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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, 1998
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period from ____________ to ______________
Commission file number 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) 525-8555
(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.:
Class A Common Stock, par value $0.01 per share
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[ ]
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405
of Regulation S-K is not contained herein, and will not be contained to the best
of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ X ]
As of February 26, 1999, there were outstanding 25,928,071 shares of Class A
Common Stock, $0.01 par value per share, and 114,000,000 of Class B Common
Stock, $0.01 par value per share, of the registrant. The aggregate market value
of the shares of the registrant's common equity held by non-affiliates of the
registrant was $1,494,568,592 based on the closing price of $58.00 per share of
Class A Common Stock on the New York Stock Exchange on February 26, 1999.
Documents Incorporated by Reference:
Portions of the Registrant's definitive proxy statement for its 1999 annual
meeting of shareholders are incorporated by reference in Part III of this Form
10-K.
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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 employee benefits products.
A majority owned subsidiary of The Hartford Financial Services Group, Inc.,
Hartford Life is the nation's largest writer of individual variable annuities,
the number two 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 12
3 Legal Proceedings 12
4 Submission of Matters to a Vote of Security Holders 12
PART II 5 Market for Hartford Life's Common Stock and Related
Stockholder Matters 12
6 Selected Financial Data 13
7 Management's Discussion and Analysis of Financial
Condition and Results of Operations 14
7A Quantitative and Qualitative Disclosures About Market Risk 35
8 Financial Statements and Supplementary Data 35
9 Changes in and Disagreements with Accountants on Accounting
and Financial Disclosure 35
PART III 10 Directors and Executive Officers of Hartford Life 35
11 Executive Compensation 35
12 Security Ownership of Certain Beneficial Owners and Management 35
13 Certain Relationships and Related Transactions 35
PART IV 14 Exhibits, Financial Statements, Schedules and Reports on Form
8-K 35
Signatures II-1
Exhibits Index II-2
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PART I
ITEM 1. BUSINESS OF HARTFORD LIFE
(Dollar amounts in millions, except for share data, 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, such as annuities, including individual variable annuities and fixed
market value adjusted (MVA) annuities, deferred compensation and retirement plan
services and mutual funds for the savings and retirement needs of over 1 million
customers, (ii) life insurance for income protection and estate planning to
approximately 500,000 customers, (iii) employee 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, 1998; the second largest writer of group disability insurance and
the third largest writer of group life insurance both based on premiums written
for the nine months ended September 30, 1998; as well as, the fourth largest
consolidated life insurance company based on statutory assets as of December 31,
1997. In addition, the Company has the fastest growing non-proprietary family of
mutual funds. 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 prepare their
estates for an efficient transfer of wealth between generations.
Hartford Life 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, the
Company's total assets under management, which includes assets invested in the
Company's retail mutual funds, increased 22% to $124.5 billion and total
stockholders' equity was $2.5 billion as of December 31, 1998. In addition,
Hartford Life generated $5.8 billion in revenues and $386 in net income in 1998.
The Company's return on shareholders' equity, excluding net unrealized capital
gains on securities, was 18.7% in 1998.
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") of 26 million shares of the Company's Class A Common Stock on May 22,
1997, Hartford Life became a publicly traded company representing approximately
18.6% of the equity ownership in the Company. Additional information regarding
the organization of the business and the IPO 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, primarily relies on the dividends from its insurance
company subsidiaries, which are primarily domiciled in Connecticut, as the
principal source of cash to meet its obligations (primarily debt obligations)
and pay stockholder dividends. Statutory net income and statutory capital and
surplus, key determinants in the amount of dividend capacity available in the
insurance company subsidiaries, have grown significantly over the past several
years. Statutory net income was $265 in 1998, 19% higher than in 1997 and more
than three and one-half times the level in 1994. Statutory capital and surplus
as of December 31, 1998 was $2.0 billion, more than 50% above the level as of
December 31, 1996. 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).
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
1,350 national and regional broker-dealers and approximately 450 banks.
Consistent with this strategy, in August 1998, the Company purchased all of the
outstanding shares of PLANCO Financial Services, Inc. and its affiliate, PLANCO,
Incorporated (collectively, "PLANCO"), the nation's largest wholesaler of
individual annuities and the Company's primary wholesale distributor of its
Director(R) variable annuity (the number one selling retail variable annuity in
the United States) and retail mutual funds, thus securing an important
distribution channel. This broad network has enabled the Company to introduce
new products and services in an effective manner and allows the
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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
Hartford Life provides its customers an innovative and diverse mix of products
and services directed at serving people's needs throughout the different stages
of their lives and during varying economic cycles. The Company offers a variety
of products including variable annuities, retail mutual funds, individual life
insurance and group life and disability insurance. The Company regularly
introduces new and innovative products and services to the market.
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 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 has achieved operating efficiencies as expenses
associated with its individual annuity products as a percentage of total
individual annuity account value continue to decline from prior year levels. 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 and Putnam
Financial Services, Inc. (Putnam) have been awarded the Annuity Service Award by
DALBAR Inc., a recognized independent financial services research organization,
for three consecutive years. Additional information related to Hartford Life's
technology in respect of Year 2000 issues may be found in the Regulatory
Initiatives and Contingencies section of the MD&A.
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, 1998, the
Company had limited exposure to disintermediation risk on approximately 99% of
its insurance liabilities through the use of non-guaranteed separate accounts,
MVA features, policy loans, surrender charges and non-surrenderability
provisions. With respect to the Company's individual annuities, 97% of the
related total account value was subject to surrender charges as of December 31,
1998. 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 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, Employee Benefits and Corporate Owned Life Insurance
(COLI). The Company includes in "Other" corporate items not directly allocable
to any of its reportable segments as well as its international operations. 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 on pages 14 to
34 and Note 17 of Notes to Consolidated Financial Statements.
INVESTMENT PRODUCTS
The Investment Products segment focuses on the savings and retirement needs of
the growing number of individuals who are preparing for retirement or have
already retired through the sale of individual annuities and other investment
products. The individual annuity products offered include individual variable
annuities, fixed MVA annuities and fixed and variable immediate annuities. The
other investment products offered include mutual funds, deferred compensation
and retirement plan services for municipal governments, teachers, hospitals and
corporations; structured settlement contracts and other special purpose annuity
contracts; and, investment management services. From 1994 to 1998 this segment's
separate account assets grew to $74.5 billion from $21.4 billion, a compounded
annual growth rate of 37%. This growth has been driven primarily by strong net
cash flow of individual variable
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annuities, the result of a high volume of sales and favorable persistency, as
well as significant market appreciation in the separate accounts of the
Company's individual and group variable annuities. Investment Products generated
revenues of $1.8 billion and $1.5 billion in 1998 and 1997, respectively. Net
income in the Investment Products segment was $266 in 1998, a 32% increase over
1997.
Hartford Life is the market leader in the annuity industry and was the number
one writer of individual variable annuities for the years ended December 31,
1998 and 1997, with total individual annuity sales of $10.0 billion and $10.2
billion, respectively. The Company sells both variable and fixed individual
annuity products, through a wide distribution network of national and regional
broker-dealer organizations, banks and other financial institutions and
independent financial advisors. Individual variable annuity sales were $9.9
billion and $9.7 billion in 1998 and 1997, respectively. The Company was ranked
the number one writer of individual variable annuities in the United States for
1998 according to Variable Annuity and Research Data Service (VARDS) and the
number one seller of individual variable annuities through banks, according to
Kenneth Kehrer and Associates.
