is subject to regular review and approval by senior management and
reported to The Hartford's Finance Committee.
The Company invests primarily in securities which are rated investment grade and
has established exposure limits, diversification standards and review procedures
for all credit risks including borrower, issuer and counterparty.
Creditworthiness of specific obligors is determined by an internal credit
evaluation supplemented by consideration of external determinants of
creditworthiness, typically ratings assigned by nationally recognized ratings
agencies. Obligor, asset sector and industry concentrations are subject to
established limits and monitored on a regular interval.
Hartford Life is not exposed to any significant credit concentration risk of a
single issuer.
The following table identifies fixed maturity securities, including guaranteed
separate accounts, for the Company's operations by credit quality. The ratings
referenced in the tables are based on the ratings of nationally recognized
rating organizations or, if not rated, assigned based on the Company's internal
analysis of such securities.
As of December 31, 2000 and 1999, over 97% of the fixed maturity portfolio,
including guaranteed separate accounts, was invested in investment grade
securities.
2000 1999
-------------------------------------------
FIXED MATURITIES BY CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- ---------------------------------------------------------------------------------
U.S. Government/Government agencies $ 2,329 8.4% $ 2,404 9.3%
AAA 4,896 17.6% 3,535 13.6%
AA 3,546 12.7% 3,199 12.3%
A 9,675 34.7% 8,731 33.6%
BBB 5,633 20.2% 5,816 22.4%
BB & below 708 2.5% 559 2.1%
Short-term 1,085 3.9% 1,728 6.7%
- ---------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $27,872 100.0% $25,972 100.0%
- ---------------------------------------------------------------------------------
The Company also maintains credit policies regarding the financial stability and
credit standing of its major derivatives' counterparties and typically requires
credit enhancement provisions to further reduce its credit risk. Credit risk for
derivatives contracts is limited to the amounts calculated to be due to the
Company on such contracts based on current market conditions and potential
payment obligations between the Company and its counterparties. Credit exposures
are generally quantified weekly and netted. Collateral is pledged to and held
by, or on behalf of, the Company to the extent the current value of derivatives
exceeds exposure policy thresholds.
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MARKET RISK
Hartford Life's general and guaranteed separate account exposure to market risk
relates to the market price and/or cash flow variability associated with changes
in market interest rates. The following discussion focuses on the Company's
exposure to interest rate risk, asset/liability management strategies utilized
to manage this risk, and characteristics of the Company's insurance liabilities
and their sensitivity to movements in interest rates.
Downward movement in market interest rates during 2000 resulted in a significant
increase in the unrealized appreciation of the fixed income security portfolio
from 1999. However, Hartford Life's asset allocation and its exposure to market
risk have not changed materially from its position at December 31, 1999.
INTEREST RATE RISK
Changes in interest rates can potentially impact Hartford Life's profitability.
Under certain circumstances of interest rate volatility, the Company could be
exposed to disintermediation risk and reduction in net interest rate spread or
profit margins. The Company analyzes interest rate risk using various models,
including multi-scenario cash flow projection models that forecast cash flows of
the liabilities and their supporting investments, including derivative
instruments. For non-guaranteed separate accounts, the Company's exposure is not
significant, as the policyholder assumes substantially all the investment risk.
The Company's general account and guaranteed separate account investment
portfolios primarily consist of investment grade, fixed maturity securities,
including corporate bonds, asset backed securities, commercial mortgage backed
securities, tax-exempt municipal securities and collateralized mortgage
obligations. The fair value of these and the Company's other invested assets
fluctuates depending on the interest rate environment and other general economic
conditions. During periods of declining interest rates, paydowns on mortgage
backed securities and collateralized mortgage obligations increase as the
underlying mortgages are prepaid. During such periods, the Company generally
will not be able to reinvest the proceeds of any such prepayments at comparable
yields. Conversely, during periods of rising interest rates, the rate of
prepayments generally declines, exposing the Company to the possibility of
asset/liability cash flow and yield mismatch. For a discussion of the Company's
risk management techniques to manage this market risk, see "Asset/Liability
Management Strategies Used to Manage Market Risk" below.
As described above, the Company holds a significant fixed maturity portfolio,
which includes both fixed and variable rate features. The following table
reflects the principal amounts of the general and guaranteed separate account
fixed and variable rate fixed maturity portfolios, along with the respective
weighted average coupons by estimated maturity year as of December 31, 2000.