The Company's total account value related to individual annuity products was
$70.8 billion as of December 31, 1998. Of the total account value, $62.2
billion, or 88%, related to individual variable annuity products and $8.6
billion, or 12%, related primarily to fixed MVA annuity products.
Hartford Life is also beginning to emerge as a significant participant in the
retail mutual fund business. The Company surpassed $1.0 billion in assets under
management in January 1998, only eighteen months after it first entered this
market. According to Strategic Insight, this made Hartford Life the fastest
non-proprietary fund family in history to reach this level. During 1998, the
Company had mutual fund sales of $1.6 billion bringing total mutual fund assets
under management to $2.5 billion as of December 31, 1998.
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 (herein after referred to as "Section 457" and
"Section 401(k)", respectively). The Company presently administers over 1,200
Section 457 plans and over 750 Section 401(k) plans. The Company also provides
products and services to plans created under Section 403(b) of the Internal
Revenue Code of 1986, as amended (herein after referred to as "Section 403(b)"),
as well as structured settlement contracts and terminal funding products.
Products
Individual Variable Annuities -- Hartford Life earns fees for managing variable
annuity assets and maintaining policyholder accounts, which are based on the
policyholders' account values. The Company uses specified portions of the
periodic premiums of 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 (DCA) 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 has become very popular with policyholders. Deposits of varying amounts
may be made 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, the Company's individual variable
annuities are subject to withdrawal restrictions and surrender charges ranging
initially from 6% to 7% of the contract's face amount which reduce to zero on a
sliding scale, usually within seven policy years. In 1998, significant
volatility experienced by the equity markets did not cause increased levels of
variable annuity surrenders demonstrating that policyholders are aware of the
long-term nature of these products. Individual variable annuity account value of
$62.2 billion as of December 31, 1998, has grown significantly from $9.7 billion
as of December 31, 1993 due to strong net cash flow, the result of a high level
of sales and consistent low levels of surrenders, coupled with significant
market appreciation in both the equity and fixed income allocations of the
policyholders' account value. Approximately 94% of the individual variable
annuity account value was held in non-guaranteed separate accounts as of
December 31, 1998.
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, and Dean Witter
InterCapital, Inc., who 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 four
leading variable annuities, The Director and Putnam Hartford Capital Manager
Variable Annuity (based on sales for the year ended 1998) are sponsored by
Hartford Life and are managed in part by Wellington and Putnam, respectively.
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.
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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 have been
relatively minor over the past two years due to the low interest rate
environment. Account value of fixed MVA annuities was $8.6 billion and $9.3
billion as of December 31, 1998 and 1997, respectively.
Mutual Funds -- In September 1996, the Company launched a new family of retail
mutual funds. In its second year of existence, the Company's family of
non-proprietary mutual funds was designated the fastest growing in United States
history according to a 1998 report by Strategic Insight, an industry research
organization. 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 400 financial services firms to distribute
these mutual funds.
Retirement Plans -- With respect to retirement products and services, Section
457 plans comprise approximately 80% of the related assets under management.
These assets have traditionally been held in the Company's general account, but
increasingly plan beneficiaries are transferring assets into mutual funds held
in separate accounts. 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 plans and certain other outside money managers act as
advisors to the equity funds offered in Section 457 plans administered by the
Company. The Company also sells Section 401(k) products targeting the small and
medium case markets since the Company believes these markets are underpenetrated
in comparison to the large case market. Additionally, the Company markets
Section 403(b) products for teachers and hospitals.
Institutional Liabilities -- Hartford Life 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 guaranteed
investment contracts (GIC) business. Prior to 1995, the Company was a sizable
participant in the GIC market, selling over $5.0 billion in new business from
1992 through 1994. The Company decided in 1995, after a thorough review of the
GIC market, to de-emphasize its GIC product. Correspondingly, from 1996 through
1998, the Company sold less than $1.0 billion in new GIC business.
Marketing and Distribution
The Investment Products distribution network has been developed based on
management's strategy of utilizing multiple and competing distribution channels
in an effort to achieve the broadest distribution and 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, 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) and quality of customer service.
Hartford Life maintains a network of approximately 1,350 broker-dealers and
approximately 450 banks (including 23 of the 25 largest banks in the United
States) through the use of wholesaling organizations and strategic alliances,
principally PLANCO and Putnam. 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 distributor of the Company's individual annuity 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, as well as
providing sales support to registered representatives, financial planners and
broker-dealers at brokerage firms and banks across the United States. The
acquisition secures 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 in 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 deferred
compensation and retirement plan market.
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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 the industry continues to consolidate, some of
these companies have or will gain greater financial strength and resources than
Hartford Life. In particular, national banks may become more significant
competitors in the future for insurers who sell annuities as a result of court
decisions and regulatory actions, particularly the recent Financial Services Act
of 1998 (H.R. 10) which is being proposed in Congress. 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, which focuses on the high end estate and business
planning markets, sells a variety of products including variable life, universal
life, interest-sensitive whole life and term life insurance. The Company's in
force block also includes whole life, which was sold in prior years, and
modified guaranteed whole life, which was acquired from Fidelity Bankers Life
Insurance Company in 1993 and Pacific Standard Life Insurance Company in 1994.
Life insurance in force increased to $61.1 billion from $55.4 billion as of
December 31, 1998 and 1997, respectively, and account value grew 19% to $4.5
billion in 1998 from $3.8 billion in 1997. The Individual Life segment generated
revenues of $567 and $510 in 1998 and 1997, respectively. Net income in the
Individual Life segment was $65 in 1998, a 16% increase over 1997.
Products
The recent 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. Hartford Life has been
on the leading edge of this industry trend and is now a top five writer of new
variable life sales according to Tillinghast-Towers Perrin. In 1998, of the
Company's new sales of Individual Life insurance, 78% was variable life and 18%
was either universal life or interest-sensitive 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 second death of the two insureds. Second-to-die policies are
frequently used in estate planning, often to fund estate taxes for a married
couple. Variable life account values were $1.7 billion and $1.1 billion as of
December 31, 1998 and 1997, 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. Universal life and
interest-sensitive whole life represented 18% of new annualized premium sales of
individual life insurance in 1998. 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 $2.0 billion and $1.9 billion as of December 31, 1998 and
1997, 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-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 160 individuals, and expects to continue to increase the number of
wholesalers in the future.
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Competition
The Individual Life segment competes with over 2,000 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, competitiveness of pricing,
relationships with third-party distributors and the quality of underwriting and
customer service.
EMPLOYEE BENEFITS
The Employee Benefits segment primarily 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, long-term care insurance 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 was the second largest provider of group disability insurance and the
third largest writer of group life insurance in the United States for the nine
months ended September 30, 1998. Generally, policies sold in this segment are
term insurance, typically with one- or two-year rate guarantees. This allows 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. Employee Benefits generated premiums of $1.6 billion in
1998 of which $637 was attributable to group disability coverage and $557 was
attributable to group life coverage. As of December 31, 1998, the Company's
Consolidated Balance Sheet included disability reserves of $1.6 billion and
group life reserves of $511. The Employee Benefits segment generated revenues of
$1.8 billion and $1.7 billion in 1998 and 1997, respectively. Net income in the
Employee Benefits segment was $71 in 1998, a 22% increase over 1997.
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 1,000 employees in a particular company. The Company is
continuing to expand its operations in the "small" 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. 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-term disability insurance provides a monthly
benefit for those periods of time not covered by a short-term disability
benefits plan when insured employees are unable to work due to disability.