Comparative totals are included for December 31, 1999. Expected maturities
differ from contractual maturities due to call or prepayment provisions. The
weighted average coupon on variable rate securities is based on spot rates as of
December 31, 2000 and 1999, and is primarily based on the London Interbank
Offered Rate (LIBOR). Callable bonds and notes are distributed to either call
dates or maturity, depending on which date produces the most conservative yield.
Asset backed securities, collateralized mortgage obligations and mortgage backed
securities are distributed based on estimates of the rate of future prepayments
of principal over the remaining life of the securities. These estimates are
developed using prepayment speeds provided in broker consensus data. Such
estimates are derived from prepayment speeds previously experienced at the
interest rate levels projected for the underlying collateral. Actual prepayment
experience may vary from these estimates. Financial instruments with certain
leverage features have been included in each of the fixed maturity categories.
These instruments have not been separately displayed because they were
immaterial to the Company's investment portfolio.
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2000 1999
2001 2002 2003 2004 2005 Thereafter TOTAL Total
- --------------------------------------------------------------------------------------------------------------------------------
BONDS AND NOTES - CALLABLE
Fixed Rate
Par value $ 5 $ 50 $ 14 $ 27 $ 7 $ 1,355 $ 1,458 $ 1,076
Weighted average coupon 7.0% 6.4% 6.4% 4.6% 6.1% 5.5% 5.5% 5.6%
Fair value $ 1,439 $ 1,016
Variable Rate
Par value $ 1 $ 11 $ 22 $ 38 $ 1 $ 1,085 $ 1,158 $ 1,363
Weighted average coupon 7.4% 7.5% 6.6% 7.3% 7.3% 7.1% 7.1% 6.6%
Fair value $ 1,075 $ 1,256
BONDS AND NOTES - OTHER
Fixed Rate
Par value $ 724 $ 1,580 $ 1,286 $ 1,162 $ 1,154 $ 8,793 $14,699 $15,724
Weighted average coupon 7.3% 6.2% 7.2% 6.9% 6.2% 5.7% 6.1% 6.2%
Fair value $13,409 $14,044
Variable Rate
Par value $ 2 $ 116 $ 158 $ 166 $ 87 $ 706 $ 1,235 $ 920
Weighted average coupon 4.8% 6.5% 7.0% 7.2% 6.5% 7.8% 7.4% 5.7%
Fair value $ 1,108 $ 827
ASSET BACKED SECURITIES
Fixed Rate
Par value $ 731 $ 433 $ 305 $ 261 $ 178 $ 435 $ 2,343 $ 2,199
Weighted average coupon 6.7% 6.3% 6.9% 7.0% 7.2% 7.6% 6.9% 6.8%
Fair value $ 2,342 $ 2,045
Variable Rate
Par value $ 214 $ 300 $ 298 $ 218 $ 335 $ 759 $ 2,124 $ 1,677
Weighted average coupon 7.3% 7.2% 7.3% 7.1% 7.2% 7.4% 7.3% 6.6%
Fair value $ 2,099 $ 1,540
COLLATERALIZED MORTGAGE OBLIGATIONS
Fixed Rate
Par value $ 157 $ 133 $ 113 $ 99 $ 111 $ 485 $ 1,098 $ 1,138
Weighted average coupon 6.4% 6.5% 6.4% 6.5% 6.3% 6.4% 6.4% 6.5%
Fair value $ 1,087 $ 1,022
Variable Rate
Par value $ 4 $ 2 $ 1 $ 2 $ 1 $ 102 $ 112 $ 128
Weighted average coupon 9.4% 11.6% 12.7% 8.9% 10.4% 4.8% 5.3% 5.8%
Fair value $ 101 $ 117
COMMERCIAL MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 50 $ 79 $ 52 $ 100 $ 54 $ 2,271 $ 2,606 $ 2,096
Weighted average coupon 7.3% 7.1% 7.1% 7.2% 7.1% 7.3% 7.3% 7.2%
Fair value $ 2,674 $ 1,922
Variable Rate
Par value $ 323 $ 266 $ 268 $ 240 $ 89 $ 544 $ 1,730 $ 1,433
Weighted average coupon 7.8% 7.7% 7.9% 7.7% 7.9% 8.0% 7.9% 7.5%
Fair value $ 1,738 $ 1,228
MORTGAGE BACKED SECURITIES
Fixed Rate
Par value $ 72 $ 80 $ 80 $ 71 $ 63 $ 426 $ 792 $ 1,288
Weighted average coupon 7.2% 7.3% 7.2% 7.2% 7.2% 7.2% 7.2% 7.5%
Fair value $ 800 $ 994
Variable Rate
Par value $ 1 $ 1 $ -- $ -- $ -- $ 1 $ 3 $ 4
Weighted average coupon 7.2% 7.2% -- -- -- 6.9% 7.0% 6.4%
Fair value $ 3 $ 4
- --------------------------------------------------------------------------------------------------------------------------------
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The table below provides information as of December 31, 2000 and 1999 on debt
obligations and reflects principal cash flows and related weighted average
effective interest rate by maturity year.