Employees may receive total or partial disability benefits. Most of these
policies usually begin providing benefits following a 90- or 180-day waiting
period and continue providing benefits until the employee reaches age 65-70.
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 innovative 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 death. In
addition, the Company offers employee groups accidental death and dismemberment
coverage.
Other -- Hartford Life also provides long-term care, travel accident, hospital
indemnity, Medicare Supplement and other coverages primarily to individual
members of various associations as well as employee groups. The Company 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.
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 sells its
product line to employers through brokers, consultants and third-party
administrators as well as to multiple employer groups through its relationships
with trade associations.
8
9
Competition
Competitive factors primarily affecting Employee 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. Employee 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
have had 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
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, thus 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 post-employment benefit liabilities.
Products marketed in this segment also include coverage owned by employees under
business sold through corporate sponsorship. During 1998, the Company recorded
$4.1 billion of deposits of new variable COLI business, increasing variable COLI
account value to $13.0 billion as of December 31, 1998 compared to $8.5 billion
as of December 31, 1997.
In November 1998, Hartford Life recaptured an in force block of leveraged COLI
business from MBL Life Assurance Co. of New Jersey (MBL Life). The transaction
was consummated through the assignment of a reinsurance arrangement between
Hartford Life and MBL Life to a Hartford Life subsidiary. Hartford Life
originally assumed the life insurance block in 1992 from Mutual Benefit Life
Insurance Company (Mutual Benefit Life), which was placed in court-supervised
rehabilitation in 1991, and reinsured a portion of those polices back to MBL
Life. MBL Life, previously a Mutual Benefit Life subsidiary, operates under the
Rehabilitation Plan for Mutual Benefit Life. Primarily as a result of this
transaction, leveraged COLI account value increased to $7.4 billion as of
December 31, 1998 compared to $3.8 billion as of December 31, 1997. This also
impacted COLI revenues, which were $1.6 billion and $980 in 1998 and 1997,
respectively. COLI segment earnings, however, declined 11%, to $24 in 1998, due
to reduced profits on the block of leveraged COLI the Company had prior to the
HIPA Act of 1996.
OTHER MATTERS
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
Hartford Life's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect Hartford Life's actual experience when appropriate. These reserves are
computed at amounts that, with additions from premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Reserves also include unearned
premiums, premium deposits, claims incurred but not reported and claims reported
but not yet paid. Reserves for assumed reinsurance are computed on bases
essentially comparable to direct insurance reserves.
For Hartford Life's universal life and interest-sensitive whole life policies,
reserves are set according to premiums collected, plus interest credited, less
charges. Other fixed death benefit and individual life reserves are based on
assumed investment yield, persistency, mortality and morbidity as per commonly
used actuarial tables, expenses and margins for adverse deviations. 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
payments.
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 the accumulation value, which
varies by product, and generally decreases gradually during the penalty period.
Surrender charges are set at levels to protect the Company from loss on early
terminations and to reduce the likelihood of policyholders terminating their
policies during periods of increasing interest rates, thereby lengthening the
effective duration of policy liabilities and improving the Company's ability to
maintain profitability on such policies.
9
10
Hartford Life's reserves comply, in all material respects, with state insurance
department statutory accounting practices; however, in the Company's
Consolidated Financial Statements, life insurance reserves are determined in
accordance with generally accepted accounting principles, which may vary from
statutory accounting practices.
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 which 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 which 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, 1998, the maximum amount of life insurance
retained on any one life by any of the life operations is approximately $2.5,
excluding accidental death benefits.
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 investment operations and the
Company's approach to managing investment risk, see the Investments section and
the Capital Markets Risk Management section of the MD&A, as well as Notes 2(e),
2(f) and 4 of Notes to Consolidated Financial Statements.
RATINGS
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Ratings".
RISK-BASED CAPITAL
Reference is made to the Capital Resources and Liquidity section of the MD&A
under "Risk-Based Capital".
LEGISLATIVE INITIATIVES
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "Legislative Initiatives".
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INSOLVENCY FUND
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "Insolvency Fund".
NAIC PROPOSALS
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "NAIC Proposals".
DEPENDENCE ON CERTAIN THIRD PARTY RELATIONSHIPS
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "Dependence on Certain Third Party Relationships".
YEAR 2000
Reference is made to the Regulatory Initiatives and Contingencies section of the
MD&A under "Year 2000".
EMPLOYEES
Hartford Life had approximately 4,500 employees at February 26, 1999.
EXECUTIVE OFFICERS OF HARTFORD LIFE
Information about the executive officers of Hartford Life who are also directors
and/or nominees for election as directors is set forth in Hartford Life's 1999
Proxy Statement. In addition to those executive officers who are listed in the
1999 Proxy Statement, listed below are other Company executive officers:
GREGORY A. BOYKO, 47, is Senior Vice President and Director of the Company's
international operations since November 1997. He joined Hartford Life in 1995 as
Controller. In 1996, he became the Company's Chief Financial Officer and
Treasurer, which position he held until August 1998. He previously worked at ING
America Life Insurance Company where he held the position of Senior Vice
President and Chief Financial Officer. His prior experience included positions
at Connecticut Mutual Life Insurance Company (CML), where he progressed from
Controller of CML to Chief Financial Officer of Connecticut Mutual Insurance
Services. Mr. Boyko holds a Juris Doctor degree and is a Certified Public
Accountant, Chartered Life Underwriter and Chartered Financial Consultant. He is
a member of the Connecticut and American Bar Associations and the Connecticut
Society of Certified Public Accountants.
DAVID T. FOY, 32, is Senior Vice President, Director of Finance and Treasurer.
Mr. Foy was appointed to his current position in August 1998. He joined Hartford
Life in 1993 in the individual annuity product management area and assumed the
position of Director of Strategic Planning in 1995. He was promoted to Assistant
Vice President and Director of Finance in 1997. He began his career in 1989 at
Milliman & Robertson, an actuarial consulting firm. He is a Fellow of the
Society of Actuaries and a member of the American Academy of Actuaries.
LYNDA GODKIN, 44, is Senior Vice President and General Counsel. She joined
Hartford Life in 1990 as Counsel for the Employee Benefits Segment. In 1994 she
was named Assistant General Counsel and Director of Hartford Life's Law
Department. In 1996 she was named General Counsel of Hartford Life. She
previously practiced law at CIGNA Corporation. She began her legal career in
1981 at the law firm of Day, Berry & Howard in Hartford, Connecticut. She is a
member of the Connecticut and American Bar Associations.
RAYMOND P. WELNICKI, 50, is Senior Vice President and heads the Strategic
Operations Unit since February 1999. He joined Hartford Life in 1992 as Actuary,
Director of Group Actuarial and Long-Term Care. He was named Vice President of
Hartford Life in 1993. He served as Senior Vice President and Director of
Employee Benefits since 1994. Prior to 1992, he was employed with Aetna Life &
Casualty Company as Assistant Vice President, Issues and Strategic Management.
He is a Fellow of the Society of Actuaries.
LIZABETH H. ZLATKUS, 40, is Senior Vice President and Director of Employee
Benefits since February 1999. Ms. Zlatkus has held positions of increasing
responsibility since joining The Hartford in 1983. She was named Senior Vice
President and Director of Group Life and Disability in 1997. Prior to that time,
she served as Vice President and Director of Risk Management and Business
Operations. She began her career at Peat, Marwick, Mitchell & Company. She
became a Certified Public Accountant in 1982.