2000 1999
2001 2002 2003 2004 2005 Thereafter TOTAL Total
- --------------------------------------------------------------------------------------------------------------------
LONG -TERM DEBT
Fixed Rate
Amount $ -- $ -- $ -- $ 200 $ -- $ 450 $ 650 $ 650
Weighted average effective interest rate -- -- -- 7.0% -- 7.5% 7.4% 7.4%
Fair value $ 658 $ 633
TruPS(1)
Fixed Rate
Amount $ -- $ -- $ -- $ -- $ -- $ 250 $ 250 $ 250
Weighted average effective interest rate -- -- -- -- -- 7.4% 7.4% 7.4%
Fair value $ 245 $ 203
- --------------------------------------------------------------------------------------------------------------------
(1) Represents company obligated mandatorily redeemable preferred securities of
subsidiary trust holding solely parent junior subordinated debentures.
ASSET/LIABILITY MANAGEMENT STRATEGIES USED TO MANAGE MARKET RISK
The Company employs several risk management tools to quantify and manage market
risk arising from its investments and interest sensitive liabilities. For
certain portfolios, management monitors the changes in present value between
assets and liabilities resulting from various interest rate scenarios using
integrated asset/liability measurement systems and a proprietary system that
simulates the impacts of parallel and non-parallel yield curve shifts. Based on
this current and prospective information, management implements risk reducing
techniques to improve the match between assets and liabilities.
Derivatives play an important role in facilitating the management of interest
rate risk, creating opportunities to efficiently fund obligations, hedge against
risks that affect the value of certain liabilities and adjust broad investment
risk characteristics as a result of any significant changes in market risks. As
an end user of derivatives, the Company uses a variety of derivatives, including
swaps, caps, floors, forwards and exchange traded financial futures and options,
in order to hedge exposure primarily to interest rate risk on anticipated
investment purchases or existing assets and liabilities. The Company does not
make a market or trade derivatives for the express purpose of earning trading
profits. The Company's derivative program is monitored by an internal compliance
unit and is reviewed frequently by senior management and reported to The
Hartford's Finance Committee. The notional amounts of derivative contracts,
which represent the basis upon which pay or receive amounts are calculated and
are not reflective of credit risk, totaled $8.5 billion as of December 31, 2000
($6.5 billion related to insurance investments and $2.0 billion related to life
insurance liabilities). As of December 31, 1999, the notional amounts pertaining
to derivatives totaled $9.6 billion ($6.3 billion related to insurance
investments and $3.3 billion related to life insurance liabilities).
The company uses derivative instruments in its management of market risk
consistent with the four risk management strategies described below.
Anticipatory Hedging -- For certain liabilities, the Company commits to the
price of the product prior to receipt of the associated premium or deposit.
Anticipatory hedges are executed to offset the impact of changes in asset prices
arising from interest rate changes pending the receipt of premium or deposit and
the subsequent purchase of an asset. These hedges involve taking a long position
in interest rate futures or entering into an interest rate swap with duration
characteristics equivalent to the associated liabilities or anticipated
investments. The notional amounts of anticipatory hedges as of December 31, 2000
and 1999 were $144 and $314, respectively.
Liability Hedging -- Several products obligate the Company to credit a return to
the contractholder which is indexed to a market rate. To hedge risks associated
with these products, the Company enters into various derivative contracts.
Interest rate swaps are used to convert the contract rate into a rate that
trades in a more liquid and efficient market. This hedging strategy enables the
Company to customize contract terms and conditions to customer objectives and
satisfies Hartford Life's asset/liability matching policy. Interest rate swaps
are also used to convert certain fixed contract rates into floating rates,
thereby allowing them to be appropriately matched against floating rate assets.