DAVID M. ZNAMIEROWSKI, 38, is Senior Vice President and Director of
Investment Strategy. Mr. Znamierowski joined Hartford Life in 1996 as
Director of Risk Management. Previously, he held various positions with
Aetna Life & Casualty Company, including Vice President, Investment Strategy
and Policy. From 1986 through 1991, Mr. Znamierowski held positions with
Salomon Brothers Inc.
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ITEM 2. PROPERTIES
Hartford Life's principal executive offices are located in Simsbury,
Connecticut. The Company's home office complex consists of approximately 615
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 and indirect basis to Hartford Life by Hartford Fire.
ITEM 3. LEGAL PROCEEDINGS
Hartford Life is involved in pending and threatened litigation in the normal
course of its business in which claims for monetary and punitive damages have
been asserted. Although there can be no assurances, at the present time the
Company does not anticipate that the ultimate liability arising from such
pending or threatened litigation, after consideration of provisions made for
potential losses and costs of defense, will have a material adverse effect on
the financial condition or operating results of the Company.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders of Hartford Life during
the fourth quarter of the fiscal year covered by this report.
PART II
ITEM 5. MARKET FOR HARTFORD LIFE'S COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Hartford Life's Class A Common Stock is traded on the New York Stock Exchange
(NYSE) under the trading symbol "HLI". Hartford Life's Class B Common Stock is
held by Hartford Accident and Indemnity Insurance Company (HA&I), an indirect
wholly-owned subsidiary of The Hartford. As such, the Class B Common Stock is
not listed on any exchange and there is no established public trading market for
it.
The following table presents high and low closing prices for the Class A Common
Stock of Hartford Life on the NYSE for the periods indicated, and the quarterly
dividends declared per share on Class A and Class B Common Stock:
1998 1997
-------------------------------------------------- ---------------------------------------------
1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr. 1st Qtr. 2nd Qtr. 3rd Qtr. 4th Qtr.
- -----------------------------------------------------------------------------------------------------------------------------------
Common Stock Price
High ............... $50.00 $56.94 $62.19 $58.38 N/A $37.50 $41.75 $45.31
Low ................ $40.00 $46.75 $42.25 $33.88 N/A $32.13 $33.94 $34.63
Dividends Declared (1) $ 0.09 $ 0.09 $ 0.09 $ 0.09 -- -- $ 0.09 $ 0.09
- -----------------------------------------------------------------------------------------------------------------------------------
(1) Dividends declared exclude amounts paid to Hartford Life's parent prior to
the Company's initial public offering.
N/A - Not applicable.
As of February 26, 1999, there were approximately 600 shareholders of record of
Hartford Life's Class A Common Stock and HA&I was the only holder of Class B
Common Stock.
Dividend decisions will be based on, and affected by, a number of factors,
including the operating results and financial requirements of Hartford Life on a
stand-alone basis and the impact of regulatory restrictions discussed in the
Liquidity Requirements section of the Management's Discussion and Analysis of
Financial Condition and Results of Operations (MD&A).
There are also various legal limitations governing the extent to which Hartford
Life's insurance subsidiaries may pay dividends, extend credit or otherwise
provide funds to Hartford Life, Inc. as discussed in the Capital Resources and
Liquidity section of the MD&A under "Liquidity Requirements".
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ITEM 6. SELECTED FINANCIAL DATA
- ---------------------------------------------------------------------------------------------------------------------
(In millions, except for per share data) 1998 1997 1996 1995 1994
- ---------------------------------------------------------------------------------------------------------------------
BALANCE SHEET DATA (1)
General account invested assets $ 24,882 $ 20,970 $19,830 $20,072 $18,078
Separate account assets (2) 90,628 69,362 49,770 36,296 22,847
All other assets 6,512 10,648 10,333 9,594 9,324
- ---------------------------------------------------------------------------------------------------------------------
TOTAL ASSETS $122,022 $100,980 $79,933 $65,962 $50,249
- ---------------------------------------------------------------------------------------------------------------------
Policy liabilities $ 25,484 $ 26,078 $26,239 $26,318 $25,208
Separate account liabilities (2) 90,628 69,362 49,770 36,296 22,847
Allocated advances from parent (3) -- -- 893 732 525
Debt (3) 650 700 -- -- --
Company obligated mandatorily
redeemable preferred
securities of subsidiary trust
holding solely parent
junior subordinated debentures (4) 250 -- -- -- --
All other liabilities 2,517 2,696 1,757 1,439 1,283
- ---------------------------------------------------------------------------------------------------------------------
TOTAL LIABILITIES $119,529 $ 98,836 $78,659 $64,785 $49,863
- ---------------------------------------------------------------------------------------------------------------------
TOTAL STOCKHOLDERS' EQUITY $ 2,493 $ 2,144 $ 1,274 $ 1,177 $ 386
- ---------------------------------------------------------------------------------------------------------------------
INCOME STATEMENT DATA (1)
Total revenues $ 5,788 $ 4,699 $ 4,384 $ 4,090 $ 3,543
Total expenses 5,402 4,393 4,360 3,940 3,392
- ---------------------------------------------------------------------------------------------------------------------
NET INCOME (5) $ 386 $ 306 $ 24 $ 150 $ 151
- ---------------------------------------------------------------------------------------------------------------------
EARNINGS PER SHARE DATA
Basic earnings per share (6) $ 2.76 $ 2.28 $ 0.19 $ -- $ --
Diluted earnings per share (6) $ 2.75 $ 2.28 $ 0.19 $ -- $ --
Dividends declared per common share (7) $ 0.36 $ 0.18 $ -- $ -- $ --
- ---------------------------------------------------------------------------------------------------------------------
(1) On November 10, 1998, the Company recaptured an in force block of
corporate owned life insurance (COLI) business from MBL Life Assurance Co.
of New Jersey (MBL Life). For additional information, see the COLI section
as well as the MBL Recapture discussion under "Purchases of Affiliates and
Other" within the Capital Resources and Liquidity section of the
Management's Discussion and Analysis of Financial Condition and Results of
Operations (MD&A).
(2) Includes both non-guaranteed and guaranteed separate accounts.
(3) For financial reporting purposes, the Company has treated certain amounts
previously allocated by The Hartford Financial Services Group, Inc. (The
Hartford) to the Company's life insurance subsidiaries as allocated
advances from parent. Cash received in respect of allocated advances from
parent was used to support the growth of the life insurance subsidiaries.
For additional information, see Note 7 of Notes to Consolidated Financial
Statements.
(4) On June 29, 1998, Hartford Life Capital I, a special purpose Delaware
trust formed by Hartford Life, issued 10,000,000, 7.2% Trust Preferred
Securities, Series A (Series A Preferred Securities). The proceeds from
the sale of the Series A Preferred Securities were used to acquire $250 of
7.2% Series A Junior Subordinated Deferrable Interest Debentures (Junior
Subordinated Debentures) issued by Hartford Life. For additional
information, see Note 8 of Notes to Consolidated Financial Statements.
(5) 1996 includes realized losses of $225 primarily resulting from actions
taken in the third quarter of 1996 related to the Company's guaranteed
investment contract business. For additional information, see the
Investment Products section of the MD&A.
(6) Pro forma effect on basic and diluted earnings per share has been given
for the 1997 and 1996 periods presented for the conversion of 1,000 shares
of common stock into 114 million shares of Class B Common Stock, which
occurred on April 3, 1997, prior to the Company's initial public offering
(IPO). For information regarding the IPO and earnings per share data, see
Notes 3 and 10 of Notes to Consolidated Financial Statements,
respectively.