Additionally, interest rate caps are used to hedge against the risk of
contractholder disintermediation in a rising interest rate environment. The
notional amounts of derivatives used for liability hedges as of December 31,
2000 and 1999 were $2.0 billion and $3.3 billion, respectively.
Asset Hedging -- To meet the various policyholder obligations and to provide
cost effective prudent investment risk diversification, the Company may combine
two or more financial instruments to achieve the investment characteristics of a
fixed maturity security or that match an associated liability. The use of
derivative instruments in this regard effectively transfers unwanted investment
risks or attributes to others. The selection of the appropriate derivative
instruments depends on the investment risk, the liquidity and efficiency of the
market, and the asset and liability characteristics. The notional amounts of
asset hedges as of December 31, 2000 and 1999 were $5.4 billion and $4.8
billion, respectively.
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Portfolio Hedging -- The Company periodically compares the duration and
convexity of its portfolios of assets to its corresponding liabilities and
enters into portfolio hedges to reduce any difference to desired levels.
Portfolio hedges reduce the mismatch between assets and liabilities and offset
the potential impact to cash flows caused by changes in interest rates. The
notional amounts of portfolio hedges as of December 31, 2000 and 1999 were $1.0
billion and $1.2 billion, respectively.
The following tables provide information as of December 31, 2000, with
comparative totals for December 31, 1999, on derivative instruments used in
accordance with the aforementioned hedging strategies. For interest rate swaps,
caps and floors, the tables present notional amounts with weighted average pay
and receive rates for swaps and weighted average strike rates for caps and
floors by maturity year. For interest rate futures, the table presents contract
amount and weighted average settlement price by expected maturity year.
2000 1999
INTEREST RATE SWAPS(1) 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- ---------------------------------------------------------------------------------------------------------------------------
Pay Fixed/Receive Variable
Notional value $ 65 $ 95 $ 98 $ 35 $ 126 $ 612 $1,031 $1,694
Weighted average pay rate 6.0% 4.4% 5.9% 6.1% 7.5% 6.9% 6.6% 5.8%
Weighted average receive rate 6.7% 7.0% 6.9% 6.8% 6.8% 6.8% 6.8% 6.2%
Fair value $ (43) $ 76
Pay Variable/Receive Fixed
Notional value $ 336 $ 372 $ 645 $1,198 $ 964 $1,371 $4,886 $4,763
Weighted average pay rate 6.7% 6.7% 6.6% 6.7% 8.1% 6.7% 7.0% 6.2%
Weighted average receive rate 7.0% 6.5% 5.8% 6.1% 7.6% 6.7% 6.6% 6.2%
Fair value $ 78 $ (160)
Pay Variable/Receive Different Variable
Notional value $ 85 $ 28 $ 4 $ 85 $ 30 $ 46 $ 278 $ 442
Weighted average pay rate 6.7% 6.8% 7.0% 6.2% 6.9% 7.2% 6.6% 6.2%
Weighted average receive rate 7.8% 6.6% 6.7% 4.7% (6.6)% 7.2% 4.9% 6.0%
Fair value $ (1) $ 1
- ---------------------------------------------------------------------------------------------------------------------------
(1) Negative weighted average receive rate in 2005 results when payments are
required on both sides of an index swap.
2000 1999
INTEREST RATE CAPS - LIBOR BASED(2) 2001 2002 2003 2004 2005 Thereafter TOTAL Total
- -------------------------------------------------------------------------------------------------------------------------------
Purchased
Notional value $ -- $ 10 $ 54 $ -- $ 77 $ 30 $ 171 $ 171
Weighted average strike rate (8.0 - 9.9%) -- 8.9% 8.5% -- 8.4% 8.3% 8.5% 8.5%
Fair value $ 1 $ 2
Notional value $ -- $ 19 $ -- $ -- $ -- $ -- $ 19 $ 31
Weighted average strike rate (10.0 - 11.9%) -- 10.1% -- -- -- -- 10.1% 10.6%
Fair value $ -- $ --
- -------------------------------------------------------------------------------------------------------------------------------
(2) LIBOR represents the London Interbank Offered Rate.
2000 1999
INTEREST RATE CAPS - CMT BASED(3) 2001 2002 2003 2004