(7) Dividends per common share represent amounts declared subsequent to the
Company's IPO on May 22, 1997. (For information regarding the IPO, see
Note 3 of Notes to Consolidated Financial Statements.) The table does not
include dividends paid to the parent in periods prior to the IPO.
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ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
(Dollar amounts in millions, except for share data, unless otherwise stated)
Management's Discussion and Analysis of Financial Condition and Results of
Operations should be read in conjunction with the Consolidated Financial
Statements and related Notes beginning on page F-1.
Certain statements contained in this discussion, other than statements of
historical fact, are forward-looking statements. These statements are made
pursuant to the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995 and include estimates and assumptions related to economic,
competitive and legislative developments. These forward-looking statements are
subject to change and uncertainty which are, in many instances, beyond the
Company's control and have been made based upon management's expectations and
beliefs concerning future developments and their potential effect on Hartford
Life, Inc. and subsidiaries ("Hartford Life" or 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 those described in the forward-looking statements.
Certain reclassifications have been made to prior year financial information to
conform to the current year presentation.
INDEX
Consolidated Results of Operations 14 Investments 20
Investment Products 16 Capital Markets Risk Management 22
Individual Life 17 Capital Resources and Liquidity 30
Employee Benefits 18 Regulatory Initiatives and Contingencies 32
Corporate Owned Life Insurance (COLI) 19 Effect of Inflation 34
Reserves 20 Accounting Standards 34
CONSOLIDATED RESULTS OF OPERATIONS
Hartford Life is a leading financial services and insurance company providing
investment products such as variable and fixed annuities, retirement plan
services and mutual funds; individual and corporate owned life insurance; and,
employee benefit products such as group life and disability insurance.
The Company derives its revenues principally from: (a) asset management fees on
separate accounts and mutual fund assets and mortality and expense fees; (b)
fully insured premiums; (c) net investment income on general account assets;
and, (d) certain other fees earned by the Company. 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 from mutual fund sales. Premium revenues are derived
primarily from the sale of group life and group disability insurance products.
Hartford Life's operating expenses primarily 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, and its ability to earn target spreads between earned
investment rates on general account assets and credited rates to customers.
OPERATING SUMMARY
1998 1997 1996
- -----------------------------------------------------------------------------------------------------------------------------------
Premiums and other considerations $ 3,833 $ 3,163 $ 3,069
Net investment income 1,955 1,536 1,534
Net realized capital losses -- -- (219)
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 5,788 4,699 4,384
----------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 3,227 2,671 2,727
Amortization of deferred policy acquisition costs 441 345 241
Dividends to policyholders 330 241 635
Other expenses 1,205 962 750
----------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 5,203 4,219 4,353
----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 585 480 31
Income tax expense 199 174 7
----------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 386 $ 306 $ 24
-----------------------------------------------------------------------------------------------------------------------------
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Hartford Life has the following reportable segments: Investment Products,
Individual Life, Employee Benefits and Corporate Owned Life Insurance (COLI).
The Company reports in "Other" 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. For information
regarding the Company's reportable segments as they relate to SFAS No. 131, see
Note 17 of Notes to Consolidated Financial Statements.
Revenues increased $1.1 billion, or 23%, to $5.8 billion in 1998 from $4.7
billion in 1997. The increase was due in part to the continued growth in
revenues in Investment Products of $274 and Individual Life of $57 as a result
of higher aggregate fees earned on growth in account values due to strong sales
and equity market appreciation. Additionally, Employee Benefits revenues
increased $109 primarily due to strong sales and good persistency. Also
contributing to the increase were COLI revenues which grew $587 primarily due to
the recapture of an in force block of COLI business (referred to as "MBL
Recapture") previously ceded to MBL Life Assurance Co. of New Jersey (MBL Life)
transacted in the fourth quarter 1998.
Total benefits, claims and expenses increased $984, or 23%, to $5.2 billion in
1998 from $4.2 billion in 1997. Benefits, claims and claim adjustment expenses
increased $556 and dividends to policyholders increased $89 which were primarily
attributable to the COLI segment where benefits, claims and claim adjustment
expenses increased $485 and dividends to policyholders increased $89 primarily
related to the MBL Recapture. In addition, increased benefits, claims and claim
adjustment expenses in Employee Benefits of $34 and Individual Life of $18 were
associated with the growth in these segments. Higher amortization of deferred
policy acquisition costs (DPAC) of $96 in 1998 was a result of the large volume
of sales in Investment Products and Individual Life in the past several years.
Also, other expenses increased $243 in 1998 as a result of higher commissions
and operating expenses in Investment Products and Employee Benefits primarily
related to the growth in these segments.
Revenues increased $315, or 7%, to $4.7 billion in 1997 from $4.4 billion in
1996. This increase was primarily due to Investment Products, where revenues
increased $503 in 1997 from 1996 as a result of fee income earned on growth in
separate account assets due to strong annuity sales and equity market
appreciation. Investment Products revenues were also impacted by the guaranteed
investment contract (GIC) business, where revenues increased $205, primarily as
a result of net realized capital losses in the third quarter of 1996.
Additionally, revenues in Employee Benefits increased $237 due to sales growth.
Higher revenues in Individual Life of $38, reflecting the impact of applying
cost of insurance charges and variable life fees to a larger block of business,
also contributed to the increase. Partially offsetting these increases was a
decrease in COLI revenues of $380 due to the Health Insurance Portability and
Accountability Act of 1996 (HIPA Act of 1996), which phased out the
deductibility of interest expense on policy loans by the end of 1998, virtually
eliminating all new sales of leveraged COLI.
Total benefits, claims and expenses decreased $134 in 1997 as compared to 1996.
This decrease was primarily driven by COLI, where dividends to policyholders
declined $394 in 1997 due to the HIPA Act of 1996, as discussed above. Partially
offsetting this decrease was an increase in benefits, claims and expenses of
$215 in Employee Benefits associated with the growth in this segment.
Additionally, benefits, claims and expenses increased $67 in Investment Products
primarily related to individual annuity products, partially offset by declines
related to GIC business.
Net income totaled $386 in 1998 as compared to $306 in 1997 and $24 in 1996. The
improvement in earnings for both comparative periods was primarily driven by
higher aggregate fee income earned on growth in the Company's account values due
to strong sales and equity market appreciation in Investment Products and
Individual Life. Additionally, the improvement in earnings for these comparative
periods was impacted by strong sales and favorable mortality and morbidity
experience in Employee Benefits. Also contributing to the improvement in 1997
was the reduction in losses resulting from actions taken in the third quarter of
1996 related to the Company's GIC business.
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 asset and fully insured premium growth and
to maximize shareholder value. Hartford Life's strong market position in each of
its primary businesses, coupled with the growth potential management believes
exists in its markets, provides opportunities to increase sales of the Company's
products and services as individuals 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.
Certain proposed legislative initiatives which could impact Hartford Life are
discussed in the Regulatory Initiatives and Contingencies section.
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SEGMENT RESULTS
Below is a summary of net income (loss) by segment.
1998 1997 1996
- ---------------------------------------------------------------------------------------------
Investment Products $ 266 $ 202 $ (80)
Individual Life 65 56 44
Employee Benefits 71 58 45
Corporate Owned Life Insurance 24 27 26
Other (40) (37) (11)
- ---------------------------------------------------------------------------------------------
NET INCOME $ 386 $ 306 $ 24
- ---------------------------------------------------------------------------------------------
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
1998 1997 1996
- --------------------------------------------------------------------------------------------------------------------------
Premiums and other considerations $ 1,045 $ 771 $ 541
Net investment income 739 739 685
Net realized capital losses -- -- (219)
- --------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,784 1,510 1,007
-------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 671 677 748
Amortization of deferred policy acquisition costs 326 250 175
Other expenses 376 269 206
- --------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,373 1,196 1,129
-------------------------------------------------------------------------------------------------------------------
INCOME (LOSS) BEFORE INCOME TAX EXPENSE (BENEFIT) 411 314 (122)
Income tax expense (benefit) 145 112 (42)
- --------------------------------------------------------------------------------------------------------------------------
NET INCOME (LOSS) $ 266 $ 202 $ (80)
-------------------------------------------------------------------------------------------------------------------
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 annuities and other investment
products. The individual annuity products offered include individual variable
annuities, fixed market value adjusted annuites (MVA) annuities and fixed and
variable immediate annuities. The other investment products offered include
retail mutual funds, deferred compensation and retirement plan services for
municipal governments, teachers, hospitals and corporations; structured
settlement contracts and other special purpose annuity contracts; and,
investment management services. The Company sells both variable and fixed
individual annuity products through a wide distribution network of national and
regional broker-dealer organizations, banks and other financial institutions,
and independent financial advisors. The Company was ranked the number one writer
of individual variable annuities in the United States for 1998 according to
Variable Annuity and Research Data Service (VARDS) and the number one seller of
individual variable annuities through banks, according to Kenneth Kehrer and
Associates.
Revenues increased $274, or 18%, to $1.8 billion in 1998 from $1.5 billion in
1997. Driven primarily by the individual annuity operation, this improvement was
a result of higher aggregate fees earned on growth in account values due to
strong net cash flow resulting from a high volume of sales and favorable
persistency as well as significant equity market appreciation in the Company's
separate accounts. Fee income related to individual variable annuity products
increased $236 as related average account values grew $14.9 billion, or 38%, to
$54.6 billion in 1998 from $39.7 billion in 1997. This growth was a result of
strong individual variable annuity sales of $9.9 billion in 1998 as well as
equity market appreciation. In addition, fee income from other investment
products increased $60 primarily as a result of growth in the Company's mutual
fund operations, where assets under management increased $1.5 billion in 1998 to
$2.5 billion as compared to $972 in 1997.
Total benefits, claims and expenses increased $177, or 15%, to $1.4 billion in
1998 from $1.2 billion in 1997 as a result of the continued growth in this
segment. Other expenses increased $107 in 1998 as compared to 1997 primarily due
to growth in the mutual funds and individual annuity operations. Amortization of
DPAC grew $76 primarily due to individual annuity products as sales remained
strong. A 38% growth in average variable annuity account value in 1998, coupled
with a reduction in individual annuity operating expenses as a percentage of
total individual annuity account value to 23 basis points in 1998 from 25 basis
points in 1997, contributed to the increase in net income of $64, or 32%, to
$266 in 1998 from $202 in 1997.
16
17
Revenues increased $503, or 50%, to $1.5 billion in 1997 from $1.0 billion in
1996. This increase was primarily driven by the individual annuity operation,
whose revenues increased $253, reflecting a substantial improvement in aggregate
fees earned as a result of this segment's growing account values. Average
individual variable annuity account values increased $13.1 billion, or 49%, to
$39.7 billion in 1997 from $26.6 billion in 1996, primarily due to strong net
cash flow resulting from a high volume of sales and favorable persistency as
well as significant equity market appreciation in the Company's separate
accounts. In addition, within other investment products, $205 of the segment's
increase in revenues was related to GIC business, which was primarily impacted
by $219 of net realized capital losses primarily resulting from actions taken in
the third quarter of 1996. Associated with strong sales and continued growth in
this segment, benefits, claims and expenses grew $67, or 6%, over the prior
year. A 27% growth in total average account value in 1997, coupled with
operating efficiencies and a reduction in losses of $225 primarily as a result
of actions taken in the third quarter of 1996 related to the Company's GIC
business, increased net income $282 to $202 in 1997 from $(80) in 1996.
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 and aggressively seeking distribution
capabilities and pursuing market share. This trend is not expected to subside,
particularly in light of pending legislation to deregulate the financial
services industry.
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
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums and other considerations $378 $339 $313
Net investment income 189 171 159
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 567 510 472
-----------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 269 251 266
Amortization of deferred policy acquisition costs 108 87 63
Dividends to policyholders 1 1 1
Other expenses 88 84 74
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 466 423 404
-----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 101 87 68
Income tax expense 36 31 24
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 65 $ 56 $ 44
-----------------------------------------------------------------------------------------------------------------------------
The Individual Life segment, which focuses on the high end estate and business
planning markets, sells a variety of life insurance products, including variable
life, universal life, interest-sensitive whole life and term life insurance.
Revenues in 1998 increased $57, or 11%, to $567 from $510 in 1997, reflecting
the impact of applying cost of insurance charges and variable life fees on the
growing block of variable life insurance. Variable life average account values
increased $562, or 67%, to $1.4 billion in 1998 from $840 in 1997 due to strong
sales and equity market appreciation. In 1998, higher variable life sales of
$29, or 30%, constituted the majority of increased total sales over 1997. Total
benefits, claims and expenses increased $43, or 10%, to $466 in 1998 from $423
in 1997. This increase was the result of an increase in amortization of DPAC of
$21 and benefits, claims and claim adjustment expenses of $18 in 1998 related to
the growth in this segment. As a result of growth in account values, primarily
variable life, net income increased $9, or 16%, in 1998 as compared to 1997.
Revenues in 1997 increased $38, or 8%, to $510 from $472 in 1996. In the first
quarter of 1996, a block of business was assumed from Investors Equity Life
Insurance Company (IEL) which increased 1996 revenues by $9. Excluding this
transaction, 1997 revenues increased $47, or 10%, as compared to 1996,
reflecting the impact of applying cost of insurance charges and variable life
fees to a larger block of business. Total account values increased $555, or 17%,
to $3.8 billion in 1997 from $3.2 billion in 1996. Sales were $140 in 1997, an
increase of 8% over 1996. Variable life sales constituted 70%, or $98, of total
1997 sales and grew $23, or 31%, over 1996 levels. Total benefits, claims and
expenses increased $19, or 5%, to $423 in 1997 from $404 in 1996. Total
benefits, claims and expenses, excluding IEL, increased $28, or 7%, in 1997.
This increase was primarily driven by an increase in amortization of DPAC of $24
in 1997 related to the growth in new variable life business. The growth in this
segment's account values, particularly variable life, along with favorable
mortality experience, contributed to an increase in net income of $12, or 27%,
in 1997 from 1996.
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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 prepare
their estates for an efficient transfer of wealth between generations.
EMPLOYEE BENEFITS
OPERATING SUMMARY
1998 1997 1996
- ------------------------------------------------------------------------------------------------------------------------------------
Premiums and other considerations $1,629 $1,538 $1,329
Net investment income 180 162 134
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,809 1,700 1,463
-----------------------------------------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 1,335 1,301 1,140
Amortization of deferred policy acquisition costs 7 6 4
Other expenses 369 303 251
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,711 1,610 1,395
-----------------------------------------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 98 90 68
Income tax expense 27 32 23
- ------------------------------------------------------------------------------------------------------------------------------------
NET INCOME $ 71 $ 58 $ 45
-----------------------------------------------------------------------------------------------------------------------------
The Employee Benefits segment primarily 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, long-term care insurance 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 was the second largest provider of group disability insurance and the
third largest writer of group life insurance in the United States for the nine
months ended September 30, 1998.
Revenues increased $109, or 6%, to $1.8 billion in 1998 as compared to $1.7
billion in 1997. This increase was driven by growth in fully insured premiums,
excluding buyouts, which increased $181, or 13%, in 1998. This increase was
primarily due to group life and group disability, where ongoing premiums
increased $69 and $55, respectively, in 1998 as compared to 1997 due to strong
sales and good persistency. Sales of fully insured business, excluding buyouts,
were $397 in 1998, an increase of $68, or 21%, over 1997; of which, group life
and group disability business were each $148 in 1998, an increase of $26 and
$23, respectively, as compared to 1997.
Total benefits, claims and expenses increased $101, or 6%, to $1.7 billion in
1998 from $1.6 billion in 1997. The increase was the result of higher benefits,
claims and claim adjustment expenses, which, excluding buyouts, increased $121
due to the growth in this segment; however, the ratio of benefits, claims and
claim adjustment expenses as a percentage of premiums and other considerations
(excluding buyouts) improved to 81.5% in 1998 from 83.2% in 1997. This
improvement was partially offset by an increase in other expenses of $66,
whereby other expenses as a percentage of premiums and other considerations,
excluding buyouts, increased to 23.3% in 1998 from 21.5% in 1997. This trend is
due to the Company's continued investment in claims management initiatives which
result in higher operating expenses, but improve benefits, claims and claim
adjustment expenses.
The segment's effective income tax rate was reduced to 28% in 1998 as compared
to 36% in 1997 as a result of increasing the level of investment in tax-exempt
securities, which resulted in an improvement in the after-tax investment yield
to 5.2% in 1998 from 5.0% in 1997, even though the rate of interest for
marketable securities decreased during 1998.
As a result of increased premium revenue, an improved after-tax investment yield
and favorable mortality and morbidity experience, Employee Benefits net income
grew $13, or 22%, to $71 in 1998 from $58 in 1997.
Revenues increased $237, or 16%, to $1.7 billion in 1997 as compared to $1.5
billion in 1996. This increase was due to growth in fully insured premiums,
excluding buyouts, attributable to group disability business of $107, or 25%,
and group life business of $79, or 19%, in 1997 as compared to 1996. Sales of
fully insured business, excluding buyouts, increased $91, or 38%, to $329 in
1997 as compared to 1996. Included in the 1997 results are group disability and
group life premiums of $89 and $16, respectively, as a result of the acquisition
of a block of business from the United States branch of Confederation Life
Insurance Company. The 1996 results include $78 of group disability premiums and
$23 of group life premiums related to the acquisition of a block of business
from North American Life Assurance Company of Toronto. Benefits, claims and
expenses increased $215, or 15%, to $1.6 billion in 1997 from $1.4 billion in
1996 primarily attributable to growth in the Company's group life and group
disability business. As a result of the premium growth in this segment, net
income grew $13, or 29%, to $58 in 1997 from $45 in 1996.
18
19
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.
CORPORATE OWNED LIFE INSURANCE (COLI)
OPERATING SUMMARY
1998 1997 1996
- ----------------------------------------------------------------------------------------------------
Premiums and other considerations $ 774 $ 551 $ 880
Net investment income 793 429 480
- ----------------------------------------------------------------------------------------------------
TOTAL REVENUES 1,567 980 1,360
---------------------------------------------------------------------------------------------
Benefits, claims and claim adjustment expenses 924 439 545
Dividends to policyholders 329 240 634
Other expenses 278 259 144
- ----------------------------------------------------------------------------------------------------
TOTAL BENEFITS, CLAIMS AND EXPENSES 1,531 938 1,323
---------------------------------------------------------------------------------------------
INCOME BEFORE INCOME TAX EXPENSE 36 42 37
Income tax expense 12 15 11
- ----------------------------------------------------------------------------------------------------
NET INCOME $ 24 $ 27 $ 26
---------------------------------------------------------------------------------------------
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
named as the beneficiary under the policy. Until the 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 at 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 post-employment benefit liabilities. Products marketed in this segment
also include coverage owned by employees under business sold through corporate
sponsorship.
Revenues in this operation increased $587, or 60%, to $1.6 billion in 1998 from
$980 in 1997. This increase was primarily related to the recapture of an in
force block of COLI business, previously ceded to MBL Life, which was transacted
in the fourth quarter 1998. (For additional information regarding the MBL
Recapture, see "Purchases of Affiliates and Other" under the Capital Resources
and Liquidity section.) The MBL Recapture, which was retroactive to January 1,
1998, resulted in an increase in COLI revenues of $624 and is comprised of $245
of premiums and other considerations and $379 of net investment income. Higher
fee income on the segment's growing block of variable COLI account values also
contributed to the increase in revenues. Partially offsetting these increases
was a decline in premiums and other considerations on leveraged COLI as that
block of business continues to decline due to the implications of the HIPA Act
of 1996 (discussed above).
Benefits, claims and expenses increased $593, or 63%, to $1.5 billion in 1998
from $938 in 1997. The MBL Recapture resulted in an increase in benefits, claims
and expenses of $624 and is comprised of $478 of benefits, claims and other
expenses and $146 of dividends to policyholders. The increase in benefits,
claims and expenses was also a result of the growth in the segment's variable
COLI block of business, which was partially offset by a decrease in benefits,
claims and expenses related to leveraged COLI.
Net income declined $3, or 11%, to $24 in 1998 from $27 in 1997 as the growth in
the Company's variable COLI business was offset by the declining block of
leveraged COLI the Company had prior to passage of the HIPA Act of 1996. The MBL
Recapture had no impact on earnings in 1998.
COLI revenues decreased $380, or 28%, to $980 in 1997 from $1.4 billion in 1996.
COLI expenses also declined, primarily due to a $394 decrease in dividends to
policyholders. These decreases were primarily the result of the HIPA Act of 1996
discussed above. Net income of $27 in 1997 was consistent with 1996 results.
19
20
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
post-employment 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 is expected to decline. COLI is subject to a
changing legislative and regulatory environment that could have a material
adverse affect on its business.
Certain proposed legislative initiatives which could impact Hartford Life are
discussed in the Regulatory Initiatives and Contingencies section.
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
Hartford Life's future obligations. Reserves for life insurance and disability
contracts are based on actuarially recognized methods using prescribed morbidity
and mortality tables in general use in the United States, which are modified to
reflect Hartford Life's actual experience when appropriate. These reserves are
computed at amounts that, with additions from premiums to be received and with
interest on such reserves compounded annually at certain assumed rates, are
expected to be sufficient to meet the Company's policy obligations at their
maturities or in the event of an insured's death. Reserves include unearned
premiums, premium deposits, claims incurred but not reported and claims reported
but not yet paid. Reserves for assumed reinsurance are computed on bases
essentially comparable to direct insurance reserves.
INVESTMENTS
GENERAL
The Company'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. The Hartford Investment Management Company, a wholly
owned subsidiary of The Hartford Financial Services Group, Inc., executes the
investment plan of the investment strategy group, including the identification
and purchase of securities that fulfill the objectives of the strategy group.
The primary investment objective of the Company's general account 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 relative to that of policyholder obligations). The Company does
not hold any financial instruments purchased for trading purposes. The Company
is exposed to two primary sources of investment risk: credit risk, relating to
the uncertainty associated with an obligor's continued ability to make timely
payment of principal and/or interest, and interest rate risk, relating to the
market price and/or cash flow variability associated with changes in market
yield curves. See the Capital Markets Risk Management section for further
discussion of the Company's approach to managing these investment risks.
The Company's separate accounts reflect two categories of risk assumption:
non-guaranteed separate accounts totaling $80.6 billion and $58.7 billion as of
December 31, 1998 and 1997, respectively, wherein the policyholder assumes
substantially all the investment risk and reward, and guaranteed separate
accounts totaling $10.0 billion and $10.7 billion as of December 31, 1998 and,
1997, respectively, wherein Hartford Life contractually guarantees either a
minimum return or account value to the policyholder. Non-guaranteed separate
account products include variable annuities, variable life insurance contracts
and COLI. Guaranteed separate account products primarily consist of modified
guaranteed individual annuities and modified guaranteed life insurance and
generally include market value adjustment features to mitigate the risk of
disintermediation.
The Company's general account consists of a diversified portfolio of
investments. Although all the assets of the general account support all the
Company's 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 $24.9 billion as of
December 31, 1998 and were comprised of $17.7 billion of fixed maturities, $6.7
billion of policy loans and other investments of $503. As of December 31, 1997,
general account invested assets totaled $21.0 billion and were comprised of
$16.8 billion of fixed maturities, $3.8 billion of policy loans and other
investments of $363. Policy loans, which had a weighted-average interest rate of
9.9% and 11.2%, as of December 31, 1998 and 1997,
20
21
respectively, increased primarily as a result of the MBL Recapture. These loans
are secured by the cash value of the underlying life insurance policies and do
not mature in a conventional sense, but expire in conjunction with the related
policy liabilities.
The following table sets forth by type the fixed maturity securities held in the
Company's general account as of December 31, 1998 and 1997.
1998 1997
-----------------------------------------------------
FIXED MATURITIES BY TYPE FAIR VALUE PERCENT FAIR VALUE PERCENT
- ------------------------------------------------------------------------------------------------------------------------------------
Corporate $ 7,898 44.6% $ 7,970 47.3%
Asset backed securities 2,465 13.9% 3,199 19.0%
Short-term 2,119 12.0% 1,395 8.3%
Commercial mortgage backed securities 2,036 11.5% 1,606 9.5%
Municipal - tax-exempt 916 5.2% 171 1.0%
Collateralized mortgage obligations 831 4.7% 978 5.8%
Government/Government agencies - foreign 530 3.0% 502 3.0%
Mortgage backed securities - agency 503 2.9% 514 3.1%
Municipal - taxable 223 1.3% 267 1.6%
Government/Government agencies - U.S. 166 0.9% 241 1.4%
Redeemable preferred stock 5 -- 5 --
- ------------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $17,692 100.0% $16,848 100.0%
- ------------------------------------------------------------------------------------------------------------------------------------
During 1998, the Company, in executing its investment strategy, increased its
allocation to municipal tax-exempt securities with the objective of increasing
after-tax yields, and also increased its allocation to commercial mortgage
backed securities while decreasing its allocation to asset backed securities.
The increase in short-term investments as of December 31, 1998 as compared to
1997 was impacted by the settlement of the MBL Recapture in the fourth quarter
1998 (as discussed in the COLI section), which resulted in short-term investment
proceeds of approximately $300.
Approximately 22.8% and 22.6% of the Company's fixed maturity portfolio was
invested in private placement securities (including Rule 144A offerings) as of
December 31, 1998 and 1997, respectively. Private placement securities are
generally less liquid than public securities; however, covenants for private
placements are designed to mitigate liquidity risk. Most of the private
placement securities in the Company's portfolio are rated by nationally
recognized rating organizations. For further discussion of the Company's
investment credit policies, see the Capital Markets Risk Management section
under "Credit Risk".
INVESTMENT RESULTS
The table below summarizes Hartford Life's investment results for the past three
years.
(Before-tax) 1998 1997 1996
- -------------------------------------------------------------------------------------
Net investment income - excluding policy loan income $1,166 $1,111 $ 1,057
Policy loan income 789 425 477
- -------------------------------------------------------------------------------------
Net investment income - total $1,955 $1,536 $ 1,534
- -------------------------------------------------------------------------------------
Yield on average invested assets (1) 7.9% 7.6% 7.7%
- -------------------------------------------------------------------------------------
Net realized capital losses $ -- $ -- $ (219)
- -------------------------------------------------------------------------------------
(1) Represents net investment income (excluding net realized capital
losses) divided by average invested assets at cost (fixed maturities at
amortized cost). In 1998, average invested assets were calculated
assuming the MBL Recapture proceeds were received on January 1, 1998.
Total net investment income, before-tax, increased $419, or 27%, to $2.0 billion
in 1998 from $1.5 billion in 1997, principally due to an increase in policy loan
income of $364 which is primarily due to the MBL Recapture. (For additional
information on the MBL Recapture, see the COLI section.) Yields on average
invested assets, before-tax, increased to 7.9% in 1998 from 7.6% in 1997
primarily due to the increase in policy loan income that resulted from the MBL
Recapture as well as an increase in fixed maturities rated BBB. There were no
net realized capital gains or losses for the years ended December 31, 1998 and
1997. During 1998, realized capital gains from the sale of fixed maturities and
equity securities were offset by realized capital losses, including $21,
after-tax, related to the other than temporary impairment charge associated with
asset backed securities securitized and serviced by Commercial Financial
Services, Inc. (CFS). (For additional information on CFS, see Note 16,
Commitments and Contingencies, of Notes to Consolidated Financial Statements.)
Total net investment income, before-tax, totaled $1.5 billion in 1997, unchanged
from 1996. Total yields on average invested assets, before-tax, decreased to
7.6% in 1997 from 7.7% in 1996 primarily attributable to declining market
interest rates. In 1996, net realized capital losses of $219 were primarily
attributable to the writedown and sale of certain securities within the
Company's GIC business.
21
22
CAPITAL MARKETS RISK MANAGEMENT
As described below, credit risk and market risk are the primary sources of
investment risk to the Company. 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
frequent review by Hartford Life's Finance Committee.
The Company invests primarily in securities 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 at
regular intervals.
The following table identifies fixed maturity securities 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, 1998 and 1997, over 98% of the fixed maturity portfolio,
including guaranteed separate accounts, was invested in investment-grade
securities.
1998 1997
-------------------------------------------------
FIXED MATURITIES BY CREDIT QUALITY FAIR VALUE PERCENT FAIR VALUE PERCENT
- -----------------------------------------------------------------------------------------------------------------------------------
U.S. Government/Government agencies $ 2,596 9.5% $ 2,907 10.7%
AAA 3,542 12.9% 3,974 14.6%
AA 2,674 9.7% 2,967 10.9%
A 8,878 32.3% 9,351 34.3%
BBB 7,019 25.6% 5,966 21.9%
BB & below 492 1.8% 205 0.7%
Short-term 2,265 8.2% 1,869 6.9%
- -----------------------------------------------------------------------------------------------------------------------------------
TOTAL FIXED MATURITIES $27,466 100.0% $27,239 100.0%
- -----------------------------------------------------------------------------------------------------------------------------------
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 quantified weekly and netted,